In the Court of Appeal of Alberta  
Citation: Capital Steel Inc v Chandos Construction Ltd, 2019 ABCA 32  
Date: 20190129  
Docket: 1703-0085-AC  
Registry: Edmonton  
Between:  
Deloitte Restructuring Inc. in its Capacity  
as Trustee in Bankruptcy of Capital Steel Inc., a Bankrupt  
Appellant  
(Plaintiff/Applicant)  
- and -  
Chandos Construction Ltd.  
Respondent  
(Defendant/Respondent)  
_______________________________________________________  
The Court:  
The Honourable Madam Justice Patricia Rowbotham  
The Honourable Madam Justice Barbara Lea Veldhuis  
The Honourable Mr. Justice Thomas W. Wakeling  
_______________________________________________________  
Reasons for Judgment Reserved of The Honourable Madam Justice Rowbotham  
Concurred in by The Honourable Madam Justice Veldhuis  
Dissenting Reasons for Judgment Reserved of The Honourable Mr. Justice Wakeling  
Appeal from the Order by  
The Honourable Mr. Justice K.G. Nielsen  
Dated the 17th day of March, 2017  
Filed on the 27th day of March, 2017  
(Docket: BK03 2169632)  
_______________________________________________________  
Reasons for Judgment Reserved of  
The Honourable Madam Justice Rowbotham  
_______________________________________________________  
I.  
Introduction  
A construction contract between Capital Steel Inc. (Capital Steel) and Chandos  
[1]  
Construction Ltd. (Chandos) contained a provision that imposed a monetary consequence on  
Capital Steel’s insolvency. When Capital Steel filed an assignment in bankruptcy, Deloitte  
Restructuring Inc. (Deloitte) was appointed as the trustee in bankruptcy for Capital Steel’s estate.  
A chambers judge allowed Chandos to rely on the provision with the result that there were less  
assets in Capital Steel’s estate for distribution to creditors. At issue on appeal is whether the  
provision conflicts with the common law anti-deprivation rule, which prevents parties from  
contracting out of bankruptcy laws.  
[2]  
This case is not fundamentally one of contract law but of bankruptcy law. It is insolvency  
law that determines the outcome. The Bankruptcy and Insolvency Act, RSC 1985, c B-3 (BIA)  
provides the mechanism for the orderly liquidation of a bankrupt’s estate and the distribution of the  
value of the estate in accordance with the statutory provisions, including the priorities established  
therein. Its purpose is to codify, for all debtors and creditors, what will transpire in the event of a  
bankruptcy. This certainty is critical to the operation of commercial entities throughout Canada.  
[3]  
One of the purposes of the BIA is to prevent a premature race to the debtor’s assets. The Act  
is premised on collective action intended to maximize the return to all creditors pari passu. The  
Act specifically gives trustees the power to set aside preferences and other fraudulent transactions  
whose underlying objective is to circumvent the Act.  
[4]  
A trustee in bankruptcy has an obligation to take possession of all property of the bankrupt.  
Section 67(1) of the BIA defines property of the bankrupt that is divisible among the creditors.  
Accounts receivable clearly fall within that definition. In addition, a right of set off that existed at  
the date of bankruptcy (not as a result of the bankruptcy) is not affected.  
[5]  
A contractual provision triggered only in the event of insolvency or bankruptcy which  
would deprive creditors of value otherwise available to them and effectively directs the value to an  
unsecured creditor is void: Aircell Communications Inc v Bell Mobility Cellular Inc, 2013 ONCA  
95 at paras 10-12, 14 CBR (6th) 276.  
[6]  
The contractual provision at issue in this appeal is such a provision and offends the  
common law anti-deprivation rule. The rule forms part of the common law of Canada and has not  
been ousted by amendments to the BIA. The chambers judge acknowledged the rule but, in my  
view, applied the wrong test for determining whether the provision offended the anti-deprivation  
rule. I allow the appeal.  
Page: 2  
II.  
Facts  
Chandos was hired as the general contractor for a condominium project in St. Albert,  
[7]  
Alberta. It subcontracted steel-related work on the project to Capital Steel for a price of  
$1,373,300.47. Capital Steel completed the majority of the work required under the subcontract,  
and Chandos made payments to Capital Steel totalling $1,223,682.08. This left an outstanding  
balance of $149,618.39.  
[8]  
On September 26, 2016, Capital Steel filed an assignment in bankruptcy. Deloitte was  
appointed as the trustee. Capital Steel had not completed everything required under the  
subcontract prior to filing the assignment, causing Chandos to incur costs estimated at $22,800.00  
to complete Capital Steel’s work on the project.  
[9]  
Offsetting the $22,800.00 in completion costs against the outstanding balance of  
$149,618.39, Chandos owed a total of $126,818.39 to Capital Steel. Chandos took the position that  
it was entitled to further offset this amount against 10 percent of the total contract price, or  
$137,330.05, which it alleged Capital Steel had agreed to forfeit in the event of insolvency. This  
would effectively eliminate the debt owing from Chandos to Capital Steel and give Chandos a  
$10,511.66 claim provable in the bankruptcy proceedings. Clause VII Q of the subcontract reads,  
in part:  
In the event the Subcontractor commits any act of insolvency, bankruptcy, winding  
up or other distribution of assets, or permits a receiver of the Subcontractor's  
business to be appointed, or ceases to carry on business or closes down its  
operations, then in any such events:  
(d) the Subcontractor shall forfeit 10 [percent] of the within Subcontract  
Agreement price to the Contractor as a fee for the inconvenience of  
completing the work using alternate means and/or for monitoring the work  
during the warranty period.  
[10] On March 6, 2017, Deloitte applied to the Court of Queen’s Bench seeking advice and  
directions on whether Chandos was entitled to rely on clause VII Q(d).  
III.  
Decision Below  
[11] Before the chambers judge, Deloitte argued that clause VII Q(d) had the effect of  
withdrawing value from Capital Steel’s estate that would otherwise flow to creditors. As the clause  
was triggered by Capital Steel’s insolvency, Deloitte argued that it violated the common law  
anti-deprivation rule. It also argued that clause VII Q(d) was an unenforceable penalty, rather than  
a liquidated damages provision.  
Page: 3  
[12] The chambers judge recognized that the common law anti-deprivation rule prevents parties  
from contracting out of bankruptcy laws. He stated that if clause VII Q(d) were a liquidated  
damages provision rather than a penalty, it would not violate the rule.  
[13] The chambers judge ultimately found that the clause was a genuine pre-estimate of  
damages, which imposed liquidated damages and not a penalty. He also held that clause VII Q(d)  
represented a bona fide commercial transaction that did not have as its predominant purpose the  
deprivation of Capital Steel’s property. Consequently, the chambers judge concluded that Chandos  
could enforce clause VII Q(d) against Deloitte.  
IV.  
Grounds of Appeal and Standard of Review  
[14] Deloitte’s appeal raises two issues:  
1. Does clause VII Q(d) violate the common law anti-deprivation rule?  
2. Does clause VII Q(d) impose liquidated damages or a penalty?  
[15] The content of the common law anti-deprivation rule and the proper test for invalidating  
penalty provisions are pure questions of law reviewable for correctness: Housen v Nikolaisen,  
2002 SCC 33 at para 8, [2002] 2 SCR 235. Absent an extricable legal error, the chambers judge’s  
application of the proper tests is reviewable on a standard of palpable and overriding error: Housen  
at para 36.  
V.  
Analysis  
[16] The common law anti-deprivation rule and the rule against penalties are two distinct  
concepts that must be assessed separately. Clause VII Q(d) may be found unenforceable under  
either of the two rules. I conclude that clause VII Q(d) conflicts with the anti-deprivation rule, and  
it is therefore unnecessary for me to consider whether clause VII Q(d) imposes liquidated damages  
or a penalty.  
A. The Common Law Anti-Deprivation Rule  
[17] The anti-deprivation rule forms a part of what is referred to as the “fraud on the bankruptcy  
law” principle. The essence of the fraud on the bankruptcy principle is that parties cannot arrange  
their affairs through contract in a way that conflicts with the operation of bankruptcy laws:  
Roderick J Wood, “Direct Payment Clauses and the Fraud Upon the Bankruptcy Law Principle: Re  
Horizon Earthworks Ltd. (Bankrupt)” (2014) 52:1 Alta LR 171 [Wood, “Fraud Upon the  
Bankruptcy”]; Anthony Duggan et al, Canadian Bankruptcy and Insolvency Law, 3rd ed (Toronto:  
Emond, 2015) at 297.  
[18] The chambers judge commented that there was some debate about whether the  
anti-deprivation rule applied in Canada and the extent of its application. He ultimately concluded  
Page: 4  
that it was clear that there was a common law rule, based on public policy, that prevented parties  
from contracting out of bankruptcy law and that given the rule, he would determine whether clause  
VII (Q)(d) was an attempt to contract out of bankruptcy law. Deloitte submits that Canadian  
jurisprudence recognizes the common law anti-deprivation rule. Chandos does not deny the  
existence of the rule, but contends it has not enjoyed significant application in Canada. My  
colleague, Wakeling JA, goes further and concludes that the common law anti-deprivation rule is  
not part of Canadian law. I disagree with his conclusion.  
[19] The fraud on the bankruptcy law principle traces its origins from England; by the 19th  
century, the principle’s adoption was certain enough to warrant commentary that “the law is too  
clearly settled to admit of a shadow of doubtabout its application: Whitmore v Mason (1861), 70  
ER 1031 at 1034, 2 J & H 204.  
[20] The fraud on the bankruptcy law principle can be divided into two distinct sub-rules:  
Roderick J Wood, Bankruptcy and Insolvency Law, 2nd ed (Toronto: Irwin, 2015) at 88 [Wood,  
“Bankruptcy and Insolvency”]. The first is the pari passu rule. This rule invalidates contractual  
provisions that, if enforced during bankruptcy proceedings, would alter the bankruptcy scheme of  
distribution. Provisions that offend the pari passu rule do not affect the size of the total pot of  
assets available to creditors but allow certain creditors to receive more than their fair share:  
Duggan et al at 444; Wood, “Fraud Upon the Bankruptcyat 177. Under the pari passu rule, it is  
irrelevant whether the contractual provision is triggered by insolvency; arrangements that would  
have been enforceable against the debtor outside of bankruptcy proceedings, but would alter the  
scheme of distribution after proceedings begin, are unenforceable against the trustee: Wood,  
“Fraud Upon the Bankruptcy” at 177.  
[21] The second rule of the fraud on the bankruptcy law principle is the anti-deprivation rule.  
The anti-deprivation rule prevents parties from agreeing to remove property from a bankrupt’s  
estate in the event of insolvency that would have otherwise vested in the trustee: Duggan et al at  
297; Wood, “Fraud Upon the Bankruptcy” at 176. Provisions that offend the anti-deprivation rule  
reduce the total pot of assets available to the bankrupt’s creditors. As stated in Whitmore at 1034:  
[N]o person possessed of property can reserve that property to himself until he shall  
become bankrupt, and then provide that, in the event of his becoming bankrupt, it  
shall pass to another and not to his creditors.  
[22] In my view, the fraud on the bankruptcy law principle, including the anti-deprivation rule,  
has a clear jurisprudential and policy basis that supports its application. The anti-deprivation rule  
was adopted from England and continues to apply in Canada.  
[23]  
There is no doubt that the pari passu rule applies in Canada. In AN Bail Co v Gingras et al,  
[1982] 2 SCR 475, 54 NR 280, the Supreme Court dealt with a direct payment clause in a  
construction contract. The clause allowed the property owner to pay any amounts owing to the  
general contractor directly to subcontractors to satisfy the general contractor’s obligations. When  
Page: 5  
the general contractor entered bankruptcy, the trustee argued that this provision was no longer  
effective. While the provision would not reduce the total amount available to creditors, the  
subcontractors receiving a direct payment would have received more than what they would have  
under the applicable legislative scheme. The Supreme Court stated at 487 that:  
It would be to disregard the Bankruptcy Act and deprive it of all meaning if the  
debtor of a bankrupt, instead of paying the trustee, were authorized, by contract or  
some other means, to pay one or other of the creditors of the bankrupt as he saw fit.  
[24] Notably, the contractual arrangement in Bail would have been enforceable against the  
debtor outside of bankruptcy proceedings. And even though, as a general rule, the trustee in  
bankruptcy enjoys no greater rights than the debtor, it would have been inequitable to enforce the  
provision against the trustee to alter the legislated scheme of distribution.  
[25] This Court applied Bail to invalidate a similar provision in Greenview (Municipal District  
No 16) v Bank of Nova Scotia, 2013 ABCA 302, 556 AR 34, as offending the pari passu rule.  
[26] Canadian courts have also adopted the anti-deprivation rule: In re Hoskins and Hawkey,  
[1877] OJ No 16, 1 OAR 379 (CA); Re Wetmore, [1924] NBJ No 6, [1924] 4 DLR 66 (SC (AD));  
Westerman (Re) (Trustee of), 1998 ABQB 946, 234 AR 371, rev’d on other grounds 1999 ABQB  
708, 275 AR 114; Knechtel Furniture Ltd (Re), [1985] OJ No 1265, 56 CBR (NS) 258 (SC);  
Frechette (Re) (1982), 138 DLR (3d) 61, 42 CBR (NS) 50 (Que SC). Canadian Imperial Bank of  
Commerce v Bramalea Inc (1995), 33 OR (3d) 692, [1995] OJ No 4884 (Ct J (Gen Div)), is often  
cited as the leading authority. The provision at issue in Bramalea would have allowed one party to  
purchase their insolvent partner’s partnership interest at the lesser of book value or fair market  
value. Blair J accepted the respondent’s argument, at 694, that:  
A provision in an agreement which provides that upon an insolvency, value is  
removed from the reach of the insolvent person's creditors to which would  
otherwise have been available to them, and places that value in the hands of others  
... is void on the basis that it violates the public policy of equitable and fair  
distribution amongst unsecured creditors in insolvency situations.  
[27] The Ontario Court of Appeal recently adopted Blair J’s formulation of the rule: Aircell at  
paras 10-12. The rule was again recently recognized by the Ontario Superior Court: HGC v IESO,  
2019 ONSC 259 at para 100.  
[28] A judge of this Court has also recognized the anti-deprivation rule. At issue in 1183882  
Alberta Ltd (Sok’s Contracting) v Valin Industrial Mill Installations Ltd, 2012 ABCA 62, 522 AR  
285, leave to appeal to SCC refused, [2012] SCCA No 180, was a contractual provision that  
conveyed an option that had the effect of depriving creditors of one of the debtor’s assets.  
McDonald JA concluded that the provision offended the common law anti-deprivation rule and  
Page: 6  
was therefore invalid. While McDonald JA was in dissent, the majority did not comment on the  
provision or the anti-deprivation rule.  
[29] There does not appear to be any decision that expressly rejects the anti-deprivation rule’s  
application in Canada. Chandos argues, however, that the Supreme Court of Canada’s decision in  
Coopérants, Mutual Life Insurance Society (Liquidator of) v Dubois, [1996] 1 SCR 900, 133 DLR  
(4th) 643 implicitly abandons the rule. This argument is premised on the basis that the reasoning in  
Bramalea relied, in part, on the Quebec Court of Appeal decision that was overturned by the  
Supreme Court of Canada in Coopérants. In my view, Coopérants does not reject the  
anti-deprivation rule’s application in Canada. The outcome in Coopérants turned on the fact that  
there was no evidence the contractual provision at issue prejudiced creditors: Adrienne Ho, “The  
Treatment of Ipso Facto Clauses in Canada” (2015) 61:1 McGill LJ 139 at 169.  
[30] The provision at issue in Coopérants allowed the debtor’s co-owners, in the event of the  
debtor’s insolvency, to purchase the debtor’s interest in certain immovable property at 75 percent  
of the property’s fair market value. Though this type of provision could potentially prejudice  
creditors, the Supreme Court determined that no prejudicial effect was apparent in the  
circumstances. The property’s fair market value was calculated without considering ownership  
restrictions that would affect the price obtained through liquidation: Coopérants at para 42. The  
evidentiary record also lacked information about the property’s appraisal value, which prevented  
the Court from identifying any prejudice: Coopérants at para 44. The Supreme Court stated at para  
40 that:  
The assets available for distribution to the other creditors are not diminished. Even  
if this may mean that the appellant's claim is satisfied while unsecured monetary  
claims are not, the other unsecured creditors cannot complain because they will not  
be suffering any harm.  
[31] The Supreme Court’s reasoning in Coopérants is consistent with the anti-deprivation rule  
described in Bramalea. The anti-deprivation rule is concerned with provisions that have a  
prejudicial impact on creditors. The rule has no application where the prejudicial effect is not  
immediately apparent and the party seeking to have the contractual arrangement deemed  
unenforceable has not established any prejudice.  
