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Feb 06, 2004


Ed Maldonado, Esq.

Dear Legal Line,
I'm a reseller out of San Diego, CA and have group of prepaid calling card providers who regularly used to buy from me because of my rates and reliability of service. I have been in the business since the late '90s and am no virgin to the telecom game. About 8 months ago I entered into a contract with a company that had a few direct routes that seemed to be in high demand. I tested the routes first for termination and quality like I do for all my resold routes. They appeared to be all VoIP routes and the tests all came back with good quality and termination. I began to market the routes along with my other services and mentioned to a number of my clients that the quality seemed really good. They bought and we began giving them service. The first two months went well. There were a few problems but nothing really big or really out of the ordinary that I had not encountered before.

Then in the 2nd week of October the whole thing really started to unravel. The quality took a dive, calls were dropping and I personally had problems getting thru when I tested. It was the old fast busy ring. I called the carrier and they said it was a technical problem that would be resolved in the next day. This also happened to be the day when the next prepayment was due. Now that I look back I shouldn't have sent the money but I did. I was worried that the problems would not be attended to or resolved immediately. Also, I knew in my carrier service contract there was a limitation clause related to the quality of service. By the end of that week the quality was even lower. My clients started to jump and canceled out of the route thru me. They told me they just did not want to risk consumer complaints and I didn't blame them. The problem was that many of them took all their business with them. It took another three days to get everyone that cancelled off the route and by then my prepayment/deposit/money was gone.

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Of course, I went back to the carrier who is also out of California. They apologized (sort of) about any confusion but just repeated the clause in the contract about the warranty and the limitations of liability being restricted, and no punitive or lost profits. They know that I'm not in the best financial position right now to fight them because of this. I also am not sure that if I do that I'll get any $$$ back. I have used that same type of clause to block claims against me in the past and I that it works. So what's the story here, am I screwed or not?

- “Can You Hear Me Now”

Dear “Hear Me Now,”

Voice quality problems are an area of the industry where technology, telecom and contract law all bump squarely into one another with no clear benefit to the reseller. First, a brief discussion about the basics of contract law, and theories, before applying it to telecom. In general, contract law allows the contracting parties to opt into, or out of, future events, standards of acceptability, and damages, should a problem arise. These kinds of limitations can generally be accomplished through clauses regarding a Warranty, the Limitation of Liability, or through a clause restricting the definition of services and terms of acceptance.

A warranty is a representation made at the time of contract by a seller as to the quality or title of the goods or services to be provided. It applies to what the buyer was supposed to have contemplated or know about, in terms of quality; at the time he or she gave final acceptance to the contract. Once the buyer accepts the warranty both the buyer and the seller are held to it. The law recognizes two basic types of warranties: those specifically expressed in the contract (an Expressed warranty), and those implied in the contract by virtue or nature of the goods or services (an Implied warranty). An Implied Warranty must be waived by the seller, preferably in writing, at the time of contract. This is because the parties are required to have privity in order to waive the warranty. You may also see this in a number a clauses relating to either Implied Warranties of Merchantability or for a Particular Purpose, and is common in many carrier service contracts.

A Limitation of Liability is a pre-agreed damage limitation that is contemplated by the parties prior to the contract. Damages are the operative words here. The clause is based upon the Economic Loss Rule, a legal principle wherein the parties may limit future damages as a term of the agreement. The parties must mutually agree to this limit from a vantage of equal bargaining power — nothing fraudulent being with held or intended by one or the other at the time of the agreement. Clauses related to a limitation of liability will speak of damages (punitive, consequential and lost profits) that a distressed party may seek in the occurrence of a contractual breach and/or in the event of business tort. Business torts are wrongful or fraudulent conduct by one or the others party to the contract in the performance of the contract. Courts generally require such clauses to be in capital lettering to draw the attention of the reader so that there is no chance of refuting the clause with “I did not see it.” The courts also recognize that fraud in the inducement is a limited exception to this type of clause. In most carrier service agreements, limitations of liability are used to restrict the damages that may be claimed for service interruption or for inferior services that result in the loss of profits.

