2021 QCCA 551, 2021 QCCA 551

Banque de Nouvelle-Écosse c. Davidovit 2021 QCCA 551 COURT OF APPEAL CANADA PROVINCE OF QUEBEC REGISTRY OF MONTREAL No: 500-09-028039-196 (500-17-084360-141) DATE: April 6, 2021 CORAM: THE HONOURABLE JACQUES J. LEVESQUE, J.A. MARK SCHRAGER, J.A. MARIE-JOSÉE HOGUE, J.A. BANQUE DE NOUVELLE-ÉCOSSE APPELLANT – Plaintiff/Cross-Defendant v.

AARON DAVIDOVIT RESPONDENT – Defendant/Cross-Plaintiff JUDGMENT [ 1 ] On appeal from a judgment rendered on November 26, 2018 by the Superior Court, District of Montreal (the Honourable Justice Frédéric Bachand), ordering Appellant to pay Respondent the sum of $35,004.49 plus interest at the annual rate of 4.99% since October 19, 2018 and the sum of $1,234.80 plus interest at the annual rate of 5% since October 24, 2018, without legal costs. [ 2 ] For the reasons of Schrager, J.A., with which Levesque and Hogue, JJ.A. concur, THE COURT : [ 3 ] ALLOWS the appeal in part; [ 4 ] REPLACES paragraphs [48] and [49] in the conclusions with the following: [48] CONDEMNS the defendant to pay to the plaintiff the sum of $35,004.49 plus interest at the annual rate of 4.99% since October 19, 2018; [49] CONDEMNS the defendant to pay to the plaintiff the sum of $1,234.80 plus interest at the annual rate of 5% since October 24, 2018; [ 5 ] ADDS the following conclusion to the judgment: [49.1] CONDEMNS the defendant to pay to the plaintiff the sum of $12,000 plus interest at the annual rate of 4.99% since November 26, 2018. [ 6 ] THE WHOLE without legal costs.

JACQUES J. LEVESQUE, J.A. MARK SCHRAGER, J.A. MARIE-JOSÉE HOGUE, J.A. Mtre Yves Martineau Mtre Jean-François Forget STIKEMAN ELLIOTT For Appellant Mtre Christopher Atchison ATCHISON PERRAULT AVOCATS INC.

For Respondent Date of hearing: February 24, 2021 REASONS OF SCHRAGER, J.A. [ 7 ] In issue is a 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 bank to collect from the debtor or the guarantor. [ 8 ] The judge of the Superior Court [1] decided that in virtue of art. 1437 C.C.Q. , the clause was invalid and, thus, he refused to condemn Respondent for the fees and disbursement portion of the Appellant bank’s claim.

At the same time, he condemned Respondent to pay the unpaid balance of the guaranteed debt and dismissed Respondent’s cross-demand for $75,000 of damages arising from alleged improvident realization by Appellant on the moveable property hypothecated as security for the term loan portion of the indebtedness. There is no incidental appeal and it is only Appellant’s claim for reimbursement of lawyers’ fees and costs incurred up to the date of the trial which is in issue on appeal. [ 9 ] Respondent was the principal of a company which operated a gym.

The company had obtained from Appellant, its banker, a term loan secured by hypothec on the gym equipment, a line of credit and an overdraft facility. When the company ran into financial trouble, Respondent contacted a professional auctioneer in an attempt to voluntarily liquidate the assets with a view to repaying Appellant, but the company’s default with respect to its landlord became an impediment to this plan. The company filed an assignment in bankruptcy and the trustee sold the assets for $35,575, which was less than what Respondent had hoped to realize (i.e. approximately $100,000).

As a result, the trustee redeemed Appellant’s security for the term loan for the remaining balance due of $19,281.99. The trustee applied the balance of the proceeds to his fees and disbursements. Thus, the amount outstanding on the line of credit ($28,533.33) and the overdraft facility ($656.80) remained unpaid.

The bank sued Respondent to recover these sums under his personal guarantee, together with its legal fees and disbursements, which amounted to $31,145 prior to trial. [ 10 ] The text of the impugned clause of the personal guarantee as cited by the judge is as follows: The guarantor’s liability includes the liability to pay any interest the customer has not paid, and interest from the date of demand. This interest is charged at the applicable rate in the agreement.

