Canada update: Recognition of the validity of legal fee reimbursement clauses in a loan contract: principles to keep in mind

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 legal fee reimbursement clause contained in a term loan and suretyship contract. In addition to clearly summarizing the law applicable to this type of provision, the Court also reviewed the criteria for qualifying a juridical act as a contract of adhesion.

Issues 

In this appeal, the Court had to decide whether the contractual clause providing for the right to reimbursement of the financial institution’s legal fees was valid. The Court had to determine (1) whether the trial judge erred in concluding that the fee reimbursement clause in the contract was abusive and, if so, (2) whether the judge erred in declaring it invalid, even though art. 1437 C.C.Q. gives the courts the discretion to reduce the extent of the obligation.2

Summary of facts 

Mr. Davidovit (the “Respondent”) took out a commercial loan on behalf of his company with 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 allow it to fully repay the outstanding debt owed to the Appellant. The Appellant therefore sued the Respondent directly to recover the balance due, which amounted to $36,238. Based on a clause in the Contract, the Bank also claimed the sum of $31,145 for the legal fees it incurred to recover the balance outstanding on the loan. This clause provided for the Respondent’s obligation to reimburse the Bank for the fees incurred in collecting its debt.

At first instance, the Honourable Frédéric Bachand, J.C.S., ordered the Respondent to repay the balance of the loan to the Appellant, but rejected the Appellant’s claim for the reimbursement of legal fees. Without explicitly addressing the issue, the Superior Court determined that the Contract between the parties was one of adhesion, and therefore subject to the application of art. 1437 C.C.Q. Justice Bachand was of the opinion that the clause allowing the Bank to obtain reimbursement of the legal fees incurred to recover its debt was abusive and should be declared invalid, in particular because it imposed a unilateral obligation on a party that was already vulnerable and dissuaded the Respondent from asserting a defence against the Bank, thereby restricting access to justice.

The Bank appealed the trial court’s decision to declare the fee reimbursement clause invalid.

The Court of Appeal decision

The Court of Appeal reversed the decision of the trial court but determined that the amount claimed by the Bank for legal fees should be reduced, as permitted by the first paragraph of art. 1437 C.C.Q. in fine.

The legal nature of the Contract 

First, the Court of Appeal analyzed the legal characterization of the Contract binding the parties. In this regard, it emphasized that a contract will not necessarily be characterized as a contract of adhesion merely because the agreement appears on a preprinted form and was prepared by one of the parties. These are simply indicia that point to this conclusion.

On the contrary, the fact that a preprinted form presents the borrower with various conditions that can be included in the Contract by ticking the appropriate boxes (e.g. secured or unsecured loan, with or without a personal guarantee) may be taken as an indication that the terms of the contract are negotiable. The Court also appears to be breaking new ground by raising the possibility that a preprinted document prepared by one party may not be a contract of adhesion where the party seeking to enter into the contract had the opportunity to “shop around.” Without providing an absolute answer, the Court stated that the presence of multiple competitors for the same service “puts into question whether the contract is one of adhesion.”3 As no evidence was adduced at trial to allow the Court to characterize the Contract in any other way, the characterization adopted by the trial judge was upheld.

Claims for legal fees

The Court of Appeal clearly stated that, in principle, legal fee reimbursement clauses, even in contracts of adhesion, are not necessarily abusive (and thus invalid).4 The Court stated that the application of this type of clause is, in essence, a claim for contractual damages.5 As a result, the burden of proof that the fees were incurred and that they were reasonable rests on the party invoking this clause. The Court reiterated that it would not be sufficient to produce the lawyer’s invoices for a party to adequately discharge this burden.6

Moreover, just because art. 54 C.C.P. gives the Court the power to intervene and order a party to reimburse the fees paid by the other party for proceedings deemed to be abusive, this does not mean that the parties cannot include a contractual clause for the reimbursement of fees, regardless of the conduct of each party.7

Furthermore, the Court did not see how the presence of a contractual fee reimbursement clause restricts access to justice. In this regard, it pointed out that art. 1617, para. 3 C.C.Q. already allows parties to include in their contract a clause providing for the obligation to pay additional damages in the event of failure to comply with the terms stipulated therein. Moreover, several jurisdictions, including Quebec, allow judges in certain cases to order one of the parties to reimburse the fees incurred by the other party, without this restricting access to justice.8

Finally, the Court established that the fee reimbursement clause included in a contract of adhesion remains subject to review by the courts. Indeed, the right to claim fees from the other contracting party must always be exercised reasonably and in good faith (arts. 6, 7 and 1375 C.C.Q.), and the fees claimed must be proportional to the rest of the proceedings (art. 18 C.C.P.).9 In analyzing the reasonableness of the fees claimed, the Court will consider all the circumstances, including the complexity of the case, the number of witnesses heard and exhibits produced, and the hourly rate of the lawyers involved.10

Hence, in cases where a fee reimbursement clause provides that one party must reimburse the other for a predetermined amount, it will be up to the party invoking the clause to show that the amount claimed is reasonable in the circumstances. Under art. 1437 C.C.Q., the court may intervene to reduce this amount if it is deemed unreasonable. In cases where the fee reimbursement clause does not provide for a predetermined amount, it will be up to the party invoking it to show that the amount claimed is justified, as provided for in the third paragraph of art. 1617 C.C.Q. 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 defence 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 serves as a reminder that the burden of proof rests on the party claiming to have entered into a contract of adhesion to demonstrate this fact, even when the agreement appears on a preprinted form prepared by the other party. Finally, the Court reaffirmed that the onus will always be on the party seeking to enforce this type of clause to demonstrate that the fees were actually incurred and that they are reasonable in light of the particular facts of each case.

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1 2021 QCCA 551.
2 Ibid, at para. 18.
3 Ibid, at para. 27.
4 Ibid, at paras. 19-22.
5 Ibid, at para. 42.
6 Ibid.
7 Ibid, at para. 23.
8 Ibid, at para. 24.
9 Ibid, at paras. 36-43.
10 Ibid, at para. 43.
11 Ibid, at para. 36.

By, Charles Lapointe and Antoine Veillette Langlois, a Transatlantic Law International Affiliated Firm. 

For further information or for any assistance please contact canada@transatlanticlaw.com

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