International Construction Law Review
THE ANTI-DEPRIVATION PRINCIPLE: WHAT DO CONSTRUCTION LAWYERS NEED TO KNOW?
JULIE FARLEY AND MICHAEL MENDELBLAT
Herbert Smith LLP, London
*
Introduction
What is the connection between a case about priorities of creditors in the liquidation of Lehman Brothers and building contracts? The answer is to be found in the recent decision of the Supreme Court in the Belmont Park case1 which considers the anti-deprivation principle. This provides, in brief, that contractual clauses which remove the property of an insolvent entity from its ownership or possession are ineffective. There are a number of provisions in standard form building contracts which provide for the deprivation of a contractor’s property and assets either during the currency of the contract or upon its termination. These provisions are of particular interest where termination occurs (whether automatic or optional) by reason of insolvency.
The anti-deprivation principle
This article discusses the anti-deprivation principle and the Supreme Court’s decision in Belmont Park before going on to consider the impact of the principle and the case on certain standard forms.
What we now know as the anti-deprivation principle has its basis in the common law. It dates from eighteenth century cases involving personal bankruptcy. It provided in essence that a contract which has the effect of removing a bankrupt’s assets from his possession upon his bankruptcy is ineffective. The rationale for the principle was to ensure that the creditors of the bankrupt would not be deprived of assets which could otherwise be used to repay his debts. One case from the 1880s outlined the principle as follows: “There cannot be a valid contract that a man’s property shall remain his until his bankruptcy, and on the happening of that event shall go over to someone else, and be taken away from his creditors.”2
While the principle might have been relatively easy to apply in individual bankruptcy cases from previous centuries it is far more difficult to see how it applies to today’s complex financial transactions between sophisticated commercial entities, which inevitably include detailed insolvency protection
* The authors are professional support lawyers at Herbert Smith LLP.
1 Belmont Park Investments Pty Ltd v. BNY Corporate Trustee Services Ltd [2011] UKSC 38.
2 Ex p. Jay, Re Harrison (1880) 14 Ch D 19.
The International Construction Law Review [2012
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