The guarantor must also pay all of the costs and expenses we incur to get the money the customer owes us, including any costs and expenses of collecting from the guarantor including without limitation legal fees on a solicitor and his/her own client basis. THE JUDGMENT [ 11 ] As stated, it is only the validity of this clause which is in issue on appeal, so that I will restrict my

summary of the judgment accordingly. An analysis of the cross-demand claiming damages is not necessary to dispose of the appeal, although the defence to the cross-demand could be pertinent in a reckoning of the fees incurred by Appellant. [ 12 ] The judge (as do the parties, apparently) assumed that the guarantee or banking agreement was a contract of adhesion (upon which I will comment later in these reasons), so that the jurisprudence [2] of this Court declaring such clauses valid in contracts by mutual agreement is not conclusive.

He then proceeded to analyze the abusive nature of the clause and noted that the clause is unilateral (i.e. it is only the bank that can recover the fees it incurs; the guarantor is not given such possibility under the clause). He concluded that such “inequality of arms” is contrary to at least the spirit of

section 23 of the Quebec Charter of Human Rights and Freedoms . [3] [ 13 ] The judge also considered that the impact of such a clause is to restrict access to justice, since it can have a deterrent effect against the contestation of a bank’s claim.

The guarantor is already a vulnerable party vis-à-vis the bank, so, in the judge’s opinion, an increase in the financial risk of litigation operates to erode the rule of law. [ 14 ] In a description of our society’s tendencies in such matters, he referred to at least one other case refusing to apply such a clause in comparable circumstances [4] while recognizing case law deciding otherwise. [5] [ 15 ] He also highlighted provisions of the Civil Code of Québec designed to protect individuals from such claims, particularly art. 2762, para. 2 C.C.Q. , which limits hypothecary claims to capital and interest. [ 16 ] While mindful of banks’ concerns for frivolous defences, the judge was assuaged by the fact that any litigant engaging in abusive tactics is liable to judicial sanction by way of a condemnation under art. 54 C.C.P. to contribute to the opponent’s legal fees in whole or in part. [ 17 ] He concluded that the clause was abusive and illegal and refused to award any amount of the fee portion of Appellant’s claim. * * * [ 18 ] Appellant submits that the judge erred in his application of art. 1437 C.C.Q. and, moreover, that even if the clause is abusive, declaring it null is not an appropriate remedy since the judge has discretion under art. 1437 C.C.Q. to reduce the extent of the obligation (i.e. to reduce the amount claimed for fees).

DISCUSSION [ 19 ] I believe that the clause is not invalid as a matter of law but that, in this instance, it is appropriate to reduce the amount of the claim for reimbursement of legal fees. [ 20 ] I am not convinced by the judge’s reasons for concluding that the clause is abusive per se and thus null pursuant to art. 1437 C.C.Q. , which reads as follow: 1437. An abusive clause in a consumer contract or contract of adhesion is null, or the obligation arising from it may be reduced. 1437. La clause abusive d’un contrat de consommation ou d’adhésion est nulle ou l’obligation qui en découle, réductible.

An abusive clause is a clause which is excessively and unreasonably detrimental to the consumer or the adhering party and is therefore contrary to the requirements of good faith; in particular, a clause which so departs from the fundamental obligations arising from the rules normally governing the contract that it changes the nature of the contract is an abusive clause.

Est abusive toute clause qui désavantage le consommateur ou l’adhérent d’une manière excessive et déraisonnable, allant ainsi à l’encontre de ce qu’exige la bonne foi; est abusive, notamment, la clause si éloignée des obligations essentielles qui découlent des règles gouvernant habituellement le contrat qu’elle dénature celui-ci. [ 21 ] Certainly, the clause is unilateral, as the judge observed, but so are all obligations of a borrower under a contract of loan. [6] Once the contract of loan is formed by the advance of funds, the lender has no obligations (absent special contractual stipulations), so that the agreement is referred to as a unilateral contract.

The same is true of the guarantee or contract of suretyship. The logic of the judge’s argument would lead to a conclusion that the obligation to repay monies lent is abusive because it is unilateral.

