Cancellation of fixed term contracts

The promulgation of the Consumer Protection Act 68 of 2008 (“CPA”) on the 31^st March 2011 has been a revolutionary legislative stride towards comprehensively protecting the rights and consumer interests of the South African consumer and  provides more structured and substantially enhanced access to consumer protection mechanisms to the legally uninformed. It has been argued though, that certain of these landmark features might have serious and unforeseen consequences and impede as much on the rights of the supplier and the sanctity of contract as it provides protection to consumers.

(2) If a consumer agreement is for a fixed term—

• The consumer and the credit provider would have entered into a fixed term agreement for a maximum duration of 24 months (unless the consumer expressly agrees to a longer period and the credit provider can prove a demonstrable financial benefit) as per section 14(2)(a) and Regulation 6(1) the regulations to the CPA. As such, the duration of a fixed term agreement which falls under the ambit of s14 is limited;

• A consumer may cancel the agreement upon expiry of the fixed term, without penalty or charge, provided that the consumer has paid all that is owing to the credit provider at such a date of cancellation – this is particularly relevant for certain agreements, as it eradicates the instance of indefinite automatic renewal of fixed term agreements of long duration but introduces a situation where an agreement is renewed on a month-to-month basis pending cancellation by the consumer and, subject to material changes as notified by the supplier;

• A consumer may cancel a fixed term agreement at any time by giving the credit supplier 20 business days’ notice in writing. Take note that no reason need be provided by the consumer for the cancellation;

• If the consumer opts to cancel the fixed term agreement as aforementioned the consumer remains liable to the supplier for any amounts owed to the supplier in terms of that agreement up to the date of cancellation and the supplier may charge the consumer a reasonable cancellation penalty;

• What is considered ’reasonable’ in light of a reasonable cancellation penalty is dependent on a variety of factors included in the Regulations to the CPA. These are of limited application as they refer mainly to particular contract clauses regarded as contra bonos mores and do not specifically include indicators as to what is ’reasonable’ relating to the calculation of a cancellation penalty. It seems that we will have to wait for this section to be litigated on before this will become clear but it is submitted that what is reasonable will depend on a variety of factors including the duration of the contract, the period of the agreement that has lapsed, the period still due to run on the agreement, the balance owing in terms of the agreement, the amount already paid in terms thereof etc. The aforementioned will make it particularly difficult for a supplier to inform a prospective consumer of his or her obligations upon cancellation;

• A supplier is also entitled to cancel the fixed term agreement before expiry of the duration of the contract on similar terms to the process prescribed for cancellation by the consumer in that the supplier may provide 20 days’ written notice to the supplier BUT only upon the consumer’s material failure to comply with the agreement, unless the consumer has rectified his or her failure within such time. Exactly what type of breach a court will consider materially sufficient for the invocation of this section remains to be seen. Again, it seems, we will have to wait for litigation on the issue before its application is crystallised. Another sensational piece of Parliamentary drafting on the seemingly baffling area of credit and consumer law (sarcasm added);

• Further, not more than 80 days and not less than 40 days prior to the expiration of the fixed term agreement, the supplier must notify the consumer in writing of the impending expiry date, including a notice of material change to the agreement if it were to be renewed or continued past the expiry date and advise the consumer of any options available to him or her.