[32] In summary, the principle that parties cannot contract out of bankruptcy laws has a lengthy  
common law history, dating back at least to the 18th century in England: Wood, “Fraud Upon the  
Bankruptcy” at 171. The anti-deprivation rule in particular has received positive treatment from  
Canadian courts. Contracting parties cannot rely on provisions that are engaged by a debtor’s  
insolvency and remove value from the debtor’s estate to the prejudice of creditors. Much like the  
pari passu rule, I accept that it would disregard the BIA and deprive it of all meaning if a bankrupt  
could agree that assets would be diverted out of its estate in the event of insolvency: Bail at 487.  
Page: 7  
B. Effect of the Statutory Ipso Facto Provisions  
[33] The BIA includes provisions invalidating certain types of contract clauses that take effect  
upon the occurrence of a debtor’s insolvency. However, the statutory provisions apply only to  
corporate restructuring, consumer proposals, and consumer bankruptcies. None of the BIA  
provisions applies to corporate bankruptcies, meaning that they do not apply in this case. Chandos  
contends and my colleague concludes that the BIA provisions codify and, in the present context,  
supplant the common law anti-deprivation rule. In my view, a more appropriate conclusion is that  
the statutory provisions were intended to expand the common law to provide protection to debtors  
in situations where the anti-deprivation rule would not have protected them.  
[34] Provisions that offend the anti-deprivation rule are also referred to as ipso facto clauses, a  
term which encompasses any provision that sets out the consequences of a debtor’s insolvency:  
Black’s Law Dictionary, 10th ed, sub verbo ipso facto clause”; Duggan et al at 296. However, not  
all ipso facto clauses offend the anti-deprivation rule. For example, some ipso facto clauses  
operate to terminate executory agreements between an insolvent debtor and another contracting  
party: Duggan et al at 296; Wood, “Bankruptcy and Insolvency” at 178. Eliminating a debtor’s  
opportunity to perform a contract does not necessarily result in a deprivation of value that would  
prejudice creditors.  
[35] The United States Code expressly prohibits ipso facto provisions regardless of whether  
they offend the anti-deprivation rule: 11 USC § 365(e); 11 USC § 541(c). The provisions read, in  
part:  
365(e)(1) Notwithstanding a provision in an executory contract or unexpired lease,  
or in applicable law, an executory contract or unexpired lease of the debtor may not  
be terminated or modified, and any right or obligation under such contract or lease  
may not be terminated or modified, at any time after the commencement of the case  
solely because of a provision in such contract or lease that is conditioned on—  
(A) the insolvency or financial condition of the debtor at any time before the  
closing of the case;  
(B) the commencement of a case under this title; or  
(C) the appointment of or taking possession by a trustee in a case under this  
title or a custodian before such commencement.  
541(c)(1) an interest of the debtor in property becomes property of the estate …  
notwithstanding any provision in an agreement, transfer instrument, or applicable  
nonbankruptcy law—  
Page: 8  
(B) that is conditioned on the insolvency or financial condition of the  
debtor, on the commencement of a case under this title, or on the  
appointment of or taking possession by a trustee in a case under this title or  
a custodian before such commencement, and that effects or gives an option  
to effect a forfeiture, modification, or termination of the debtor’s interest in  
property.  
[36] In contrast, section 65.1 of the BIA, which applies when a commercial debtor has filed a  
notice of intention or proposal, is representative of the BIA’s ipso facto provisions. The provision  
reads, in part:  
65.1 (1) If a notice of intention or a proposal has been filed in respect of an  
insolvent person, no person may terminate or amend any agreement, including a  
security agreement, with the insolvent person, or claim an accelerated payment, or  
a forfeiture of the term, under any agreement, including a security agreement, with  
the insolvent person, by reason only that  
(a) the insolvent person is insolvent; or  
(b) a notice of intention or a proposal has been filed in respect of the  
insolvent person.  
[37] Sections 66.34 and 84.2 of the BIA are similarly worded and invalidate ipso facto clauses in  
the context of consumer proposals and consumer bankruptcies, respectively. Notably, all of these  
sections mirror 11 USC § 365(e) but make no mention of the property deprivation targeted by 11  
USC § 541(c). In my view, this is because the BIA provisions were primarily intended to prohibit  
ipso facto clauses that terminate or modify executory agreements.  
[38] The prohibition on ipso facto clauses initially applied only to commercial restructuring and  
consumer proposals, as sections 65.1 and 66.34 of the BIA were enacted prior to section 84.2. In  
other words, Parliament first saw fit to prohibit the use of certain ipso facto provisions in contexts  
where debtors are attempting to reach a compromise with their creditors. In those contexts, it is  
important to maintain the status quo by allowing debtors to continue to rely on existing contractual  
relationships: Ho at 146. Preserving such relationships helps provide debtors with the opportunity  
to successfully restructure their liabilities: Crystalline Investments Ltd v Domgroup Ltd (2002), 58  
OR (3d) 549 at paras 6-8, 210 DLR (4th) 659 (CA), aff’d 2004 SCC 3, [2004] 1 SCR 60. The same  
concern is not as pressing with respect to a corporate bankruptcy, as the corporate entity is destined  
for liquidation: Ho at 182.  
Page: 9  
[39] For consumers, the ipso facto provisions provide further protection, preventing creditors  
from terminating basic services even where the debtor has failed to make required payments: BIA,  
ss 66.34(3), 84.2(3).  
[40] For example, section 66.34(3) provides:  
66.34 (3) Where a consumer proposal has been filed in respect of a consumer  
debtor, no public utility may discontinue service to that consumer debtor by reason  
only that  
(a) the consumer debtor is insolvent,  
(b) a consumer proposal has been filed in respect of the consumer  
debtor, or  
(c) the consumer debtor has not paid for services rendered, or  
material provided, before the filing of the consumer proposal  
until the consumer proposal has been withdrawn, refused by the creditors or the  
court, annulled or deemed annulled.  
[41] In the 2009 amendments to the BIA, the ipso facto prohibitions were extended to consumer  
bankruptcies. This was motivated by the “fresh start” principle that stems from the discharge  
available to consumer bankrupts. Prohibiting ipso facto termination clauses ensures that a debtor  
seeking a fresh start cannot be “unreasonably evicted from their home, denied basic and essential  
services or denied other benefits to which they would otherwise be entitled”: Duggan et al at 296,  
citing Industry Canada, Bill C-55 Clause-by-Clause Analysis (6 September 2011). The Senate  
Standing Committee on Banking, Trade and Commerce, which recommended the reform,  
similarly stated that ipso facto clauses “should be unenforceable in order to ensure that debtors  
continue to have access to the basic services that they and their families need”: Senate, Standing  
Committee on Banking, Trade and Commerce, Debtors and Creditors Sharing the Burden: A  
Review of the Bankruptcy and Insolvency Act and the Companies’ Creditors Arrangement Act  
(November 2003) at 75 (Chair: Hon Richard H. Kroft). This concern has no bearing on corporate  
bankruptcies.  
[42] The statutory provisions exhibit a debtor-protection purpose with two facets. First, they  
ensure that consumer and corporate debtors seeking to restructure their affairs have the time and  
resources to do so by maintaining the status quo. Second, the provisions extend protection to all  
consumer debtors to prevent the termination of basic services and executory agreements. This  
protection recognizes the impact such terminations would have on individuals and their families.  
These purposes are either less pressing or completely inapplicable to corporate bankruptcies,  
which may explain why the statutory provisions were not extended to those situations. Moreover,  
the debtor-protection purpose of the statutory provisions stands in contrast to the anti-deprivation  
rule, which protects creditors by ensuring a fair and equitable distribution of the debtor’s estate:  
Page: 10  
Bramalea at 694. In my view, this difference in purpose suggests that the statutory provisions  
expanded the common law. It does not lead to the inference that the common law rule was  
replaced.  
[43] Furthermore, the BIA provisions represent only a partial codification of the  
anti-deprivation rule: Wood, “Bankruptcy and Insolvency” at 90. None of the statutory provisions  
mentions a deprivation of assets from the debtor’s estate – the sole concern of the anti-deprivation  
rule. In my view, there are at least some deprivations of property that would not be considered a  
termination, amendment, acceleration, or forfeiture of a term caught by the language of the  
statutory provisions. Professor Wood also notes that “there may be instances where the transaction  
arises out of a grant rather than an agreement or involves a transfer of an asset to a third party so as  
to take it outside the ambit of the statutory provision[s]”: Wood, “Bankruptcy and Insolvency” at  
90.  
[44] Even if the BIA provisions do fully capture the common law rule, their scope is certainly  
much broader. The anti-deprivation rule is not generally concerned with the termination of  
agreements unless value is removed from the debtor’s estate. The anti-deprivation rule also  
differentiates between the defeasance of an absolute interest and grants that create limited interests  
from the outset, holding that the latter are enforceable: Belmont Park Investments Pty Ltd v BNY  
Corporate Trustee Services Ltd, [2011] UKSC 38 at paras 84-87, [2012] 1 All ER 505; Knechtel.  
The BIA provisions do not have the same limitation, extending their application to interests such as  
leases and licenses: Wood, “Bankruptcy and Insolvency” at 90. I conclude that expansion of the  
common law in the restructuring and consumer bankruptcy contexts does not mean that the  
anti-deprivation rule was eliminated for corporate bankruptcies.  
[45] In my view, the distinctions between the statutory provisions and the common law  
anti-deprivation rule prohibit the inference that the statutory provisions have occupied the field  
with respect to ipso facto clauses. As the BIA provisions and the anti-deprivation rule serve  
different purposes, and the overlap between them is not extensive, Parliament’s legislative  
prohibition of one type of clause does not invite the inference that it condones the other. The  
statutory provisions expand the common law, protecting debtors by prohibiting ipso facto clauses  
that would not have been caught by the anti-deprivation rule. The anti-deprivation rule continues  
to apply, protecting creditors by ensuring that a bankrupt’s property is distributed in accordance  
with the BIA’s scheme of distribution.  
C. The Test for Applying the Anti-Deprivation Rule  
[46] Even if the anti-deprivation rule applies in Canada, Chandos contends that it does not  
invalidate good faith commercial transactions and urges this Court to adopt the test enunciated by  
the United Kingdom Supreme Court in Belmont. The court concluded that the anti-deprivation rule  
does not apply to “bona fide commercial transactions which do not have as their predominant  
purpose, or one of their main purposes, the deprivation of the property of one of the parties on  
bankruptcy: Belmont at para 104. This test looks at the purpose of the provision rather than its  
Page: 11  
effect. I decline to adopt Belmont. The purpose-based test articulated in Belmont is inconsistent  
with Canadian cases applying the anti-deprivation rule and would eliminate virtually all of the  
rule’s utility.  
[47] Canadian cases applying the anti-deprivation rule adopt an effects-based approach to  
determining the validity of a contractual provision: Wood, Bankruptcy and Insolvencyat 89-90.  
Blair J in Bramalea, stated that the fraud on the bankruptcy law principle targets “not necessarily  
‘fraud’ in the sense of dishonesty or impropriety, but fraud in the effect: Bramalea at 694. And  
while the Supreme Court of Canada did not address the issue directly in Coopérants, an  
effects-based approach is implicit in the court’s determination that no prejudicial effect was  
evident in the circumstances: Coopérants at para 44.  
[48] Cases dealing with the pari passu rule similarly apply an effects-based approach. Bail and  
Greenview both dealt with contractual provisions allowing payments to be made directly to  
subcontractors to satisfy the obligations of a general contractor. Such provisions are generally  
motivated by the inability of subcontractors to acquire liens over public lands: Greenview at para  
31; Bail at 483-484. The provisions clearly served a legitimate commercial purpose. Nevertheless,  
applying them after the general contractor had entered bankruptcy proceedings would have  
operated to disrupt the bankruptcy scheme of distribution. Both this Court and the Supreme Court  
of Canada refused to allow such a result.  
[49] In Belmont at paras 78-79, the court distinguished between the anti-deprivation rule and the  
pari passu rule, holding that a purpose-based approach applies only to the former. However, both  
rules stem from the basis that it would be inequitable to creditors if parties could contract out of the  
bankruptcy scheme. I see no principled basis to adopt differing standards for the two rules.  
[50] Furthermore, adoption of a purpose-based approach in the United Kingdom has received  
criticism for defeating the purpose of the anti-deprivation rule. Professor Worthington notes that  
“insisting that breach of the [anti-deprivation] rule depends on a deliberate intention to evade the  
insolvency law effectively emasculates this limb of the [fraud on the bankruptcy principle]”: Sarah  
Worthington, “Good Faith, Flawed Assets and the Emasculation of the UK Anti-Deprivation  
Rule” (2012) 75:1 Mod L Rev 112 at 117. Professor Wood similarly concludes that Canadian  
courts should not adopt a purpose-based test: Wood, “Fraud Upon the Bankruptcy” at 184. The  
purpose of the anti-deprivation rule is to ensure that contracting parties cannot opt out of the  
distribution of assets mandated by the BIA. This purpose is best served by invalidating provisions  
that operate in the event of insolvency and have the effect of prejudicing creditors.  
[51] Finally, I do not accept that an effects-based approach would inappropriately undermine  
the values of freedom of contract and party autonomy, given the creditor-protection purpose of the  
fraud on the bankruptcy principle. The Supreme Court recognized this in Coopérants at para 41,  
stating that contracts signed in good faith should be respected, unless the obligations contained  
therein are prejudicial to the other creditors and give rise to an unjust preference in light of all the  
circumstances” [emphasis added]. Freedom of contract is a much more central consideration when  
Page: 12  
enforcing provisions that have been negotiated by the parties they affect. A party who might  
become insolvent has no motivation to negotiate a clause that directs property out of its estate upon  
insolvency. At the moment the clause becomes operative, the insolvent party is set to lose the  
property regardless of the contractual provision. The creditors who are impacted by the clause do  
not have a seat at the negotiating table.  
[52] For all of these reasons, I decline to adopt the purpose-based approach espoused in  
Belmont. Canadian authorities on the anti-deprivation rule support an effects-based approach to  
determining whether a provision is enforceable against the trustee in bankruptcy. Moreover, I  
agree with the conclusion that considering the purpose of a contractual provision would all but  
sterilize the anti-deprivation rule. The anti-deprivation rule applies to provisions that operate in the  
event of insolvency and, in effect, remove value from a bankrupt’s estate to the prejudice of the  
bankrupt’s creditors. It follows that I do not endorse the new test proposed by my colleague.  
VI.  
Application  
[53] The chambers judge correctly identified the existence and application of the fraud on the  
bankruptcy principle in Canada. In outlining the scope of the anti-deprivation rule, however, the  
chambers judge erred. The chambers judge adopted the purpose-based approach set out by the  
Supreme Court of the United Kingdom in Belmont. He stated that if the clause were a genuine  
pre-estimate of damages, or a bona fide commercial transaction not premised on the avoidance of  
bankruptcy laws, it would have to be upheld.  
[54] As I have indicated, the proper approach is to look at the effect of clause VII Q(d), rather  
than its purpose. Whether the provision is a liquidated damages or penalty clause is a separate  
analysis.  
[55] Looking at the effect of clause VII Q(d), this case is not comparable to Coopérants, where  
there was no established prejudice to creditors. Clause VII Q(d) effectively redirects $126,818.39  
to Chandos that would have otherwise formed part of Capital Steel’s estate and gives Chandos a  
further claim for $10,511.66. Other provisions of Clause Q address the ability of Chandos to  
complete the work, to recover the cost to complete the work, and to withhold a percentage of the  
contract price until all warranties have expired. It is only Clause VII Q(d) which is at issue. While  
Chandos undoubtedly has legitimate commercial interests it was seeking to protect, it would  
conflict with the BIA’s scheme of distribution if Chandos could elevate itself to a preferred status  
through such a contractual arrangement. The common law anti-deprivation rule invalidates clause  
VII Q(d) and Chandos cannot rely on the provision in defence of a claim for payment by the  
trustee.  
[56] Given that clause VII Q(d) contravenes the common law anti-deprivation rule, it is  
unnecessary to address whether it also would constitute an unenforceable penalty.  
Page: 13  
VII. Conclusion  
[57] The appeal is allowed. Chandos is not entitled to rely on clause VII Q(d) of the subcontract  
against Deloitte, the trustee in bankruptcy.  
Appeal heard on November 28, 2017  
Reasons filed at Edmonton, Alberta  
this 29th day of January, 2019  
Rowbotham J.A.  
I concur:  
Veldhuis J.A.  
Page: 14  
_______________________________________________________  
Dissenting Reasons for Judgment Reserved of  
The Honourable Mr. Justice Wakeling  
_______________________________________________________  
I.  
Introduction  
[58] This case presents challenging contract and bankruptcy law issues of national importance.  
[59] At issue is the enforceability of a construction-contract term providing that the  
subcontractor forfeits ten percent of its total fee if the subcontractor commits an act of bankruptcy.  
[60] I agree with the chambers judge that it is enforceable and dismiss the trustee in  
bankruptcy’s appeal.  
A.  