It is not surprising, then, that the Court has held that the mere fact that the claim under a fee reimbursement clause is unilateral or that the contracting parties do not have equal economic strength does not necessarily make it abusive. [7] Because of this unilateral characteristic of the contracts of loan and suretyship, there is no valid comparison to be made with consumer contracts for the provision of goods or services where the consideration contributed or the obligations assumed by the consumer vis-à-vis the merchant are so excessive that parts of the contract are ruled abusive. [8] [ 22 ] The mere fact that one party to a contract finds itself at a disadvantage is not in itself reason to conclude that the clause in question is abusive per se. [9] That the effect of such a clause operates negatively for a party is not sufficient reason to label it abusive. [10] One cannot simply assume the economic vulnerability of a party because he or she has signed a guarantee. [ 23 ] Moreover, such unilateral feature is counterbalanced by the ability of a court to sanction abusive conduct of any litigant under

article 54 C.C.P. This was the judge’s reason for saying that the clause is unnecessary for the bank as a deterrent against frivolous defences – i.e. the possibility that the unsuccessful frivolous guarantor could be obliged to reimburse the bank’s fee expense already exists in law without the clause. [11] This is certainly true, but does not speak to the validity or enforceability of such possibility agreed to by the parties to a contract.

In my view, if the law provides a mechanism for reimbursement of a plaintiff’s legal fees where the defence is abusive or where conduct is inappropriate (article 342 C.C.P. ), it is not a huge moral or philosophical leap to conclude that a prior agreement for such reimbursement (irrespective of abuse) is not abusive or otherwise illegal.

It does not shock the senses as morally reprehensible. [12] Indeed, it allows for meritorious claims to be pursued before the courts in a cost-effective manner. [ 24 ] I equally disagree with the judge that the mere presence of the claim is a clog on access to justice or a significant disincentive or impediment for a guarantor to contest an unfounded claim. Unlike the judge, I am not bothered by the risk that if unsuccessful in defence, the guarantor will be required to pay more than capital and interest.

Art. 1617, para. 3 C.C.Q. (to which the judge makes no reference) specifically provides for the possibility of a contractual stipulation for the award of damages in addition to interest for the refusal to pay monies due. Moreover, the ability of a court to award costs on a solicitor/client basis is part of the law in jurisdictions other than Quebec, for example, the neighboring province of Ontario. [13] Nor is the concept unknown in Quebec.

For example, in addition to its powers under art. 54 C.C.P. , the Superior Court, applying other statutes such as the Bankruptcy and Insolvency Act [14] ( section 197(2) ) and the

Canada Business Corporations Act [15] ( section 242(4) ) can, in its discretion, award costs on a solicitor/client basis.

Article 342 C.C.P. also contemplates an award to cover fees in order to sanction a party’s “substantial breach” in the conduct of the proceedings. Access to justice has not been shown to be unreasonably impeded because of the possibility of costs being awarded on a solicitor/client basis.

Nor can it be said that considerations of public order in Ontario, or at the federal legislative level in Quebec, are fundamentally different from such concerns in the civil law of Quebec. [16] This is particularly the case where the courts maintain discretion to alleviate the effects of any unreasonable application of such a clause or claim for reimbursement of exorbitant fees. [ 25 ] The so-called “inequality of arms” infringement of the spirit of the right to a fair trial protected by

section 23 of the Charter is simply without merit. The record indicates that Respondent benefited from a two-day hearing before an impartial tribunal, which rendered a reasoned judgment and considered all Respondent’s arguments, particularly with respect to the claim for reimbursement of the bank’s fees. No procedural safeguard was violated as a result of the presence of such clause in the agreement binding the parties.

Section 23 essentially refers to procedural safeguards for fundamental rights, such as the right to be heard. [17] In this case, the argument is but another reiteration of the “unilateral argument”. [ 26 ] Of most significance is the judge’s failure to consider art. 1617, para. 3 C.C.Q. which, as stated, provides for the possibility of damages in addition to interest, without distinction as to whether this may be included in a contract of adhesion or by mutual agreement, as the Court held in Van Houtte . [18] [ 27 ] The judge treated the contract herein as one of adhesion, without discussion.

