Contract Countdown Series – Most Dangerous Risks #12
If you’ve been following our Contract Countdown series, you’ll know that we’ve been counting down from #15 to #1 for changes you can make to your Terms and Conditions of Sale that would enhance the trading relationship between a Supplier and a Customer. This next risk, #12, is all
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#12 IPSO FACTO CLAUSES
Back in July 2018, the Corporations Act was reformed to prevent contract parties from exercising certain “ipso facto” rights when the other suffered an “insolvency event”. Not just a fancy set of words used by Judges, ipso facto means “by the very fact” – allowing a party to do certain things just because a Customer has entered an external administration scenario, such as voluntary administration, receivership, or a scheme of arrangement. Commonly, those rights would include termination or withholding supply of goods.
But if a struggling business sought to turn itself around with voluntary administration, and all its suppliers terminated as soon as they caught a whiff of the VA, you can see why ipso facto clauses are seen as depriving a company of the opportunity to successfully restructure.
The Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Act 2017 (Cth) changed all that by enforcing a stay on ipso facto clauses. There are exclusions, but generally it means that parties will be prohibited from relying on those clauses, instead ‘locked in’ to performing their contractual obligations. From 1 July 2018, suppliers should have reviewed their contracts for rights that are solely based on “insolvency events” to rework those rights with a different approach.
However, its 2020 and we are still seeing Terms and Conditions of Supply with ipso facto clauses that are likely to be caught by the reform. That’s why ipso facto provisions come in at #12 on our Contract Countdown of the most dangerous legal risks we see in T&C’s. Unless those provisions are revised, suppliers could be leaving themselves with inadequate protections and very few options for rights such as termination. Or worse, suppliers could be invoking outdated provisions that they are prohibited from using.
How do you remedy any possible inadequacies? Easy – get your T’s and C’s LEDchecked at no charge. We will highlight the areas where you are most at risk and how you can cost effectively correct them. Contact us for a free assessment of your current Terms and leave the rest to us.
For more information, contact Ledlin Lawyers:-