Bankruptcy Provisions in Contracts: Drafting Tips, Mitigating Risks, Enforcement Issues

Description

Most businesses, no matter what the industry, rely on executory contracts that often contain bankruptcy provisions. When entering into any agreement it is important for businesses to understand the implications of these provisions and the risks they may present if the counterparty files for bankruptcy.

Bankruptcy provisions often provide that upon a bankruptcy filing of any party to the contract, the contract shall be deemed terminated and unenforceable. Bankruptcy courts refer to such contract provisions as unenforceable, ipso facto clauses. Contractual waivers of the automatic stay (established by Section 362 of the Bankruptcy Code) are not per se unenforceable like ipso facto clauses, but the enforceability of such waivers is the exception, not the rule.

Beyond ipso facto clauses and automatic stay waivers, references to the bankruptcy process in any contract should be scrutinized. Such provisions could unintentionally invoke provisions of the Bankruptcy Code, creating confusion at the time of enforcement or seek to avoid the requirements of the Bankruptcy Code in a way that would never be tolerated in a bankruptcy setting.

The better approach when drafting bankruptcy provisions is that they provide clarity in a stressful bankruptcy situation. Regardless of what form bankruptcy provisions take, the parties should understand the terms at the time of execution of the contract rather than try to understand what they've agreed to after a bankruptcy filing occurs.

Listen as our authoritative panel discusses key considerations when reviewing and drafting bankruptcy clauses and provides tips for providing innovative relief in advance of a bankruptcy filing.