In my mind, the mere fact that the terms of a contract appear on a preprinted form does not mean that the contract is necessarily one of adhesion , [19] albeit the preprinted form may

be an indication that the terms are imposed and not negotiable. [20] However, where the form document contains conditions that are included by ticking the appropriate box (for example: secured versus unsecured, personal guarantee versus not guaranteed), as is the case here, this can be an indication of a negotiable term despite the preprinted form. Moreover, where there is competition in the market place for the goods or services that are the object of the contract in question, the possibility is open to “buying from the shop across the street”.

In such a case, despite the actual terms or wording not being negotiable, the possibility of saying no and going elsewhere puts into question whether the contract is one of adhesion. I contrast, in such regard, the situation where several banks do business in a geographic area to that of a telecom provider which may be the only one providing such service in a given area. Both may use preprinted forms, but in the case of the bank which has competitors, the terms for its services may be negotiable.

I do, however, concede that there are few absolutes, such that the existence of competition does not necessarily exclude adhesion. [21] [ 28 ] As stated, in the case at bar, it appears to have been taken as a given by the parties as well as the judge that the banking contract, including the personal guarantee, was one of adhesion.

No proof or argument to the contrary was presented to this Court and it may well have been the case that any such proof would have revealed that no Canadian chartered bank would have made credit available to a small or medium-sized business without the personal guarantee of the company’s principal, for all or part of the debt, so that the guarantee (including the fee clause) was indeed imposed and not negotiable. [ 29 ] The evolution of the jurisprudence in the matter indicates a tendency towards considering such clauses as valid (or at least not invalid per se). [ 30 ] In 1998, the Court laid to rest any notion that the obligation in a contract for one party to reimburse the other party’s legal fees incurred to recover a debt was invalid because the obligation was undetermined or indeterminable. [22] [ 31 ] In 2010, in Van Houtte , [23] the Court clearly stated that such fee reimbursement clauses were, as a general rule, valid in contracts by mutual agreement (as the judge noted), but the Court left open the debate when the clause is contained in a contract of adhesion.

Working on the premise that the document here under scrutiny is a contract of adhesion, the judgments since Van Houtte , while not always explicit, move towards the conclusion that the clause is not invalid.

Moreover, in Van Houtte , the Court held that the enforceability of such a clause was subject to control for its reasonableness or, more precisely, the reasonableness of the fees claimed. [ 32 ] In Distribution Stéréo Plus inc. v. 140 Gréber Holding Inc. , [24] the Court confirmed the judgment of the Superior Court, which had found the clause to be valid even if the contract were to be considered as one of adhesion.

Though the judgment of the Court on the instant question could be qualified as having minimal weight given the lack of reasons, the issue was nevertheless clearly before the Court and the judgment of the Superior Court examined the matter in detail and ruled explicitly. [ 33 ] This Court also confirmed a condemnation for the reimbursement of a bank’s legal fees, as agreed by the parties, in 9208-0472 Quebec inc. v.

Bank of Nova Scotia . [25] Again, however, there was no substantive treatment of the validity or enforceability of the contractual provisions. [ 34 ] Several Superior Court judgments, which were not appealed, also found the clause to be valid, [26] including where the contract was qualified as one of adhesion. [27] Though the case law of the Superior Court is not binding and judgments of this Court that do not provide reasons on the issue can be given minimal weight, this review indicates the acceptance of such clauses in society and before the courts. [ 35 ] The trial judge relied on Professor Moore (as he was then), writing in 2012, to invalidate the clause. [28] In the current edition of the text book Droit des obligations , [29] Luelles and Moore reiterate the position, but only state that the clause could (“ pourrait ”) be invalid.

Baudouin, Jobin and Vézina have expressed a similar view. [30] [ 36 ] I believe that, in 2021, it is appropriate to declare, in principle, that fee reimbursement clauses, even in contracts of adhesion, 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. Where a fee reimbursement clause in a contract of adhesion is not invalid and specifies an amount payable, art. 1437 C.C.Q. provides that the obligation may be reduced.

When no such quantification appears in the contract, the courts nevertheless have jurisdiction to control the amount since the damages (the fees) must be proved (art. 1617, para. 3 C.C.Q. ) and the enforcement of the claim is subject to the creditor’s overriding obligations to exercise its rights reasonably and in good faith (arts. 6, 7 and 1375 C.C.Q. ).

