The right to cancel fixed term agreements

The Consumer Protection Act allows consumers to cancel a fixed-term agreement prematurely unless both parties are juristic persons.

Source: Lester Timothy of Denys Reitz Attorneys
Fixed-term agreements of many suppliers contain clauses which effect the automatic renewal of the agreements for a further fixed term. When the Consumer Protection Act commences on or about 31 March 2011, such clauses will have limited effect. The consumer will be empowered to cancel any fixed-term agreement prematurely.
The definitions of “goods” and “services” in the act are wide. As a result, the provisions are applicable to most renewable fixed-term agreements. Examples of such fixed-term agreements include those relating to gym membership, cellphone contracts, newspaper subscriptions, dancing lessons and the provision of transportation, season tickets and internet access.
The Consumer Protection Act permits a consumer to cancel fixed-term agreements at any time prior to expiry, by giving the supplier 20 business days’ notice of such cancellation. Consumers must give notice to the supplier in writing or in any other recorded manner. The supplier is, however, not left without recourse. A supplier may impose a reasonable cancellation penalty for any goods, services or discounts that were supplied to the consumer on the assumption that the agreement would continue for the proposed fixed term. A consumer cancelling a fixed-term agreement also remains liable to the supplier for any amounts owing under the agreement up to the date of cancellation. A supplier will not be entitled retain any advance payments received from the consumer but may set the amount off against any cancellation penalty.
The term “reasonable cancellation penalty” will be interpreted differently in relation to different types of agreements or different circumstances. For example, where a consumer enters into a cellphone contract and receives a handset, which should be paid for over the 24 month period of the contract, the supplier will have incurred an expense in relation to the handset. As a result it would be reasonable for the supplier to charge a cancellation penalty which would effectively be a reasonable reimbursement to the supplier for its unrecouped cost.
Where the supplier, on the other hand, incurs no significant additional expense as a result of the consumer’s cancellation, such as where the consumer cancels an agreement to attend dance classes for two years, it will be more difficult to establish the reasonableness of any cancellation penalty if no discount was given.
If at inception of the agreement a supplier grants a consumer a discount for any goods or services on the assumption that the agreement will continue for the entire fixed term, the supplier would be entitled to be compensated by way of the penalty for such discounts in the event of early cancellation.
On expiry, a fixed term agreement will automatically continue on a month-to-month basis, unless the consumer expressly directs the supplier to cancel the agreement on the expiry date or agrees to a renewal of the agreement for a further fixed term. In order to avoid having to continue to pay for unwanted goods or services, consumers should therefore cancel the agreement. When the consumer’s cupboard or bookshelf is already laden with wines-of-the-month or books-of-the-month, there is therefore a remedy.
The supplier must notify the consumer in writing of the impending expiry of a fixed-term agreement. This notice should be given not more than 80 and not less than 40 business days before the expiry date and should include information on any material changes that would apply to the agreement if it is automatically renewed or is to continue on a month-to-month basis. Unless the consumer expressly directs the supplier to cancel the agreement on the expiry date or agrees to renew the agreement for a further fixed period perhaps on new terms, the agreement will continue on a month-to-month basis subject to any reasonable material changes of which the supplier has given notice. A month-to-month contract can be cancelled by either party on a month’s notice.
A supplier is permitted to cancel a fixed-term agreement after giving written notice to a consumer who has breached a material term of the agreement and fails to correct the breach within 20 business days, or when directed to do so by the consumer.
The provisions are applicable to certain pre-existing agreements which have been concluded prior to the general commencement date of the Consumer Protection Act on 31 March 2011.  Pre-existing agreements will be subject to the above provisions if the parties to the agreement are bound for a fixed term which ends on or after 24 April 2013.  Any suppliers not wanting their agreements to be subject to these provisions should therefore ensure that their current agreements are either not fixed-term agreements or must ensure that they come to an end before 24 April 2013.
Whilst the CPA changes the legal position of parties to a fixed-term agreement, it has done so with the objective of promoting the social and economic welfare of consumers, which is the primary purpose of the CPA.  Consumers traditionally have the weaker bargaining power of the two contracting parties, in transactions for the sale of goods or rendering of services, particularly where consumers contract with juristic entities that have extensive market strength and knowledge of the goods, services and the transactions involved. Such entities usually have internal advisors and resources that create an unequal balance of power between consumers and suppliers in various market places.
 
Suppliers should, however, not consider the provisions of the act as an obstacle to their profitability. On the contrary, they should consider this as an opportunity to build stronger customer relations and earn consumer confidence, as it has the potential to promote healthy business practices which, in ordinary circumstances, will in turn increase supplier profitability for those who embrace the law.