Early agreement termination and reasonable termination costs
25 Oct 2023
Loadshedding and the resulting economic crises have caused serious disruptions to businesses and individuals. Due to economic pressures, many individuals and entities are forced to terminate agreements they had entered into and consequently, they find themselves being held liable for early termination costs.
What is the legal position of a party that is seeking the early termination of an agreement?
The Consumer Protection Act and its Regulations, the common law principle of pacta sunt servanda (Latin for “agreements must be kept”), along with the Conventional Penalties Act apply to and bind consumer agreements entered by parties in South Africa.
The Consumer Protection Act
The Consumer Protection Act applies to all transactions and agreements other than transactions entered into between juristic entities and commercial agreements.
Parties to consumer agreements may terminate them at any time after they have entered into an agreement by giving the supplier 20 business days’ notice in writing. The consumer remains liable to the supplier for amounts owed in terms of the agreement until the date of termination.
The supplier may then charge reasonable termination costs, taking the costs it incurred for the duration of the agreement until its termination into account.
The common law principle of pacta sunt servanda
The principle of pacta sunt servanda is central to the law of contract. If one party to a contract seeks to cancel or be released from the contract without valid legal grounds and in the absence of a clause that permits cancellation, the other party (the innocent party) is entitled to claim from the defaulting party either for the fulfilment of the contract or for cancellation and damages arising from the breach.
Damages are aimed at putting the innocent party in the position that he or she would have been in had the contract been properly performed, in essence, the innocent party may not impose a termination penalty that is disproportionately excessive compared to the loss suffered.
The Conventional Penalties Act
Similar to the common law position above, the Conventional Penalties Act requires termination penalties imposed on a party to be proportional to the loss suffered, subject to the individual merits of the prejudice suffered.
A consumer may terminate an agreement in terms of the Consumer Protection Act, but he or she remains liable for termination costs. The supplier may then charge reasonable termination costs up to the date of termination. The termination costs should not negate the consumer’s right to terminate an agreement as afforded to him by the Consumer Protection Act and its Regulations, read with the Conventional Penalties Act.
Contact an expert at Schoemanlaw Inc for your contractual needs.
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