Cancelling fixed term contracts – The Consumer Protection Act

Contract Cancelation
07 Jan 2013

Cancelling your fixed term contract could easily turn into a nightmare. Is it even possible to cancel a contract without unreasonable cancellation fees? Let’s look at what the CPA (Consumer Protection Act) says about fixed term contracts?

Section 14 together with Regulation 5 of The CPA essentially addresses the fixed term contract and provisions such as: the period of a fixed term contract, the cancellation of a contract as well as its requirements.

Regulation 5 (1) of the CPA provides that the maximum period for fixed-term consumer agreements is 24 months from the date of signature by the consumer unless:

  • Such longer period is expressly agreed with the consumer and the supplier can show a demonstrable financial benefit to the consumer
  • Differently provided for by regulation in respect of a specific type of agreement, type of consumer, sector or industry;
  • Provided for in an industry code contemplated in section 82 of the Act in respect of specific type of agreement, type of consumer, sector or industry.

Regulation 5(1)(a) specifies that if a consumer agrees to a fixed term contract over the regulated 24 month period, such a contract should only be entered into if it will be of a financial advantage to consumer. The supplier MUST demonstrate such an advantage to the consumer.

Section 14(2) of The CPA addresses cancellation of fixed-term contracts prior to expiry. This provision allows the consumer to cancel a contract by giving the supplier “20 business days’ notice in writing or other recorded manner and form,” please take note of the requirement that a cancellation MUST be in writing or a recorded form. On cancellation of a contract, a consumer is liable for all outstanding amounts owed in terms of that agreement (Section 14 (3) a). For example if a consumer cancels his or her gym membership contract in March but has defaulted on January and February membership fees, on cancellation of this contract he or she will be liable for outstanding membership fees for these two months as well as the cancellation clauses that he or she has agreed to when signing the contract.

Section 14 (3) b (i) allows the supplier to charge a consumer a “reasonable cancellation penalty” when a consumer cancels a contract prior to its expiry. Regulation 5 (2) of The CPA describes the criteria that must be taken into account when determining a “reasonable cancellation fee”. They are the following:

(a) The amount which the consumer is still liable for to the supplier up to the date of cancellation;

(b) The value of the transaction up to cancellation;

(c) The value of the goods which will remain in the possession of the consumer after cancellation

(d) The value of the goods that are returned to the supplier;

(e) The duration of the consumer agreement as initially agreed;

(f) Losses suffered or benefits accrued by consumer as a result of the consumer entering into the consumer agreement;

(g) The nature of the goods or services that was reserved or booked;

(h) The length of notice of cancellation provided by the consumer;

(i) The reasonable potential for the service provider, acting diligently, to find an alternative consumer between the time of receiving the cancellation notice and the time of the cancelled reservation; and

(j) The general practice of the relevant industry

Regulation 5 (3) of The CPA further provides that suppliers cannot “charge a consumer a charge that would have the effect of negating the consumer’s right to cancel a fixed term consumer agreement as afforded to the consumer by the Act”, simply meaning that the cancellation charge cannot be exorbitant or render cancellation of the contract more of a financial burden than a long-term relief from a contract.

Section 14 (2) c further requires that the supplier MUST supply the consumer with notice in writing or any other recordable form that such a contract will be expiring shortly. Suppliers are required to give such notice not more than 80 days or not less 40 business days from the date of expiry of such a contract. Please take note of the following that MUST be supplied in writing or any other recorded form to the consumer:

(a) The impending expiry date;

(b) Any material change that would apply if the agreement is renewed or otherwise continued beyond the expiry date;

(c) That the agreement will be automatically continued on a month to month basis unless the consumer expressly directs the supplier to terminate the agreement on the expiry date or agrees to a renewal of the agreement for a further fixed term.

Section 14 of The CPA has a fundamental role in any fixed-term contract (these are essential provisions that a consumer must be aware of when signing a gym membership or any telephone or mobile contract).

Lastly if you concluded a fixed-term contract prior to the release of The CPA, do not despair, you may still find some protection in Schedule 2 of The CPA. (Section 3: Application of Act to pre-existing transactions and agreements), this section basically provides that certain provisions of the CPA shall apply to pre-existing agreements between suppliers and consumers in the following instances:

  • Where the pre-existing agreement would have been subject to the CPA if the CPA had been in effect at the time the agreement was made; and
  • Where the supplier and consumer are bound for a fixed term until a date that is on or after the second anniversary of the general effective date (general effective date is: 1 April 2011).

(Please take note of the table in Schedule 2 of Section 3 of The CPA, it provides the extent of application of certain sections of the Act.)

The following articles about the cancellation of agreements may also interest you:

(This article is provided for informational purposes only and not for the purpose of providing legal advice. For more information on the topic, please contact the author/s or the relevant provider.)

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