The Promise and Perils of Regulating Ipso Facto Clauses

International Insolvency Review

31 Pages Posted: 11 Oct 2021

See all articles by Janis P. Sarra

Janis P. Sarra

University of British Columbia (UBC), Faculty of Law

Jennifer Payne

University of Oxford - Faculty of Law

Stephan Madaus

Martin-Luther-University Halle-Wittenberg

Date Written: October 6, 2021

Abstract

It is common for contracts to include a clause which provides that on an event of default the counterparty has an unconditional right to terminate the contract or accelerate payment (an ipso facto clause). The regulation of ipso facto clauses has become a topic of debate in recent years with a number of jurisdictions introducing constraints on such clauses as part of broader restructuring reform packages. These jurisdictions include Germany in 2021 (as part of its implementation of the EU Restructuring Directive) and the UK in 2020. For jurisdictions introducing such constraints for the first time, there is much to learn from those, such as Canada, that have had constraints on ipso facto clauses in place for much longer. This article examines the experience in Canada alongside the constraints introduced in the UK, the EU Restructuring Directive and in Germany, and identifies a series of steps which policymakers should follow when revising a regime on ipso facto clauses. Although there are a number of common themes that emerge, it is clear that different jurisdictions often make quite distinct policy choices regarding the rationale for any constraints on ipso facto clauses as well as on the specific nature and scope of the provisions. Different jurisdictions find different points of balance between the interests of individual creditors in upholding their freedom of contract and the rights of the debtor and creditors as a whole in preserving the business as a going concern. The range of choices is not per se problematic as long as they are implemented with clarity and transparency, so that debtors and creditors can bargain ex ante in the light of any legislative provisions.

Keywords: ipso facto clause, insolvency, restructuring, policy choice, Germany, Canada, United Kingdom

JEL Classification: K12, K20, K22

Suggested Citation

Sarra, Janis P. and Payne, Jennifer and Madaus, Stephan, The Promise and Perils of Regulating Ipso Facto Clauses (October 6, 2021). International Insolvency Review, Available at SSRN: https://ssrn.com/abstract=3937157 or http://dx.doi.org/10.2139/ssrn.3937157

Janis P. Sarra

University of British Columbia (UBC), Faculty of Law ( email )

1822 East Mall
Vancouver, British Columbia V6T 1Z1
Canada
604-822-9255 (Phone)

HOME PAGE: http://www.law.ubc.ca/faculty/Sarra/

Jennifer Payne

University of Oxford - Faculty of Law ( email )

Oxford
United Kingdom

Stephan Madaus (Contact Author)

Martin-Luther-University Halle-Wittenberg ( email )

Faculty of Law , Economics and Business
Universitaetsring 2
Halle/Saale, 06108
Germany

HOME PAGE: http://www.jura.uni-halle.de/lehrstuehle_dozenten/madaus/madaus/?lang=en

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