It’s almost inevitable: business deals will sometimes turn sour. Enforcing one’s rights through litigation can be quite costly. But perhaps parties could reduce those costs with some strategically worded clauses in their contracts – essentially transferring them to the defaulting party.
When the other party to a contract breaches its obligations, clients often have to decide if it makes economic sense to take legal proceedings to en- force the contract and seek payment of sums due, including recovery of re- sulting damages and losses. The amounts in issue and the anticipated costs of litigation are factors to consider.
Quebec law now recognizes that a party who seeks to remedy a breach of con- tract, or recover losses caused by that breach, can obtain its legal fees and dis- bursements (known as “extrajudicial fees and disbursements”) from the de- faulting party, but only if the contract expressly provides for this right.
The validity of such a clause was unani- mously confirmed in the case of Groupe Van Houtte Inc. v. Développements in- dustriels et commerciaux de Montréal Inc., 2010 QCCA 1970 and recently re- affirmed in Re/Max Montreal Métro Inc.v. 9188-0955 Québec Inc., 2013 QCCQ 7927.
In order for such a clause to be found valid, the contract must expressly pro- vide for the right to recover legal fees, expenses and costs in relation to the enforcement of a right. This can arise under a commercial contract such as a franchise or lease agreement, and/or a contract of sale.
The clause must be specific and reason- able, and the amounts recoverable must be determinable. A clause which is too vague will not be upheld. Proper draft- ing and wording are therefore key.
The inclusion of such a clause in a com- mercial contract makes business sense. It protects the party who seeks a reme- dy for a breach by allowing for the re- covery of legal fees, making the institu- tion of legal proceedings financially via- ble. At the same time, it keeps contracting parties honest, since a de- faulting party is faced with the prospect of having to pay not only the sums due and losses and damages resulting from the breach, but also the other party’s legal fees and disbursements in addition to its own.