The High Cost of Cost Indemnification: A Warning

November 16, 2022

Written By Scott Bower, David Gruber, Russell Kruger and Joshua Koop

A contractual indemnification can require the losing party in a lawsuit to pay the winning  party's full legal costs, the Alberta Court of Queen's Bench recently confirmed in Ruel v Rebonne, 2022 ABQB 486 [Ruel]. While courts only award full legal costs—called solicitor and client costs—in "exceptional circumstances," they may do so if a contract "'clearly and unambiguously' contemplates that right." Normally a Canadian court will only allow the winning party to recover of a portion of its legal costs. Ruel serves as a good reminder that while there is some uncertainty about the degree to which courts will enforce indemnities for solicitor-client costs, courts can and do enforce them.

In the underlying decision, Ruel v Rebonne, 2022 ABQB 271, the Court awarded the plaintiff, Mr. Ruel, general and aggravated damages as a result of the defendant's breach of a non-competition clause found in a share purchase and sale agreement (the Agreement). The plaintiff claimed that the Agreement indemnified him for solicitor and client costs. The defendant argued that it did not as its indemnification clause was not clear and unambiguous, applied only to third party claims and did not require a court to order solicitor and client costs.

The Court accepted the plaintiff's argument. As the Court noted, a successful party is typically awarded partial recovery of legal costs on a party and party basis as set out in the Alberta Rules of Court, but courts also have "considerable discretion in making costs awards to ensure that any award of costs is reasonable and proper under the circumstances." Courts rarely award solicitor and client costs, saving such an order for "exceptional circumstances such as intentional misconduct of a party during the litigation" or "where they are provided for by contract." In the latter case, the party claiming such costs must show that the contract "clearly and unambiguously" provides for them. In so doing, "[t]he contract must be construed as a whole and must demonstrate that the parties intended solicitor and client costs be paid in the circumstances for which they are claimed … "

The Court found that the clause indemnified the plaintiff against both third party claims and the defendant's breach. Noting that the Agreement indemnified the plaintiff against "any non-performance or non-fulfillment of any covenant or agreement," and that such indemnification included indemnification for "all costs and expenses including without limitation, legal fees on a solicitor-and-client basis," the Court found that the Agreement specifically provided for solicitor and client costs. When the defendant breached the Agreement's non-competition clause, the plaintiff suffered a loss. Limiting the clause's applicability to third party claims would render meaningless the words "of which the Purchaser or the Corporation may suffer or incur as a result of, in respect of or arising out of ... " found at the beginning of the indemnity clause. In the result, the Court found the entitlement to solicitor and client costs was clear and unambiguous.

In concluding its judgment, the Court noted that notwithstanding a contractual entitlement to solicitor and client costs, it could still exercise its discretion to award costs on another basis "if the circumstances warrant." Examples of factors that are relevant here include the conduct of the litigation, the degree of success achieved and any offers exchanged during the litigation. On the facts, the Court found no basis for disturbing the plaintiff's contractual entitlement to solicitor and client costs.

Ruel reminds us that parties can provide for a contractual indemnity for solicitor and client costs, and that courts will, in their discretion, enforce such a provision if it is clear and unambiguous. Ruel provides an example of language that the Court agrees provides for solicitor and client costs, should that be desired by those drafting contracts. Parties should carefully review any indemnity clauses to ensure that their breadth and scope corresponds with the parties' wishes. The more expansive the indemnity protection desired, the more clear and unambiguous the clause should be.

While the issue did not arise in Ruel, in contracts where the parties have provided for arbitration to resolve some or all disputes between, the situation is different. In these cases, costs are generally awarded on a full indemnity basis regardless of whether the parties have included a contractual indemnity, since arbitrators generally favour providing full indemnification to the successful party.

If you have any questions about the decision, please contact the authors.

Authors