The Penalty Rule Issue  
[61] For over 200 years courts in England1 and the United States2 and, for shorter periods of  
time in Canada,3 Australia,4 New Zealand5 and Hong Kong,6 have declined to enforce contractual  
1 Holles v. Wyse, 23 Eng. Rep. 787 (Ch. 1693)(the Court refused to enforce a default-interest-uplift term because it  
was a penalty); Sloman v. Walter, 28 Eng. Rep. 1213 (Ch. 1783)(the Court refused to enforce a promise a coffee-house  
partner made to pay £500 to another partner if the promisor refused to make available a particular room in the  
coffee-house whenever the promisee demanded it: “where a penalty is inserted merely to secure the enjoyment of a  
collateral object [access to the coffee-house room], the enjoyment of the object is considered as the principal intent of  
the deed, and the penalty only as accessional, and therefore, only to secure the damage really incurred”); Hardy v.  
Martin, 29 Eng. Rep. 1046 (Ch. 1783)(the Court enjoined by injunction a promissee who secured a common law  
judgment on a bond from enforcing it because the promisor breached his obligation not to operate a competitive  
brandy-merchant business within a defined area and time); Astley v. Weldon, 126 Eng. Rep. 1318 (Common Pleas  
1801)(the Court characterized an actress’ promise to pay 200£ if she failed to discharge her obligations to the theatre  
owner as a penalty and unenforceable because the parties did not intend her to pay £200 for any breach regardless of its  
nature); Kemble v. Farren, 130 Eng. Rep. 1234 (Common Pleas 1829)( the Court characterized a comedian’s promise  
to pay £1000 if he failed to discharge his obligations to the theatre owner as an unenforceable penalty because the  
parties could not have intended this to be the consequence of minor and major breaches alike); Betts v. Burch, 157  
Eng. Rep. 938 (Ex. 1859) (the Court upheld a jury verdict that the purchaser of stock-in-trade was not obliged to pay  
the vendor £50 for breach of the purchase-and-sale agreement as it was an unenforceable penalty); Commissioner of  
Public Works v. Hills, [1906] A.C. 368 (P.C.) (Cape of Good Hope) (the Court held that a ten per cent forfeit of  
retained moneys was unenforceable because it did not reflect the promisee’s actual loss); Pearl Assurance Co. v. South  
Africa, [1934] A.C. 570 (P.C.) (S. Africa); (the Privy Council declared that a term in a commercial agreement  
acknowledging that a £10,000 deposit be forfeited on the occurrence of certain conditions and described as liquidated  
damages was an unenforceable penalty); United Dominions Trust (Commercial) v. Ennis, [1967] 2 All E.R. 345 (C.A.)  
(the Court refused to enforce a term in a consumer hire-purchase contract that obliged the hirer to pay a minimum of  
two-thirds of the hire-purchase price on early termination of the hire-purchase agreement); Gilbert Ash (Northern) Ltd.  
v. Modern Engineering (Bristol) Ltd., [1974] A.C. 689, 703 (H.L. 1973) per Lord Morris of Borth-y-Gest (“Such a  
heavily penalising provision ought not to be accorded any validity”); Jobson v. Johnson, [1989] 1 All E.R. 621 (C.A.  
Page: 15  
1988) (the Court characterized a term in a share-purchase agreement that required the purchaser of shares in a football  
club to deliver the shares to the vendor upon default for one-quarter of the instalment amounts paid before default as an  
unenforceable penalty); Workers Trust Bank Ltd. v. Dojap Ltd., [1993] A.C. 573 (P.C.)(Jamaica)(the Privy Council  
allowed a land purchaser’s appeal and held that the forfeiture of a twenty-five percent deposit was an unenforceable  
penalty); Jeancharm Ltd. v. Barnet Football Club Ltd., [2003] EWCA Civ 58 (the Court allowed an appeal on the  
ground that a 260 percent annual interest on late payments was an unenforceable penalty) & CMC Group Plc & Ors v.  
Zhang [2006] EWCA Civ 408 (the Court allowed the appeal on the ground that the key term in the settlement  
agreement was primarily a deterrent and not a genuine preestimate of damages).  
2 Perkins v. Lyman, 11 Mass. 76 (Sup. Ct. 1814)(the Court held that a ship vendor’s promise not to do business in the  
northwest coast of America and pay $8000 if he did to be an unenforceable penalty); Robeson v. Whitesides, 16 Serge  
& Rawle 320; 1827 Pa. Lexis 88 (Sup. Ct.) (the Court held that a $1000 defeasible bond made void upon the obligor’s  
extinguishment of encumbrances on sold property within a nine month period was an unenforceable penalty); Van  
Buren v. Digges, 52 U.S. 461, 477 (1851)(“The clause of the contract providing for the forfeiture of ten per centum on  
the amount of the[building] contract price, upon a failure to complete the work by a given day, cannot properly be  
regarded as an agreement or settlement of liquidated damages. … [I]t has no necessary or natural connection with the  
measure or degree of injury which may result from a breach of contract, or from an imperfect performance. It implies  
an absolute infliction, regardless of the nature and extent of the causes by which it is superinduced”); Greenblatt v.  
McCall, 67 Fla. 165, 169 (Sup. Ct. 1914)(the Court concluded that a retailer’s promise to pay a sum equal to two-thirds  
of the charges for the duration of the supply contract following breach was an unenforceable penalty); Advance  
Amusement Corp. v. Franke, 109 N.E. 471 (Ill. Sup. Ct. 1915) (the Court upheld lower court determinations that a  
theatre-rental deposit of $2500 was not liquidated damages and on breach of the rental agreement the theatre owner  
was not entitled to keep it); Priebe & Sons, Inc. v. United States, 332 U.S. 407, 418 (1947) per Frankfurter, J.  
(“exactions for a breach of contract not giving rise to damages and merely serving as added pressure to carry out  
punctiliously the terms of a contract, are not enforced by courts. In familiar language, penal provisions in a contract ...  
are not enforceable”); Wilmington Housing Authority v. Pan Builders, Inc., 665 F. Supp. 351, 354 (D. Del. 1987)(“If  
the provision fails to meet one of these criteria, the damages stemming from a breach being easily ascertainable or the  
amount fixed excessive, the provision is void as a penalty”); City of Rye v. Public Service Mutual Insurance Co., 315  
N.E. 2d 458 (N.Y. Ct. App. 1974) (the Court refused to enforce against a surety a construction bond for late  
completion of a large residential complex on the ground that it provided for a penalty) & American Law Institute, The  
Restatement (Second) of Contracts (1981) §356(1) (“Damages for breach by either party may be liquidated in the  
agreement but only at an amount that is reasonable in light of the anticipated or actual loss caused by the breach and  
the difficulties of proof of loss. A term fixing unreasonably large liquidated damages is unenforceable on grounds of  
public policy as a penalty”).  
3 Empire Loan and Savings Co. v. McRae, 5 O.L.R. 710 (H. Ct. 1903) (the Court upheld a Master’s decision refusing  
to give force to a term it characterized as a penalty); Townsend v. Rumball, 19 O.L.R. 433 (Div. Ct. 1909)(the Court set  
aside a County Court judgment on the ground that a noncompetition term in a business-sale contract was a penalty and  
not liquidated damages); St. Catherines Improvement Co. v. Rutherford, 26 O.W.R. 76 (K.B. 1914)(the Court refused  
to enforce a stipulated-payment-on-breach term characterizing it as a penalty); Shatilla v. Feinstein, [1923] 3 D.L.R.  
1035 (Sask. C.A.) (the Court characterized a promise by a wholesale dry-goods merchant to pay the purchaser of the  
business $10,000 if the vendor engaged in a competitive business as an unenforceable penalty); MacDonald v. N.W.  
Biscuit Co., [1924] 1 D.L.R. 987, 998-99 (Alta. Sup. Ct. App. Div.)(the Court declared a provision in a construction  
contract that deprived the contractor of an amount over and above the cost of repairing deficient work to be an  
unenforceable penalty); Waugh v. Pioneer Logging Co., [1949] S.C.R. 299 (the Court characterized a provision in a  
commercial logging contract that entitled the vendor of the timber rights to claim a portion of the proceeds of the sale  
of timber held in trust as an unenforceable penalty); Charterhouse Leasing Corp. v. Sanmac Holdings Ltd., 57 W.W.R.  
615 (Alta. Sup. Ct. 1966) (the Court held that a term obliging the lessee of equipment on default to pay immediately  
the whole balance due under the lease was an unenforceable penalty); Canadian Acceptance Corp. v. Regent Park  
Butcher Shop Ltd., 3 D.L.R. 3d 304 (Man. C.A. 1969)(the Court held that an acceleration-payment term in an  
Page: 16  
equipment-lease agreement was an unenforceable penalty); H.F. Clarke Ltd. v. Thermidaire Corp, [1976] 1 S.C.R.  
319, 339 (1974)(“I would characterize the exaction of gross trading profits for a three-year period as a penalty [and  
unenforceable] ... The respondent is, however, entitled to recover its provable damages for the breach of covenant”);  
Unilease Inc. v. York Steel Construction Ltd., 83 D.L.R. 3d 275 (Ont. C.A. 1978) (the Court allowed the appeal on the  
ground that the accelerated-lease-payment-on-default term was an unenforceable penalty); Dial Mortgage Corp. v.  
Baines, 15 Alta. L.R. 2d 211 (Q.B. 1980)(the Court declined to enforce a stipulated-payment-on-breach term in a  
mortgage application because it was a penalty); Prince Albert Credit Union v. Johnson, 131 D.L.R. 3d 710 (Sask. Q.B.  
1982)(the Court held that a term requiring the defaulting borrower to pay a designated sum to cover the lender’s  
resulting expenses on default was an unenforceable penalty); Dezcam Industries Ltd. v. Kwak, [1983] 5 W.W.R. 32  
(B.C.C.A.)(the Court reversed the original court and held that the licencee’s obligation to pay $85,000 was an  
unenforceable penalty); B.L.T. Holdings Ltd. v. Excelsior Life Insurance Co., 52 A.R. 1 (Q.B. 1984)(the Court  
characterized a mortgage standby fee of $61,500 as an unenforceable penalty), rev’d, [1986] 6 W.W.R. 534 (C.A.);  
Federal Business Development Bank v. Eldridge, 76 N.B.R. (2d) 399 (C.A. 1986) (the Court upheld the trial judgment  
declaring a commitment fee of three percent an unenforceable penalty); Newman, Hill, Duncan & Lacoursiere v.  
Murray, [1987] B.C.J. No. 2326 (C.A.)(the Court held that a provision in an employment agreement obliging the  
employee who breached a noncompetition term to pay 150 % of the fees the plaintiff charged the client that the  
defendant serviced contrary to the employment agreement as an unenforceable penalty); Deer Valley Shopping Centre  
Ltd. v. Sniderman Radio Sales and Services Ltd., 67 Alta. L.R. 2d 203 (Q.B. 1989)(the Court declined to enforce an  
interest-escalation-on-overdue rent term because it was an unenforceable penalty); Ashland Scurlock Permian Canada  
Ltd. v. NESI Energy Marketing Canada Ltd. (Bankrupt), [1999] 1 W.W.R. 364, 371 (Alta. Q.B. 1998) (the Court  
declared a provision in a natural gas sales contract as an unenforceable penalty because “the amount of the multiple  
used in the formula creates an extravagant amount which cannot be regarded as having any real relation to any loss  
which Ashland could possibly sustain”); Cracknell v. Jeffrey, 284 A.R. 372, (Prov. Ct. 2001) (the Court refused to  
enforce a property-lease term that obliged the tenant to pay a $5 assessment for every day rent is outstanding); Place  
Concorde East Limited Partnership v. Shelter Corp. of Canada, [2003] O.J. No. 5437; 43 B.L.R. 3d 54 (Super.  
Ct.)(the Court declined to enforce an interest-escalation term on a promissory note default); MTK Auto West Ltd. v.  
Allen, 2003 BCSC 1613 (the Court declared a provision in a vehicle-purchase agreement that obliged the purchaser to  
pay the car dealer $5000 if the purchaser sold the vehicle in the United States contrary to the terms of the  
vehicle-purchase agreement to be an unenforceable penalty) & Dundas v. Schafer, 2014 MBCA 92; 377 D.L.R. 4th  
485 (the Court refused to enforce a term in a prenuptial agreement that obliged the wife to pay the husband $20,000 if  
she challenged the prenuptial agreement on the ground that it was a penalty).  
4 O’Dea v. Allstates Leasing System (W.A.) Pty. Ltd., [1983] HCA 3, ¶15; 152 C.L.R. 359, 374 (the High Court held  
that a stipulated-payment-on-breach term in a truck-lease contract was an unenforceable penalty); Paciocco v.  
Australia and New Zealand Banking Group, [2016] HCA 28,¶74; 258 C.L.R. 525, 558 per Gageler, J. (“The ultimate  
question ... is whether the contractual stipulation for the late payment fee was unenforceable as a penalty at common  
law”).  
5 T.K. (Hong Kong) Ltd. v. Diamond Milk Formulas Ltd., [2016] NZHC 2642, ¶39 (“before there can be any question  
of disallowance of penalties, it must involve the contract imposing a penalty in circumstances where it provides for a  
sanction to be paid by a party breaking the contract which exceeds the likely loss that will flow from the breach”).  
6 Leatra Co. v. Wing, [1978] HKDC 32 (the Court refused to enforce a termination term in an employment contract  
because it was not a pre-estimate of damages; it was a penalty); Arnold & Co. v. Attorney General, [1989] HKCFI 275  
(the Court declared a fee-reduction-for-delay term in a construction contract as an unenforceable penalty); Polyset Ltd.  
v. Panhandat Ltd., [2002] HKCFA 15 (the Court held that a term in a commercial land agreement allowing the vendor  
to keep $40.25 million in deposits in a $115 million transaction on the failure of the purchaser to close was an  
unenforceable penalty); Savino Del Bene China Ltd. v. Convac Technologies Ltd., [2002] HKDC 106 (the Court  
refused to enforce a term in a freight contract relieving the shipper of the obligation to pay the freight forwarder  
because part of the shipment was not delivered on time); Ricoh Hong Kong Ltd. v. Maxwin Digital Printing Ltd., 2008  
Page: 17  
stipulated-consequence-on-breach terms7 that they characterized as penalties and contrary to  
public policy. As a consequence, in spite of the promisor’s express agreement to the contrary, the  
disappointed promisee has had to prove the damages caused by the promisor’s contract breach, just  
as the promisee would have had to do if there had been no stipulated-consequence-on-breach  
term.8 These and related propositions are known as the common law penalty rule. 9  
HKDC 146 (the Court characterized an acceleration-payment in an equipment hire-purchase agreement as an  
unenforceable penalty); Canning International Ltd. v. Freenet Asia Ltd., [2011] HKDC 1595 (the Court characterized  
a delay-charge-reduction term in a clothing manufacture contract as an unenforceable penalty) & Sun Champ  
Investment Ltd. v. Green Leaves Trade Investment Ltd., [2013] HKDC 1461 (the Court refused to enforce a term in a  
property sale agreement obliging the vendor to pay a stipulated sum on its failure to convey good title, characterizing  
the term as an unenforceable penalty).  
7 This is a contractual term that imposes an obligation on a promisor to pay a sum of money to the promisee or do some  
other thing for the promisee’s benefit, or accept some other detriment for the promisee’s benefit if the promisor fails to  
discharge a specified obligation in the agreement. Scottish Law Commission, Discussion Paper on Penalty Clauses  
(No. 162) 11 (November 2016) (“[The Scottish Law Commission] recommended that judicial control over contractual  
penalties should apply whether the penalty was expressed in monetary terms or in some other way. The basis of our  
recommendation was that there was no apparent reason why a provision should escape control simply because it is in  
the form of a penalty other than the payment of money”). E.g., Jobson v. Johnson, [1989] 1 All E.R. 621, 628 (C.A.  
1988) (the Court characterized a term in a football-club share-sale contract that obliged the purchaser to transfer  
ownership of the shares back to the vendor for a fraction of the price the purchaser had paid before the purchaser  
defaulted on an instalment payment as a penalty) & Cavendish Square Holding BV v. El Makdessi, [2015] UKSC 67,  
¶16; [2016] A.C. 1172, 1197 (S.C.) per Lord Neuberger & Lord Sumption (“there is no reason why an obligation to  
transfer assets (either for nothing or at an undervalue) should not be capable of constituting a penalty”), ¶170 & [2016]  
A.C. at 1253-54 per Lord Mance (“the doctrine should [not] be confined to cases of payment of money. It would be  
absurd to draw a rigid distinction between a requirement to transfer money and property. It would also be absurd to  
draw such a distinction between them and the withholding of moneys due. Such uncertainties as may exist regarding  
the doctrine’s applicability to deposits or to clauses forfeiting pre-payments must await decision in due course”) &  
226 & [2016] A.C. at 1270 per Lord Hodge (“I see no principled reason why the law on penalties should be confined  
to clauses that require the contract-breaker to pay money in the event of breach and not extend to clauses that in the  
same circumstances allow the innocent party to withhold moneys which are otherwise due”).  
