The Anti-Deprivation Rule and its Implications for Construction Contracts: Chandos Construction v Deloitte

  • November 11, 2020
  • Bruce Reynolds and Nicholas Reynolds, Singleton Reynolds.

In Chandos Construction v Deloitte Restructuring, the Supreme Court clarified one aspect of bankruptcy law – the scope and application of the anti-deprivation rule – while leaving an unsettled area of contract law – the penalty doctrine – to be resolved for another day. Here, we consider the implications of the newly-clarified anti-deprivation rule as it applies to the construction industry.

Background

Chandos Construction Ltd (“Chandos”) was the general contractor on a condominium project in Alberta. Chandos entered into a subcontract with Capital Steel Inc. (“Capital Steel”) for structural steel work (the “Subcontract”). The Subcontract provided for a series of consequences should Capital Steel commit any act of bankruptcy or insolvency, including that:

  • Capital Steel would pay Chandos’ costs of having to complete Capital Steel’s work, plus a “reasonable allowance” for overhead and profit;
  • Chandos would be entitled to withhold up to 20% of the Subcontract price until the warranty and guarantee periods expired; and
  • Capital Steel would forfeit 10% of the Subcontract price as a fee for Chandos completing Capital Steel’s work and/or for monitoring the work during the warranty period. (collectively, these are the “Bankruptcy Clause”)

Capital Steel filed an assignment in bankruptcy prior to completing its work. At that time, Chandos owed Capital Steel $149,618.39. Chandos argued that it was entitled to set off the costs it had incurred to complete Capital Steel’s work, relying on the common law of set-off, which persists in bankruptcy pursuant to s. 97(3) of the Bankruptcy and Insolvency Act (the “BIA”). Chandos also argued it was entitled to set off the 10% of the Subcontract price that Capital Steel had forfeited.

Capital Steel’s trustee in bankruptcy, Deloitte, applied for advice as to whether the Bankruptcy Clause was contrary to the anti-deprivation rule, which rule voids any contractual term stipulating that upon an insolvency or bankruptcy, property is removed from the bankrupt’s estate and placed in the hands of a third party who is not the trustee in bankruptcy. The anti-deprivation rule is intended to avoid depriving the trustee in bankruptcy of the opportunity to realize upon the property in question, and to thereby avoid prejudicing creditors.