The recent case of De Wolf v. Bell ExpressVu Inc.,  O.J. No. 3548 is an excellent reminder to creditors of the dangers of charging an administration fee for late payment. This case held that the administration fee caused the creditor or service provider to be in violation of the Canadian Criminal Code Rate of Interest of sixty (60%) percent under Section 347. The case followed the Supreme Court of Canada's decision in Garland v. Consumers' Gas Co.,  3 S.C.R. 112 ("Garland"), which came to a similar conclusion. This is of particular importance to our U.S. clients where charging administration fees is common practice, or to our clients who bill for their services on a monthly basis and charge an administration fee for late payment.
Peter De Wolf ("De Wolf") entered into a standard form contract for satellite television services with Bell ExpressVu Inc., Bell ExpressVu L.P. (collectively, "Bell"). De Wolf was billed on a monthly basis for services in advance. Payment was due 25 days following the date of the invoice. Interest was charged on an unpaid account five days after the payment was due. In addition, an administration fee (the "Fee") was levied in the event that an account remained unpaid for 60 days, (being 35 days after the due date). Should the payment remain outstanding, services were "soft" disconnected on day 75, and at day 105, the services were deactivated and a deactivation fee of $50 was levied.
De Wolf argued that the Fee constituted interest and was, therefore, in contravention of Section 347. Bell argued that the Fee constituted a genuine pre-estimate of the costs associated with collection and management of an overdue account. While Justice Parell agreed with Bell as to their explanation of how the amount of the Fee was calculated, he found that such a determination did not answer the question of whether the Fee constituted interest. In calculating the Fee as interest, he held that the Fee was in contravention of the sixty (60%) percent interest rate prohibited in Section 347.
The court found in favour of De Wolf. It held that the Fee constituted interest and was, therefore, in contravention of Section 347 and accordingly was unenforceable.
Contravention of Section 347 requires "an agreement or arrangement to receive interest at a criminal rate". A "criminal rate" means "an effective annual rate of interest…that exceeds sixty per cent on the credit advanced…" and, as Justice Parell paraphrased, "credit advanced" is money and the monetary value of any goods, services or benefits actually advanced or to be advanced under an agreement or arrangement minus any fees, commissions or similar charges incurred by the creditor, and "interest" is a charge paid under an agreement or arrangement by a person to whom credit is advanced for the advancing of credit, exclusive of the repayment of the credit advanced.
Paring the analysis down, Justice Parell determined that the following questions needed to be answered. First, was the Fee a charge? Second, if so, (a) was the charge paid under an agreement or arrangement; and (b) was the charge, in substance, a cost incurred by a debtor to receive credit under an arrangement? The answer to the first question and part (a) of the second question required little analysis as it was clear on its face that the Fee was a charge and that it was paid under an agreement.
In respect of part (b) of the second question, Justice Parell relied on Garland and Justice Major's explanation that (a) an agreement to defer payment of the amount due under an agreement for goods or services constituted an agreement to advance credit, and (b) the charge imposed by the agreement as the price for the deferral of payment constituted the interest.
Bell argued that there was no agreement to extend credit, instead, that they were pursuing contractual rights to enforce a breached contract. However, Justice Parell disagreed, relying on the payment cycle. He stated that, despite payment being overdue, De Wolf would have had the benefit of the services from day 60, when the Fee was levied, to day 75 when the "soft" disconnection was to occur, and that such an arrangement allowed De Wolf to delay payment for the services without losing the benefit of the services during the 15 day period. Therefore, the arrangement had the appearance of an advance of credit in return for paying the interest and the Fee, and not the enforcement of a breached contract.
Clients who charge an administration fee need to be careful that the structure of the fee is not such that it would result in a violation of the Canadian Criminal Code Rate of Interest. Our firm practice has been to avoid these fees and levy a higher interest rate, than would otherwise be changed, in respect of late payments. It should be noted that NSF fees and similar charges are not caught by this provision. It is also common practice to charge a percentage of the payment as a late fee. For the reasons set out above, this practice is very dangerous and would likely cause that portion of the contract to be held unenforceable.