8 Cavendish Square Holding BV v. El Makdessi, [2015] UKSC 67, ¶9; [2016] A.C. 1172, 1195 per Lord Neuberger &  
Lord Sumption (“Deprived of the benefit of the provision, the innocent party is left to his remedy in damages under the  
general law”); Scandinavian Trading Tanker Co. v. Flota Petrolera Ecuatoriana (Scaptrade), [1983] 2 A.C. 694, 702  
per Lord Diplock (“The classic form of relief against ... a penalty clause has been to refuse to give effect to it, but to  
award the common law measure of damages for the breach of the primary obligation instead”); Dunlop Pneumatic  
Tyre Co. v. New Garage and Motor Co., [1915] A.C. 79, 100 (H.L. 1914) per Lord Parmoor (“If the Court ... comes to  
the conclusion that the parties have made a mistake in calling the agreed sum liquidated damages, and that such sum is  
not really a pactional pre-estimate of loss within the contemplation of the parties at the time when the arrangement was  
made, but a penal sum inserted as punishment on the defaulter irrespective of the amount of any loss which could at the  
time have been in contemplation of the parties, then such sum is a penalty, and the defaulter is only liable in respect of  
damages which can be proved against him”) & United States v. Bethlehem Steel Co., 205 U.S. 105, 119 (1907) (“[the  
courts] tendency was to construe language as a penalty, so that nothing but the actual damages sustained by the party  
aggrieved could be received”).  
Page: 18  
[62] The classic penalty rule a stipulated-consequence-on-breach term that is a penalty and  
not a genuine pre-estimate of damage is unenforceable is confusing and complex10 and produces  
inconsistent results. Its value has been questioned for almost as long as it has existed.  
[63] In 2015 Lord Neuberger and Lord Sumption, of the United Kingdom Supreme Court,  
described the penalty rule in unflattering language:11 “The penalty rule in England is an ancient,  
haphazardly constructed edifice, which has not weathered well, and which in the opinion of some  
should simply be demolished ...”.  
[64] These judges were not the penalty rule’s first detractors.  
[65] There were a number of high profile nineteenth century critics. Lord Eldon railed against  
the penalty rule in 1811, 12 observing that the rule was “utterly without foundation”. Justice  
Ruggles of New York’s highest court acknowledged in an 1854 opinion that “[t]he ablest of judges  
have declared that they felt themselves embarrassed in ascertaining the principle on which the  
decisions [refusing to enforce stipulated-consequence-on-breach terms] were founded”.13 In 1859,  
9 The penalty rule is not an alien concept in the civil law. See generally Scottish Law Commission, Review of Contract  
Law: Discussion Paper on Penalty Clauses 15-18 (Discussion paper No. 162 November 2016) for a discussion of the  
law of France, Germany and the Netherlands.  
10 Mortgage Makers Inc. v. McKeen, 2009 NBCA 61, ¶39; 312 D.L.R. 4th 82, 100 (“The above summary attests to the  
complexity of the common law surrounding the enforcement of clauses that pre-determine damages for breach of  
contract”).  
11 Cavendish Square Holding BV v. El Makdessi, [2015] UKSC 67, ¶3; [2016] A.C. 1172, 1192. Lord Carnwath  
agreed with his colleagues.  
12 Hill v. Barclay, 34 Eng. Rep. 238, 239 (Ch. 1811). See also Astley v. Weldon, 126 Eng. Rep. 1318, 1321 (Common  
Pleas 1801) per Lord Eldon (“when their case came before me ..., I felt as I have often done before in considering the  
various cases on this head, much embarrassed in ascertaining the principle upon which those cases were founded”) &  
Robophone Facilities Ltd. v. Blank, [1966] 3 All E.R. 128, 142 (C.A.) per Diplock, C.J. (“I make no attempt, where so  
many others have failed, to rationalize this common law rule”).  
13 Cotheal v. Talmadge, 9 N.Y. 551, 553 (Ct. App. 1854). Other American judges have subsequently expressed similar  
sentiments. E.g., Brecher v. Laikin, 430 F. Supp. 103, 106 (S.D.NY. 1977) (“Liquidated damages provisions have a  
checkered history”); Callanan Road Improvement Co. v. Colonial Sand & Stone Co., 72 N.Y.S. 2d 194, 196 (Sup. Ct.  
App. Div. 1947) (“Many more complex and intrinsically less tractable subjects have been reduced to order; this one,  
from the struggles of the English judges with it before the Revolution to the present time, remains oddly elusive”);  
Evans v. Moseley, 114 P. 374, 377 (Kan. Sup. Ct. 1911) (“There is no branch of law on which unanimity of decision is  
more difficult to find or on which more illogical and inconsistent holdings may be found”); Wilson v. Mayor of  
Baltimore, 34 A. 774, 775 (Md. Ct. App. 1896) (“Whether a sum named in a contract to be paid by a party in default on  
its breach is to be considered liquidated damages or merely a penalty, is one of the most difficult and perplexing  
inquiries encountered in the construction of written agreements. The solution of that question ... [is] to some extent  
controlled by artificial general rules which are not wholly in harmony with the ordinary canons of construction);  
Gobble v. Linder, 76 Ill. 157, 158 (Sup. Ct. 1875) (“ No branch of the law is involved in more obscurity, by  
contradictory decisions, than whether the sum named in an agreement to secure performance will be treated as  
liquidated damages or as penalty”) & Jaquith v. Hudson, 5 Mich. 123, 133 (Sup. Ct. 1858)(“It is not to be denied that  
Page: 19  
Baron Martin14 of the English Court of Exchequer expressed his frustration with the penalty rule.  
He complained that binding precedent precluded him from declaring that “parties are at liberty to  
enter into any bargain they please” and must live with “improvident” bargains. In 1882 Sir George  
Jessel decried it as an “absurdity”15 and lamented that he did not know “[t]he ground of that  
doctrine”.16  
[66] Opposition to the penalty rule in India was so profound in the nineteenth century that it was  
statutorily revoked by s. 74 of the Indian Contract Act, 1872. 17 Speaking almost 100 years after  
this legislative intervention, the Indian Supreme Court observed that “[s.74] is clearly an attempt  
to eliminate the somewhat elaborate refinements made under the English common law in  
distinguishing between stipulations providing for payment of liquidated damages and stipulations  
in the nature of penalty”.18  
[67] Complaints about the theoretical underpinnings of the penalty rule continued in the  
twentieth century. For example, Lord Parmoor, in 1914, used more restrained language to flag the  
rule’s shortcomings:19 “It is too late to question whether such interferences with the language of a  
contract can be justified on any rational principle.”  
[68] The Supreme Court of the United Kingdom, in Cavendish Square Holding BV v. El  
Makdessi,20 the High Court of Australia in Paciocco v. Australia and New Zealand Banking Group  
Ltd.21 and the Scottish Law Commission22 have all recently extensively reviewed the merits of the  
penalty rule and provided valuable fresh insights on its utility. This is a task that the Supreme  
there is some conflict, and more confusion, in the cases; judges have been long and constantly complaining of the  
confusion and want of harmony in the decisions upon this subject”) (emphasis in the original).  
14 Betts v. Burch, 157 Eng. Rep. 938, 940 (Ex. 1859).  
15 Wallis v. Smith, 21 Ch. D. 243, 257 (1882). See also 21 Ch. D. 243, 277 per Lord Justice Lindley (“The decisions on  
penalty and liquidated damages ... are perplexing”).  
16 Id. 256.  
17 C. 6, as amended (“When a contract has been broken, if a sum is named in the contract as the amount to be paid in  
case of such breach, or if the contract contains any other stipulation by way of penalty, the party complaining of the  
breach is entitled, whether or not actual damage or loss is proved to have been caused thereby, to receive from the  
party who has broken the contract reasonable compensation not exceeding the amount so named or, as the case may  
be, the penalty stipulated for”).  
18 Fateh Chand v. Balkishan Das, [1964] 1 S.C.R. 515, 526 (1963).  
19 Dunlop Pneumatic Tyre Co. v. New Garage and Motor Co., [1915] A.C. 79, 101 (H.L. 1914).  
20 [2015] UKSC 67; [2016] A.C. 1172.  
21 [2016] HCA 28; 258 C.L.R.525.  
22 Review of Contract Law: Discussion Paper on Penalty Clauses (No. 162) (November 2016).  
Page: 20  
Court of Canada has not yet undertaken. Indeed, it has not had an opportunity to do so since its  
1978 judgment in Elsley v. J.G. Collins Insurance Agencies Ltd.23  
B.  
The Fraud-on-the-Bankruptcy-Law Issue  
[69] England enacted its first bankruptcy statute in 1542.24 It25  
displayed two central features of bankruptcy law that have persisted to the present  
day. First, it created a summary and collective procedure that operated for the  
benefit of all the creditors, and not simply for the creditor who initiated the process.  
Second, it adopted a pro rata sharing principle in respect of the distribution of the  
debtor’s assets among the creditors.  
[70] It is not clear when English judges first thought it prudent to construct a rule that parties  
could not order their affairs so as to minimize the adverse effect the fundamental tenets of the  
bankruptcy laws would have on their legitimate interests. But it is obvious that by 1812 such a  
principle had been in place for a considerable period of time.26 Lord Eldon, in Higinbotham v.  
Holme,27 described a trust term the validity of which had been challenged as a “direct fraud upon  
the Bankrupt Laws” and refused to enforce it against the interests of a bankrupt’s creditors. No  
doubt, the strategies that ingenious English solicitors had adopted to diminish the harm the  
application of the bankruptcy laws had on their clients’ interests prompted this judicial response.  
[71] Bankruptcy practitioners usually refer to contract terms that impose adverse consequences  
on the insolvent party and the insolvent party’s creditors on the occurrence of an act of insolvency  
as ipso facto clauses.28  
23 [1978] 2 S.C.R. 916.  
24 An Acte against such persons as doo make Bankrupte, 34 & 35 Hen. 8, c. 4. In 1571 Parliament passed a second  
bankruptcy act, An Acte touching Orders for Bankruptes, 13 Eliz. 1, c. 7. It introduced more acts of bankruptcy and  
only applied to merchant or trader debtors. R. Wood, Bankruptcy and Insolvency Law 30 (2d ed. 2015) & C. Tabb,  
The Law of Bankruptcy 40 (2d ed. 2009). A third amendment in 1705, An Act to prevent Frauds frequently committed  
by Bankrupts, 4 & 5 Anne, c. 4 introduced “the concept of the discharge of a bankrupt. Prior to this, a bankrupt  
remained liable for all amounts remaining unpaid to the creditors following the bankruptcy”. R. Wood, Bankruptcy  
and Insolvency Law 31 (2d ed. 2015). See also C. Tabb, The Law of Bankruptcy 40 (2d ed. 2009).  
25 R. Wood, Bankruptcy and Insolvency Law 30 (2d ed. 2015).  
26 E.g., Re Murphy, 1 Sch. & Lef. 44, 49 (Ch. 1803) (Ire.) (“All the cases in England have held this to be a fraud upon  
the bankrupt laws which cannot be supported”).  
27  
34 Eng. Rep. 451, 453 (Ch. 1812). Writing in 2012, Lord Collins observed that “[t]he  
[fraud-on-the-bankruptcy-law] rule has existed for nearly 200 years”. Belmont Park Investments Pty Ltd. v. BNY  
Corporate Trustee Services Ltd., [2011] UKSC 38, ¶59; [2012] 1 A.C. 383, 409.  
28 R. Wood, Bankruptcy and Insolvency Law 178 (2d ed. 2015)(“these [contractual] provisions – often referred to as  
ipso facto clauses stipulate that the commencement of bankruptcy or other insolvency proceedings is of itself an  
event of default that permits the party to terminate the contract”); Ho, “The Treatment of Ipso Facto Clauses in  
Page: 21  
[72] One wonders why, if the harm ipso facto clauses caused was so pressing, Parliament did  
not declare them unenforceable.29 This, after all, was an era when “English Law had a distinctly  
pro-creditor orientation … Imprisonment for debt was the order of the day, from the time of the  
Statute of Merchant in 1285, until Dicken’s time in the mid-nineteenth century”.30  
[73] I suspect that at least 150 years following 1542 passed before a judge introduced the  
fraud-on-the-bankruptcy-law principle. In this gap period courts gave ipso facto terms in contracts,  
wills and trusts their plain and ordinary meaning.  
[74] By 1861 the existence of this rule was not in doubt. Sir W. Page Wood, V.C., in Whitmore  
v. Mason,31 proclaimed that “the law is too clearly settled to admit of a shadow of a doubt that no  
person possessed of property can reserve that property to himself until he shall become bankrupt,  
and then provide that … it shall pass to another and not to his creditors”.  
[75] The same observation cannot be made about the Canadian law. The Supreme Court of  
Canada has never acknowledged that a fraud-on-the-bankruptcy law principle is a component of  
the Canadian common law. Only a few Canadian courts have ever considered it.32 If there is such a  
principle in Canada, its content is certainly debatable.  
[76] In 2009 important changes were made to the Bankruptcy and Insolvency Act33 and the  
Companies’ Creditors Arrangement Act.34 These amendments declared unenforceable ipso facto  
Canada”, 61 McGill L.J. 139, 141 (2015) (“Many parties preserve contractual rights, through what are commonly  
known as ipso facto clauses, to terminate and amend contracts or to demand an accelerated payment in the event that a  
counterparty to the contract becomes insolvent”) & Black’s Law Dictionary 905 (10th ed. B. Garner ed. in chief  
2014)(“A contract clause that specifies the consequences of a party’s bankruptcy”).  
29 Professor Atiyah notes that at the dawn of the nineteenth century Parliament and the executive were not assisted by  
a large complement of skilled civil servants and that “there was good reason to assume that in general the Courts  
would make a better job of law-making than Parliament’. P. Atiyah, The Rise and Fall of Freedom of Contract 96  
(1979). While this may be true, Parliament had amended the bankruptcy statute on several occasions before this  
judicial foray into law making. C. Tabb, The Law of Bankruptcy 40 (2d ed. 2009)(“The first comprehensive  
bankruptcy law was passed in 1570 during the reign of Queen Elizabeth I. Over the next two centuries, Parliament  
periodically amended the bankruptcy laws, in each instance enhancing the power of the bankruptcy commissioner to  
reach more of the debtor’s assets and increasing the penalties against debtors”).  
30 C. Tabb, The Law of Bankruptcy 39 (2d ed. 2009).  
31 70 Eng. Rep. 1031, 1034 (Ch. 1861).  
32 Ho, “The Treatment of Ipso Facto Clauses in Canada”, 61 McGill L.J. 139, 170 (2015) (“the anti-deprivation rule  
… has not been widely used in Canadian jurisprudence”).  
33 The Economic Recovery Act (stimulus), S.C. 2009, c. 31, s. 64 introduced s. 84.2 of the Bankruptcy and Insolvency  
Act. It came into force December 15, 2009. Section 65.1 of the Bankruptcy and Insolvency Act came into force on  
August 1, 1992. An Act to amend the Bankruptcy Act and to amend the Income Tax Act in consequence thereof, S.C.  
1992, c. 27, s. 30 & S.I./92-135. This section declared unenforceable an ipso facto term affecting an insolvent debtor –  
a natural person or a corporation upon the debtor filing a notice of intention or proposal.  
Page: 22  
terms that imposed adverse consequences on natural person bankrupts and corporations pursuing  
restructuring and their creditors.  
[77] The 2009 amendments said nothing about corporate bankruptcy ipso facto terms. Section  
VII Q(d), the term under review in this appeal, is a corporate bankruptcy ipso facto term.  
II.  
Questions Presented  
A. Contract Law  
[78] On what principled basis may a court decline to enforce a stipulated-consequence-  
on-breach term in a commercial contract between two or more parties that have the resources  
necessary to obtain legal advice and that are perfectly capable of protecting their own interests?  
[79] What is the common law in Canada on the enforceability of  
stipulated-consequence-on-breach provisions in commercial contracts?  
[80] Does the classic penalty rule apply?  
[81] Or is a stipulated-consequence-on-breach term only unenforceable if it is oppressive?  
[82] If so, what are the features of an oppressive term?  
[83] How does the law apply to the term in dispute in this appeal?  
[84] Is s. VII Q(d), the provision in the agreement between Chandos Construction Ltd. and  
Capital Steel Inc. in which Capital Steel agreed that “[i]n the event [it] ... commits any act of ...  
bankruptcy [it would] forfeit ten percent of the [$1,373,000] ... subcontract agreement price to ...  
[Chandos Construction] as a fee for the inconvenience of completing the work using alternate  
means ... [or] for monitoring the work during the warranty period [or both]”, a stipulated-  
consequence-on-breach term?  
[85] If so, is it enforceable?  
34 R.S.C. 1985, c. C-36. An Act to establish the Wage Earner Protection Program Act, to amend the Bankruptcy and  
Insolvency Act and the Companies’ Creditors Arrangement Act and to make consequential amendments to other Acts,  
S.C. 2005, c. 47, s. 131 introduced s. 34 of the Companies’ Creditors Arrangement Act. This provision came into force  
on September 18, 2009. S.I./2009-68.  
Page: 23  
[86] Justice Nielsen concluded that s.VII Q(d) was an enforceable liquidated-damages term, in  
part, because the sum $137,300 – was not “extravagant and unconscionable” and that it would be  
“impossible to calculate the cost of [Capital Steel’s] ongoing obligations with any precision”.35  
B.  
