The recent ipso facto amendments to the Corporations Act prevent parties from terminating a contract simply because the other party falls into external administration.
Nevertheless, as with many areas of life and law, there are the rules and then there are the exceptions to the rules.
While the rules have been covered a lot by now, the exceptions have been mostly ignored. Here we’ll explore the most likely exceptions to the stay on termination, as they might relate to the construction industry. We’ll also cover a few non-termination options that you have available to you, which haven’t been affected by the amendments.
If The Project Is Valued Over 1 Billion Dollars
You will not be prevented from terminating a party in financial distress if the contract:
- was entered into after 1 July 2018 (but before 1 July 2023).
- was for “Building Work” “Construction Work” or “related goods or services” (as relevantly defined).
- relates to a “Project” with a total value of at least $1 billion. However, the interpretation of “Project” is not very clear.
If your project fits within the above listed requirements, you remain entitled to terminate the contract in circumstances where the other entity has fallen into administration.
Government Work Does Not Apply
Is the government involved in your construction project? If so, so long as you are supplying essential or critical goods, services or works to the government, an authority of the government or a local governing body, the construction project will not be forced to uphold a contract with a company in financial distress.
What are “essential critical goods, services or works”? Sadly these terms aren’t defined, and the examples given are unhelpfully vague. As best as we can tell, it includes all works and supply in relation to:
- Public transport services (our example, the construction of a train line).
- Public security or safety services (our example, the construction of a jail).
- Works affecting essential public infrastructure (our example, town utilities such as water and electricity).
If your construction project falls within “Government Works” your rights to terminate will not be affected.
Hospitals and Related Health Services are Excluded
According to the Corporations Regulations, any contract, agreement or arrangement for the supply of goods or services for, by or on behalf of a public hospital or a public health service is expressly excluded from the stay provisions.
Therefore, if you are involved in the construction of a public hospital or related health service, the stay on termination does not apply.
Contracts Resulting from a Novation / Variation / Assignment
If the contract was already on foot before 1 July 2018 (and therefore not covered by the stay) you will not be prevented from ispo facto terminating a contracting party if your contract resulted from:
- a novation;
- an assignment; or
- a variation,
of that contract. So basically, if you take on a contract that already existed before 1 July 2018, you’re in the same position as if you were the original contracting party.
However, much like the $1 billion exception, this exception will no longer apply after 1 July 2023.
NONE OF THE ABOVE? THERE ARE OTHER SOLUTIONS
What are the options for parties to a non-government construction project that is worth less than $1 billion and is no way related to the public health sector?
There remain alternative ways around being forced to work with a company in financial distress.
For example – the stay does not apply to contractual rights that are declared by a Minister not to apply.
You Can Still Novate or Assign the Works to Someone Else
A right:
- to assign or otherwise transfer rights or obligations;
- to novate rights or obligations;
is not affected by the Ipso Facto stay.
Therefore, if your contract contains a right to novate (without requiring the consent of the other party) you may novate the contract to effectively remove all rights and obligations from the first contractor’s hands to an alternative contractor.
You Can Take Give All the Works to Someone Else
A right:
- to perform obligations;
- to engage another person to perform obligations;
- to enforce rights; or
- to engage another person to enforce rights;
is not affected by the Ipso Facto stay.
Construction contracts often include provisions which allow a principal or superior contractor to “step in” and perform the obligations of a sub-contractor. This is commonly referred to as a “take out” clause because it effectively allows for the party to take away the works and obligations from the first party and engage someone else instead.
In this case, the contract isn’t necessarily being terminated, but the distressed party will no longer be performing its obligations under it.
The right to engage another entity to perform the obligations of the insolvent entity is expressly excluded from the ipso facto stay.
If your construction contract has this “take out” or “step in” clause, it may provide a feasible alternative to kicking the contractor off the project, without having to terminate the contract.
THE ISPO FACTO CHECKLIST
Worried that you will be forced to contract with a company that recently had administrators appointed?
If:
- the Project is valued over $1 billion;
- the contract is for government related work;
- the contract is for a hospital or related health service; or
- the contract resulted from a novation, variation or assignment;
you are the exception to the rule – and you can likely terminate.
However, terminating a contract in any event (including an insolvency event) is serious, comes with many complications and is not a decision to be taken lightly. You should always get advice before terminating or stepping in to a contract.
Otherwise, if your contract or project does not fit within the criteria above, you might still be able to:
- novate yourself, or the contractor, out of the contract;
- take all of the work from the insolvent contractor, and give it to someone else.
Insolvency is complicated, and the law is not always very clear.
If in doubt – please give us a call and we’ll clarify the situation for you.
