Guarantor’s payment of legal fees incurred by a lender to sue a borrower

April 30, 2021 | Maxime B. Rhéaume

The following is a summary of a judgment concerning the Bank’s right to be reimbursed for legal fees it incurred to sue and obtain a judgment against a surety (hereinafter called “the Guarantor”).

Facts

The facts of the case can be summarized as follows:

1) The Bank had a $35,000 claim against the borrower, who went bankrupt.

2) The Bank sued the Guarantor for this $35,000 debt, plus $31,000 on account of legal fees which the Bank incurred to sue the borrower.

3) The suretyship agreement contained the following clause:

“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.

4) The Superior Court judge declared this clause invalid and dismissed the Bank’s claim seeking to recover the legal fees that it had incurred.

Decision of the Court of Appeal[1]

The central point from the Court’s decision regarding the legal fees that the lender incurred to sue the Guarantor is as follows:

“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.”

Exercising its discretion, however, the Court determined that in this instance, absent adequate evidence, the sum of $31,000 in legal fees to recover $35,000 was unreasonable, and it reduced the said sum of $31,000 to $12,000. Apart from the amounts involved, an interesting point from this decision is that it confirms the validity of these types of clauses.

Taking into account the foregoing, here are the key takeaways from the decision:

 1) The principle applies both to the guarantor (surety) and the actual borrower.

 2) The lender’s right to recover legal fees does not result from the law; rather, it must be specified in the contract and agreed to by the parties concerned.

 3) This right is not absolute; the lender must prove the amount of the legal fees it is claiming and must demonstrate that it is reasonable, and the court retains the right to reduce the amount of the claim if it is not reasonable having regard to the specific circumstances of the case.

 4) Although it is now recognized that legal fees can be recovered from a borrower, it is important to know that such amounts are not secured by a hypothec in the lender’s favour.

This is because article 2762 of the Civil Code of Québec specifically excludes such amounts from the obligations secured by hypothecs. In other words, the borrower’s obligation to reimburse the lender’s legal fees is an unsecured personal debt. Furthermore, if the lender obtains a judgment ordering that its legal fees be reimbursed, it must be understood that (i) the judgment debt is valid for 10 years and is not subject to the three-year prescription period; (ii) the judgment can be enforced against all the debtor’s property; and (iii) it also enables the lender to take out a legal hypothec on all the judgment debtor’s property.

Suggestions

Depending on the forms used by the lender, it might be worth ensuring that the loan agreements and offers provide that the borrower is responsible for paying the legal fees incurred by the lender to obtain a judgment against the borrower. Similarly, suretyship forms should aso contain a clause in which the surety agrees to reimburse the legal fees incurred to obtain a judgment against the surety.

In the case of the surety, if his or her obligation is limited, it would be a good idea to specify that the obligation to reimburse the lender for legal fees is over and above the specified limit.


[1]     The reasons of the Court of Appeal were given by Mark Schrager, J.A.

Disclaimer

This publication is provided as an information service and may include items reported from other sources. We do not warrant its accuracy. This information is not meant as legal opinion or advice.

Miller Thomson LLP uses your contact information to send you information electronically on legal topics, seminars, and firm events that may be of interest to you. If you have any questions about our information practices or obligations under Canada's anti-spam laws, please contact us at privacy@millerthomson.com.

© 2021 Miller Thomson LLP. This publication may be reproduced and distributed in its entirety provided no alterations are made to the form or content. Any other form of reproduction or distribution requires the prior written consent of Miller Thomson LLP which may be requested by contacting newsletters@millerthomson.com.