Bankruptcy Law  
1. Introduction  
[87] There are two sets of questions here. The first set focuses on the common law. The second  
set puts the Bankruptcy and Insolvency Act36 under the microscope.  
2.  
Common Law  
[88] In 2011 the United Kingdom Supreme Court substantially rewrote the English common  
law on ipso facto terms.37 It directed courts to enforce an ipso facto clause unless it has as its  
“predominant purpose, or one of ... [its] main purposes, the deprivation of the property of one of  
the parties on bankruptcy”.38 Ipso facto terms that constitute “a blatant attempt to deprive a party of  
property in the event of liquidation”39 contravene public policy and are of no force.  
[89] Is a similar principle part of the common law of Canada?  
[90] If so, what are its distinguishing features?  
3.  
Bankruptcy and Insolvency Act  
[91] The Bankruptcy and Insolvency Act40 is a sophisticated and comprehensive statute. It has  
close to 300 sections. It applies to both natural persons and corporations, and, as its title reveals, to  
both bankruptcies and insolvencies.41  
35 Appeal Record F11.  
36 R.S.C. 1985, c. B-3.  
37 Belmont Park Investments Pty Ltd. v. BNY Corporate Trustee Services Ltd., [2011] UKSC 38; [2012] 1 A.C. 383.  
38 Id. at ¶104; [2012] 1 A.C. at 421.  
39 Id.  
40 R.S.C. 1985, c. B-3.  
41 The American Bankruptcy Code, 11 U.S.C. also applies to both natural persons and corporations. “In England,  
Australia, and New Zealand, there is a basic division between insolvency of individuals and insolvency of  
corporations. Bankruptcy law governs the former, while corporate insolvency legislation governs the latter”. R. Wood,  
Bankruptcy and Insolvency Law 35 (2d ed. 2015).  
Page: 24  
[92] Section 84.2 of the Bankruptcy and Insolvency Act, introduced by the 2009 amendments,42  
and in force as of December 15, 2009, declares a category of ipso facto terms unenforceable if the  
bankrupt is a natural person.43  
[93] But no provision in the Bankruptcy and Insolvency Act declares corporate ispo facto terms  
of any type of no force or effect.  
[94] Also noteworthy is the fact that on September 18, 2009 s. 34 of the Companies’ Creditors  
Arrangement Act came into force.44 This provision expressly deprived a corporate restructuring  
ipso facto term of any force.  
[95] Is it reasonable to assume that if Parliament had intended to accord the same treatment to  
corporate bankruptcy ipso facto terms as it attached to natural bankruptcy person ipso facto terms  
and corporate restructuring ipso facto terms that it would have incorporated unambiguous  
statutory text to that effect?  
[96] Has Parliament, with the passage of s. 84.2 of the Bankruptcy and Insolvency Act, occupied  
the field relating to the regulation of ipso facto clauses tied to an act of bankruptcy?  
[97] If so, does that mean that s. VII Q(d), a corporate bankruptcy ipso facto term, must be  
enforceable?  
[98] If Parliament has not occupied the field and the common law on ipso facto terms applies, is  
s. VII Q(d) enforceable?  
[99] Does the bankrupt’s property include the accounts receivable for work performed for  
Chandos Construction but unpaid or does it exclude the ten percent forfeiture fee triggered when  
Capital Steel became bankrupt?  
III.  
Brief Answers  
A. Contract Law  
[100] The classic penalty rule provides no principled basis for assessing the enforceability of  
stipulated-consequence-on-breach provisions in commercial contracts between parties with  
sufficient resources to protect their own interests. It should not be used anymore.  
[101] The Supreme Court said so in Elsley v. J.G. Collins Insurance Agencies Ltd.45 It stated that  
only oppressive stipulated-consequence-on-breach terms were unenforceable.  
42 Economic Recovery Act (stimulus), S.C. 2009, c. 31, s. 64.  
43 Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3.  
44 S.I. /2009-68.  
Page: 25  
[102] The Supreme Court of Canada has not recorded the benchmarks of an oppressive  
stipulated-consequence-on-breach term in the context of ascertaining the enforceability of such a  
term.  
[103] Because freedom of contract is of paramount importance in Canada, oppression should be  
given a limited meaning.46  
[104] It should only apply in extraordinary circumstances to a commercial contract between  
parties that have the resources necessary to retain legal counsel to advise them on the nature of  
their responsibilities and benefits under a proposed contract. It makes no sense whatsoever to ask a  
court to assess the enforceability of a term that commercial entities with the resources required to  
secure legal advice have agreed upon. It is presumptuous in the extreme to believe that judges have  
a better grasp of what obligations and benefits should be in a commercial contract than those who  
negotiated it and are expected to understand the implications of their bargain.  
[105] The United Kingdom Supreme Court case Cavendish Square Holdings BV v. El  
Makdessi47 illustrates this point. One contracting party was part of the world’s leading marketing  
communications group.48 The other contracting parties, Messrs. Makdessi and Ghossoub, were the  
co-founders and co-owners of the Middle East’s largest advertising and marketing  
communications group.49 Messrs. Makdessi and Ghossoub had agreed to sell sufficient shares in  
45 [1978] 2 S.C.R. 916, 937.  
46 See Philips Hong Kong Ltd. v. Hong Kong, [1993] UKPC 3a, ¶22; [1993] 1 H.K.L.R. 269, 280 (“the court has to be  
careful not to set too stringent a standard and bear in mind that what the parties have agreed should normally be  
upheld. Any other approach will lead to undesirable uncertainty especially in commercial contracts”).  
47 [2015] UKSC 67; [2016] A.C. 1172. See also Clydebank Engineering and Shipbuilding Co. v. Castaneda, [1905]  
A.C. 6 (H.L. 1904) (why should judges be asked to review a contract between the Spanish government and a  
shipbuilder in order to determine whether an important term should be enforced?) & Polyset Ltd. v. Panhandat Ltd.,  
[2002] HKCFA 15, ¶158 (why should judges be asked to review a $115 million land sale contract to determine  
whether the purchaser’s agreement to forego a $40.25 million deposit in the volatile Hong Kong real estate market if it  
failed to close? per Litton, N.P.J.: “Over the past half-century there have been many cycles of dramatic rise and fall.  
Upon entering into the contract, in May 1997, the purchaser had the possibility of almost immediate profit upon  
sub-division and re-sale. With the contract in hand, in an inflationary environment, the purchaser would have had little  
difficulty in raising money from the market. The vendor was, of course, locked into the contract for over 9 months, and  
exposed to uncertainties over a long period. It was therefore entirely reasonable for the vendor to seek reassurance that  
if the market should fall and the purchaser should default, it would be compensated: And that the compensation should  
be certain : that is to say, not dependent upon a court assessing the amount of compensation years after the event : Few  
vendors would welcome the prospect of expensive litigation to claim compensation, when the outcome would depend  
upon the resolution of conflicting evidence based upon valuation exercises by opposing experts, whose opinions could  
vary widely (as occurred in this case). The size of the deposit was a matter of bargain for the parties, as was every other  
term. They were contracting at arm’s length, each independently advised, with each looking to its own advantage”).  
48 [2015] UKSC 67, ¶116; [2016] A.C. 1172, 1232.  
49 Id.  
Page: 26  
their advertising and marketing business to give Cavendish Square Holdings majority control of it.  
The purchase price was over US $100 million. Mr. Makdessi had violated a term in the share-sale  
agreement and the purchaser sought a declaration that the agreed-upon consequences for that  
breach were now in force and that the amount the purchaser had to pay Mr. Makdessi for this  
shares had drastically declined. No court should have to spend much time assessing the  
enforceability of a term in this contract.  
[106] An extraordinary circumstance exists if the stipulated-consequence-on-breach term is  
oppressive. A term in a commercial contract is oppressive if it is so manifestly grossly one-sided  
that its enforcement would bring the administration of justice into disrepute. The focus is on the  
contested term and not the relative bargaining strengths of the contracting parties.50  
[107] This is a bright-line test.  
[108] Stipulated-consequence-on-breach terms in commercial contracts will seldom breach this  
marker.  
[109] The oppression concept may be engaged more frequently in consumer contracts. A less  
demanding standard for oppression in consumer contracts rental-car, parking, credit-card and  
utility adhesion contracts and perhaps also increasingly online contracts of adhesion, such as  
Facebook’s “terms of use” – may be appropriate. In these situations a dominant party provides a  
service or a product to a large number of consumers who are not in a position to extract any  
concessions from the service or product provider. If the consumer wishes to acquire the services or  
the product provided by the dominant party, it will be only on the terms stipulated by the dominant  
party.  
[110] A promisor that asks to be relieved of a burden that it promised to discharge bears the legal  
burden of establishing the facts it relies on to support its oppression claim.51  
[111] In this appeal, there can be no reason to doubt that both Chandos Construction and Capital  
Steel had the resources necessary to retain legal counsel and secure competent advice as to the  
burdens and benefits that each party would have under their steel-construction contract. They were  
able to protect their own interests.  
50 Imperial Tobacco Co. v. Parsley, [1936] 2 All E.R. 515, 522 (C.A.) (the Court thought it important that the  
tobacconist who entered into a price-maintenance agreement was “of full age and understanding” and that it was  
irrelevant that the tobacco supplier was a large commercial enterprise). Some courts have held that inequality of  
bargaining power is a relevant consideration. E.g., Birch v. Union of Taxation Employees Local 70030, 2008 ONCA  
809, ¶45; 305 D.L.R. 4th 64, 78 & Bankers Mortgage Corp v. Plaza 500 Hotels Ltd., 2016 BCSC 722, ¶71; 35 C.B.R.  
6th 263, 278.  
51 Mortgage Makers Inc. v. McKeen, 2009 NBCA 61, ¶47; 312 D.L.R. 4th 82, 104 & Robophone Facilities Ltd. v.  
Blank, [1966] 3 All E.R. 128, 142 (C.A.). Contra, Law Reform Act, S.N.B. 1993, c. L-1.2, s. 5(1).  
Page: 27  
[112] The term in this commercial contract is a stipulated-consequence-on-breach term and is  
undoubtedly enforceable. The breach is the subcontractor’s failure to carry on business and  
discharge the promise that it made and its acquisition of the status of a bankrupt.  
[113] Section VII Q(d) is part of a binding contract between commercial actors. It clearly is not  
so manifestly grossly one-sided that its enforcement would bring the administration of justice into  
disrepute. This term is not one-sided in any way at all. A judgment giving effect to s. VII Q(d) will  
not diminish the reputation of the judicial branch of government.  
[114] The result would be the same if the standard applied was that fashioned by the House of  
Lords and the Privy Council at the start of the twentieth century in Clydebank Engineering and  
Shipbuilding Co. v. Castaneda,52 Dunlop Pneumatic Tyre Co. v. New Garage and Motor Co.53 and  
Webster v. Bosanquet54 and adopted by many Canadian courts.  
[115] Section VII Q(d) is not a penalty provision. It is fair and balanced. It serves a justifiable  
business purpose. It is not unreasonable, extravagant, or unconscionable. It may fairly be  
characterized as a liquidated damages term.  
B.  
Bankruptcy Law  
1. Common Law  
[116] The fraud-on-the-bankruptcy-law principle is not now and likely never has been part of the  
common law of Canada.  
[117] The Supreme Court of Canada has never expressly acknowledged the existence of this  
principle and has implicitly denied its status as part of Canadian law.55  
[118] Only one provincial appellate court has applied the concept.56 It did so in a 2013 appeal in a  
very brief judgment that assumed the fraud-on-the-bankruptcy-law was an element of Canadian  
common law. No consideration was given to the effect that the 2009 amendments to the  
Bankruptcy and Insolvency Act and the Companies’ Creditors Arrangement Act had on the  
common law.  
[119] If the fraud-on-the-bankruptcy-law principle was ever a feature of the Canadian common  
law, the aspect that dealt with ipso facto clauses ceased to exist no later than 2009.  
52 [1905] A.C. 6.  
53 [1915] A.C. 79 (H.L. 1914).  
54 [1912] A.C. 394 (P.C.) (Ceylon).  
55 Les Coopérants Société mutuelle d'assurance-vie (Liquidateur) v. Dubois, [1996] 1 S.C.R. 900.  
56 Trustee of Aircell Communications Inc. v. Bell Mobility Cellular Inc., 2013 ONCA 95; 14 C.B.R. 6th 276.  
Page: 28  
[120] The amendments to the Bankruptcy and Insolvency Act and the Companies’ Creditors  
Arrangement Act that came into force in 2009 relating to ipso facto terms now constitute the code  
governing the enforceability of ipso facto clauses. There was no room for any common law norms  
after 2009.  
[121] If, contrary to my conclusion, the 2009 amendments do not occupy the field and there is  
still some room for the common law, does it have the bite that the Ontario Court of Appeal  
attributed to it an ipso facto term is unenforceable if its effect is the diminution of the bankrupt’s  
estate?57 Or should the benchmark of an enforceable corporate ipso facto term be less demanding  
and easier to meet? Should the common law test not accord more weight to the values of party  
autonomy and freedom of contract?  
[122] I agree with the approach that the United Kingdom Supreme Court set out in Belmont Park  
Investments Pty Ltd. v. BNY Corporate Trustee Services Ltd..58 The common law should attach  
more weight to the value of party autonomy and freedom of contract than the collective interests of  
creditors favoured by the effects-based test given that bankruptcy is a statutory construct and  
judicial intervention is only interstitial in nature. Parliament has already identified the  
circumstances when collective interests trump party autonomy and freedom of contract.59  
[123] This rebalance leads to a new Canadian common law test.  
[124] A corporate bankruptcy ipso facto term is enforceable if its most important feature is the  
advancement of a reasonable and defensible commercial purpose and its enforcement provides a  
benefit for the nonbankrupt party that is not significantly greater than is necessary to promote the  
nonbankrupt party’s legitimate commercial interests.  
[125] Section VII Q(d) meets this new common law standard.  
[126] Its only purpose is to declare the amount to which Chandos Construction is entitled if  
Capital Steel goes out of business and Chandos Construction must find other suppliers to provide  
the material and services that Capital Steel had promised to provide. Objectively assessed, this is a  
reasonable and defensible commercial purpose.  
[127] The benefit Chandos Construction derives from the enforcement of the ipso facto clause is  
not greater, let alone significantly greater, than is necessary to promote Chandos Construction’s  
legitimate commercial interests.  
[128] Section VII Q(d) is not a blatant and egregious attempt to hijack Capital Steel’s property  
and attack the interests of its creditors.  
57 Id.  
58 [2011] UKSC 38; [2012] 1 A.C. 383.  
59 Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, ss. 65.1, 66.34 & 84.2.  
Page: 29  
2.  
Bankruptcy and Insolvency Act  
[129] Parliament’s decision in 200960 not to follow the American61 and Australian62 legislative  
models and accord the same treatment to natural person bankruptcy and corporate bankruptcy ipso  
facto terms is strong evidence that Canada’s legislators were not convinced that corporate  
bankruptcy ipso facto clauses are inimical to the welfare of the Canadian bankruptcy regime.  
[130] I am satisfied that Parliament has occupied the field and that corporate bankruptcy ipso  
facto terms are enforceable.  
[131] If Parliament had intended to deny enforceability to corporate ipso facto clauses it would  
have said so in unambiguous language.  
[132] There is no compelling reason that would justify the contrary conclusion. Parliament  
cannot have left this subject matter unregulated satisfied that the common law had introduced  
norms that are generally recognized and applied across the country. There is little judge-made law  
on this topic.  
[133] Because the Bankruptcy and Insolvency Act does not deprive a corporate bankruptcy term  
of its force and s. VII Q(d) is a corporate bankruptcy term, s. VII Q(d) is enforceable.  
3.  
Conclusion  
[134] To summarize, s. VII Q(d) is enforceable for two independent reasons. First, the  
Bankruptcy and Insolvency Act does not proscribe corporate bankruptcy ipso facto terms. Section  
VII Q(d) is a corporate bankruptcy ipso facto term. Second, if the Bankruptcy and Insolvency Act  
does not extinguish the common law on corporate bankruptcy ipso facto clauses, s. VII Q(d) meets  
the new party-autonomy-inspired common law test and is valid.  
IV.  
Statement of Facts  
A. The Construction Contracts  
[135] On March 2, 2015 Boudreau Developments Ltd., the developer, and Chandos  
Construction, the general contractor, entered into a stipulated-price contract for the construction of  
60 Economic Recovery Act (stimulus), S.C. 2009, c. 31, s. 64.  
61 Bankruptcy Code, 11 U.S.C. §365(e).  
62 Bankruptcy Act 1966, No. 33 s. 301 (Cth) & Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Act  
2017, No. 112, s. 7 (introduced s. 415 D of the Corporations Act 2001, No. 50). See Australia House of  
Representatives, Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Bill 2017 Explanatory  
Memorandum.  
Page: 30  
phase one of “The Botanica” condominium project in St. Albert.63 The developer agreed to pay the  
general contractor $55 million to construct phase one.  
