The Anti-Deprivation Rule in Canadian Common Law

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In a recent 8-1 decision, the Supreme Court of Canada upheld a majority decision of the Court of Appeal and invalidated a semi-ipso facto clause providing that the filing for bankruptcy of a company triggers a payment of 10% of the contract price to its counterparty. See Chandos Construction Ltd. vs. Deloitte restructuring, 2020 CSC 25 (Oct 2, 2020). Resolving a pending issue, the Supreme Court of Canada found that the clause violated the Canadian common law “anti-deprivation rule” which, according to the Court, overrides any provision of an agreement that provides that in the event of bankruptcy, the value must be taken out of the reach of creditors and handed over to other parties. What does this mean for the United States and other global trade players doing business in Canada?

Facts

Chandos, a general construction contractor, has entered into an agreement with Capital Steel, as a subcontractor, to perform certain structural steel work on a condominium project in Alberta, Canada. The contract contained a clause (hereinafter referred to as “the insolvency clause”) listing four consequences to be triggered if Capital Steel files for bankruptcy or takes certain insolvency-related actions: (1) the contract will be “suspended”, ( 2) Capital Steel will bear the costs of such suspension, (3) Chandos may withhold certain funds of Capital Steel until the expiration of the applicable warranty and guarantee periods, and (4) Capital Steel will pay Chandos 10% of the contract price, which amounted to approximately CA $ 137,000.



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