Recognition of the validity of legal fee reimbursement clauses in a loan agreement: principles to remember

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The context

On April 6, 2021, in its decision in Bank of Nova Scotia v. Davidovit,1 the Quebec Court of Appeal had the opportunity to rule on the validity of a clause for reimbursement of legal fees contained in a term loan and surety contract. In addition to clearly summarizing the law applicable to this type of provision, the Court also examined the criteria for qualifying a legal act as a contract of adhesion.

Problems

In this appeal, the Court had to decide whether the contractual clause providing for the right to reimbursement of legal fees from the financial institution was valid. The Court had to determine (1) whether the trial judge had erred in concluding that the reimbursement of fees clause of the contract was abusive and, if so, (2) whether the judge had erred in declaring it invalid, even if s. 1437 CCQ gives the courts the discretionary power to reduce the scope of the obligation.2

Summary of the facts

Mr. Davidovit (the “Respondent”) contracted a business loan on behalf of his company from the Bank of Nova Scotia (the “Appellant” or the “Bank”) and personally guaranteed its repayment (the “Contract “).

The respondent’s company declared bankruptcy in 2014 and the proceeds from the liquidation of its assets were insufficient to enable it to repay the appellant’s outstanding debt in full. The appellant therefore sued the respondent directly to recover the balance due which amounted to $ 36,238. On the basis of a clause in the Contract, the Bank also claimed the sum of $ 31,145 for legal fees it incurred to collect the outstanding loan balance. This clause provided for the Respondent’s obligation to reimburse the Bank for the costs incurred in collecting its debt.

At first instance, the Honorable Frédéric Bachand, JCS, ordered the respondent to reimburse the appellant’s loan balance, but dismissed the appellant’s request for reimbursement of legal fees. Without explicitly addressing the question, the Superior Court determined that the contract between the parties was a contract of adhesion, and therefore subject to the application of art. 1437 CCQ Bachand J. is of the opinion that the clause allowing the Bank to obtain reimbursement of legal costs incurred to recover its debt is abusive and must be declared invalid, in particular because it imposes a unilateral obligation on a party already vulnerable and dissuaded the Respondent from raising a defense against the Bank, thereby restricting access to justice.

The Bank appealed against the decision of the Court of First Instance to declare the reimbursement of costs clause invalid.

The decision of the Court of Appeal

The Court of Appeal reversed the decision of the court of first instance but determined that the amount claimed by the Bank for legal costs should be reduced, as permitted by the first paragraph of s. 1437 CCQ in fine.

The legal nature of the Contract

First, the Court of Appeal analyzed the legal qualification of the Contract binding the parties. In this regard, she stressed that a contract will not necessarily qualify as a contract of adhesion simply because the agreement appears on a pre-printed form and has been prepared by one of the parties. These are simply clues that point to this conclusion.

On the contrary, the fact that a pre-printed form presents to the borrower various conditions which can be included in the Contract by checking the appropriate boxes (for example, loan secured or not, with or without personal guarantee) can be interpreted as an indication that the terms of the contract are negotiable. The Court also seems to innovate by raising the possibility that a pre-printed document prepared by a party may not be a contract of adhesion when the party seeking to conclude the contract has had the opportunity to “shop around”. Without providing an absolute answer, the Court specified that the presence of several competitors for the same service “calls into question the fact that it is a matter of a membership contract”.3 As no evidence was presented at trial to enable the Court to characterize the Contract in any other way, the qualification adopted by the trial judge was accepted.

Claims for legal fees

The Court of Appeal made it clear that in principle, clauses for reimbursement of legal fees, even in membership contracts, are not necessarily abusive (and therefore invalid).4 The Court said that the application of this type of clause is, in essence, a claim for contractual damages.5 Therefore, the burden of proof that the costs were incurred and that they were reasonable rests on the party invoking this clause. The Court reiterated that it would not be enough to produce the lawyer’s invoices for a party to adequately meet this burden.6

Moreover, just because art. 54 CCP gives the Court the power to intervene and order one party to reimburse the costs paid by the other party for a procedure deemed to be abusive, this does not prevent the parties from providing for a contractual clause for reimbursement of costs, regardless of the conduct of each party.7

Moreover, the Court did not see how the presence of a contractual clause for reimbursement of fees restricted access to justice. In this regard, she recalled that art. 1617, s. 3 CCQ already allows the parties to include in their contract a clause providing for the obligation to pay additional damages in the event of non-compliance with the terms and conditions provided for therein. In addition, several jurisdictions, including Quebec, allow judges in certain cases to order one of the parties to reimburse the costs incurred by the other party, without this restricting access to justice.8

Finally, the Court has established that the cost reimbursement clause included in a membership contract remains subject to review by the courts. Indeed, the right to claim fees from the other contracting party must always be exercised in a reasonable manner and in good faith (arts. 6, 7 and 1375 CCQ), and the fees claimed must be proportional to the rest of the proceedings ( art. 18 CCP).9 In analyzing the reasonableness of the fees claimed, the Court will take into account all the circumstances, including the complexity of the case, the number of witnesses heard and exhibits produced as well as the hourly rate of the lawyers involved.ten

Thus, in cases where a reimbursement of fees clause provides that one party must reimburse the other a predetermined amount, it will be up to the party invoking the clause to demonstrate that the amount claimed is reasonable in the circumstances. By virtue of art. 1437 CCQ, the court may intervene to reduce this amount if it is deemed unreasonable. In cases where the reimbursement of costs clause does not provide for a predetermined amount, it will be up to the party invoking it to demonstrate that the amount claimed is justified, as provided for in the third paragraph of art. 1617 CCQ for additional damages.11

In this case, the Court was of the opinion that the level of complexity of the case under consideration was higher than usual because of the defense and the counterclaim. Taking into account all the factors specific to this case, the Court concluded that the fees claimed should be reduced from $ 31,000 to $ 12,000.

Conclusion

This decision reiterates that the onus is on the party claiming to have concluded a membership contract to demonstrate this fact, even when the agreement is on a pre-printed form prepared by the other party. Finally, the Court reaffirmed that it will always be for the party seeking to enforce this type of clause to demonstrate that the costs have actually been incurred and that they are reasonable in light of the particular facts of each case.

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