[136] In order to discharge its obligation to the developer, Chandos Construction entered into a  
number of agreements with other construction businesses to perform and provide some of the  
necessary tasks and materials.  
[137] Capital Steel was one of these construction enterprises. It agreed to supply and install the  
64  
structural and miscellaneous steel components of the project. The agreed price was  
$1,373,300.47.  
[138] Capital Steel did not do what it promised. It did not complete its work.  
[139] Chandos Construction paid Capital Steel $1,223,682.08 for the work performed and  
material supplied. The outstanding balance is $149,618.39.  
[140] The completion costs are estimated to be $22,800.  
[141] Capital Steel is responsible for warranty work that arises in a twelve-month period  
following substantial completion of the project. The start date has tolled. The extent of this  
obligation cannot be catalogued until the warranty period has expired.  
B.  
Capital Steel Is a Bankrupt  
[142] On September 26, 2016 Capital Steel filed an assignment in bankruptcy.  
[143] The court subsequently appointed Deloitte Restructuring Inc. as the trustee of the estate of  
the bankrupt Capital Steel.  
C.  
Deloitte Restructuring Seeks Advice and Directions  
[144] On March 6, 2017 Deloitte Restructuring filed an application in the Court of Queen’s  
Bench asking the court to determine “whether Chandos [Construction] is entitled to rely on s. VII  
Q(d) of the Subcontract between it and Capital Steel and, if not, for a direction that the balance of  
$126,818.39 is payable to ... [Deloitte Restructuring”].65  
63 This is a standard form contract prepared by the Canadian Construction Documents Committee. This committee is a  
national joint committee made up of representatives of public and private sector owners, The Association of  
Consulting Engineering Companies, The Canadian Construction Association, Construction Specifications Canada and  
The Royal Architecture Institute of Canada.  
64 Counsel informed us during oral argument that this is a contract Chandos Construction uses. It is not prepared by the  
Canadian Construction Documents Committee.  
65 This is the difference between the outstanding balance of $149,618.39 and estimated completion costs of 22,800.  
Page: 31  
D.  
Justice Nielsen’s Decision  
[145] Justice Nielsen concluded that s. VII Q(d) is valid and that the $126,818.39 is Chandos  
Construction’s property.  
[146] The key parts of Justice Nielsen’s March 17, 2017 decision are as follows:  
Section 97 of the Bankruptcy and Insolvency Act ... provides that the law of set off  
... applies to all claims made against the estate of the bankrupt, except in cases  
involving frauds or fraudulent preferences. …  
In this case, there is no suggestion by … [the bankruptcy trustee] of fraud or a  
fraudulent preference in relation to … [s. VII Q(d)].  
The issue … is whether … [s. VII Q(d)] was such as to provide that all funds due  
from Chandos to Capital Steel would be the property of Capital Steel unless it  
became insolvent, in which case the property would pass to Chandos, as opposed to  
… [s. VII Q(d)] being a genuine covenanted pre-estimate of damages.  
To answer this question, it is necessary to have regard to the whole … [of the two  
contracts between Chandos Construction and Capital Steel, and Boudreau  
Developments and Chandos]. Chandos is fully responsible for the acts and work  
of its subcontractors. Further, it has undertaken to indemnify… [Boudreau  
Developments] in respect of the involvement of Chandos … . Chandos has  
undertaken to warrant the work under the [contract with Boudreau Developments],  
which includes the work of Capital Steel, for a period of one year from the date of  
substantial performances of the work, which has not yet occurred.  
… [Section VII Q(d)] provides for the payment of a fee to Chandos of 10 percent of  
the subcontract price. … [T]he total amount of the subcontract was $1,373,300. A  
10 percent fee is … $137,330.  
I do not find that such a sum is “extravagant and unconscionable in amount in  
comparison with the greatest loss that could conceivably be proved to have flowed  
from the breach”, nor is it “a grossly and punitive response to the problem to which  
it was addressed”, all as referred to by the Supreme Court of Canada in the H.F.  
Clarke Ltd. case.  
Clearly, Chandos has ongoing obligations which flow from the work of Capital  
Steel . It would be impossible to calculate the cost of such ongoing obligations  
with any precision. It is, therefore, fair and reasonable for such risk to be calculated  
on the basis of a percentage of the value of … [the contract between Chandos  
Page: 32  
Construction and Capital Steel]. … [T]he value of the … [contract between  
Chandos Construction and Capital Steel] is $1,373,300. The value of the [contract  
between Boudreau Developments and Chandos Construction] was $56,852,453. In  
my view, a payment of 10 percent of … [$1,373,300] or 0.24 percent of the value of  
the [contract between Boudreau Developments and Chandos Construction], could  
not be considered to be gross and punitive given the ongoing obligations of  
Chandos and its potential risk with respect to the work of Capital Steel.  
I acknowledge that ... [s. VII Q(d)] uses the term “forfeit”. This is an unfortunate  
choice of words as it could connote that the 10 percent amount is being lost or  
surrendered as a penalty. In my view, this single word cannot be determinative of  
the issue. ... [Section VII Q(d)] must be considered in the context of the [two  
contracts] and the position that Chandos is in as a result of the insolvency of Capital  
Steel. Clearly, it would incur administration and management costs as a result of  
the insolvency of Capital Steel, and is at risk for future liabilities of Capital Steel.  
[Chandos Construction and Capital Steel] must be taken to have had these  
considerations in mind at the time of execution of ... [their contract].  
E.  
Deloitte Restructuring Appeals  
[147] Deloitte Restructuring appeals. It argues that Justice Nielson committed several reversible  
errors.  
V.  
Relevant Contract and Statutory Provisions  
[148] The relevant provisions of the contract between Chandos Construction and Capital Steel  
are set out below:  
III. Guarantee  
[Capital Steel] agrees to immediately, or in accordance with a schedule acceptable  
to … [Chandos Construction], repair and make good any defect in its work and all  
resulting damages that may appear as the result of any improper work or defective  
materials furnished by … [Capital Steel]. This provision shall apply for the entire  
guarantee period specified in the prime contract, but shall not be less than one year  
from completion of the project.  
VII. Conditions  
Q. Subcontractor Ceases Operations  
Page: 33  
In the event …[Capital Steel] commits any act of insolvency, bankruptcy, winding  
up or other distribution of assets, or permits a receiver of the Subcontractor’s  
business to be appointed, or ceases to carry on business or closes down its  
operations, then in any of such events:  
(a) this Subcontract Agreement shall be suspended but may be reinstated and  
continued if … [Chandos Construction], the Liquidator, or Trustee of …  
[Capital Steel] and the surety, if any, so agree. If no agreement is reached, …  
[Capital Steel] shall be considered to be in default and … [Chandos  
Construction] may give written notice of default to … [Capital Steel] and  
immediately proceed to complete the work by other means as deemed  
appropriate by … [Chandos Construction], and  
(b) any cost to … [Chandos Construction] arising from the suspension of this  
Subcontract Agreement or the competition of the work by … [Chandos  
Construction] plus a reasonable allowance for overhead and profit, will be  
payable by … [Capital Steel] and or his sureties, and  
(c) [Chandos Construction] … is entitled to withhold up to 20% of the within  
Subcontract Agreement price until such time as all warranty and or guarantee  
periods which are the responsibility of … [Capital Steel] have expired, and  
(d) [Capital Steel] shall forfeit 10 percent of the … Subcontract Agreement price  
to [Chandos Construction] as a fee for the inconvenience of completing the work  
using alternate means [or] monitoring the work during the warranty period [or  
both].  
[149] The important parts of the “General Conditions” of the stipulated price contract between  
Boudreau Developments Ltd., the owner of the condominium project, and Chandos Construction,  
follow:66  
GC 3.7 Subcontractors and Suppliers  
3.7.1 The Contractor shall preserve and protect the rights of the parties under  
the Contract with respect to work to be performed under subcontract,  
and shall:  
.3 be as fully responsible to the Owner for acts and omissions of Subcontractors  
… as for acts or omissions of persons directly employed by the Contractor.  
66 Emphasis in original.  
Page: 34  
Part 12 Indemnification, Waiver of Claims and Warranty  
GC 12.3 Warranty  
12.3.1 Except for extended warranties, as described in paragraph 12.3.6, the  
warranty period under the Contract is one year from the date of Substantial  
Performance of the Work.  
12.3.4 Subject to paragraph 12.3.2, the Contractor shall correct promptly, at the  
Contractor’s expense, defect or deficiencies in the Work which appear prior to  
and during the one year warranty period.  
[150] Sections 2, 65.1,67 66.34,68 71, 84.2,69 95(1) and (2), and 97(3) of the Bankruptcy and  
Insolvency Act70 are as follows:  
2 In this Act,  
property means any type of property, whether situated in Canada or elsewhere, and  
includes money, goods, things in action, land and every description of property,  
whether real or personal, legal or equitable, as well as obligations, easements and  
every description of estate, interest and profit, present or future, vested or  
contingent, in, arising out of or incident to property ... .  
65.1(1) If a notice of intention or a proposal has been filed in respect of an insolvent  
person, no person may terminate or amend any agreement, including a security  
agreement, with the insolvent person, or claim an accelerated payment, or a  
forfeiture of the term, under any agreement, including a security agreement, with  
the insolvent person, by reason only that  
(a) the insolvent person is insolvent; or  
(b) a notice of intention or a proposal has been filed in respect of the insolvent  
person.  
67 An Act to amend the Bankruptcy Act and to amend the Income Tax Act in consequence thereof, S.C. 1992, c. 27, s.  
30 (in force November 30, 1992 S.I./92-194).  
68 An Act to amend the Bankruptcy Act and to amend the Income Tax Act in consequence thereof, S.C. 1992, c. 27, s.  
32 (in force November 30, 1992 S.I./92-194).  
69 Economic Recovery Act (stimulus), S.C. 2009, c. 31, s. 64 (in force December 15, 2009 S.I./2009-68).  
70 R.S.C. 1985, c. B-3.  
Page: 35  
66.34(1) If a consumer proposal has been filed in respect of a consumer debtor, no  
person may terminate or amend any agreement, including a security agreement,  
with the consumer debtor, or claim an accelerated payment, or the forfeiture of the  
term, under any agreement, including a security agreement, with the consumer  
debtor, by reason only that  
(a) the consumer debtor is insolvent, or  
(b) a consumer proposal has been filed in respect of the consumer debtor  
until the consumer proposal has been withdrawn, refused by the creditors or the  
court, annulled or deemed annulled.  
(5) Any provision in an agreement that has the effect of providing for, or  
permitting, anything that, in substance, is contrary to subsections (1) to (3) is of no  
force or effect.  
...  
71 On a bankruptcy order being made ... , a bankrupt ceases to have any capacity to  
dispose of or otherwise deal with their property, which shall, subject to this Act and  
to the rights of secured creditors, immediately pass to and vest in the trustee named  
in the bankruptcy order ... .  
84.2(1) No person may terminate or amend or claim an accelerated payment or  
forfeiture of the term under any agreement, including a security agreement, with a  
bankrupt individual by reason only of the individual’s bankruptcy or insolvency.  
(2) If the agreement referred to in subsection (1) is a lease, the lessor may not  
terminate or amend, or claim an accelerated payment or forfeiture of the term  
under, the lease by reason only of the bankruptcy or insolvency or of the fact that  
the bankrupt has not paid rent in respect of any period before the time of the  
bankruptcy.  
(3) No public utility may discontinue service to a bankrupt individual by reason  
only of the individual’s bankruptcy or insolvency or of the fact that the bankrupt  
individual has not paid for services rendered or material provided before the time of  
the bankruptcy.  
Page: 36  
(4) Nothing in this section is to be construed as  
(a) prohibiting a person from requiring payments to be made in cash for goods,  
services, use of leased property or other valuable consideration provided after  
the time of the bankruptcy; or  
(b) requiring the further advance of money or credit.  
(5) Any provision in an agreement that has the effect of providing for, or  
permitting, anything that, in substance, is contrary to this section is of no force or  
effect.  
95(1) A transfer of property made, a provision of services made, a charge on  
property made, a payment made, an obligation incurred or a judicial proceeding  
taken or suffered by an insolvent person  
(a) in favour of a creditor who is dealing at arm’s length with the insolvent  
person, or a person in trust for that creditor, with a view to giving that creditor a  
preference over another creditor is void as against or, in Quebec, may not be  
set up against the trustee if it is made, incurred, taken or suffered, as the case  
may be, during the period beginning on the day that is three months before the  
date of the initial bankruptcy event and ending on the date of the bankruptcy; and  
(b) in favour of a creditor who is not dealing at arm’s length with the insolvent  
person, or a person in trust for that creditor, that has the effect of giving that  
creditor a preference over another creditor is void as against or, in Quebec,  
may not be set up against the trustee if it is made, incurred, taken or suffered,  
as the case may be, during the period beginning on the day that is 12 months  
before the date of the initial bankruptcy event and ending on the date of the  
bankruptcy.  
(2) If the transfer, charge, payment, obligation or judicial proceeding referred to in  
paragraph (1)(a) has the effect of giving the creditor a preference, it is, in the  
absence of evidence to the contrary, presumed to have been made, incurred, taken  
or suffered with a view to giving the creditor the preference even if it was made,  
incurred, taken or suffered, as the case may be, under pressure and evidence of  
pressure is not admissible to support the transaction.  
97(3) The law of set-off or compensation applies to all claims made against the  
estate of the bankrupt and also to all actions instituted by the trustee for the  
Page: 37  
recovery of debts due to the bankrupt in the same manner and to the same extent as  
if the bankrupt were plaintiff or defendant, as the case may be, except in so far as  
any claim for set-off or compensation is affected by the provisions of this Act  
respecting frauds or fraudulent preferences.  
[151] Section 3(1) and part of s. 3471 of the Companies’ Creditors Arrangement Act72 read as  
follows:  
3(1) This Act applies in respect of a debtor company or affiliated debtor companies  
if the total of claims against the debtor company or affiliated debtor companies ... is  
more than $5,000,000 or any other amount that is prescribed.  
34(1) No person may terminate or amend, or claim an accelerated payment or  
forfeiture of the term under, any agreement, including a security agreement, with a  
debtor company by reason only that proceedings commenced under this Act or that  
the company is insolvent.  
(2) If the agreement referred to in subsection (1) is a lease, the lessor may not  
terminate or amend the lease by reason only that proceedings commenced under  
this Act, that the company is insolvent or that the company has not paid rent in  
respect of any period before the commencement of those proceedings.  
(5) Any provision in an agreement that has the effect of providing for, or  
permitting, anything that, in substance, is contrary to this section is of no force or  
effect.  
VI.  
Analysis  
A. Introduction  
[152] The first part of this segment of the judgment records the deficiencies that strip the classic  
penalty rule of any utility and explains why a stipulated-consequence-on-breach term in a  
71 An Act to establish the Wage Earner Protection Program Act, to amend the Bankruptcy and Insolvency Act and the  
Companies’ Creditors Arrangement Act and to make consequential amendments to other Acts, S.C. 2005, c. 47, s. 131  
(in force September 18, 2009 S.I./2009-68).  
72 R.S.C. 1985, c. C-36.  
Page: 38  
commercial contract should be enforced unless it is oppressive, a position staked out by the  
Supreme Court of Canada in 1978. 73 The next part applies the oppressive test to s. VII Q(d).  
[153] The second part explains why corporate bankruptcy ipso facto terms are lawful in Canada.  
It also constructs a new common law test for the identification of unenforceable corporate  
bankruptcy ipso facto terms, in the event the Bankruptcy and Insolvency Act74 does not preclude  
common law intervention. The final segment applies the new common law test to s. VII Q(d) and  
concludes that it is enforceable against the bankruptcy trustee.  
B.  
Section VII Q(d) Is Neither Oppressive Nor a Penalty and Is Enforceable  
1. The Classic Penalty Rule Is Without Merit and Should Be Abandoned  
[154] The penalty rule was suspect when common law courts first applied it and it has not shed  
this limiting characteristic in the intervening centuries.75 It is unsound and should not be used any  
more. Justice Dickson, as he then was, speaking for the Supreme Court in Elsley v. J.G. Collins  
Insurance Agencies Ltd.,76 said so roughly forty years ago. But many Canadian courts have not  
paid heed to his unequivocal message.77  
[155] A stipulated-consequence-on-breach term should be enforced unless doing so would bring  
the administration of justice into disrepute.78 With regard to a commercial contract, this would  
happen only if a stipulated-consequence-on-breach term is manifestly grossly one-sided. A less  
onerous standard may be suitable for consumer contracts.  
73 Elsley v. J.G. Collins Insurance Agencies Ltd., [1978] 2 S.C.R. 916, 937.  
74 R.S.C 1985, c. B-3.  
75 Cavendish Square Holdings BV v. El Makdessi, [2015] UKSC 67,¶36; [2016] A.C. 1172, 1206 (“[The penalty rule]  
is the creation of the judges, and, she argued, the judges should now take the opportunity to abolish it. There is a case  
to be made for taking this course. ...We rather doubt that the courts would have invented the rule today if their  
predecessors had not done so three centuries ago”).  
