The ipso facto stay regime now applies to all contracts entered into on or after 1 July 2018. The regime is expected to have a significant impact on the construction industry. Until now, a party faced with a counterparty insolvency would be able to act swiftly, enforcing clauses that give rise to a right to terminate or call upon performance security. Now, the stay on the enforcement of ipso facto clauses will compel a party to continue a contractual relationship with an insolvent counterparty, unless an exemption set out in the Corporations Amendment (Stay on Enforcing Certain Rights) Regulations 2018 or the Corporations (Stay on Enforcing Certain Rights) Declaration 2018 applies.
The construction industry has not enjoyed the same level of success as other sectors in lobbying for exemptions from the ipso facto stay. However, the Regulations and the Declaration contain some important exemptions of which you should be aware.
We previously looked at the impact for the construction industry upon the release of the exposure drafts of the Regulations and Declaration. The Regulations and Declaration are now in final form, and we now look at what has changed since the exposure drafts.
Regulations
Three significant changes have emerged:
1. a narrower exemption for contracts with a Special Purpose Vehicle (SPV) – contracts exempt must now involve an SPV and provide for:
- securitisation;
- a public-private partnership (PPP); or
- a project finance arrangement;
2. a new exemption for any construction contract:
- for Building Work (as defined under statute )[1]
- entered into between 1 July 2018 and 1 July 2023; and
- where the overall project (including the construction contract) has total payments under all contracts for the project for works, goods or services of at least $1 billion.
However the utility of this exemption is reduced by the $1 billion threshold. The Explanatory Memorandum refers to the "complex nature of large scale construction projects", but it is difficult to see why complex major construction projects that fall short of the $1 billion threshold merit a different approach. We also foresee difficulties in applying the $1 billion threshold given that in reality it may not be possible to determine whether total payments under all contracts will exceed $1 billion until late in a project. If an insolvency impacts a project in its early stages, when the overall cost is not known, will the stay apply?
3. as a result of stakeholder consultation, an existing government exemption for the supply of essential IT, or communications technology, products or services has been significantly broadened. The exemption now encompasses contracts for the supply of essential or critical goods or services to government, or to the public on behalf of government: Corporations Amendment (Stay on Enforcing Certain Rights) Regulations (No. 2) 2018 (Amending Regulation). This exemption also applies to the carrying out of essential or critical works for government.
This expanded exemption could potentially cover many government construction or services contracts. The language of the exemption is broad. The Amending Regulation notes that examples of types of essential or critical goods, services or works include public transport services, public security or safety services, and works affecting essential public infrastructure. The Explanatory Statement accompanying the Amending Regulation provides further guidance as to the scope of the exemption. Examples of essential public infrastructure include new roads and railways. Examples of essential services include signalling services and maintenance services for public transport.
The new exemptions relevant to the construction industry
Defence
A contract relating to Australia's national security, border protection or defence capability.
Public hospitals or public health services
A contract for the supply of goods and services to, or by or on behalf of a public hospital or public health service.
Critical or essential goods or services supplied to government
A contract for the supply of essential or critical goods or services to, or the carrying out of essential or critical works for:
- government; or
- the public on behalf of government.
SPV with securitisation
A contract that involves an SPV and provides for securitisation.
SPV in a public-private partnership
A contract that involves an SPV and provides for a public-private partnership.
SPV with project finance arrangements
A contract that involves an SPV and that provides for a project finance arrangement which:
- a financial accommodation is to be repaid or otherwise discharged primarily from the project's cash flow; and
- all or substantially all of the project's assets, rights and interests are to be held as security for the financial accommodation.
Building Work (contracted for prior to 1 July 2023) for projects priced at least $1 billion
Any construction contract:
- for Building Work;
- entered into before 1 July 2023; and
- where the overall project (including the construction contract) has total payments for works, goods or services of at least $1 billion.
Note: Building Work is defined to exclude:
- drilling or extracting oil or natural gas; and
- the extraction of minerals (including tunnelling or boring or construction underground works for that purpose).
Declaration
No new exemptions have been added to the draft Ipso Facto Declaration that significantly impact the construction and infrastructure industry.
Exemptions to rights pertinent in construction contracts are:
- step-in rights, which now expressly exempt rights to engage a third party to step-in (for example, for the Principal, or an authorised third party, to step in and carry out the works);
- set-off rights; and
- a right to payment as indemnity for any liability or loss arising from, and any charges and expenses incurred by another person in, preserving or enforcing its rights (whether or not the indemnity is limited in any way).
Need more information?
See a broader summary of the impact of the Ipso Facto Regulations across industries.
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[1] Building Work means:
- "building work" in section 6 of the Building and Construction Industry (Improving Productivity) Act (Cth) 2016;
- work to be carried out anywhere in Australia that, if carried out in New South Wales, would be covered by paragraph 5(1)(d) or (f) of the Building and Construction Industry Security of Payment Act 1999 (NSW) and not to be excluded by subsection 5(2) of that Act; or
- goods or services to be provided anywhere in Australia that, if provided in New South Wales, would be related goods and services (within the meaning of the Building and Construction Industry Security of Payment Act 1999 (NSW)). Back to article
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