Case information

Bankruptcy and insolvency — Insolvent estate — Anti-deprivation rule — Contracts — Penalties — Classic penalty rule — Provision in contract imposing consequences upon insolvency of contracting party — Whether the anti-deprivation rule exists in the common law of Canada — If so, whether provisions added to the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, in 2009 constitute the entire code governing the enforceability of contractual provisions that set consequences upon the bankruptcy, insolvency, or financial condition of a party — If not, whether anti-deprivation should be subject to a purpose-based test or an effects-based test — Whether the “classic penalty rule” applied — Whether the “classic penalty rule” for contracts was abandoned in Elsley v. J.G. Collins Ins. Agencies, [1978] 2 S.C.R. 916 — Whether the Court of Appeal erred by emphasizing bankruptcy law over contract law.

Case summaries are prepared by the Office of the Registrar of the Supreme Court of Canada (Law Branch). Please note that summaries are not provided to the Judges of the Court. They are placed on the Court file and website for information purposes only.

A construction contract between Capital Steel Inc. and Chandos Construction Ltd. contained a provision under which Capital Steel was to forfeit 10 percent of the total contract price in the event that Capital Steel became insolvent (s. VII Q(d)). Capital Steel filed an assignment in bankruptcy prior to completing its contract, and Deloitte Restructuring Inc. was appointed as its trustee in bankruptcy. Chandos argued that it was entitled to set off the costs it had incurred to complete Capital Steel’s work on the project and the amount triggered by the bankruptcy. Deloitte applied for advice and directions on whether Chandos could rely on provision allowing the provision triggered by the bankruptcy.

Neilsen J. found that s. VII Q(d) was enforceable because, as a genuine pre-estimate of damages, it imposed liquidated damages and not a penalty. As a result, it represented a bona fide commercial transaction, the predominant purpose of which was not the deprivation of Capital Steel’s property. The majority at the Court of Appeal allowed the trustee’s appeal on the grounds that s. VII Q(d) contravened the anti-deprivation rule.