Responsibility for legal fees in breach-of-contract disputes: Who should pay?

Why should I pay the legal fees incurred in a dispute arising from another party's breach of contract? Can I claim compensation from the defaulting party for the extrajudicial fees (attorney/client) I paid? 

In all likelihood, anyone who has ever been involved in a commercial dispute has asked themselves these same questions. In Quebec, however, unlike in most other Canadian provinces, it is well established that the reimbursement of legal fees by the opposing party is very much the exception to the rule—and is also subject to a very heavy burden of proof.

Prior to obtaining a ruling that the prevailing party's legal fees must be reimbursed, a party must demonstrate that, on the balance of probabilities, the other party abused its right to institute legal or civil proceedings. That is the case, for example, if a party initiates unnecessary legal action or acts recklessly,^[1] i.e. by arguing a case or by filing legal proceedings even though a "reasonable and prudent person" in the same circumstances would conclude that there is no valid basis for litigation, whether as claimant or defendant.

The courts are reluctant to hand down such rulings because taking legal action is a right. Being the "losing" party does not automatically mean that it should have to reimburse the prevailing party's legal fees.^[2] The bar is high because the courts do not wish to trivialize the notion of "abuse of process," as this might impede access to justice.^[3] For that reason, in Quebec, rulings requiring the reimbursement of legal fees due to abuse of process are very rare.

Nevertheless, can a contractual clause provide for the reimbursement of legal fees if one party has to take legal action to enforce its rights arising from the other party's non-performance or breach of contract?

Anyone familiar with the famous Van Houtte^[4] decision knows that such clauses exist and are generally recognized as valid by Quebec courts. They are often included in contracts in various areas of law, including commercial leases. Indeed, the underlying principle is still relevant today, as was recently reiterated and clarified in the case of Enerkem Alberta Biofuels v. Constructions EDB inc.,^[5] which forms the focus of this article.

Summary of the facts

This construction law case pitted the client Enerkem Alberta Biofuels LP ("Enerkem") against the service provider Constructions E.D.B. Inc. ("EDB"). Enerkem hired EDB to construct a portion of the pipework in a production facility used for Enerkem's ethanol and methanol operations.

Executing the contract proved difficult and the parties' relationship began to deteriorate. Enerkem criticized EDB for multiple failures to meet its contractual obligations, including defective products and delivery delays. According to Enerkem, as a result of these failures, it incurred significant additional costs to bring its project to completion.

Against that backdrop, despite the fact that Enerkem acknowledged that it owed a contractual debt to EDB (amounting to $834,061.22), it held back payment because it maintained that it was owed money for damages caused by EDB during the execution of the contract. Enerkem therefore launched legal proceedings against EDB, in which it claimed more than $2 million in damages and asked the court to deduct this amount from its contractual debt to EDB.

EDB, for its part, maintained that it had correctly upheld its part of the contract and that if there were any product defects or delivery delays, they were attributable to Enerkem. EDB therefore called on Enerkem to settle the unpaid debt for the work it had performed and to pay miscellaneous damages that it attributed to Enerkem.

In our view, the most interesting parts of the Superior Court decision are paragraphs 328 and following, in which Honourable Justice Sylvain Provencher examined a legal fee reimbursement clause (the "Clause") included in the contract between Enerkem and EDB. The Clause reads as follows:

"11.1 Indemnification.

Supplier shall indemnify and hold harmless Enerkem, its Affiliates and their respective officers, directors, employees, agents, successors, assigns and customers (whether direct or indirect) against any Liabilities that they or any of them may incur or suffer due to: (a) any breach by Supplier of this Agreement, including any failure to comply with any provision of this Agreement or any legal or conventional warranty applicable on the Equipment and services relating thereto: (b) any false or inaccurate declaration or statement; (c) any fault or negligent act or omission of Supplier or its personnel or anyone for whose acts or omissions Supplier may be liable; or (d) any Liabilities arising in connection with any damage to property, goods or injury to any Person arising in the performance of the Supplier's obligations under this purchase order, provided however that the Supplier shall not be liable for any indirect, special, consequential or punitive damages of any type or king suffered by Enerkem."

