In Chandos Construction Ltd. v. Deloitte Restructuring Inc., a decision released on October 2, 2020, the Supreme Court of Canada affirmed the anti-deprivation rule in the common law of Canada. The dispute in this case revolved around a construction contract between Chandos Construction Ltd. and Capital Steel Inc. that included a clause which provided a fee of 10% of the contract price for the inconvenience and for monitoring the work in the event of Capital Steel’s bankruptcy.
When Capital Steel filed for bankruptcy prior to completing the contract, Chandos asserted it was entitled to set off 10% of the subcontract price as provided by the contractual clause. The bankruptcy Trustee, Deloitte Restructuring, applied for a determination whether the 10% fee was valid. The judge at first instance found the provision to be a valid liquidated damages clause, but the Alberta Court of Appeal reversed the decision.
The legal issue to be decided by the Supreme Court was whether the commercial purpose behind this clause saved it or whether it was unenforceable due to the anti-deprivation rule. In an 8-1 decision, the Supreme Court adopted a two part “effects-based” test to trigger the anti-deprivation rule:
- that the relevant clause is triggered by an event of insolvency or bankruptcy; and
- that the effect of the clause is to remove value from the insolvent’s estate.
Applying this test to the facts at hand, the Supreme Court held that the effect of the provision in the subcontract was to create a debt from Capital to Chandos in the event of insolvency. Justice Rowe, for the majority, writes, “one can hardly imagine a more direct and blatant violation of the anti-deprivation rule.” The dissenting judgment agreed that the anti-deprivation rule had a longstanding place in Canadian law, but found that the rule should not be applied to transactions or contractual provisions where there was a bona fide commercial purpose which is the approach adopted by the UK Supreme Court’s judgement in Belmont Park Investments Pty. Ltd. v. BNY Corporate Trustee Services Ltd. [2011] UKSC 38, [2012] 1 A.C. 383.
This is the first time that Canada’s highest Court has fully considered the place of the anti-deprivation rule in Canadian law. There are several key takeaways:
- The test for the anti-deprivation rule in Canada is effects-based and not one based on commercial purposes.
- Going forward, it will be more difficult for Canadian contracts to include terms that remove monetary value from an estate in the event of insolvency.
With thanks to Tina Yuan for her assistance in preparing this article.
