CONSTRUCTION LAW
avoid the effect of bankruptcy laws.2 The majority
of the Alberta Court of Appeal reversed
this decision, finding the Insolvency Clause to
be invalid based on the common law anti-deprivation
rule.3
The SCC agreed the Insolvency Clause violated
the anti-deprivation rule and was void.
The court articulated a two part test for invalidating
a contractual provision based on the anti
deprivation rule as follows:
1. The relevant clause must be triggered by an
event of insolvency or bankruptcy; and
2. The effect of the clause must be to remove
value from the insolvent’s estate.
The SCC stated the test for the anti-deprivation
rule was an effects-based test, meaning the
ultimate effect of the clause should be examined
in assessing the above criteria.
The SCC affirmed that set-off is generally allowed
during the bankruptcy of a contracting
party due to section 97(3) of the Bankruptcy
and Insolvency Act.4 Set-off reduces the value of
assets that are transferred to the insolvent’s estate,
but it only applies to enforceable debts or
claims. Since the anti-deprivation rule voided
the Insolvency Clause, Chandos was unable to
apply set-off against Capital Steel for the 10 per
cent amount.
Key takeaways
Chandos urges parties entering into construction
contracts to avoid clauses that are triggered
by insolvency or bankruptcy and that
remove value from the insolvent party’s estate.
These clauses are invalid and unenforceable.
Some contractual terms that are prohibited by
the anti-deprivation rule include clauses where
a party forfeits some or all of the contract price
due to their insolvency or bankruptcy, or clauses
where fees, charges or other amounts are payable
solely upon insolvency or bankruptcy.
Other contractual terms can be employed
to protect a party in the event of insolvency or
bankruptcy by their contractual counterpart.
For example, any clause triggered by events
other than bankruptcy or insolvency are valid,
including penalties that arise upon default of
the contract.
Contracting parties can consider using clauses
where property is removed from the insolvent
party’s estate but no value is eliminated from
the estate. For example, the anti-deprivation rule
does not apply if a third party’s assets are forfeited
upon bankruptcy or insolvency, since this
term would not reduce the value of the insolvent
party’s estate. Additionally, parties may be able
to modify their security interests or enter into
a credit default swap agreement (amending the
nature or type of security) upon the insolvency
or bankruptcy of their contractual counterpart
without offending the anti-deprivation rule, provided
these clauses do not increase the amount of
security held over the insolvent party.5
Parties can also protect themselves in the
event of an insolvency or bankruptcy by their
contractual counterparts by taking security,
acquiring insurance or requiring third-party
guarantees when the contract is executed.6
Before entering into a security agreement, parties
should verify whether any creditors already
have priority charges against the assets which
comprise of the security. In the case of guarantees,
suitable guarantors may include a parent
company, directors or officers of the contracting
party. A guarantee causes the guarantor to become
personally liable for the debts or contractual
breaches of the subcontractor.
Suppliers and subcontractors can require a labour
and materials payment bond at the time of
entering into a contract.7 This bond guarantees
that suppliers and subcontractors are paid for
the work and materials that they supply, up to a
specified amount. Additionally, parties may require
a performance bond, which provides payment
up to a specified amount if the contractor
is unable to complete the project work or is in
default of the construction contract. For the
most project security (but usually at an additional
cost to the price of the work), a contractor
would have both a labour and materials payment
bond and a performance bond in place for
at least 50 per cent of the value of the contract.
Overall, when entering into construction
contracts, contracting parties should consider
contacting legal counsel to ensure their contracts
are drafted with enforceable terms that
do not offend the anti-deprivation rule. When
drafting construction contracts, parties should
also consider if they are appropriately protected
should their counterparty become bankrupt
or insolvent.
Charles W. Bois is a partner in the Vancouver
office of Miller Thomson LLP. Rachel Haack and
Kayla Romanow are associates in the Regina office
of Miller Thomson LLP. For inquiries, contact
Charles at cbois@millerthomson.com, or for
any Saskatchewan construction inquiries, please
contact Rachel at rhaack@millerthomson.com,
or Kayla at kromanow@millerthomson.com.
References
1. 2020 SCC 25.
2. Alta Q.B., Edmonton,
242169632, 17 March 2017.
3. 2019 ABCA 32.
4. RSC, 1985, c B-3. Set-off allows a creditor
(who happens to also be a debtor)
to reduce the amount they owe to
the bankrupt by the amount they (as
debtor) are owed by the bankrupt.
5. Belmont Park Investments Pty
Ltd v. BNY Corporate Trustee
Services Ltd, 2011 UKSC 38.
6. Supra note 1 at para 40.
7. See s. 81 of The Builders’ Lien
Act, S.S. 1984-85-86, c. B-7.1 and
s. 69 of The Construction Lien
Act, R.S.O. 1990, c. C.30;
Parties can also protect
themselves in the event of an
insolvency or bankruptcy by their
contractual counterparts by taking
security, acquiring insurance or
requiring third-party guarantees
when the contract is executed.
46 Think BIG | Quarter 1 2021 | saskheavy.ca
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