It is common for a contract to be written so that if one party to it becomes insolvent the contract ceases, but when the contract relates to the creation of something of value to both parties and this is jointly owned, the situation can become more complicated.
In a recent case, the BBC undertook a joint venture agreement (JVA) with a company (part of the Woolworths group) which became insolvent. The JVA created a licence to intellectual property rights, which formed a considerable proportion of the value of the licence. The contractual terms provided that the JVA was terminated if a partner became insolvent and in practical terms meant that the solvent partner could force the insolvent partner to transfer its shares in the joint venture at a substantial undervalue.
The company’s administrators contested the agreement on the basis that its effect was to deprive the creditors of the company of the value of the licence rights. The High Court agreed, in a long and rather complicated judgment, holding that the agreement was contrary to public policy.
It is important when drafting clauses in any agreement to ensure that they are not too one-sided or do not result in unfairness. Such clauses may themselves be unenforceable or render an entire agreement unenforceable.