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Reimbursement clause for extrajudicial fees by a surety: valid or invalid?
On April 6, 2021, the Court of Appeal, per Justice Mark Schrager, rendered an interesting decision in Bank of Nova Scotia c. Davidovit (2021 QCCA 551). The Bank of Nova Scotia (the “Bank”) had granted a commercial loan to a company, of which Aaron Davidovit (“Davidovit” or the “Surety”) was the principal, for the operation of a gym. Under a clause contained in the personal guarantee (suretyship) signed by Davidovit, he was to reimburse all costs and expenses incurred by the Bank to collect amounts owed to it by the principal debtor or Surety, including, but not limited to, legal fees on a solicitor/client basis (the “Clause”). The Bank was claiming $31,145.22 in extrajudicial fees and legal costs from Davidovit, while the amount claimed from the Surety in capital and interest amounted to $35,004.49. The trial judgment The trial judge, the Honourable Frédéric Bachand, concluded that the contract of suretyship was a contract of adhesion within the meaning of article 1379 of the Civil Code of Québec (the “C.C.Q.”) and agreed with Davidovit’s arguments that the Clause was invalid because it was excessively and unreasonably detrimental to the adhering party and contrary to the requirements of good faith, in violation of article 1437 C.C.Q. Justice Bachand emphasizes two main problems with the Clause: (i) it was unilateral, thus giving a disproportionate advantage to the Bank while the Surety did not benefit from such an advantage; (ii) it could restrict access to justice in that it could deter the Surety (who was already vulnerable vis-a-vis his opponent) from contesting the Bank’s claim, the Clause thus doing little to promote the rule of law. Appeal decision The Court of Appeal reversed Justice Bachand’s judgment on the invalidity of the Clause, but confirmed Davidovit’s personal condemnation as Surety. Firstly, the Court of Appeal pointed out that a unilateral clause is not in itself abusive. All of a borrower’s obligations under a loan agreement or a surety’s obligations under a contract of suretyship are unilateral, but that this fact alone cannot determine whether a clause is abusive. The logic applied by the trial judge would lead to the conclusion that the repayment of a balance due at the end of a loan is abusive, because it is unilateral. Secondly, the fact that one party finds itself at a disadvantage is also not reason to conclude that a clause is abusive. Section 23 of the Quebec Charter of Human Rights and Freedoms, raised by Justice Bachand in dealing with equality of arms in a judicial process, did not apply in this case, despite the fact that a bank may appear to have more means to initiate legal proceedings than a surety does. Thirdly, just because the law provides for a monetary sanction, such as payment of legal fees or other damages (e.g. in application of article 54 or 342 of the Code of Civil Procedure) for an abusive situation (e.g. a frivolous defence of a surety), this does not mean that contracting parties cannot agree to provide for such payment. The judges of the Court of Appeal held that, on the contrary, a clause for the reimbursement of extrajudicial costs and fees allows for legitimate claims to be pursued before the courts against principal debtors and sureties who refuse to pay. Justice Schrager also took the liberty of commenting on the trial judge’s conclusion regarding the qualification of the contract of suretyship as a contract of adhesion. However, considering that neither party questioned this qualification, the Court of Appeal did not formally rule on this aspect, but pointed out that the mere fact that the terms of a contract appear on a preprinted form does not necessarily mean that it constitutes a contract of adhesion, although a preprinted form may be an indication that the terms imposed are not negotiable. The reasonableness of the amount claimed under the Clause Although valid, the Clause must still be subject to control by the courts to ensure that the amount claimed for extrajudicial costs and fees is not abusive and is claimed in good faith. The Court found that the reimbursement of more than $31,000 in legal fees where the principal claim amounts to just over $35,000 is unreasonable and disproportionate. Given 1) the complexity of the case, 2) the amount of the claim against the Surety, 3) that the burden of demonstrating the reasonableness of the costs was on the Bank, 4) that claims for reimbursement of extrajudicial costs and fees must be exercised reasonably and in good faith (in accordance with articles, 6, 7 and 1375 C.C.Q.), the Court of Appeal reduced the claim and arbitrarily established it at $12,000. Conclusion Clauses for the reimbursement of extrajudicial fees have a certain acceptability in society, particularly in the commercial sphere. Even in a contract of adhesion, they are not necessarily abusive and invalid, but their application is subject to control by the courts so that they are exercised reasonably and in good faith.
