On 1 July 2018, the Australian Government’s ipso facto reforms (the Reforms) came into effect. Rather than prohibiting the inclusion of ipso facto clauses, the Reforms impose statutory limitations on the enforcement of certain rights found in contracts, agreements or arrangements.
It is crucial that government and government agencies understand these Reforms and take them into consideration in both the drafting and management of all contracts, agreements and arrangements.
What rights have been impacted by the Reforms?
The Reforms impact all rights that arise because a counterparty is in voluntary administration, has appointed or may appoint a managing controller, or is subject to a scheme of arrangement (an Event). The Reforms provide that, unless an exemption applies, a clause that is triggered by an Event is unenforceable for a period of time (the Stay) following the announcement of the event. The Stay restricts a counterparty from exercising termination, enforcement or other specified rights triggered by an Event.
What rights have been excluded from the Reforms?
Certain prescribed rights have been excluded from the reforms and will still be available to the government. These include:
Do the Reforms impact all contracts, agreements or arrangements?
Not all contacts, agreements, or arrangements are affected by the Reforms. Exempt from the Reforms include government contracts, agreements or arrangements:
Do the Reforms apply extraterritorially?
The Reforms are expressed to be that rights cannot be enforced against a corporation if the Events occur. One issue is the potential effect of the Reforms on contracts with parties in foreign jurisdictions
Contract with foreign counterparty under Australian law
If the Event occurs to a Queensland Government Owned Corporation (GOC), the Reforms apply. There may however be practical difficulties of enforcement if the rights are exercised overseas.
Although the Reforms apply to “corporations”, which includes any body corporate incorporated outside Australia (section 57A of the Corporations Act 2001 (Cth)), a scheme of arrangement or administration Event cannot occur to a foreign corporation because those Events, by their nature, relate only to the capacity of Australian registered companies. However, it is possible for a managing controller to be appointed to a foreign company because receivership is administration of assets and not the company itself; in this event, the Reforms will apply to Australian based assets.
Contract with foreign counterparty under foreign law
Legislation generally will not have extraterritorial effect unless expressly provided. The Corporations Act 2001 (Cth) (by which the Reforms have effect) does not purport to have extraterritorial effect.
It follows that if the Event occurs to the foreign corporation, the Reforms do not apply unless (potentially) it could be shown that the foreign company is carrying on business in Australia and the enforcement of the rights triggering the Event could be said to arise from that business.
The position when the Event occurs to the Australian party is less certain. The foreign law will determine the validity and enforceability of the contract and its particular provisions, including the enforceability of rights triggered by an Event, unless (were the matter to come before an Australian court) it could be said that the enforceability contravenes public policy or is illegal. There is the prospect that a court may hold that the purported unfettered enforcement of rights triggered by an Event may contravene public policy or be illegal in circumstances under which an Australian law, designed to protect a Queensland GOC the subject of the action, specifically stays their enforcement.
How should the government move forward and ensure compliance?
The Reforms do not prohibit the inclusion of ipso facto clauses in contracts, agreements or arrangements, rather they curtail the circumstances for when they can be relied upon. It is critical that these clauses are not merely deleted without having given due care and attention to alternative means of protecting the government’s rights.
One way of managing this would be to leave the current clauses, but insert an additional clause that provides that all ipso facto clauses included are to be read in accordance with Chapter 5 of the Corporation Act 2001 (Cth). Here is an example of an interpretation clause which could be included:
The rights of the Parties under this Agreement must be construed as being subject to and limited by Chapter 5 of the Corporations Act.
Government departments and agencies should also review and understand the Reforms’ excluded rights and exempted contracts, agreements or arrangements to explore alternative pathways to the desired destination. These alternatives may maintain or even better serve the government’s risk tolerance and appetite.
Moving forward, the government will be required to employ a different approach to the management of contractual counterparties. Best practice would encourage a review of contracts, precedents, policies and procedures to ensure compliance, while at the same time ensuring contractual rights are not diminished.
There is potential for the Reforms to increase the risks associated with contracts involving insolvent counterparties. In these circumstances, it imperative for government and government Agencies to:
Scott Couper, Partner
Paul Catchlove, Solicitor