In its most recent decision, Chandos Construction Ltd v Deloitte Restructuring Inc.1, the Supreme Court of Canada (the "SCC") reaffirmed the existence of the common law anti-deprivation rule in Canada. The anti-deprivation rule provides that a contractual provision is void if it removes an asset upon insolvency that would otherwise be available for the bankrupt's creditors. This case sheds light on important aspects of the enforceability of certain contract provisions in an insolvency context and confirms that contract provisions that have the effect of depriving the insolvent debtor's estate of value are unenforceable.
Facts
Chandos Construction Ltd. ("Chandos"), a general construction contractor, entered into a construction contract ("Subcontract") with Capital Steel Inc. ("Capital Steel"), a subcontractor. The Subcontract contained a provision that entitled Chandos to 10% of the contract price in the event of Capital Steel's bankruptcy. Pursuant to the Subcontract, this sum would be forfeited "as a fee for the inconvenience of completing the work using alternative means and/or for monitoring the work during the warranty period" (the "Insolvency Clause").
Prior to completing its obligations under the Subcontract, Capital Steel filed an assignment in bankruptcy. At that date of bankruptcy, Chandos owed Capital Steel $149,618.39 under the Subcontract. Chandos argued that the cost of completing the work should be set-off against what it owed since Chandos completed the balance of the work at its own expense. Chandos also argued that it was owed 10% of the contract price based on the Insolvency Clause and that this amount should also be set-off against the amount Chandos owed to Capital Steel. If...
