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cancel fixed term contarct 

As a consumer, be sure to calculate the consequences of early cancellation of your contract

 Lease cancellations:

 Section 14 of The Consumer Protection Act No 68 of 2008 (CPA):

In our last blog, we looked at the wording of the whole of section 14 (2) and commented on its content and the background to the section.

Today we will concentrate on the whole of section 14 (3) of the CPA and also regulation 5.

 Section 14 (3) reads as follows:

(3) Upon cancellation of a consumer agreement as contemplated in subsection (1) (b)

              (a) 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

             (b) the supplier—

             (i) may impose a reasonable cancellation penalty with respect to any goods supplied, services provided, or discounts granted, to the consumer in contemplation of the agreement enduring for its intended fixed term, if any; and

             (ii) must credit the consumer with any amount that remains the property of the consumer as of the date of cancellation, as prescribed in terms of subsection (4).

 Section 14(3): therefore deals with the consequences of cancellation by a consumer:

 As stated above the whole of section 14(3) governs the consequences of cancellation by a consumer.

The subsection applies to cancellation on 20 days’ notice as well as at expiry of the contract term.

  • The first consequence of cancellation is that consumer Will remain liable for any amounts due to the supplier as at the date of cancellation. The question of when an amount is due is of course not always a simple one. In the context of the delivery of goods the obligations of the buyer and seller are reciprocal and, in the absence of contrary agreement, payment of the purchase price becomes due upon delivery (or a tender of delivery) by the seller. In other words, the payment of the purchase price becomes due once the supplier has delivered the goods or performed the services or has offered to deliver the goods or perform the services or at the end of each period set for performance in the case of continuous contracts.

An example of the latter is a lease agreement.

A lease agreement ordinarily gives rise to the continuing obligation to pay rent at the end of agreed periods (for instance, every month) during the currency of the lease. The obligation to pay rent becomes due and payable at the end of each such period and cannot be reclaimed by the tenant should the agreement terminate. A supply agreement which provides for the periodic delivery of products is another example of a continuing obligation depending on how the contract was worded. If the wording of the contract gives rise to distinct rights, ie if the contract is divisible, then those rights which are “accrued, due, and enforceable as a cause of action independent of any executory part of the contract” are not affected by the cancellation. 

  • In addition to claiming the amounts already due from the consumer, the supplier may impose a “reasonable cancellation penalty with respect to any goods supplied, services provided, or discounts granted in contemplation of the agreement enduring for its intended fixed term”. The penalty is limited to goods and services already supplied and provided or to discounts granted specifically as a result of the anticipated duration of the agreement. Therefore, if the duration of the agreement had no influence on the structure of the transaction and/or the amount paid by the consumer, the supplier will not be entitled to charge a cancellation penalty. 

The cancellation penalty provided for in section 14 is not a penalty for breach of contract as this has not occurred; ie it should not be confused with a claim for damages. The consumer has legally cancelled the agreement.

Section 14(4)(c) authorises the Minister to regulate

“the manner, form and basis for determining the reasonableness of credits and charges contemplated in subsection (3)”

which left the Minister open to regulate factors to be taken into account when calculating the reasonable penalty.

What are these factors?

Regulation 5 provides that:

[T]he reasonable credit or charge as contemplated in section 14(4)(c) may not exceed a reasonable amount, taking into account

 (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 calculation; 

(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 [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; 

(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 in the relevant industry.

Despite some difficulties in applying the factors, which will be discussed below, this is an improvement from previous versions of the regulations which provided that a reasonable charge “may not exceed 10% of the amount which would have been payable by the consumer for the remainder of the intended fixed term, excluding interest”. This approach was not flexible enough to cater to different types of fixed-term agreements.

The use of the phrase “reasonable credits and charges” in section 14(4) (c) and regulation 5(2) is anomalous. Section 14(3) itself refers to amounts owed by the consumer (section 14(3)(a)), a reasonable cancelation penalty (section 14(3)(b)(i)) and amounts which are still the consumer's property at the time of cancellation (section 14(3)(b)(ii)). It does not refer to “credits and charges”. The amounts referred to in section 14(3) (a) and section 14(3) (b) (ii) are not dependent on reasonableness; the amounts are calculated after assessing a factual situation and the supplier will have no discretion in establishing what the amounts are. The only amount which is dependent on the supplier's assessment of what is reasonable is the cancellation penalty in section 14(3) (b) (i). It would, therefore, seem that the guidelines listed in regulation 5(2) only apply to the calculation of a “reasonable penalty”.

Regulation 5(2) (a) provides that “the amount which the consumer is still liable for to the supplier up to the date of cancellation” must be taken into account when calculating a reasonable cancellation penalty. The inclusion of this guideline is superfluous given that a consumer will remain liable for all amounts which have become due up to the time of cancellation in terms of section 14(3)(a) in any event. It is unclear what bearing this will have (if any) on the cancellation penalty.

The phrase “still liable for . . . up to the date of cancellation” suggests that the factor is backward-looking instead of looking at the remainder of the contract had the consumer not cancelled.

Regulation 5(2) (b) provides that “the value of the transaction up to cancellation” must also be taken into account. Presumably, if the transaction value is high a lower penalty would be justified and vice versa.

“[T]he value of the goods which will remain in the possession of the consumer after calculation” is another factor. If the agreement does not provide for the return of goods if the agreement is cancelled prematurely, the consumer may under certain circumstances receive a windfall. This factor allows for an adjustment in favour of the supplier by taking this windfall into account when calculating the cancellation penalty.

Conversely, regulation 5(2) (d) provides that “the value of the goods that are returned to the supplier must be taken into account when calculating a reasonable cancellation penalty. If this is the case, it may justify a downward adjustment in the calculation of the penalty. However, if the goods have been used the value may be greatly diminished.

