In a decision rendered on April 6, 2021 in Banque de la Nouvelle-Écosse c. Davidovit[1], the Québec Court of Appeal (the “Court”) confirmed the validity, in principle, of contractual clauses providing for the reimbursement of a party’s legal expenses incurred in collection or enforcement proceeding against a guarantor (a “Fee Reimbursement Clause”), even when contained in a contract of adhesion. This type of clause is ubiquitous in a wide variety of commercial agreements, including in loan agreements, guarantees (suretyships) and commercial leases and, as such, it is expected that this decision will have broad-reaching implications.

Factual Background and the Decision in First Instance

Mr. Davidovit (the “Guarantor”) was the principal of a company who contracted a term loan from the Bank of Nova Scotia (the “Bank”) secured by a hypothec on the company’s equipment. The Guarantor personally guaranteed the obligations of the company towards the Bank.

The company filed for bankruptcy and the Bank turned to Mr. Davidovit for the payment of the unpaid portion of the loan after the liquidation of the company’s assets. In first instance, Mr. Davidovit argued that the Bank could not recover any amounts from him because it had acted abusively. The court rejected this argument and found that he was personally liable for the amounts which remained due by the company to the Bank.

The Bank also sought to recover from the Guarantor the legal fees it incurred as part of the enforcement proceedings basing itself on the guarantee and banking agreement, which included a Fee Reimbursement Clause drafted as follows:

The guarantor’s liability includes the liability to pay any interest the customer has not paid, and interest from the date of demand. This interest is charged at the applicable rate in the agreement. The guarantor must also pay all of the costs and expenses we incur to get the money the customer owes us, including any costs and expenses of collecting from the guarantor including without limitation legal fees on a solicitor and his/her own client basis.

On this portion of the claim, the trial judge concluded that the guarantee or banking agreement between the Guarantor and the Bank was a contract of adhesion and that the Fee Reimbursement Clause was abusive within the meaning of section 1437 para. 2 of the Civil Code of Québec (“C.c.Q.”). As such, the Court refused to award any amount to the Bank pursuant to the Fee Reimbursement Clause. The Bank’s appeal pertained exclusively to this portion of the decision.

Court of Appeal's Decision

The Court allowed the appeal, holding that a Fee Reimbursement Clause, even when included in a contract of adhesion, will not per se be abusive. In reaching this conclusion, the Court was reassured by the fact that first instance judges retain the discretion to adjust the debtors’ obligations if the amount sought is excessive. Importantly, although in obiter, the Court also expressed its disagreement with the trial judge’s conclusion that the contract was a contract of adhesion simply because it appeared on a preprinted form.

Validity of the Fee Reimbursement Clause

First, the Court rejected the Guarantor’s argument that the Fee Reimbursement Clause was abusive simply because it was “unilateral”, in that only the Bank could recover its fees. The Court held that the mere fact “[t]hat the effect of such a clause operates negatively for a party is not sufficient reason to label it abusive”[2].

The Court also rejected the Guarantor’s argument that the Fee Reimbursement Clause in itself, impeded access to justice. Indeed, according to the Guarantor, the validity of such clauses would have a chilling effect on a guarantor’s willingness to contest a claim in order to avoid paying the creditor’s legal fees arising from an eventual dispute. However, the Court noted that although rarely used in Québec, the ability to award costs on a solicitor-client basis is settled law in other jurisdictions, such as Ontario. The concept is also not entirely foreign to Québec law: Courts may award them pursuant to sections 54 and 342 of the Code of Civil Procedure, and the Superior Court can award them pursuant to the Bankruptcy and Insolvency Act[3] and the Canada Business Corporations Act[4]. In light of those powers, the Court held that it was not “a huge moral or philosophical leap to conclude that a prior agreement for such reimbursement (irrespective of abuse) is not abusive or otherwise illegal. It does not shock the senses as morally reprehensible” (our underlining).[5]

Lastly, the Court concluded that the Fee Reimbursement Clause was akin to contractual damage clauses which are already provided for and governed by article 1617 para. 3 of the C.c.Q., and can be included in a contract of adhesion or by mutual agreement, without distinction. The Court specified that if a Fee Reimbursement Clause is included in a contract of adhesion and specifies an amount payable which is unreasonable, the Court may reduce the amount payable pursuant to article 1437 C.c.Q. Alternatively, if the clause does not specify an amount, the Court nevertheless has the discretion to control the amount awarded since (i) the damages claimed must be proven, and (ii) the enforcement of the claim must be exercised reasonably and in good faith pursuant to articles 6, 7, and 1375 C.c.Q.[6]

In conclusion, the Court adopted commercially sensitive and pragmatic approach to the questions at issue, recognizing “the pervasiveness of [Fee Reimbursement Clauses] in different types of contracts, as evidenced in the jurisprudence” and that “is difficult to banish the clause entirely given what appears to be a certain acceptability in society generally and the commercial sphere particularly”. [7]

The Fees Sought Must Be Proportional to the Amounts Sought on the Merits

In coming to the conclusion that the Fee Reimbursement Clause is not per se abusive, the Court was reassured by the discretionary power conferred on trial judges to alleviate the effects of an unreasonable application of such a clause when the amount sought is excessive or disproportional:

[15] Access to justice has not been shown to be unreasonably impeded because of the possibility of costs being awarded on a solicitor/client basis. … This is particularly the case where the courts maintain discretion to alleviate the effects of any unreasonable application of such a clause or claim for reimbursement of exorbitant fees.[8]

The Court held that the amount of fees claimed must be proportionate to the principal amount of monetary award sought on the merits. The Court also reminded parties who may want to invoke Fee Reimbursement Clauses that the burden rests on the party claiming its fees to establish them and demonstrate their reasonableness, adding that “simply filing a lawyer’s invoice in evidence will not do”.[9]

On the facts of the case at bar, the Court awarded an amount of $12,000 (out of the $31,000 sought) when the claim on the merits was for $35,000.

A Party Must Prove That a Contract Is One of Adhesion

The trial judge assumed that the contract was one of adhesion without discussion, presumably based on the fact that the contract appeared on a preprinted form provided by the Bank. The Court disagreed with this assumption. In doing so, the Court provided useful guidance for litigants seeking to determine whether a contract is one of adhesion:

  1. The Court noted that the mere fact that a contract appears on a preprinted form does not necessarily mean that it is one of adhesion, although the preprinted form may be an indicationthat the terms imposed are not negotiable;
  2. For example, the fact that the form document contains conditions that are included by ticking a box (for example: secured versus unsecured or personal guarantee versus not guaranteed) can indicate that the terms of the preprinted form are, in fact, negotiable;
  3. Additionally, the fact that there is a high level of competition in the market place for the goods or services that are being negotiated can also indicate the possibility of saying “no” and going to a different provider. In such a case, even though the contract is printed on a form, the terms of service may be negotiable.[10]

Conclusion

This decision should be warmly welcomed by several institutions who use Fee Reimbursement Clauses as a tool to deter their contracting parties from invoking frivolous or abusive defences to legal proceedings. Although this decision may provide these institutions with an added level of assurance, care should be taken in the drafting of Fee Reimbursement Clauses to ensure that their content is reasonable and not overly onerous on their counterparty, especially so if the contract is on a preprinted form.

Additionally, in order to fully benefit from the protection of such a clause, litigants must act reasonably, proportionately and in good faith throughout the course of the legal proceedings. Indeed, parties should keep in mind that although the Court concluded that such clauses are valid in principle, a party seeking to invoke it successfully will have to demonstrate that the fees sought are reasonable and justified in the circumstances of the case.