"(x) 'Liabilities' any and all actions, causes of action, prosecutions, charges, orders, claims, damages, losses, liabilities (including in connection with the death of or injury to any individual or damage to or loss of any property, including property of Enerkem), costs and expenses (including legal costs and reasonable fees), fines, penalties, royalties or other payments and other expenses;"

[Our emphasis]

Justice Provencher began his analysis by stipulating that such clauses, when negotiated by mutual agreement, are valid, even if no specific fee amounts or detailed calculations are set out. The Court explained that the clause was not "potestative" (i.e. in which a debtor party required to fulfill an obligation is under the "power" of the creditor party) because the lawyer whose fees were the subject of the claim had ethical obligations with respect to billing.^[6]

However, Justice Provencher pointed out that despite its validity, the Clause was subject to review by the Court, which had to ensure that the authorized reimbursement applied to legal fees that were reasonably incurred and were not excessive or abusive.^[7] Proving the "reasonableness" of legal fees is incumbent on the party seeking reimbursement, and the burden of proof requires more than the mere presentation of  legal bills.^[8] For example, in a recent decision, the Court of Appeal took into consideration the complexity of the case (including the number of witnesses and the amount of documentary evidence), the time required and devoted to the case, the manner in which the case was conducted and the hourly rates charged based on the lawyer's experience.^[9]

In the case in question, Enerkem claimed $424,128.08 from EDB as reimbursement for the legal fees it incurred. Although it did not contest the lawyers' hourly rates, their professionalism or the time they devoted to the case, or the manner in which Enerkem conducted itself, the Court held that the amount claimed in this respect was clearly disproportionate in terms of the results obtained. In other words, the amount awarded at the end of the legal action must also be considered when determining the reasonableness of the legal fees being claimed.

Based on the foregoing, Justice Provencher analyzed Enerkem's claim, in particular by focusing on the proportionality of the fee amount claimed, in light of the mixed outcome of the litigation and the ruling handed down. Based on this analysis, the Court held that it was reasonable, in consideration of the ruling and the overall context, to award Enerkem $25,000 in reimbursement for its legal fees.

The Superior Court justified this decision as follows [unofficial English translation]:

[343] The purpose of such a clause is to enable a creditor to recover amounts due from a defaulting debtor or to require a debtor to carry out its obligations, without having to incur legal fees to do so. The purpose is not to fund one or more legal actions that a creditor might take against a debtor, simply because it wished to, knowing that in the end, it would have nothing to lose because even its legal fees would be reimbursed;

[344] In this case, in the opinion of the Court, it would be unjust, even indecent, to require Constructions EDB, which has had to defend itself at great expense, to reimburse the significant legal fees incurred by Enerkem Alberta Biofuels, even though most of the latter's claims proved baseless or were grossly exaggerated, and even though most of its applications in line with the interim interlocutory injunction were denied;

[Our emphasis]

Conclusion

As a general rule, negotiated fee reimbursement clauses will be recognized as valid by the courts, in accordance with the principles underlying the Van Houtte decision. It would thus be advisable for you to include such a clause in your contracts in order to limit your financial risk if you ever have to go to court to enforce your rights.

Nevertheless, creditors and their legal advisors should not view such clauses as providing permission to incur significant and disproportionate fees due to complex litigation and the large number of issues involved. As the Enerkem case makes clear, the courts have great discretion when awarding amounts for reimbursement of legal fees (in the case in question, the amount awarded worked out to less than 6% of the amount claimed). The best advice is to remain mindful of the limits of such clauses, even though they may be legally binding and enforceable.

If you would like further information on this decision or if you have any related legal questions about handling or resolving civil or commercial disputes, please do not hesitate to contact Gowling WLG's litigation team, which will be pleased to assist you.

If you would like further information on this decision or if you have any related legal questions about handling or resolving civil or commercial disputes, please do not hesitate to contact a member of Gowling WLG's litigation team.

You are also encouraged to contact Gowling WLG's Commercial Law Group if you require advice on the inclusion of a legal fee reimbursement clause in your upcoming contracts.