This was the reasoning the Court applied in Van Houtte to the enforcement of a fee reimbursement clause in a contract by mutual agreement, and the same legal logic applies here. [31] [ 37 ] On the whole, and given the pervasiveness of such clauses in different types of contracts, as evidenced in the jurisprudence, it is difficult to banish the clause entirely given what appears to be a certain acceptability in society generally and the commercial sphere particularly. In today’s world, the inclusion of such a clause is hardly a departure from accepted practice.

My sense of morality is not shocked by the obligation to compensate the creditor for its fees incurred to enforce the performance of its rights, particularly where the court maintains discretion to adjust the debtor’s obligation. [32] [ 38 ] Clearly, the issues surrounding the enforceability or the abusive character of such clauses are contextual. As the present case concerns clauses for the reimbursement of bank fees in contracts of guarantee for commercial bank loans, these reasons should not be read as extending beyond such considerations, let alone beyond the specific factual context of the record.

It is however an error to consider such a clause in a contract of adhesion per se invalid. [ 39 ] I would intervene to overrule the judge and find that the clause in question is not invalid per se, but at the same time examine the quantum of the claim for its reasonableness. The judge did not attempt any such exercise given his view that the clause is invalid.

We do, however, have the detailed invoices submitted to Appellant by its attorneys (who are not the attorneys of record on appeal), but no other proof, such as the testimony of the lawyers or a transcript of the testimony of the banker with respect to such fees. It would be impractical and unfair to send the case back for additional proof and hearing on such point, so I propose to deal with this aspect here based on the available data.

[ 40 ] In applying such clauses, the case law accepts the notion that the quantum of fees claimed must be proportionate to the principal amount of the monetary award sought in the action. [33] [ 41 ] Aside from good sense, such concerns for proportionality in court proceedings is now dictated under art. 18 C.C.P. as a guiding principle in litigious matters. [ 42 ] The claim for fees is, in essence, a claim for contractual damages.

Not only does the burden of proof that the fees were incurred rest on the party claiming them, but, in the case at bar, Appellant has the burden of persuading the court that the fees are reasonable. Simply filing a lawyer’s invoice in evidence will not do. [34] [ 43 ] In this particular instance, the exercise requires an evaluation of the quantum of the fee reimbursement claimed in order to determine whether it is reasonable.

In such regard, a court should consider all the circumstances, such as the complexity of the case (including the number of witnesses and the quantity of documentary evidence), the time required by and devoted to the matter, the manner of managing the conduct of the file and the hourly rates applied as a function of a lawyer’s experience. [35] [ 44 ] The present case was somewhat more complicated than a straightforward claim under a guarantee for monies lent because of the defence and cross-claim ($75,000) based on the improvident realization on the principal debtor’s assets.

Nevertheless, and overall, the case was not overly complex. [ 45 ] The invoices provide dates and descriptions of the services rendered, with the time spent for each service together with the initials of the different attorneys performing the services. Hourly rates are not provided other than the average rate one can obtain by dividing the total fees charged on any given invoice by the total hours reflected on such invoice. Since different lawyers were involved, different hourly rates were presumably applied. No fees were claimed for the trial, which lasted two days.

The factual matrix is relatively straightforward. Each party called two witnesses. [ 46 ] The documentary evidence presents some peculiarities regarding the fees. The initial invoice of Appellant’s attorneys for the period from March to April 2014, in the amount of $12,854, appears to cover services rendered in relation to the realization on the hypothecated assets. No indemnity other than interest may be claimed on the debt secured by hypothec (art. 2762 C.C.Q. ). Hence, these fees could not be claimed against Respondent’s company, the principal debtor.

Obligations under guarantees cannot exceed those of the principal debtor (art. 2343 C.C.Q. ). Consequently, the amount of this invoice could not have been claimed from Respondent. However, the invoice was the subject of a credit note bearing the same date as the invoice for the full amount. Were the fees incorporated into subsequent billings? We have no answer in the record or from counsel. [ 47 ] The next invoice, dated June 6, 2014, for the period from April 14 to June 6, 2014, in the amount of $3,577, also relates, in part, to services rendered with regard to the hypothecated property.