Quarterly legal newsletter intended for accounting, management, and finance professionals, Number 21
CONTENTS The Pros and Cons of Arbitration Clauses in Commercial Contracts Pirating and Using Software Without a Licence: The BSA | The Software Alliance Case Interprovincial Taxation: The Importance of Severing Residential Ties on Departure Security Under Section 427 of the Bank Act: Do the Rights of a Bank Rank Ahead of Those of the Holder of a Retention Right? THE PROS AND CONS OF ARBITRATION CLAUSES IN COMMERCIAL CONTRACTSCatherine Méthot and André PaquetteArbitration clauses are increasingly finding their way into commercial contracts. However, the fact that arbitration is a frequently chosen path nowadays does not necessarily mean that it is always the best solution. One must know its advantages and disadvantages and be wary of standard clauses which may be ill-adapted to one’s situation.Generally, the main advantages and disadvantages of arbitration clauses which are most often mentioned are the following:Advantages: (i) simplified procedure; (ii) less documentation to file; (iii) obtaining a decision is quicker than in the context of the judicial process; (iv) generally reduced costs compared to the judicial process; (v) absence of a right to appeal; and (vi) the confidentiality of the process and the decision, subject to an application for homologation of the arbitral award or a recourse to cancel the decision.Disadvantages : (i) the absence of a right to appeal, with some exceptions; (ii) the risk of the arbitration clause being ill-adapted to your particular situation; (iii) costs beyond the expectations of the parties, particularly when three arbitrators are appointed, some authors even maintaining that in such a case, arbitrators’ fees are sometimes almost multiplied by four because of the delays caused by time management and communications between three arbitrators;(iv) the impossibility to access items of evidence in the hands of opposing party outside of the judicial process; and (v) the exclusion of this decision from case law while the issue in dispute may constitute an important law issue.Before inserting an arbitration clause in a contract, one must assess these advantages and disadvantages and, if arbitration is chosen, the terms of the clause must be adapted, particularly with respect to following items : (i) things and situations covered under the clause; (ii) applicable law, making sure to verify whether such law limits or prohibits arbitration (for example, section 11.1 of the Consumer Protection Act,1 which prohibits stipulations whereby the consumer is obliged to refer a dispute to arbitration or restrict his right to go before a court, particularly by prohibiting him from bringing a class action or being a member of a group exercising such a remedy); (iii) the opportunity to provide for a right to appeal; (iv) the confidentiality of the arbitration process (subject to an application for homologation or a recourse for cancelling the decision); (v) the arbitration process (number of arbitrators, rules for submitting evidence, etc.); and (vi) the opportunity to provide for mediation meetings prior to arbitration.In all cases, the objective sought should be to ensure that in the event a dispute occurs, your interest will be better served by arbitration rather than the judicial process. If such is not the case, avoid inserting an arbitration clause in your contract._________________________________________1 C. P-40.1.PIRATING AND USING SOFTWARE WITHOUT A LICENCE: THE BSA | THE SOFTWARE ALLIANCE CASEBruno VerdonThe claims of the BSA | the Software Alliance (the “BSA”) against Quebec and Canadian businesses seem to be increasingly frequent.The BSA is a U.S.-based non-profit organization operating in more than 80 countries. Its members include companies such as Adobe, Apple, IBM and Microsoft.According to the information it publishes on its website, the BSA particularly fights copyright infringement when software has been installed by users without acquiring the necessary licence. It would appear that most investigations of the BSA target businesses and are conducted further to calls on its anti-piracy line or anonymous reporting via its website. Most reports come from current or former employees. In principle, after receiving information alleging software infringement, the BSA contacts the business to investigate the matter further and invites it to negotiate a settlement where it concludes that there is actual infringement. If a settlement cannot be reached, the BSA assigns the file to its attorneys and ultimately, if they cannot negotiate a settlement, the case goes to court.In Quebec and elsewhere in Canada, the BSA bases its claims for use of software without a licence on the provisions of the Copyright Act.1 this Act particularly provides that “When a person infringes copyright, the person is liable to pay such damages to the owner of the copyright as the owner has suffered due to the infringement and, in addition to those damages, such part of the profits that the infringer has made from the infringement and that were not taken into account in calculating the damages as the court considers just.”2In addition, since the Act to amend the Copyright Act,3 assented to on June 29, 2012, came into force, the holder of the infringed copyright may elect to claim, instead of damages and profits made by the person who infringed the copyright in question, an award of statutory damages which are not less than $500 and not more than $20,000 per violation if the