Validity of the legal fee reimbursement clauses in commercial contracts
On April 6, 2021, in Bank of Nova Scotia v. Davidovit, the Québec Court of Appeal confirmed the validity of the clause in a contract of personal guarantee (or suretyship) for a commercial loan which provides that the guarantor is liable for the legal fees incurred by the creditor to collect from the debtor or the guarantor. This clause, omnipresent in loan agreements, provides that the debtor and/or guarantor remains responsible for legal costs incurred by the creditor to recover the amounts due by the debtor.
The Court of Appeal, under Justice Schrager’s writings, reversed the judgement in the first instance and based its decision on the following points: 1) a unilateral obligation clause, by which one party unilaterally obliged itself to another, is not necessarily abusive; 2) the Civil code of Québec allows the contractual provision granting additional damages to one party in case of default and in obiter; 3) a preprinted contract prepared by the creditor is not automatically qualified as an adhesion contract.
1) Abusive nature of a clause
Justice Schrager confirms that a clause providing for the payment of the creditor’s legal fees by the debtor is not in itself abusive, even if it is included in an adhesion contract. The Court reiterated that “the mere fact that a party to a contract is at a disadvantage is not in itself reason to conclude that the clause in question is abusive per se”. Indeed, the contrary would be to remove all legal effect from the fee payment clause and any guarantee because it creates, by its nature, unilateral obligations of the guarantor in favor of the creditor.
2) Article 1617 para. 3 C.C.Q.
Subsequently, the Court stipulates that the clause for reimbursement of legal fees can find its source in the provisions of the Civil Code of Québec, in particular article 1617 para. 3, which specifically allows the contractual stipulation by which the creditor will be entitled to additional damages if these are justified. The Court further specifies that the clause, based on this article, is valid both in mutual agreements and in adhesion contracts.
3) Adhesion Contracts
Although in passing, because this part of the trail judgment was one of the grounds of the appeal, Justice Schrager disagreed with the trail judge’s characterization of the contract. Despite the term loan agreement and surety bond having been prepared by the creditor using the creditor’s pre-printed forms, this does not mean that the contract is an adhesion contract. The Court emphasized that several factors must be considered to qualify the contract, in particular the possibility of selecting, with the use of check boxes, certain aspects of the form may demonstrate a possibility of negotiating the conditions.
Although the Court confirms the validity of the clause in both adhesion and mutual agreements, it also confirms that they are guided by the principle of good faith. Justice Schrager writes in this regard: “I believe that, in 2021, it is appropriate to declare, in principle, that fee reimbursement clauses, even in adhesion contracts, are not necessarily abusive (and thus invalid), but their enforcement is subject to control by the courts so that the right to claim fees is exercised reasonably and in good faith”. The Court ultimately reduced the creditor’s claim from $ 31,000 to $ 12,000.