The mechanism and origin of stereoinduction in a chiral N-heterocyclic carbene (NHC) catalyzed C-C bond activation of cyclobutenone has been established using B3LYP-D3 density functional theory computations. The activation of cyclobutenone as an NHC-bound vinyl enolate and subsequent reaction with the electrophilic sulfonyl imine leads to the lactam product. The most preferred stereocontrolling transition state exhibits a number of noncovalent interactions rendering additional stabilization. The computed enantio- and diastereoselectivities are in good agreement with the previous experimental observations.