[co-author: Dylan Gibbs - Articling Student]
The Supreme Court of Canada recently granted leave to appeal from the Alberta Court of Appeal's decision in Capital Steel Inc v Chandos Construction Ltd, 2019 ABCA 32. The case addresses the enforceability of clauses that impose monetary consequences for breach of contract, particularly where those consequences are levied because of a contracting party's insolvency. A majority of the Court of Appeal concluded that clauses imposing such consequences cannot be enforced where the effect would prejudice creditors.
BackgroundChandos Construction Ltd. was the general contractor for a condominium development in St. Albert. Chandos hired Capital Steel Inc. as a subcontractor for the project. The parties agreed that Capital Steel would forfeit 10 percent of the total contract price, approximately $140,000, in the event that it committed any act of insolvency (the "Insolvency Clause"). Capital Steel ultimately did become insolvent and voluntarily assigned itself into bankruptcy, triggering the Insolvency Clause. When Capital Steel became bankrupt, Chandos owed Capital Steel approximately $150,000 in unpaid amounts under the agreement. Chandos purported to reduce the amount owing to Capital Steel by $140,000, based on the Insolvency Clause, which would have reduced the assets available to Capital Steel's creditors.
The Alberta Court of Appeal considered whether the Insolvency Clause was an enforceable term of the agreement between the parties.
Ipso Facto Clauses and the Anti-Deprivation RuleAn ipso facto clause is a contractual provision that levies a consequence against a contracting party as a result of their insolvency. In restructuring proceedings, legislative provisions in the Bankruptcy and Insolvency Act, 1985, c B-3 [BIA] and the Companies' Creditors Arrangement Act, 1985, c C-36 [CCAA] expressly prohibit the...