It is impossible to divide the amount with precision, so, if required, this invoice could be arbitrated by cutting the amount in half. [ 48 ] Oddly, the payout statement produced by Appellant for the line of credit as at October 18, 2018 indicates a balance outstanding of $28,431.68, but also indicates a “payout amount” of $35,004.49. Is the difference of $6,573.41 attributable to the fees? We have no answer. The total difference cannot be interest, because Appellant provided a statement to the trustee fourteen months earlier indicating a balance outstanding of $28,533.33.

At 4.99% interest, the additional amount as at October 18, 2018 would have been between two and three thousand dollars. Though counsel for Respondent admitted the amounts claimed at the beginning of the trial, as I understand it, there is no admission that, in the circumstances, the amounts claimed for fees are reasonable and payable under the clause of the guarantee. To the contrary, that is the issue to be resolved where the clause is not invalid. [ 49 ] The burden to demonstrate the reasonableness of the fee claimed is on Appellant. This is so, even if the quantum claimed was admitted at trial.

Given the disproportion overall of $31,000 of fees on a $35,000 claim and the unexplained queries above, particularly the fact that the amount awarded in first instance appears to already include more than the capital and interest owed, the amount claimed for the fee reimbursement should be reduced. Consequently, I would arbitrate the claim for fees and award $12,000. Because of this mitigated result and the amounts in question, no award of costs should be made on appeal.

Interest cannot run on this sum from the date of the institution of proceedings since the fee obligations of Appellant were incurred progressively while the suit was pending. Therefore, interest should run from the date of the judgment in first instance. [ 50 ] At the hearing before the Court, counsel for Appellant stated that his conclusion for legal costs included the claim for the expert evaluation in first instance. Neither the amended introductory motion, nor the notice of appeal nor the brief explicitly claims expert fees (aside from a conclusion in general terms for “costs”).

The valuation report for the hypothecated equipment is reproduced in Appellant’s brief, but the testimony of the expert is not transcribed (for the Court to determine its usefulness). Moreover, no invoice for the expert’s services is in the record and there is no document mentioned in Appellant’s brief. In my view, Appellant has not met its burden. Moreover, the judge did not grant costs given the mitigated outcome.

I see no reason to disturb such conclusion. [ 51 ] Costs are not sought in appeal and so will not be granted. [ 52 ] For all these reasons, I would allow the appeal in part so as to add the following conclusion to the judgment: [49.1] CONDEMNS the defendant to pay to the plaintiff the sum of $12,000 plus interest at the annual rate of 4.99% since November 26, 2018. [ 53 ] As well, the conclusions of the judgment are framed as “ ORDERS ” to pay which is incorrect. I would thus substitute the word “ CONDEMNS ” in each of paragraphs 48 and 49 of the judgment. MARK SCHRAGER, J.A.

[10] Kechichian , supra , note 7 , para. 53, included in Latreille v . Industrielle Alliance (L'), compagnie d'assurance sur la vie , 2009 QCCA 1575 , para. 36 . [11] The judge could also have referred to

article 342 C.C.P. in virtue of which the tribunal “may punish substantial breaches noted in the conduct” of the case by awarding, as legal costs, an amount considered “fair and reasonable” to cover lawyer’s fees. [32] Baudouin, Jobin and Vézina, supra , note 12 , p. 235, par a . 144; Beaulne , supra , note 7 , para. 24 ; Ford du Canada Ltée v. Automobiles Duclos inc. , 2007 QCCA 1541 , par a . 84 ; Armtec ltée v. Exportation et développement Canada/Export Development Corporation , 2007 QCCA 99 , para. 33 . [33] Van Houtte , supra , note 2 , paras. 124-125 ; Banque Royale du Canada v.

Patron , 2017 QCCS 3865 , para. 73 ; National Leasing , supra , note 27 , paras. 47-50; S uperior Energy Management Gas, supra , note 27 , paras. 68 and 76; Second Cup Ltd. v. 9033-2438 Québec inc. , 2017 QCCQ 197 , paras. 37 and 39 ; Superior Energy Management Gas, l.p. v. 4328230 Canada inc. , 2013 QCCQ 1706 , para. 92 ; El Mostafa , supra , note 23 , para. 7; Langevin v. Puits artésien Fréchette & Associés inc. , 2018 QCCQ 3313 , paras. 48 and 57 .