76 [1978] 2 S.C.R. 916, 937.  
77 E.g., B.L.T. Holdings Ltd. v. Excelsior Life Insurance Co., [1986] 6 W.W.R. 534 (Alta. C.A. 1986); Dial Mortgage  
Corp. v. Baines, 15 Alta. L.R. 2d 211 (Q.B. 1980); Dezcam Industries Ltd. v. Kwak, [1983] 5 W.W.R. 32 (B.C.C.A.);  
Colliers Macaulay Nicolls Inc. v. Park Georgia Properties Ltd., 2003 BCSC 1785; 15 R.P.R. 4th 132; Schindler  
Elevator Corp. of Canada v. New Vista Society, [1998] B.C.J. No. 2327 (Sup. Ct.); Place Concorde East Ltd.  
Partnership v. Shelter Corp. of Canada, [2003] O.J. No. 5437; 43 B.L.R. 3d 54 (Sup. Ct.).  
78 See Principles, Definitions and Model Rules of European Private Law, Draft Common Frame of Reference (C. von  
Bar & E. Clive eds. 2009)(a penalty clause may be modified and a different obligation imposed only if it is “grossly  
excessive”); Scottish Law Commission, Report on Penalty Clauses (No. 171) ¶3.10 (May 1999) (the Commission  
recommended that a penalty term be unenforceable only if it is “manifestly excessive”) & Davis, Penalty Clauses  
Through the Lens of Unconscionability Doctrine: Birch v. Union of Taxation Employees, 55 McGill L.J. 151, 164  
(2010) (“Employing the unconscionability doctrine instead of the traditional penalty doctrine was a bold and valuable  
step. But the potential benefits of that innovation will not be realized so long as courts’ vision continues to be occluded  
by the remnants of the penalty doctrine”).  
Page: 39  
a.  
The Purpose of the Penalty Rule Is Unclear  
[156] The purpose of the penalty rule is unclear.79 The few courts that have addressed this issue  
have presented a variety of opinions. This is troublesome.80 If there is no consensus as to the  
purpose a concept serves, how can it be implemented in a consistent and rational manner?  
[157] Chief Justice Laskin, in H.F. Clarke Ltd. v. Thermidaire Corp.,81 asserted that the rule “is  
simply a manifestation of a concern for fairness and reasonableness ... whenever the parties seek to  
remove from the courts their ordinary authority to determine ... what damages may be recovered as  
a result [of contractual breach]”. Is this focus on the fairness and reasonableness of a contractual  
term misplaced? Courts have historically disavowed any jurisdiction to review bargains for their  
fairness or reasonableness.82 Why should a stipulated-consequence-on-breach term be singled out  
for special treatment?  
[158] Lord Roskill, in Export Credits Guarantee Department v. Universal Oil Products Co.,83 a  
1983 case, suggested that the “main purpose [of the penalty rule] ... is to prevent a plaintiff  
79 Robophone Facilities Ltd. v. Blank, [1966] 3 All E.R. 128, 142 (C.A.) per Lord Diplock (“I make no attempt ... to  
rationalize this common law rule”); Hill v. Barclay, 34 Eng. Rep. 238, 239 (Ch. 1811) per Lord Eldon (“[the penalty  
rule was ] utterly without foundation”) & Astley v. Weldon, 126 Eng. Rep. 1318, 1321 (Common Pleas 1801) per Lord  
Eldon (“I felt ... much embarrassed in ascertaining the principle upon which [the penalty rule cases were founded”).  
80 Holmes, “The Path of the Law”, 10 Harv. L. Rev. 457, 469 (1897)(“a body of law is more rational ... when every  
rule it contains is referred articulately and definitely to an end which it subserves, and when the grounds for desiring  
that end are stated ... in words”) & Coke, The First Part of the Institutes of the Lawes of England or a Commentarie  
upon Littleton 395 (1628) (“knowing for certaine that the Lawe is unknowne to him that knoweth not the reason  
thereof”). See The Queen v. Big M Drug Mart Ltd., [1985] 1 S.C.R. 295, 331 (“All legislation is animated by an object  
the legislation intends to achieve”); City of Montreal v. 2952-1366 Quebec Inc., 2005 SCC 62, ¶23; [2005] 3 S.C.R.  
141, 156 (“Identifying the purpose of a regulation can be helpful in determining the meaning of a given word or  
expression”); Hirsch v. Protestant Board of School Commissioners, [1926] S.C.R. 246, 267 (a court must always  
consider the object of the statute) & Alberta v. Cardinal, 2013 ABQB 407, ¶51; 565 A.R. 271, 286 (“a court forced to  
interpret legislation and apply it to a fact pattern without an understanding of the underlying purpose of the enactment  
functions with a severe handicap”).  
81 [1976] 1 S.C.R. 319, 331 (1974).  
82 Cavendish Square Holding BV v. El Makdessi, [2015] UKSC 67, ¶13; [2016] A.C. 1172, 1196 (H.L) per Lord  
Neuberger & Lord Sumption (“Leaving aside challenges going to the reality of consent, such as those based on fraud,  
duress or undue influence, the courts do not review the fairness of men’s bargains either at law or in equity”) & ¶73,  
[2016] A.C. at 1216 per Lord Neuberger & Lord Sumption (“It is not a proper function of the penalty rule to empower  
the courts to review the fairness of the parties’ primary obligations, such as the consideration promised for a given  
standard of performance”); Export Credits Guarantee Department v. Universal Oil Products Co. [1983] 1 W.L.R.  
399, 403 (H.L.) per Lord Roskill (“it is not and never has been for the courts to relieve a party from the consequences  
of what may ... prove to be an onerous or possibly even a commercially imprudent bargain”); Bridge v. Campbell  
Discount Co., [1962] A.C. 600, 626 (H.L.) per Lord Radcliffe (“the courts of equity never undertook to serve as a  
general adjuster of men’s bargains”) & Jobson v. Johnson, [1989], 1 All E.R. 621, 626 (C.A. 1988) (“This is of course  
not saying that the courts claim a general power not to enforce any agreement which the courts regard as  
unconscionable and extravagant”.)  
83 [1983] 1 W.L.R. 399, 403 (H.L.). The other judges agreed with Lord Roskill.  
Page: 40  
recovering a sum of money ... which bears little or no relationship to the loss actually suffered by  
the plaintiff as a result of the breach by the defendant”. The unstated assumption is that an innocent  
promisee deprived of a bargained benefit is only entitled to an award in accordance with governing  
common law damage principles and that this principle is more important than the benefits society  
derives from the enforcement of bargained contracts. It is not obvious to me that this is a defensible  
proposition.  
[159] Justice Frankfurter, dissenting in Priebe & Sons, Inc. v. United States,84 had a different  
understanding: “I assume that the basic reason for this doctrine is that the infliction of punishment  
through courts is a function of society and should not inure to the benefit of individuals”. He cites  
no authority for this opinion. 85 The underpinning for this norm is the assumption that a promisor  
has agreed to suffer punishment if the promisor fails to discharge a contractual promise. This  
strikes me as an unsupportable assumption. The promisor makes a commitment necessary to  
secure the agreement of the other side. From my perspective, the punishment concept has nothing  
to do with whether a stipulated-consequence-on-breach-term is enforceable.  
b.  
There Are Fundamental Problems with the Classic Penalty  
Rule  
[160] There are six fundamental problems with the classic penalty rule and one unrelated and  
unwelcome consequence.  
[161] First, it is not clear what constitutes a penalty. “The test for distinguishing penal from other  
principles is unclear”.86 This is a significant drawback.87 If an adjudicator does not know what the  
core element of a principle is, it is impossible to apply it rationally and consistently.88  
84 332 U.S. 407, 418 (1947).  
85 Justice Frankfurter was not the first to present this idea. See Craig and Son v. MBeath, 1 M. 1016, 1018 (Scot. Ct.  
Sess. 1863) per Inglis, L.J.-Clerk (“Parties cannot lawfully enter into an agreement that the one party shall be punished  
at the suit of the other”). Other jurists have subsequently agreed with Justice Frankfurter. See Paciocco v. Australia  
and New Zealand Banking Group Ltd., [2016] HCA 28, ¶253; 258 C.L.R. 525, 605-06 per Keane, J. (“the real  
objection, as a matter of public policy, to a penalty clause which operates upon breach of contract is that it is no part of  
the law of contract to allow one party to punish the other for non-performance”) & Legione v. Hateley, [1983] HCA  
11, ¶32; 152 C.L.R. 406, 445 per Mason & Deane JJ. (“A penalty ... is the nature of a punishment for non-observance  
of a contractual stipulation; it consists of the imposition of an additional or different liability upon breach of the  
contractual stipulation”).  
86 Cavendish Square Holding BV v. El Makdessi, [2015] UKSC 67, ¶3; [2016] A.C. 1172, 1192 per Lord Neuberger &  
Lord Sumption.  
87 See Clarkson, Miller & Muris, “Liquidated Damages v. Penalties: Sense or Nonsense?” 1978 Wis. L. Rev. 351 &  
Hunter Engineering Co. v. Syncrude Canada Ltd., [1989] 1 S.C.R. 426, 460 (the Court favoured abandoning the  
fundamental breach doctrine because the proper characterization of a breach is fraught with difficulties and tended to  
camouflage the important issue did the parties intend the limitation-of-liability term to capture this breach?).  
Page: 41  
[162] Some courts adopt an objective test and employ a variety of inconsistent criteria.89  
[163] Some courts scrutinize the contract text90 to determine if the parties agreed that the  
stipulated-consequence-on-breach term is liquidated damages91 or a penalty.92 Does the text mean  
88 International Association of Firefighters, Local 2461 v. County of Strathcona 22 (Wakeling 1982)(“Neither the  
shooters nor the officials know what the target is when the match begins”) & Woodlands Enterprises Ltd. v.  
International Woodworkers of America Local 1-184, at 4 (Wakeling 1978) (“Should both sides discharge their  
howitzers against different targets, an observer will never know which one is the better shot”).  
89 Canada: Chief Justice Fitzpatrick, in Canadian General Electric Co. v. Canadian Rubber Co., 52 S.C.R. 349, 351  
(1915), stated that “[a] penalty is the payment of a stipulated sum on breach of the contract, irrespective of the damage  
sustained”. This is not helpful. Under this test, all stipulated-payment-on-breach terms are penalties. United Kingdom:  
Lord Neuberger and Lord Sumption, with Lord Carnwath’s concurrence, in Cavendish Square Holding BV v. EI  
Makdessi, [2015] UKSC 67, ¶32; [2016] A.C. 1172, 1204, concluded that “[t]he true test is whether the impugned  
provision is a secondary obligation which imposes a detriment on the contract-breaker out of all proportion to any  
legitimate interest of the innocent party in the enforcement of the primary obligation”. This obviously introduces an  
objective yardstick – what is “out of all proportion”? Lord Diplock presented a definition in Scandinavian Trading  
Tanker Co. v. Flota Petrolera Ecuatoriana (“The Scaptrade”), [1983] 2 A.C. 694, 702 (H.L.) that adopted an element  
with historical precedents: “The classic form of penalty clause is one which provides that upon breach of a primary  
obligation under the contract a secondary obligation shall arise on the part of the party in breach to pay to the other  
party a sum of money, which does not represent a genuine pre-estimate of any loss likely to be sustained by him as a  
result of the breach of primary obligation but is substantially in excess of that sum”. Lord Dunedin, in Dunlop  
Pneumatic Tyre Co. v. New Garage & Motor Co., [1915] A.C. 79, 86 (H.L. 1914) opined that “[t]he essence of a  
penalty is a payment of money stipulated as in terrorem of the offending party”. This is an objective feature, but is it  
helpful? Could a term not be a penalty even if it does not terrorize the promisor? This distinction strikes me as highly  
artificial. See also Lordsvale Finance PLC v. Bank of Zambia, [1996] Q.B. 752, 762 (“whether a provision is to be  
treated as a penalty is a matter of construction to be resolved by asking whether at the time the contract was entered  
into the predominant contractual function of the provision was to deter a party from breaking the contract or to  
compensate the innocent party for breach”). Australia: In AMEV UDC Finance Ltd. v. Austin, 162 C.L.R. 170, 190  
(1986), Justices Mason and Wilson of the Australian High Court constructed a definition with a strong objective  
component: “[T]here is much to be said for the view that the courts should [allow] ... parties to a contract greater  
latitude in determining what their rights and liabilities will be, so that an agreed sum is only characterised as a penalty  
if it is out of all proportion to damages likely to be suffered as a result of breach”. Justices Mason and Deane, in  
Legione v. Hateley, [1983] HCA 11, ¶32; 152 C.L.R. 406, 445, gave the term this meaning: “A penalty ... is in the  
nature of a punishment for non-observance of a contractual stipulation; it consists of the imposition of an additional or  
different liability upon breach of the contractual stipulation”. United States: Interstate Industrial Uniform Rental  
Service, Inc. v. Couri Pontiac, Inc., 355 A. 2d 913, 921 (Me. Sup. Jud. Ct. 1976)(“This Court has often said that an  
agreement made in advance of breach, fixing the damages thereon, is not enforceable unless the damages caused by  
the breach are very difficult to estimate accurately and the amount so fixed is a reasonable forecast of the amount  
necessary to justly compensate one party for the loss occasioned by the breach”) Has the Maine Supreme Judicial  
Court not fashioned contradictory markers? How can both coexist? How can one reasonably forecast damages if it is  
very difficult to forecast damages?  
90 Rickman v. Carstairs, 110 Eng. Rep. 931, 935 (K.B. 1833) (“in ... cases of construction of written instruments [the  
question] is, not what was the intention of the parties, but what is the meaning of the words they have used”).  
91 Wallis v. Smith, 21 Ch. D. 243, 267 (C.A. 1882) per Cotton L.J. (“liquidated damages ... means ... the sum which the  
parties have by the contract assessed as the damages to be paid, whatever may be the actual damage”) & T. Sedgwick,  
A Treatise on the Measure of Damages, or, an Inquiry into the Principles Which Govern the Amount of Pecuniary  
Page: 42  
that the contract-breaker must pay the stipulated sum? Or does the text support the conclusion that  
its purpose was only to incentivize the promisor to keep its commitment and the parties never  
contemplated that the contract-breaker would pay the stipulated sum?  
[164] The intention school of thought is without merit. The proposition that the parties intended  
that the contract-breaker would be relieved of the obligation under  
a
stipulated-consequence-on-breach term strikes me as impractical and artificial. Why would a party  
agree to an important term inserted for its benefit that it knows is unenforceable? This does not  
accord with commercial standards with which I am familiar.  
Compensation Awarded by Courts of Justice 411 (3d rev. ed.1858) (“[liquidated damages:] where the contracting  
parties fix or liquidate the amount that shall furnish the measure of compensation in case of non-fulfillment of the  
agreement”).  
92 Canada: Canadian General Electric Co. v. Canadian Rubber Co. of Montreal, 52 S.C.R. 349, 352 (1915)(“There  
are innumerable cases in which it has been necessary, in particular cases, to decide whether the parties intended that  
the payment provided for by the contract should be in the nature of a penalty or liquidated damages”) (emphasis  
added); United Kingdom: Peachy v. Duke of Somerset, 93 Eng. Rep. 626, 630 (Ch. 1720) (“The true ground of relief  
against penalties is from the original intent of the case, where the penalty is designed only to secure money, and the  
Court gives him all that he expected or desired”); Reynolds v. Bridge, 119 Eng. Rep. 961, 966 (Q.B. 1856)(“[a]ll that  
the Courts have done has been only to lay down a canon for establishing the intention of the parties”) 967 per  
Crompton, J (“[N]o decision ever went so far as to say that the Courts would not follow what they considered to be the  
meaning of the parties”); Clydebank Engineering and Shipbuilding Co. v. Castaneda, [1905] A.C. 6, 16 (H.L. 1904)  
per Lord Davey (if you find a sum of money made payable for the breach, not of an agreement generally which might  
result in either a trifling or a serious breach, but a breach of one particular stipulation in an agreement, and when you  
find that the sum payable is proportioned to the amount ... or the rate of non-performance of the agreement ... then you  
infer that primâ facie the parties intended the amount to be liquidate damages and not penalty. 1 say ‘primâ facie’  
because it is always open to the parties to show that the amount ... is so exorbitant and extravagant that it could not  
possibly have been regarded as damages for any possible breach which was in the contemplation of the parties”) &  
Photo Production Ltd. v. Securicor Transport Ltd., [1980] UKHL 2, ¶9; [1980] A.C. 827, 850 per Lord Diplock (“[a  
term] must not offend against the equitable rule against penalties; that is to say, it must not impose upon the breaker of  
a primary obligation a general secondary obligation to pay to the other party a sum of money that is manifestly  
intended to be in excess of the amount which would fully compensate the other party for the loss sustained by him in  
consequence of the breach of the primary obligation”); Australia: O’Dea v. Allstates Leasing System (W.A.) Pty. Ltd.,  
[1983] HCA 3, ¶5; 152 C.L.R. 359, 378 per Wilson, J. (“ In essence the task of a court in such a case is to discern the  
true intention of the parties: is the clause under challenge a genuine pre-estimate of damage, or is it a penal sanction  
imposed on the observance of the agreement by the lessee?”) & Lamson Store Service Co. v. Russell Wilsons & Sons  
Ltd., [1906] HCA 87; 4 C.L.R. 672, 686 per Griffith, C.J. (“On the whole, to use the words of Jessel M.R. in Wallis v.  
