In a recent 8-1 decision, the Supreme Court of Canada upheld a majority court of appeals decision and invalidated a semi-ipso facto clause providing that a company’s bankruptcy filing triggers a payment of 10% of the contract price to its counterparty. See Chandos Construction Ltd. v. Deloitte Restructuring, 2020 SCC 25 (Oct. 2, 2020). Resolving an unsettled issue, the Supreme Court of Canada found that the clause violated the Canadian common law “anti-deprivation rule,” which the court held renders void any provision in an agreement which provides that upon bankruptcy, value is to be removed from the reach of creditors and handed to others parties. What does this mean for U.S. and other global commercial actors doing business in Canada?

The Facts

Chandos, a general construction contractor, entered into an agreement with Capital Steel, as a subcontractor, to perform certain structural steel work on a condominium project in Alberta, Canada. The contract contained a clause (referred to hereinafter as the “Insolvency Clause”) enumerating four consequences to be triggered in the event Capital Steel files for bankruptcy or takes certain insolvency-related actions: (1) the contract will be “suspended,” (2) Capital Steel shall bear the costs of such suspension, (3) Chandos could withhold certain funds from Capital Steel until the applicable warranty and guarantee periods run out, and (4) Capital Steel will pay Chandos 10% of the contract price, which amounted to about CAD$137,000.

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