Are Ipso Facto clauses on their way out?

"Apropos...it's Latin. You got to have a basic grasp of Latin if you're working in Curry's” - Alan Partridge.

Apart from being used to underline the authenticity of historical dramas or to confuse opponents and the media by certain politicians, Latin is, at best, a dormant language

 

Except in legal circles where it’s useful shorthand for various concepts and precedents – Ipso Facto being a great example. 

 

What is Ipso Facto? The dictionary describes it simply as meaning “by that very fact or act” and gives an example of “the enemy of one’s enemy may be ipso facto a friend”. 

 

Another easy way is to remember it’s another way of saying “if this, then that” or if you eat 20 deep fried mars bars ipso facto you’re going to feel ill/put on weight. 

 

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The legal importance and definition in the UK of Ipso Facto relates to contracts between companies, specifically termination clauses. 

 

For example company B signs a contract to supply company A. Company A unfortunately goes into administration, so company B exercises the Ipso Facto clause and terminates the contract. 

 

Now, it could be beneficial for company B as they could find a new customer and head off potential losses but it’s problematic for company A, especially if they’re trying to restructure the business and get it back on its feet financially. In fact, the use of this clause can exacerbate insolvency situations tremendously. 

 

Which is why their use might be curtailed shortly.

 

As part of The Insolvency Service’s May 2016 consultation on the corporate insolvency framework in the UK, the government proposes outlawing Ipso facto clauses. 

 

They consider that it would be detrimental to the other additional measures designed to strengthen the insolvency regime including new insolvency and administration tools such as the proposed restructuring moratorium and subsequent restructuring plans. 

 

Currently a company can trigger an ipso facto clause not only if a partner becomes insolvent, but also if there are events connected with the debtor company’s financial position. These would otherwise allow ipso facto clauses to be exercised on or following (but not before) a trigger event such as discussing a CVA with an insolvency practitioner but not yet entering into one. New legislation would outlaw this. 

 

Cui bono?  

 

It’s part of a concerted effort by the government to tighten up the insolvency process in the UK, closing various loopholes and tactics that could derail administrations or otherwise make them harder to achieve their purpose of rescuing failing businesses.  

 

They will also bring the UK into line with other international jurisdictions with robust insolvency legal apparatus such as Australia and the USA which have also declared ipso facto clauses ineffective. 

 

This doesn’t commit a partner to remain in a contract indefinitely. Suppliers are still able to terminate agreements based on other grounds such a non-payment for goods and services or criminal activity. 

 

Chris Horner, insolvency director with Robson Scott said: “By outlawing the use of ipso facto clauses in the event of insolvency, the consultation would give companies in administration a better chance of a successful outcome and emerging from the process stronger and viable. 

 

“The legislation also proposes that certain essential supplies such as utilities and IT have to continue to be supplied to a company in administration. Certain other financial services are also exempted as the risk of pulling the plug on crucial working capital and other debt facilities is too great.”

 

“While the consultation is still ongoing it’s impossible to judge for certain the outcome but it will have an effect on companies in future deciding whether or not to include them in contracts if they are going to be void or unenforceable should one of the signitaries be under an insolvency event.” 

So maybe it’s usque ad tempus, in ipso facto incurrendae – or time’s up for ipso facto.