Are your termination clauses affected by the Corporate Insolvency and Governance Act?

What's the issue?

Many commercial contracts for the supply of goods or services contain clauses (known as ipso facto clauses) which allow a party to terminate in the event that the other enters into an insolvency process. Concerns have grown that termination under these circumstances restricts the ability of the company in trouble to engage in a successful restructuring or rescue (of either the company or the business) which can result in a negative impact on creditors.

What's the development?

The recently enacted Corporate Insolvency and Governance Act (CIGA), reverses the previous position that ipso facto clauses in contracts for the supply of goods and services are enforceable. This means that such contracts cannot be terminated just because one of the parties enters into an insolvency process.

What does this mean for you?

This marks a significant change to English law and brings our rules more in line with countries such as Australia and the US. The amendments apply to new and existing contracts although there are some temporary COVID-19 exemptions for small suppliers.

There are exceptions to this rule and also some grey areas as to what is covered so you should always take advice but you should be aware that ipso facto clauses covered by CIGA will no longer be enforceable.

This means you may want to reconsider your contractual termination clauses, but also that you should be particularly alive to any indications that the party you are contracting with might be in financial difficulty so that you can consider whether there are grounds for termination before any insolvency proceedings begin.

See our article on other elements of CIGA and the effect of the changes to ipso facto clauses in IP licences which is part of our wider series of articles on IP and insolvency in Download.