Smith, ‘I am glad to find that I do not feel myself compelled to decide contrary to what is the plain meaning of the  
terms by any of the decisions’”); United States: Sun Printing and Publishing Assoc. v. Moore, 183 U.S. 642, 662  
(1902)(“this court has consistently maintained the principle that the intention of the parties is to be arrived at by a  
proper construction of the agreement ... and that whether a particular stipulation to pay a sum of money is to be treated  
as a penalty, or as an agreed ascertainment of damages, is to be determined by the contract, fairly construed”).  
Page: 43  
[165] Courts decline to enforce stipulated-consequence-on-breach terms in spite of the obvious  
fact that the parties intended them to be enforced.93  
[166] Many modern courts have held that the term the parties use to describe the  
stipulated-consequence-on-breach provision – “penalty”, “forfeiture” or “liquidated damages” – is  
not determinative. 94 Does this orientation not completely undermine the validity of the intention  
93 Wilmington Housing Authority v. Pan Builders, Inc., 665 F. Supp. 351, 354 (D. Del 1987)(“Courts adopting this  
intention criterion have been criticized by numerous commentators for merely paying lip service to the intention of the  
parties while deciding the cases based on ... the certainty of damages and the reasonableness of the stipulated amount.  
... [T]his Court declines to adopt the intention criterion”) & Interstate Industrial Uniform Rental Service, Inc. v. Couri  
Pontiac, Inc., 355 A. 2d 913, 921 (Me. Sup. Jud. Ct. 1976) (“This Court has held that the question of whether a  
stipulated amount is liquidated damages or a penalty shall be resolved by finding the intent of the parties. ... Clearly  
that ... does not mean that the Court must follow the intent as it appears on the face of the contract, for so doing would  
require the Court to uphold any provision designated ‘liquidated damages’ since the parties have clearly stated that  
they intend to pay that amount in the event of breach”).  
94 Canada: Waugh v. Pioneer Logging Co., [1949] S.C.R. 299, 311 per Estey J. (“the mere use of the words ‘liquidated  
damages’ or ‘penalty’ is not conclusive. In this case the language used is not particularly helpful as both the words  
‘forfeited’ and ‘liquidated damages’ appear in the text”); Canadian General Electric Co. v. Canadian Rubber Co., 52  
S C.R. 349, 366 (1915) per ldington, J. (“It is not for the law ... to act upon the name given or name assigned the  
amount of reduction”); J. McCamus, The Law of Contracts 965 (2012)(“The fact that the parties may describe the  
stipulated sum as ‘liquidated damages’ or, as is often stipulated, ‘as liquidated damages and not as a penalty’ is not  
dispositive”); United Kingdom: Cavendish Square Holding BV v. EI Makdessi, [2015] UKSC 67, ¶15; [2016] A.C.  
1172, 1197 (“the classification of terms for the purpose of the penalty rule depends on the substance of the term and  
not on its form or on the label which the parties have chosen to attach to it”); Jeancharm Ltd. v. Barnet Football Club  
Ltd., [2003] EWCA Civ 58, ¶ 27 per Peter Gibson L.J. (“the court looks at the substance of the matter, rather than the  
form of words, to determine what was the real intention of the parties”); Dunlop Pneumatic Tyre Co. v. New Garage  
and Motor Co, [1915] A.C. 79, 86 (H.L. 1914) (“Though the parties to a contract who use the words ‘penalty’ or  
‘liquidated damages’ may prima facie be supposed to mean what they say, yet the expression used is not conclusive.  
The Court must find out whether the payment stipulated is in truth a penalty or liquidated damages”); Commissioner of  
Public Works v. Hills, [1906] A.C. 368, 375 (P.C.) (Cape of Good Hope) (“it is well settled law that the mere form of  
expression ‘penalty’ or ‘liquidated damages’ does not conclude the matter”); Clydebank Engineering and  
Shipbuilding Co. v. Castaneda, [1905] A.C. 6, 9 (H.L. 1904) per Earl of Halsbury, L.C.) (“Both in England and  
Scotland it has been pointed out that the Court must proceed according to what is the real nature of the transaction, and  
that the mere use of the word ‘penalty’ ... or ‘damages’ ... would not be conclusive as to the right of the parties”);  
Thompson v. Hudson, L.R.4 H.L.1, 30 (1869)(“if the sum described as liquidated damages be a very large sum, and the  
title to that sum is to arise upon some very trifling consideration, then it follows plainly that the large sum never could  
have been meant to be the real measure of damages”); Forrest and Barr v. Henderson, Coulborn & Co., 7 Scot. L.  
Rptr. 112, 115 (Ct. Sess. 1869)(“even where parties stipulate that a sum of this kind shall not be regarded as a penalty,  
but shall be taken as an estimate and ascertainment of the amount of damage to be sustained in a certain event, equity  
will interfere to prevent the claim being maintained to an exorbitant and unconscionable amount)”; Astley v. Weldon,  
126 Eng. Rep. 1318, 1321 (Common Pleas 1801) per Lord Eldon (“A principle has been said to have been stated in  
several cases, the adoption of which one cannot but lament, namely, that if the sum would be very enormous and  
excessive considered as liquidated damages, it shall be taken to be a penalty though agreed to be paid in the form of  
contract”); Australia: Paciocco v. Australia and New Zealand Banking Group Ltd., [2016] HCA 28, ¶46 per Kiefel, J.  
(“The fact that the sum was called a penalty was not, of course, conclusive”); Hong Kong: Polyset Ltd. v. Panhandat  
Ltd., [2002] HKCFA 15, ¶8 (“Even if the sum so specified is described as liquidated damages, it may be seen upon  
examination to have been fixed as a threat to be held over a party’s head with a view to compelling him to perform. If  
so, the specified sum will be regarded as a penalty and therefore not recoverable”) & United States: United States v  
Page: 44  
test? How can an adjudicator assert that the parties’ intention is important and then proclaim that  
the text unequivocally proclaiming that intention is not determinative? One must assume that the  
ordinary and plain meaning of the text conveys what the parties intended.  
[167] Second, because the penalty rule is confusing, it produces inconsistent results that cannot  
be rationally explained.95 This is not a trait of a useful norm. It is the mark of a misleading and  
suspect measure.  
[168] Third, even if the benchmarks of a penalty term were universally acknowledged, it is not  
readily apparent that the penalty concept captures the essence of judicial reluctance to enforce  
some contract terms and provides much assistance in deciding whether a contested term should be  
enforced or not. A determination that a provision is a penalty provides little assistance to an  
adjudicator who must decide whether it is appropriate to relieve a promisor of a contractual  
obligation. How does the knowledge that a term is a penalty assist a court to decide whether it  
should be enforced? Characterizing a stipulated-consequence-on-breach term as a penalty is no  
more helpful than describing it as a remedial term or written in English. Suppose that a Casablanca  
Bethlehem Steel Co., 205 U.S. 105, 120 (1907)(“Either expression [penalty or liquidated damages] is not always  
conclusive as to the meaning of the parties”); Truck Rent-A-Center, Inc., v. Puritan Farms 2nd, Inc., 361 N.E. 2d  
1015, 1018 (N.Y. Ct. App. 1977) (“it is not material whether the parties themselves have chosen to call the provision  
one for ‘liquidated damages,’ or have styled it as a penalty.. ... Such an approach would put too much faith in form and  
too little substance”); Caesar v. Robinson, 67 N.E. 58, 59 (N.Y. Ct. App. 1903) (“The circumstance that the deposit is  
described in the lease as liquidated damages ... is not at all conclusive”); Willson v. Mayor of Baltimore, 34 A. 774, 775  
(Md. Ct. App. 1896)(“the intention of the parties at the time the contract was entered into is often, though not always,  
given weight; and whilst the language they have used in the instrument, if they declare that the damages shall be  
liquidated, is a circumstance that may have its influence ... yet even their explicit words will be sometimes  
disregarded”); Jaquith v. Hudson, 5 Mich. 123, 138 (Sup. Ct. 1858)(“Thus, though the word ‘penaltybe used ... or  
forfeit’ ... or ‘forfeit and pay... it will still be held to be stipulated damages if, from the whole contract, the subject  
matter, and the situation of the parties, it can be gathered that such was their intention”) & T. Sedgwick, A Treatise on  
the Measure of Damages, or, an Inquiry into the Principles Which Govern the Amount of Pecuniary Compensation  
Awarded by Courts of Justice 419 (3d rev. ed. 1858) (“The language of the contract is not controlling. If, indeed, the  
word ‘Penalty’ is used ... it will never be construed as a sum absolutely fixed. But the reverse is by no means the case;  
and the phrase ‘liquidated damages’, has often been made to read ‘penalty’”). Some contracts use both terms. E.g.,  
Commissioner of Public Works v. Hills, [1906] A.C. 368, 375 (P.C.) (Cape of Good Hope) (“Indeed, the form of  
expression here, ‘forfeited as and for liquidated damages’, if literally taken, may be said to be self-contradictory, the  
word ‘forfeited’ being peculiarly appropriate to penalty, and not to liquidated damages”).  
95 Cavendish Square Holdings BV v. El Makdessi, [2015] UKSC 67, ¶31; [2016] A.C. 1172, 1204 per Lord Neuberger  
& Lord Sumption (“the law relating to penalties has become the prisoner of artificial categorisation, itself the result of  
unsatisfactory distinctions: between a penalty and genuine pre-estimate of loss, and between a genuine pre-estimate of  
loss and a deterrent”); Evans v. Moseley, 114 P. 377 (Kan. 1911) (“There is no branch of the law on which a unanimity  
of decision is more difficult to find or on which more illogical and inconsistent holdings may be found”); Gobble v.  
Linder, 76 Ill. 157, 158 (Sup. Ct. 1875) (“No branch of the law is involved in more obscurity, by contradictory  
decisions, than whether the sum named in an agreement to secure performance will be treated as liquidated damages or  
as penalty”) & Jaquith v. Hudson, 5 Mich. 123, 133 (Sup. Ct. 1858) (“It is not to be denied that there is some conflict,  
and more confusion, in the cases; judges have been long and constantly complaining of the confusion and want of  
harmony in the decisions upon this subject”) (emphasis in original).  
Page: 45  
visitor gets lost in the Kasbah, the vast labyrinth of market lanes, and cannot remember the name  
or address of his or her hotel. A good Samaritan cannot help the tourist find his or her hotel when  
all the tourist can say is that he or she is lost. The knowledge that the tourist is lost does not  
contribute to the solution of the problem.  
[169] Fourth, the distinction between a penalty and a pre-estimate of damages is of limited value.  
There are fact patterns which make it exceedingly difficult, if not impossible, to estimate  
damages.96 This might mean that a stipulated-consequence-on-breach term is unenforceable even  
though it makes sound business sense.97  
[170] Fifth, the penalty aspect of a provision can often be camouflaged by clever drafting. An  
onerous obligation can be transformed into a beneficial option, as Justice Heath explained more  
than 200 years ago in Astley v. Weldon:98  
It is a well-known rule in equity, that if a mortgage covenant be to pay £5 per cent.,  
and if the interest be paid on certain days, then to be reduced to £4 per cent. The  
Court of Chancery will not relieve if the early day be suffered to pass without  
payment; but if the covenant be to pay £4 per cent, and if the party do not pay at a  
certain time it shall be raised to £5 per cent., there the Court of Chancery will  
relieve.  
[171] Professor Farnsworth made the same point:99  
Although it is beyond the parties’ power to provide for a penalty of, say, $1,000 for  
every day’s delay in performance, up to a maximum of $10,000, they can shape  
their substantive rights and dates through a provision for a premium by setting the  
completion date ten days later and providing that the price shall be increased by  
$1,000 for each day the work is finished early, up to a maximum of $10,000.  
[172] A doctrine that can so easily be manipulated must be carefully scrutinized. It is like a snow  
bridge not as useful as it appears. In fact, it is downright dangerous.  
96 Cavendish Square Holdings BV v. El Makdessi, [2015] UKSC 67, ¶31; [2016] A.C. 1172, 1204 per Lord Neuberger  
& Lord Sumption (“The real question ... is whether [a stipulated-consequence-on-breach term] ... is penal, not whether  
it is a pre-estimate of loss”).  
97  
Scottish Law Commission, Review of Contract Law: Discussion Paper on Penalty Clauses 6-7 (No. 162)  
(November 2016). Contra Paciocco v. Australia and New Zealand Banking Group Ltd., [2016] HCA 28, ¶30; 258  
C.L.R. 525, 547 per Kiefel, J. (“[a stipulated-payment-on-breach term may be enforceable even] if no pre-estimate is  
made at the time the contract is entered into”).  
98 126 Eng. Rep. 1318, 1322-23 (Common Pleas 1801). See also Wallingford v Mutual Society, 5 A.C. 685, 702 (H.L.  
1880) per Lord Hatherley.  
99 E. Farnsworth, Contracts 818 (4th ed. 2004). See Banta v. Stamford Motor Co., 92 A. 665 (Conn. Sup. Ct. 1914)(the  
yacht-construction contract featured a premium for advance delivery).  
Page: 46  
[173] Sixth, it is not obvious why a promisor’s commitment in a commercial agreement to pay a  
sum for breach of another term of the agreement that may bear no relationship to the damages that  
a court would award for nonperformance is contrary to public policy. A  
stipulated-consequence-on-breach term in a commercial contract and the common law damages  
principle serve completely different purposes. The former is adopted to avoid the need to utilize  
the common law damages protocol to resolve the consequences of nonperformance of a contract  
promise. The latter is resorted to because the parties have been unable to resolve the obligation of  
the promisor to the promisee on the former’s breach of a contractual obligation.  
[174] Here is an example of a contract that is the product of careful negotiations that contain a  
stipulated-consequence-on-breach term that does not incorporate common law damage values.  
Suppose that A, a public undertaking responsible for the provision of healthcare services in E, a  
metropolitan area, enters into an agreement with B, a multi-national medical-testing services  
enterprise. B agrees to build in E a modern laboratory and provide medical-testing services for a  
twenty-five year period. A promises to pay B an annual minimum fee with escalating factors based  
on the number of test results produced for each of the twenty-five years of the contract. The  
price-per-test declines as the quantity of annual tests escalates. 100 A and B are satisfied that once  
the laboratory is up and running and meeting A’s needs, C and D, public undertakings responsible  
for the provision of health care services in E’s satellite communities, will want to do business with  
B and ultimately allow B to operate at maximum capacity. A expects that its needs will rise  
significantly over the contract term. If B operates at a maximum capacity A’s per test costs drop.  
Both A and B appreciate that a change in government may affect A’s willingness to do business  
with B. B insists that A undertake onerous commitments if A terminates the contract before the  
end date. A knows that B requires a guaranteed minimum income stream to justify B’s upfront  
investment and that without A’s business B could not attract other customers. A and B recognize  
that a change in service provider may leave B with a special-design facility that may have no  
market value; would leave B with an unprofitable business in E; would greatly inconvenience both  
sides; and consume large amounts of their leadership teams’ time to secure a smooth transition. A  
accepts that B’s concerns are reasonable and agrees to pay B three times the total minimum  
amount due over the unexpired portion of the contract. A understands that the likelihood a court  
would order A to pay a sum this large if A terminated the agreement prematurely is low. There is a  
change of government after five years and A terminates the agreement with B after year eight. B  
sues A for three times the minimum amount that A was obliged to pay B in the period covering  
years nine to twenty-five inclusive. A refuses to pay on the ground the  
stipulated-consequence-on-breach term is an unenforceable penalty.  
[175] There is no good reason to relieve A of its obligation to pay the stipulated sum set out in the  
contract. A voluntarily made the agreement with B. It was the product of negotiations between  
parties with contracting capacity who fully understood their obligations and responsibilities under  
100  
Davis, “Penalty Clauses Through the Lens of the Unconscionability Doctrine”, 55 McGill L.J. 151, 158  
(2010)(“[the penalty doctrine] ignores the possibility that the prejudicial impact of a penalty clause on a breaching  
party has been offset by a benefit such as a price reduction conferred by another term of the contract”).  
Page: 47  
the contract. Each side had top-notch lawyers. Both believed the relationship was in their best  
interests.  
[176] It would be a disservice to A, the promisor, to assume that it was unaware of this onerous  
obligation and that it did not extract from B, the beneficial promisee of this  
stipulated-consequence-on-breach term, compensating concessions that offset this detriment. 101  
The correlation between B’s fees and the volume of testing may fall in this category.  
[177] I now mention the deleterious consequence of the penalty rule the detriment the penalty  
rule does to contract-interpretation principles. It forces courts to make indefensible claims about  
the meaning of contract text and to give text implausible meanings that the text cannot bear.102  
Court