When friends, or people who know each other outside of business, enter into contracts together, they may do so because of a belief that business with friends or acquaintances is easier than traditional methods. With loans, it may be true that in many situations an agreement may be made more quickly than through traditional methods, and perhaps interest rates are more favourable for the borrower. However, a recent decision from the Court of King’s Bench of Alberta highlights the fact that these informal agreements can be difficult to enforce, similarly to contracts prepared by the parties. In cases involving loans and significant financial investments, these informal agreements may lead to issues when it comes to debt collection for the lender. Disagreements over the terms of a contract can also lead to litigation, which strains not only relationships, but can impact the financial and mental health of those involved.

Creative approach to loan terms proves to be ineffective

In the matter of Uhl v Ostergaard, the borrower respondent, “RU”, was looking to purchase a skid steer in 2015 for the price of $38,500. However, he chose not to pursue traditional financing and instead entered into a loan agreement with his friend and lender applicant, “BO”. RU had paid a $12,500 deposit but required an additional $26,000 to close on the deal. BO was not prepared to simply lend the money to RU, but agreed to take ownership of the skid steer himself by paying cash to close the sale. RU would then take ownership of the skid steer and would work off the $26,000 he owed to BO. The work being done was related to houses that BO was building. According to the terms of the agreement between the parties, the first 16 hours of the week that RU worked would go towards repayment of the loan, and he would be paid wages for any hours beyond the minimum 16.

The contract was prepared by BO and stated that if the agreement was terminated by either party prior to the loan being paid back in full, the skid steer would be sold. From the proceeds of the sale, BO’s investment less the value of work credits to that point would be paid back first, followed by RU’s deposit. If any money was left over, it would be divided between the parties.

In March 2018, BO terminated the agreement because RU had defaulted on payments. At the time of the termination, RU owed $4,000 on the skid steer. However, RU claimed that he had worked enough hours to take ownership of it and refused to hand it over to BO. According to the Court, this action meant that the “fight was on.”

Arbitrator sides with lender

RU was initially successful in arbitration, but after a decision was rendered, it was discovered that the arbitrator had miscalculated the work credits RU had earned. As such, it was declared that RU had not actually worked off sufficient credits to entitle him to ownership of the skid steer. Under the contract, the parties had agreed that the successful party in arbitration would be awarded full indemnity costs. BO, who was ultimately the successful party, had incurred legal costs of $104,927.92. However, the arbitrator awarded over $100,000 to RU and his company for both compensatory and punitive damages. This decision was appealed and, upon review by the Court, was sent back for review by another arbitrator.

When the matter came before the Court again, it was ultimately determined that RU had not earned sufficient credits to entitle him to obtain ownership of the skid steer. As such, there was no basis for RU’s claims for compensatory or punitive damages. This meant that ownership of the skid steer remained with BO. Accordingly, the Court ordered the skid steer to be sold and the proceeds split between the parties as per the terms of the contract.

Reprehensible conduct results in substantial costs award

By this time, BO’s legal costs had reached a staggering $257,846.60 and he sought full indemnity from RU. He told the Court that even if the contract did not provide for full indemnity costs, he was entitled to them because of the unreasonable positions that RU had taken over the course of litigation. RU argued that if costs were awarded, it should only be for the latest appearances before the Court and not for previous arbitration, which amounted to approximately $8,000.

The Court found that, during the course of litigation, RU had opportunities to avoid liability for costs by accepting various settlement offers from BO. Instead of accepting a settlement deal, RU demanded over $1,000,000 to resolve the claim. The Court found RU’s behaviour during the court appearances to be reprehensible, citing an instance where he accused an expert, who provided a report on work credits corrupt, and his presentation, as being fraudulent. The Court wrote that “while I have sympathy for Mr. Uhl in terms of the toll this litigation took on his physical and mental health, this repeatedly unacceptable behavior must have cost consequences.”

Ultimately, this conduct played a role in the Court’s decision when it came to awarding costs. The Court determined that RU and his company were responsible for paying the full legal costs incurred by BO, as well as the $31,657.04 incurred to prepare and obtain the expert report.

Let the Commercial Litigation Lawyers at DBH Law Help You Resolve Contract Disputes and Recover Unpaid Debts

The skilled collections and commercial litigation lawyers at DBH Law in Calgary have decades of experience advising clients on commercial disputes and litigating on their behalf in order to recover funds owed. We work with clients to develop a practical and cost-effective strategy in order to minimize risk and avoid expensive litigation when possible. To learn more about how we can help you, contact us online or by phone at 403.252.9937.