There is another type of clause that you should be aware of that is often important to your possible claims when voice quality goes bad. These clauses usually attempt to sidestep the issues of good voice quality issues by restricting the definition of “services” and the “terms” by which you accept them. Classic examples are clauses whereby you “accept any and all” services, or “all network services” that the provider has to give. The legal defense underlying this clause is that you negotiated for capacity of the provider, hence, “all services” which include those of high quality and those that may (sometimes) be of less quality. This is often advanced when you are purchasing resold data and VoIP services from the same provider. It is also common when bandwidth was at part of the “services” involved under the contract. I agree that it sounds silly, however, I have seen more than one attorney representing the provider in a contract dispute advance this contention in open court as a part of their defense that service quality was a secondary issue in the contract and no breach occurred. (The sad part was that these guys were serious.)

Now let's talk telecom contracts and voice quality problems. It sounds from your email that you have a copy of your carrier services contract in your possession. Before seeing your civil attorney, a move that I highly advise, take a brief look at the verbiage of any warranties, limitations of liability or restrictions of service in the definition or service clause. I would imagine that the warranty provision you spoke of in your email referred to either a waiver of expressed or implied warranties, and this must be specifically stated as such. If this is the case, re-read the contract to see if the contract contemplated resale of the services to eventually reach California consumers. If it is not these types of clauses, bring it to the attention of your attorney. If it is warranties of this type, I want you to give your attorney a case that occurred two years ago. Ting v. AT&T, C01-02969 BZ in the United States District Court in the Northern District of California decided on January 15th 2002 may be of particular interest. Although the crux of the case is a residential consumer class-action claim attacking the imposition of new contract terms on the consumer by long distance carriers, the rulings therein set a tone that California consumer protection laws can override provisions in carrier's contracts that apply to California consumers in certain instances.

In the case of Ting, the consumers dealt with declaratory and injunctive relief of consumers and not money damages between carriers. However, it is worth a look because it advances the premise that carrier limitation provisions can be challenged if it is known that services will be delivered to the consumers. From a public policy standpoint, there is no issue as critical to the consumer than the ability of a carrier to limit its responsibility if the quality of services delivered is crap. The Ting case also strikes to the heart of carrier warranty waivers because it applies violation of the California Consumer Legal Remedies Act to provisions in the carrier's contract that may have been lacking privity of the consumer, but that directly affect the services they were delivered. In relation to your case, this may be important because if your underlying carrier knew that your services were being supplied to California consumers, then they may have knowingly violated Consumer Protection Laws. While not an automatic slam-dunk win for your legal position, the violation of a law (even a consumer protection law) can be the source of liability that can result is the waiver being found unenforceable for the provider.

This brings up the issue of other limitations of liability under the Economic Loss rule. Have your attorney check the Ting case a second time because the case also addresses the inapplicability of the Economic Loss Rule, certain intentional conduct by the carrier. Again, the key factors here are a violation of the California Act. In your case, I think it is also important to explore any instances of fraud and fraud in the inducement to contract, as they are other exceptions to the Economic Loss Rule. A good summary of the fraud in the inducement exception is found in a Wisconsin Supreme Court decision that was ruled on this past year: Digicorp, Inc. v Ameritech Corporation, Case Nos. 01-1833 & 01-2258 decided June 3, 2003. This case involved communications providers but was more about contract law than telecom. It is, however, one of the better primers for the Economic Loss Rule I have seen in a while and important to bring up to your attorney as you are exploring any possibility that you were defrauded. If the provider knew prior to the contract that they couldn't deliver the service, or that an eventual problem would result in poor quality, then you may be able to pierce the limitation.

Finally, review the contract to see if the service description does not try to side-step quality with capacity clauses or “all and any” capacity clauses. If it does, bring it up to your attorney because he or she will likely have to prepare for a defense argument that you merely negotiated for capacity of the provider and not a specific quality from day one. Again, public policy concerns that service was bought for resale to consumer will be important to your potential claims. As always, it is important to see a qualified civil litigator who is familiar and seasoned with telecommunications and not just drafting clauses. The mere experience drafting contracts, and not prosecuting or defending claims, is not enough when it comes to voice quality controversies.

Good Luck and Success
in the Industry


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