Chandos Construction v.
How to draft construction contracts to
avoid the anti-deprivation rule
In Chandos Construction Ltd v. Deloitte
Restructuring Inc1 “Chandos”, the majority
of the Supreme Court of Canada
(SCC) reaffirmed the common law anti-deprivation
rule in Canada. The anti-deprivation rule
voids contractual terms that apply upon a party’s
insolvency and bankruptcy where the clause
removes value from an insolvent person’s estate
that would otherwise have been available for
the insolvent person’s creditors. Anyone entering
into construction contracts should avoid
contractual provisions that may trigger the antideprivation
rule and understand that if they are
already in a contract, they may not be enforceable.
However, despite the anti-deprivation rule,
there are contractual provisions that can be used
to protect parties where their contracting counterpart
becomes insolvent or bankrupt.
Chandos Construction Ltd. (Chandos) was a
general contractor that entered into a subcontract
with Capital Steel Inc. (Capital Steel). The
subcontract provided that in the event of Capital
Steel’s insolvency or bankruptcy, Capital Steel
would forfeit 10 per cent of the contract price to
Chandos “as a fee for the inconvenience of completing
the work using alternate means and/or
for monitoring the work during the warranty
period” (the “Insolvency Clause”).
Capital Steel filed an assignment in bankruptcy
prior to completing the subcontract work.
Chandos argued that it was entitled to rely upon
the Insolvency Clause and set-off 10 per cent
of the subcontract price as a fee. The Trustee
in Bankruptcy for Capital Steel applied to the
Alberta Court of Queen’s Bench to determine
whether the Insolvency Clause was valid.
Trial and appellate
In Chandos, the Alberta Court of Queen’s Bench
found the Insolvency Clause was valid because
the Insolvency Clause was not an attempt to
By Charles W. Bois, Rachel Haack and Kayla Romanow, Miller Thomson LLP
XICRO / 123RF
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