infringements are for commercial purposes and not less than $100 and not more than $5,000 in the case of violations for non-commercial purposes.4Therefore, since 2012, a business which uses software without having acquired the required licences is liable to a claim of not less than $500 and not more than $20,000 per licence which it failed to acquire.In the case of Adobe Systems Incorporated et al. c. Thompson (Appletree Solutions),5 the Federal Court was called upon to apply this new provision of the Copyright Act. the Court noted that in awarding statutory damages, the following must be taken into account: (1) the good or bad faith of defendant, (2) the conduct of the parties before and during the proceedings; and (3) the need to deter other infringements of the copyright in question.Having concluded that proof had been made of the intention of the defendant to infringe and that severe deterrent measures were warranted, the Federal Court issued an injunctive order to prevent defendant from continuing to violate copyrights. On the issue of damages, the Court declared:“ I find no reason not to award maximum statutory damages in the amount of $340,000, being $20,000 per work infringed for each of the three Plaintiffs.”Proof the (1) the good or bad faith of defendant, (2) the conduct of the parties before and during the proceedings; and (3) the need to deter other infringements of the copyright in question being easier to make than that of the damages, it is anticipated that the BSA and its members will not hesitate in invoking the statutory damages provided for in this new provision of the Act in support of their claims.As these statutory damages can be well beyond the value of each non-acquired licence, it goes without saying that a negotiated settlement of the claim will constitute a preferred approach.The BSA usually publishes on its website the settlement agreements entered into with businesses.However, nothing prevents the parties from agreeing that the settlement of the claim and the settlement terms will be kept confidential, which will avoid he business concerned having its name associated with the settlement of a BSA claim._________________________________________1 R.S.C. (1895) c. C-42.2 Ibid., sec. 35.3 S.C. 2012, ch. 20.4 Ibid., sec. 38.1.5 2012 CF 1219 (CanLII).INTERPROVINCIAL TAXATION: THE IMPORTANCE OF SEVERING RESIDENTIAL TIES ON DEPARTUREJean-Philippe LatreilleThe place of residence of an individual is a fundamental tax concept which determines, among other things, his liability for provincial income tax. under the Taxation Act,1 an individual is subject to tax for a given year if he resides in Quebec on December 31 of that year. the tax base then consists of the individual’s income from all sources, except for business income from a Canadian establishment situated outside Quebec.The fact that an individual moves from a province to another usually results in a change of his place of residence for provincial tax purposes. However, it may happen that some residential ties with the province of origin remain, with unanticipated and unwanted results, as shown by a recent decision of the Court of Quebec in the case of Perron c. L’Agence du revenu du Québec.2In that case, the taxpayer was challenging assessments made by revenu Québec for taxation years 2005 to 2007, arguing that he was a resident of Alberta during the relevant period. the taxpayer, an engineer, had held various positions in Quebec prior to moving in Alberta in May 2005 after finding permanent employment there. From that time on, the taxpayer had rented a dwelling unit in Alberta and had purchased furniture for it. He also had opened a bank account and became a member of the Association of Professional engineers and Geoscientists of Alberta.However, the taxpayer had retained several residential ties with Quebec during years 2005 to 2007, particularly the following:a) His spouse, to whom he was married since 1985, and his son had continued residing in Quebec despite the departure of the taxpayer for Alberta. the taxpayer was neither divorced or separated under a judgment or a written agreement. b) the taxpayer had remained co-owner with his spouse of the family residence located in Beauport. c) the taxpayer had continued to provide for the financial needs of his son and to assume certain maintenance expenses of the residence located in Quebec. d) the taxpayer had stayed in Quebec every three months for periods of four or five days. When doing so, he was staying at his residence in Beauport. e) the taxpayer had retained his Quebec driver’s licence and maintained is eligibility to the Quebec health insurance regime. f) the taxpayer had remained a member of the Ordre des ingénieurs du Québec. g) the taxpayer had continued to use the postal address of his Beauport residence, particularly with respect to his credit cards. h) the taxpayer was the owner of a vehicle registered in Quebec, which he had given to his son in 2009. The Court determined that the taxpayer had provided prima facie evidence that his tax residence was located in Alberta during years 2005 to 2007, particularly by establishing the permanent nature of his position in Alberta and the low frequency of his visits in Quebec. the tax authorities thus had the burden to prove that the residence of the taxpayer had remained in Quebec.After reviewing the case law, the Court concluded that revenu Québec had established, by preponderance of evidence, that the taxpayer had retained his tax residence in Quebec during the disputed period by reason of