21 Août 2017

Cancellation fees of wireless telephone contracts : class action lawsuit

Par Vinay Desai, Lapointe Rosenstein Marchand Melançon, L.L.P.


By Vinay Desai
Lawyer
Lapointe Rosenstein Marchand Melançon, L.L.P.

In January 2011, the Quebec Superior Court
(the “Superior Court”) authorized
the plaintiff, Mr. Denis Gagnon (the “Representative”)
to commence a class action lawsuit against Bell Moblité Inc. (“Bell”) concerning cancellation fees
contained in wireless telephone contracts entered into between January 1st,
2007 and June 30, 2010 with Bell. 

The Representative argued that the anticipatory
cancellation fees were illegal and contravened articles 2125 and 2129 of the Civil Code of Quebec (the “CCQ”) as well as article 8 of the Consumer Protection Act (the “CPA”).

The members of the class shared the
following:
–       
they entered into a fixed-term contract
with Bell;
–       
they then received a discount on the
purchase price of a mobile telephone;
–       
they resiliated their contracts prior to
the expiration of the contracts; and
–       
they therefore paid the amounts provided
for in the “Cancellation Fees” clause.

The Cancellation Fee clause stipulated
that the cancellation fee would be the higher of (i) $100 or (ii) $20 per month
remaining on the contract, to a maximum of $400. The Cancellation Fees clause
also provided that by selecting a fixed-term contract, the consumer agreed that
the cancellation fee was a reasonable estimate of Bell’s damages in the event
the contract is resiliated before its term. The customers had the option of an
open-ended contract, but with this contract they would not receive a discount on
the purchase price of a phone.

In total, Bell collected cancellation fees
amounting to roughly $21.3 million as a result of members of the class having
resiliated their contracts before their end.

Trial decision

The Superior Court discussed articles 2125
and 2129 of the CCQ noting that the right to resiliate is not public order;
however the class members did not waive their right to resiliate the service
contract when they agreed to the Cancellation Fees clause. The Superior Court
turned to article 2129 CCQ in order to determine the amounts the class members
owed to Bell after they resilated the contracts. The judge specifically
excluded anticipated profits from the “injury” suffered by Bell and determined
that the discount on the purchase price of a mobile phone was the injury
actually suffered by Bell. According to the data available, Bell provided an
average discount of $236 to customers who agreed to the fixed-term contracts
and found that its average claim for Cancellation Fees was $249. In other words,
the class members who paid termination fees would have paid, on average $13
more than Bell was allowed to claim under article 2129 CCQ.

As 76,225 class members paid the
Cancellation Fees, the trial judge ordered Bell to reimburse $991,316 (76,225 x
$13). The trial judge rejected arguments from the Plaintiff that the
Cancellation Fees constituted a penal clause or was abusive.

Appeal

The parties appealed the judgment from the
Superior Court and the Quebec Court of Appeal (the “Court”), led by the Judge Vézina, focused on Bell’s argument that
the Cancellation Fees clause was not abusive and should be applied as well as
the Plaintiff’s claim that the trial judge failed to take into account that
Bell’s injury decreased monthly.

Is the Cancellation Fees clause abusive?

Bell maintained that the class members
waived their right to resiliate the contract under article 2125 CCQ by choosing
a fixed-term contract – as opposed to an open-ended contract – and by agreeing
to either 12, 24 or 36-month terms. Bell asserted that this waiver results from
the fact that the class members were informed of the fees payable in the event
of early termination.

The Quebec Court of Appeal (the “Court”) dismissed Bell’s argument that
the class members waived their right to resiliate as the Cancellation Fees
clause specifically provided for the right for the members to cancel their
contract before the term. Bell’s alternative argument was that the lack of
waiver of the right to resiliate under article 2125 does not mean that the indemnity
owed for early termination must be determined under article 2129 because the
class members agreed to a predetermined indemnity by agreeing to the
Cancellation Fees clause. Bell argued that the predetermined indemnity for
early termination (i.e. the Cancellation Fees) could override or substitute the
determination of damages owed under article 2129. The Court explained that in
order for the predetermined indemnity contained in the Cancellation Fees clause
to be valid, such a clause of adhesion must not be considered abusive.

