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Fixed-Term Agreements – A Deal With The Devil?

Contract Law

Fixed-Term Agreements – A Deal With The Devil?

Francois has had it with his cellphone service provider. He feels unappreciated as a client and advises that the service is just shocking. He approached the provider and advised then that he wanted to cancel the agreement but was advised that the said agreement is in fact a 24-month fixed agreement and that he could cancel it only after the expiry of the term. Francois is livid and has decided to approach an attorney for thorough advice on what his rights are and if he can proceed to cancel the agreement.

Fixed-term agreements

A fixed-term agreement is an agreement to which the term is expressly agreed upon. This means that agreements that renew on a month-by-month basis do not apply, but that Francois’ cellphone contract that has an agreed duration of 24 months- is a fixed-term agreement.
The regulations to the Consumer Protection Act, 68 of 2008 (the CPA), sets the maximum period for a fixed-term agreement at 24 months from the date of signature by the consumer. The act stipulates that a longer period may be expressly agreed upon, but that the supplier must in such cases be able to demonstrate that there is a financial benefit to the consumer.

The consumer protection act on cancellation

The good news for Francois is that the CPA does indeed allow for the cancellation of any fixed term agreement. This is provided for in section 14(b) of the Act, which provides that a consumer may cancel a fixed term agreement as follows:

  • “(aa) upon the expiry of its fixed term, without penalty or charge, but subject to subsection (3)(a); or
  • (bb) at any other time, by giving the supplier 20 business days’ notice in writing or other recorded manner and form, subject to subsection (3)(a) and (b)”

Francois is thus able to cancel the agreement with his cellphone company, giving the company 20 business days’ notice of such intended cancellation.
Subsection 3(a) however is applicable to such cancellation and provides that the consumer will remain liable for any amounts that are due to the supplier at the time of cancellation and that the supplier may levy a cancellation penalty that is reasonable.
This means that if Francois cancels his cellphone contract on 5 February for example, he would be liable for payment for the month of February, as well as a reasonable penalty for cancellation. The term “reasonable penalty” is however open for interpretation and many industries have taken to the ombuds or the like to advise on what would be an acceptable penalty for cancellation of a fixed-term agreement.

Regulation 5 provides that a reasonable charge should be calculated taking certain factors into account, these factors are:

  1. the amount which the consumer is still liable for to the supplier up to the date of cancellation;
  2. the value of the transaction up to cancellation;
  3. the value of the goods which will remain in the possession of the consumer after calculation;
  4. the value of the goods that are returned to the supplier;
  5. the duration of the consumer agreement as initially agreed;
  6. losses suffered or benefits accrued by the consumer [sic] as a result of the consumer entering into the consumer agreement; (g) the nature of the goods or services that were reserved or booked;
  7. the length of notice of cancellation provided by the consumer;
  8. 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
  9. the general practice in the relevant industry.

There is thus no exact amount stipulated that constitutes a reasonable penalty, and such penalty will have to be decided or disputed on a case-by-case basis.

The Consumer Goods and Services Ombud, has published an advisory note, being note 12, regarding the cancellation of agreements which gives good insight as to how a cancellation penalty must ideally be calculated. Pages 26 to 31 specifically deal with cell phone contracts and reading this portion especially may be insightful to Francois’ situation.

Are all fixed-term contracts capable of cancellation?

Almost all fixed-term contracts are capable of cancellation thereof in terms of section 14 of the CPA, barring agreements with banks. Regulation to the CPA as published on 27 June 2011 specifically exempts all banks from the provisions of section 14 of the CPA. It must however be noted that agreements with banks are capable of cancellation, such cancellation will just not be done in terms of the CPA, but rather in terms of either the agreement itself or other applicable case law.

Practical Implications

How does Francois actually go about cancelling his cell phone contract in terms of the CPA? Francois is best advised to write a cancellation letter to the company with whom he contracted advising of this intention of cancelling the agreement in terms of the CPA and noting that he gives notice of 20 days, as anticipated by the act. This must be submitted to the company in terms of the agreement or by attending the company offices itself. Francois must obtain clarity regarding any potential penalty and thereafter he will be fully advised whether the cancellation will be in his best interests.

The Consumer Protection Act provides for a myriad of consumer relief measures, and should you be faced with any such issue, it is best to discuss your legal recourse with an attorney who has a full knowledge and understanding of the working of the act. Please contact our offices for advice in this regard, or have a look at the various articles on our blog regarding the CPA which may be of assistance or interest to you.

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