the absence of severance of residential ties with Quebec.The judge particularly noted the absence of evidence corroborating the separation between the taxpayer and his spouse. According to the Court, several factors rather indicated that the spousal link was maintained between them. In addition, the taxpayer failed to establish sufficient connection to Alberta, except for his employment.This decision of the Court of Quebec, which was not appealed, underlines the importance of severing all residential ties with Quebec when moving to another province, particularly if the tax regime of the other province is less onerous. the place of residence is a complex issue which has to be decided according to the legislation in force and applicable case law. Any individual who maintains a more or less important presence in more than one province would be well-advised to consult a professional in this respect._________________________________________1 RLRQ RSQ?, c. I-3.2 2013 QCCQ 3271.SECURITY UNDER SECTION 427 OF THE BANK ACT: DO THE RIGHTS OF A BANK RANK AHEAD OF THOSE OF THE HOLDER OF A RETENTION RIGHT?Mathieu Thibault, Étienne Guertin and Jean LegaultFor financing its activities, a Quebec-based business may grant to a Canadian chartered bank a security under 427 of the Bank Act. This security interest allows the bank to exercise its rights on the borrower’s inventories as well as on the debts resulting from their sale while avoiding the formalities and notices which would otherwise be required under the Civil Code of Québec upon the exercise of a hypothecary remedy.1For its part, article 2293 of the Civil Code of Québec allows the holder of a retention right to retain the stored property until the depositor has, among other things, paid him the agreed upon compensation.In the Levinoff-Colbex, s.e.c. (Séquestre de) et RSM Richter inc.,2 the Superior Court had to decide whether the rights of National Bank of Canada (“NBC”) resulting from a security granted to it under the Bank Act, a federal statute, ranked ahead of the retention right relied upon by another creditor under the Civil Code of Québec following the failure of the debtor to meet its contractual commitments respecting the payment of the storage and refrigeration costs of its inventories.According to the Superior Court, the rights of a creditor under section 427 of the Bank Act may be described as a sui generis ownership right, according to the wording used by the Court of Appeal in the case of Banque Canadienne Nationale v. Lefaivre.3However, this sui generis ownership right does not constitute a true ownership right within the meaning of the Quebec civil law on property covered by such security interest. Section 427 and following of the Bank Act rather establish a security interest regime focused on ownership and confer on the bank which holds such security interest rights as a secured creditor and not as an owner of the property covered by such security interest.In this context, NBC could not be bound by the retention right created in favour of another creditor. In fact, the determination of the priority of these rights did not derive from holding an ownership right within the meaning of civil law: the NBC was rather a secured creditor of the debtor.The priority of creditors’ rights must be determined by applying and interpreting the Bank Act in accordance with the doctrine of paramountcy and the judgment issued by the Supreme Court of Canada in the case of Bank of Montreal v. Innovation Credit Union.4Since section 428 of the Bank Act contains an express provision resolving this priority conflict, one has simply to apply the rule provided in this section whereby the rights of the BNC had “priority over all rights subsequently acquired in, on or in respect of that property” covered by the security interest._________________________________________1 Banque de Montréal v. Hall,  1 S.C.R.2 2013 QCCS 1489. It must be noted that an appeal of this judgment has been filed with the Court of Appeal under number 500-09-023539-133.3  B.R. 83, at page 88, referring to Landry Pulpwood Co. v. Banque Canadienne Nationale,  S.C.R. 605, page 615.4  3 S.C.R.3
Limits of the deemed trust created under provincial tax legislation
In its judgment in the case of Banque Nationale du Canada v. Agence du Revenu du Québec, 2011 QCCA 1943, issued on October 21, 2011, the Court of Appeal of Quebec discussed two grounds of dispute that might be of interest to the hypothecary creditors of tax debtors when the tax authorities rely on provincial statutory provisions pertaining to deemed trusts, namely : the limits of the scope of the deemed trust; and the estoppel.
The Partnership and the Independent Patrimony of its Partners: the Bankruptcy of Ferme C.G.R. Enr. S.E.N.C.
On April 16, 2010, the Quebec Court of Appeal issued a judgment concerning the right of a general partnership (“S.E.N.C.”) to file for assignment under the Bankruptcy and Insolvency Act without its partners having also filed for the assignment of their assets, themselves.By responding affirmatively to this question, the Court has not only rejected the long-established practice of the Superintendent of Bankruptcy, but went further and affirmed the independent character of the patrimony of the S.E.N.C. with respect to that of the partners as individuals. The Court therefore distinguished earlier jurisprudence, based on the Civil Code of Lower Canada, which had decided that in the absence of a legal personality, a partnership may not own assets, its property being divided between the partners.