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:
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