5 Q&A’s on Termination of Fixed Term Agreements

5 QUESTIONS TO HELP YOU BETTER UNDERSTAND EARLY TERMINATION OF FIXED TERM AGREEMENTS AND THE PENALTIES INVOLVED

The legislation that governs fixed term agreements is the Consumer Protection Act, 68 of 2008 (the “CPA“), which must be read together with the Consumer Protection Regulations (“the Regulations“). The specific section concerning fixed term agreements is section 14 of the CPA, which you can access by following this link https://www.gov.za/sites/default/files/32186_467.pdf.

This article aims to provide some clarity on the legal position relating to the early termination of fixed term agreements and the penalties allowed by the CPA.

1.  WHAT IS A FIXED TERM AGREEMENT?

The CPA does not define fixed term agreements. However, the phrase presumably refers to agreements between a supplier and a consumer that will carry on until a date specified in the agreement or for a specified time period. This means that if your agreement states a specific end date (i.e. 26 March 2020) or provides a determinable date (i.e. for one year) it will be classified as a fixed term agreement.

Some common examples of fixed term agreements are:

• Cell phone agreements,
• Gym memberships, and
• Lease agreements.

The Minister of Trade and Industry is responsible for setting the maximum duration of a fixed term agreement. The current maximum period is 2 (two) years from the date the agreement is concluded.

2.  WHO CAN TERMINATE A FIXED TERM AGREEMENT EARLY?

Simply put, if you can enter into a fixed term agreement the CPA gives you the right to terminate that agreement earlier than was initially agreed. This is the case, regardless of whether you are the consumer or the supplier of the respective goods and/or services. However, you should be aware of certain qualifications that apply.

The first qualification is that a juristic person (i.e. a company or other business enterprise) is only entitled to cancel the agreement early if they entered into the fixed term agreement with a consumer. This means that section 14 of the CPA does not affect agreements between companies or other types of business entities.

3.   HOW DOES EARLY TERMINATION WORK?

A supplier’s right to terminate a fixed term agreement early is much more limited than a consumer’s right. The different requirements that both parties must comply with are compared below.

A consumer may decide to cancel the agreement at any stage by giving the supplier 20 (twenty) days’ notice of their intention to cancel the agreement. This notice must be in writing or any other recordable form. If your agreement contains a clause that prevents early termination, such a clause will not be enforceable in terms of section 14 (2)(b) of the CPA.

On the other hand, a supplier may only terminate the agreement if the consumer breaches a material term of the agreement (e.g. the obligation to pay rent) and the consumer has not remedied their breach within 20 (twenty) days of the supplier giving them written notice to do so.

4.   WHAT ARE THE CANCELLATION PENALTIES INVOLVED?

A consumer will still need to pay any amounts that are due to the supplier as at the date when the 20 (twenty) day notice period expires and the cancellation takes effect.

In addition to claiming the amounts already due from the consumer, section 14 (3)(b)(i) of the CPA entitles the supplier to impose a reasonable cancellation penalty concerning any goods supplied, services provided or discounts granted. The amount of the penalty or what might be considered reasonable under the circumstances is still to be tested by our courts and remains the subject of much debate.

One must remember that the cancellation penalty is not a penalty for breach of contract, as no breach has occurred. What this means is that the consumer has legally cancelled the agreement. Therefore, the cancellation penalty should not be confused with a claim for payment of damages.

Regulation 5(2)(a) – (j) of the Regulations lists several factors that must be taken into account in calculating the penalty, these factors are listed as follows:

• The amount the consumer is still liable to pay the supplier up to the date of cancellation;
• The value of the transaction up to the date of cancellation;
• The value of the goods which will remain in the possession of the consumer after cancellation;
• The value of the goods that are returned to the supplier;
• The duration of the consumer agreement as initially agreed;
• Losses suffered or benefits accrued by the consumer as a result of the consumer entering into the consumer agreement;
• The nature of the goods or services that were reserved or booked;
• The length of notice of cancellation provided by the consumer;
• 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
• The general practice of the relevant industry.

The CPA is silent on whether a cancellation penalty clause must be included in the agreement for the penalty to become due. It is always advisable that a supplier includes a clause to this effect and discloses the amount of the penalty or at least set out the calculation method as this will go a long way to avoiding disputes about the penalty.

5.   WHY IS THIS SIGNIFICANT CHANGE IMPORTANT AND CONTROVERSIAL?

Section 14 of the CPA has been subject to much criticism, especially in its application to lease agreements.

Before section 14 of the CPA, a consumer who signed a fixed-term agreement was bound for the duration of the agreement. If the consumer cancelled the agreement before the expiry date, the supplier could claim from the consumer for breach of contract. Now, section 14 of the CPA allows consumers an escape route to terminate the agreement early.

There are certain situations in which it may be desirable to give consumers a general right to cancel fixed term agreements, however there is much concern that this can also lead to undesirable outcomes as there are sound commercial reasons why parties agree to enter into fixed term agreements and why, often, longer notice periods for cancellation are required.

CONCLUSION

Fixed term agreements are a common feature of everyday commercial life. It is likely that you are already a party to one or more fixed-term agreements or will enter into such an agreement in the future. Regardless of whether you are a supplier or a consumer you should be aware of the escape route provided by section 14 of the CPA, allowing for early termination of a fixed term agreement.

If you require any other information regarding termination of a fixed term agreement or how best to protect yourself when entering into a agreement, contact Pagdens at 041 502 7200 or send us your query and we’ll get back to you

This article is for general information and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor any loss or damage arising from reliance upon any information herein. Always contact an attorney for specific and detailed advice. Errors and omissions excepted (E&OE).