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Enforceability of Indemnity Clauses for Solicitor Client Costs

Enforceability of Indemnity Clauses for Solicitor Client Costs

Many contracts, commercial or otherwise, often contain an indemnity clause that puts an onerous costs obligation on a losing party in a contractual dispute. Specifically, such clauses typically state that if one party has to take steps to enforce the agreement and are successful in doing so, the other party is liable for the winning party’s solicitor client costs.  The rationale behind such a clause is to deter frivolous objections to upholding one’s end of the contractual bargain. If a party has to pay the other side’s lawyer in the event a dispute turns litigious, perhaps that party will be more likely to reconsider the strength of its position at the outset.

In general, the starting principle in respect of costs awards arising out of litigation is that the losing party pays the winning party for at least a portion of their costs unless otherwise ordered. Absent a contractual agreement between the parties concerning costs, the Court awards what is commonly referred to as party-party costs. These costs are meant to represent some portion of the money the winning party actually spent on the litigation. These party-party costs are based on a Schedule in the Alberta Rules of Court which sets out a tariff of fees contingent upon how much the claim was worth and what steps were taken. The Court retains a great deal of discretion in respect of the Schedule to determine what are “reasonable and proper” costs and may depart significantly from the Schedule in any event. A party’s conduct (or misconduct) during the litigation will often dictate the awarding of costs.

However, while “loser pays” is the starting principle, in reality, a step may have cost the winning party an amount much higher than what the tariff has allotted to engage a lawyer to do the drafting, consult about the matter, etc. Therefore, for a winning party, the prospect of the losing party having to pay their actual lawyer fees is very attractive. Again, absent a contractual right, solicitor client costs are only awarded by the Alberta courts in exceptional circumstances of fraud or where there has been serious misconduct by a party during the litigation.

Therefore, to deter frivolous claims or defences or to add some level of costs certainty, many parties insert a costs indemnity clause into their contracts. However, to what extent will the Alberta courts uphold and enforce such contractual obligations concerning costs?

The Alberta Court of King’s Bench recently discussed this issue in Ruel v. Rebonne12022 ABQB 486. In that case, the Share Purchase and Sale Agreement contained an indemnification clause that contractually entitled the Purchaser to their solicitor and client costs in the event the Vendor was liable for non-performance or non-fulfillment of the agreement. The Vendor was found liable to the Purchaser for breach of contract and the Purchaser sought their costs of the litigation on a solicitor client basis. 

The Court reviewed the indemnity clause and found that there was a clear and unambiguous entitlement to solicitor and client costs in these circumstances. It was found that protection for the Purchaser in the form of such an indemnity clause when it had made such a substantial investment was consistent with the purpose and intent of the Agreement as a whole. 

The Court noted that when it comes to claiming a contractual right to costs on a solicitor and client basis, the contract must “clearly and unambiguously” contemplate that right in order for such a clause to be enforced. Given that solicitor client costs are typically reserved where conduct has been egregious, the Court takes a close and critical view of clauses that seek to place such a burden on a losing party. 

The Court always retains a great deal of discretion when it comes to costs and is free to “…exercise…discretion and award costs on some other basis if the circumstances warrant.” (Ruel, supra). Therefore, it is always open to the Court to not enforce a contractual clause entitling a party to solicitor client costs. This discretion is evident in another recent Alberta Court of King’s Bench decision, Suri Holdings Inc. v. Jung22022 ABKB 714. Here, the lower court did not enforce an indemnity clause in a lease agreement that saw the landlord being entitled to solicitor client fees for a breach. On appeal, the Alberta Court of Appeal upheld the decision and noted that: 

“Trial courts have wide discretion in choosing how costs are awarded in any given case. They are not bound by any contractual arrangement between the parties. The existence of a contractual term governing costs is a significant relevant consideration but does not oust the Court’s discretionary control over the award of costs after litigation.”

As a result, in order to ensure an indemnity clause concerning solicitor client costs has the best chance of being enforced, it is critical to ensure it is drafted as clearly and unambiguously as possible. Beyond that, it is left up to the Court’s discretion.

Given the large discretion afforded to the Court on costs awards, potential litigants should always be mindful of the risks of receiving limited or no costs in an Action, even when there is a clear indemnity clause. Generally, the pursuit of costs should never be the predominant motivating factor in commencing a lawsuit.

  • 1
    2022 ABQB 486
  • 2
    2022 ABKB 714
*This update is intended for general information only on the subject matter and is not to be taken as legal advice.

Posted: December 9, 2022

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