The Bell contract was clearly a contract
of adhesion and notwithstanding if the Cancellation Fees was considered a penal
clause, if the clause is considered abusive, the obligation (the predetermined
indemnity) may be reduced.

The Court explained that the resiliation
of a contract results in the liberation of future commitments and doing so
fulfills their obligations entirely. Therefore, the price of the service
provided by Bell includes its costs and its profits. The resiliation of the
Bell contract would necessarily result in it being deprived of profits it
anticipated for the rest of the term, but this loss results from the exercise
of a right and not from the failure to perform an obligation. An interpretation
of articles 2125 and 2129 led the Court to the conclusion that the legislator
intended to favour the customer over the contract or service provider and by
including post-resiliation profits in its Cancellation Fees clause, Bell
departed from law and frustrated the intention of the legislator. The effect of
the clause favoured Bell which, as a result of the resiliation, no longer
provided the service (thereby incurring costs), but pocketed the “lost” profits
from early termination. The Court determined that this reversal is to the
detriment of the consumer and therefore abusive and that the trial judge was
right to order the reimbursement of part of the Cancellation Fees collected by
Bell.

Bell’s injury decreased month to month

As regards the argument that Bell’s injury
decreased month to month, Judges Vézina and Bélanger had differing opinions.

Bell argued that the discount it provided
to customers choosing the fixed-term contract represented a marketing
expenditure aimed at attracting new customers and ensure revenue. The trial
judge decided that the discount granted on the wireless device at the time of
the signing of the customer contracts constituted the actual injury Bell
suffered and the Court agreed, but qualified this by specifying that Bell’s
actual injury is its failure to recover the investment when contracts were
terminated early.

The Cancellation Fees clause provided that
the fees decrease from $400 to $100 according to the number of months elapsed
at the time of resiliation and this was recognition that Bell’s injury
decreased over time. The Court did not agree that because Bell’s average
discount-related costs were $236, this was what it was entitled to receive
explaining that Bell’s injury caused by the resiliation of the contract
depended on when resiliation took place.

Judge Vézina explained that as Bell’s
injury decreased over time, its corresponding indemnity should be reduced
proportionately. The monthly rate paid by customers ensured Bell made a profit
as of the first month, enabling it to recover a part of its discount-related
costs every month, month after month. In the Court’s view, Bell’s injury
decreased in equal proportions from month to month and this is the basis on
which the overpayment should be calculated.

Taking into account an event and proportionate
rate of reduction of Bell’s injury, Judge Vézina concluded that there was an
overpayment from the class members amounting to approximately $10 million as
opposed to the roughly $1 million the trial judge determined.

However, Judge Bélanger did not share
Judge Vézina’s conclusions on the overpayment explaining that the monthly rates
do not reflect amortization and Bell did not recover the discount provided to
customers through the monthly rates, which were all the same for all class
members.

Ultimately, the Court dismissed both
parties’ appeals and upheld the damage award of approximately $1 million in
favour of the class members.

An important takeaway
from this decision is that the Court upheld the notion that a consumer’s right
to resiliate a contract under article 2125 CCQ is not waived where there is an
early termination fee. Moreover, the right to resiliate a contract without
cause does not necessarily trigger the application of article 2129 CCQ; the
parties may determine the damages in advance. However, an agreed-upon and
quantified anticipated injury (i.e. the early termination fee) can be set aside
if it is considered abusive. In this case, the Court determined that the
Cancellation Fee was abusive as it claimed post-cancellation profits beyond what
it was owed. The amount contained in the Cancellation Fee was set aside and
substituted with an amount calculated by a analysis of article 2129 CCQ.

This decision can be found here.

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