Legal Drafting Tip: Payment of Costs and Expenses

Thursday, July 30, 2015       By Tilly Gray

This clause is intended to confirm who pays the costs and expenses[1] that parties incur in connection with an agreement.

While there are common practices in certain industries,[2] it is typical to specify whether each party is responsible for[3] their own costs and expenses or whether one party shall pay the costs and expenses of another party.[4] Consequently, the scope of what costs and expenses are included is paramount and should be drafted with some detail in order to avoid any ambiguity.

The Boilerplate Agreement includes the following clause:

[Except as set out in section • (•)/this agreement, ]Each party is responsible for all costs and expenses (including legal fees) that it incurs in connection with the preparation, negotiation, execution, and delivery of this agreement[ and the other Transaction Documents/and any other document entered into or delivered under [this agreement/the Transaction Documents][ and the consummation of the transactions contemplated thereunder]].

You should identify any provisions of the agreement that shift responsibility from one party to another, and specifically carve out any exceptions at the beginning of the clause.

The language above intentionally refers only to the “preparation, negotiation, execution, and delivery” of the agreement and provides the option to include “the consummation of the transactions”[5] but it does not extend to the enforcement of the agreement, which is a far more complex matter. (For example, the scope of the costs and expenses addressed in this clause should not be confused with those that may be incurred by parties involved in litigation or arbitration.)

Generally, if the scope of your clause extends beyond that of the language above, the costs and expenses that may be incurred may be complex enough to warrant defining certain terms in the agreement to avoid potential disputes.[6] Specifically, if the scope of your clause extends to include enforcement of the agreement, consider whether it should be paired with an indemnity (typically, the party in breach of its obligations under the agreement indemnifies the non-breaching party for all costs and expenses related to the breach)[7] and on what basis it would be appropriate for costs to be awarded.[8]

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[1] For a discussion on the use of each of the terms “costs” and “expenses” and the phrase “costs and expenses” in contracts, see Ken Adams’ blog posting entitled “Costs and Expenses” on www.adamsdrafting.com.

[2] For example, in commercial loan agreements, the borrower or debtor typically pays its costs and expenses as well as those of the lender or secured party. In that case, consider the following language used in our precedent security documents, which extends to capture perfection and enforcement: The Debtor shall pay all costs and expenses (including legal fees, if applicable, on [a substantial indemnity/•] basis) that it and the Secured Party[, or its agents on its behalf,] incur in connection with the drafting, negotiation, execution, delivery, perfection, (including those incurred for registration costs of any financing statement registered in connection with the Security Interest) and enforcement of the Secured Party’s interest under this agreement, which will be paid immediately upon demand and form part of the Obligations.

[3] The phrase “is responsible for” converts the provision from the language of obligation to the language of policy. Parties likely have no interest in whether the other parties actually pay for their own expenses. only that they are not responsible for them. Note that the provision does not state “is solely responsible for,” since that would be redundant. See Ken Adams’ blog posting entitled “Is Responsible For” on www.adamsdrafting.com.

[4] Cynthia L. Elderkin & Julia S. Shin Doi, Behind and Beyond Boilerplate: Drafting Commercial Agreements, 3d ed (Toronto: Thomson Carswell, 2011) at 154.

[5] In the context of M&A, the parties typically extend the scope to include reference to the “consummation of the transactions” contemplated under the agreement. However, if this “catch-all” is included in other contexts, consideration must be given to whether it is in your client’s best interests to include such non-specific language.

[6] In Newfoundland Telephone Co v CANAC International Inc, the disputed provision was not drafted well enough to include the full range of expenses that could arise, including those that were actually foreseen by the parties. It permitted one party to cancel the contract provided it paid the other party certain expenses associated with cancelling the project. The other party requested that the cancelling party contribute to the cost of completion (in accordance with an internal memo explaining the intent of the contract). The cancelling party refused and the court ruled in the cancelling party’s favour stating that it “was at a loss to understand why the agreement ... did not use similarly clear language [as the internal memo] to express the desired concept”.

[7] Supra note 4.

[8] In Ontario, costs may be awarded on a partial indemnity (formerly, party-and-party), substantial indemnity (formerly, solicitor-and-client), or full indemnity (solicitor-and-his own client) basis. In British Columbia, costs are classified as ordinary, increased, and special.