Legal Definitions - ipso facto clause

An ipso facto clause is a specific provision within a contract that outlines what automatically happens if one of the parties involved in the agreement experiences financial distress, such as filing for bankruptcy or becoming insolvent. These clauses are designed to pre-determine the contractual consequences of such an event, often allowing the non-bankrupt party to terminate the contract, alter its terms, or exercise other specified rights.

Here are some examples to illustrate how an ipso facto clause works:

• Commercial Lease Agreement: Imagine a small restaurant business leases a storefront from a landlord. Their lease agreement contains an ipso facto clause stating that if the restaurant files for bankruptcy, the lease is automatically terminated, and the landlord has the immediate right to repossess the premises. This clause allows the landlord to quickly regain control of their property without a lengthy legal battle, protecting their investment from a financially unstable tenant.

• Software Licensing Agreement: A large technology company licenses its proprietary software to a smaller startup. The licensing agreement includes an ipso facto clause specifying that if the startup declares bankruptcy, their right to use the software is immediately revoked. This protects the technology company's intellectual property and ensures they don't have to provide ongoing support or updates to a defunct entity, which could be a financial burden.

• Supply Contract: A car manufacturer has a long-term contract with a parts supplier for critical components. An ipso facto clause in their agreement stipulates that if the supplier enters bankruptcy proceedings, the manufacturer can immediately terminate the supply contract and seek alternative suppliers without penalty. This allows the manufacturer to quickly secure its supply chain and avoid production delays that could arise from a supplier's financial collapse, even if the original contract had a minimum purchase commitment.