Regulation 5(2) (e) provides that “the duration of the consumer agreement as initially agreed must also be taken into account. If the consumer cancelled the agreement shortly after its inception the supplier may be entitled to a bigger penalty than if the agreement was cancelled close to its termination. This is while always keeping in mind that the penalty must always relate to “goods supplied, services provided, or discounts granted in contemplation of the agreement enduring for its intended fixed term”. If the duration of the agreement did not influence the structure of the transaction the supplier will not be entitled to charge a cancellation penalty.

The “losses suffered or benefits accrued by consumer [sic] as a result of the consumer entering into the consumer agreement” is another factor. It is not clear what “losses” are contemplated here. The benefits may relate to any discounts or other types of financial benefit which accrued to the consumer due to the fact that the consumer agreed to a fixed term.

Regulation 5(2) (g) provides that “the nature of the goods or services that were reserved or booked” must be taken into account when calculating a reasonable cancellation penalty. This factor is identical to one of the factors listed in section 17(4) that are taken into account when calculating a fair “charge for cancellation” of an advance booking or order. The formulation is awkward as it was not adapted to the context of fixed-term agreements, but the reasoning behind this sub-regulation applies in this context. A consumer can cancel a fixed-term agreement for special order goods at considerable expense for the supplier. Where the goods or services are customised to meet the needs of a particular consumer a higher penalty for cancellation may well be warranted.

Regulation 5(2) (h) provides that “the length of notice of cancellation provided by the consumer” must be taken into account. This factor is also borrowed from section 17(4). If the supplier is forewarned the supplier may be able to mitigate its loss. The reasoning may be that this opportunity to mitigate should be reflected in the cancellation penalty.

Regulation 5(2)(i) continues in this vein as it provides that 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” must be taken into account. Again the wording of section 17(4) should have been adjusted to suit the context, but the reasoning applies. If the supplier could find a replacement consumer the supplier is not out of pocket. Regulation 5(2) (h) and (i) will not be applicable to all services as it presupposes service which involves “filling seats” or a service such as lease where it is possible to “replace” the consumer. Services such as telecommunication services are not provided on this basis.

Regulation 5(2) (j) provides that “the general practice in the relevant industry” must be taken into account when calculating a reasonable cancellation penalty. This factor would apply regardless of whether the consumer knew about the practice or not. A “general practice” could be compared to the common-law concept of a “trade usage”'. A trade usage is described as “a practice generally known and regularly followed within a particular trade or market” or a “form of professional practice which is generally adopted by a particular profession”.

 However, the standard of proof required to establish a trade usage is perhaps higher than what is required by regulation 5(2) (j). A trade usage must be shown “to be universally and uniformly observed within the particular trade concerned, long-established, notorious, reasonable and certain, and does not conflict with positive law (in the sense of endeavoring to alter a rule of law which the parties could not alter by their agreement) or with the clear provisions of the contract”. This means that if the trade usage itself is inconsistent with the CPA; this factor will not be of any assistance, which is clearly correct. However, if a cancellation penalty is unreasonable, the fact it is the practice in a relevant industry cannot render it fair.

The cancellation penalty may not “have the effect of negating the consumer's right to cancel a fixed-term agreement”. This means that the supplier must not indirectly circumvent the consumer's right to cancel by charging a high cancellation penalty. As a start, this would mean that the cancellation penalty cannot equal the remainder of the contract value. But given that cancellation penalties are at least partly aimed at dissuading a consumer from cancelling it is hard to establish exactly when a penalty will “negate” a consumer's right to cancel. To negate means to “make ineffective” or to “nullify”. Therefore, simply making it difficult for a consumer to cancel will not contravene the Act. A penalty which “negates the consumer's right to cancel” would not be reasonable.

The provisions relating to penalty clauses raise a number of practical difficulties. Suppliers must be able to prove the advantage in the form of services, goods or discounts which accrued to the consumer as a result of entering into the agreement in order to entitle it to charge a cancellation penalty. The Act is silent on whether a cancellation penalty clause must be included in the contract in order for the penalty to become due. However, suppliers should include a penalty clause in the agreement rather than relying on the Act as the sole cause of action. Such a penalty clause could simply provide for a “reasonable cancellation penalty”, but disclosing the actual amount or at least the calculation method is preferable.

Imposing a reasonableness standard on contractual penalty clauses is not a new concept. Section 3 of the Conventional Penalties Act 15 of 1962 provides for the reduction of a contractual penalty (for breach of contract) in cases where “it appears to the court that such penalty is out of proportion to the prejudice suffered by the creditor by reason of the act or omission in respect of which the penalty was stipulated”. If this is the case “the court may reduce the penalty to such an extent as it may consider equitable in the circumstances”. 

Under the Conventional Penalties Act

The onus of proving that a reduction is justified rests on the consumer.

Once the consumer has adduced prima facie evidence that the penalty is disproportionate to the prejudice suffered by the supplier, the onus shifts to the supplier who will have to prove the proportionality of the penalty. Section 14 does not expressly govern the question of the onus of proof, but it is submitted that the consumer should (at most) only have to adduce prima facie evidence that a reduction of the penalty is justified but that the overall onus will remain on the supplier.

 Section 14(3) applies to pre-existing fixed term agreements if the agreement will endure until a fixed date on or after the second anniversary of the general effective date (31 March 2013).

In our next blog; which will be a much shorter blog; we will look finally at section 14 (4) and also the effect of the Ministerial regulations in the termination of lease agreements.

These regulations have already been discussed in some detail above.

You can see clearly from the above that you need expertise and professional legal advice in dealing with lease cancellations.

Please visit our website at www.legaladviceoffice.co.za or send us an email to This email address is being protected from spambots. You need JavaScript enabled to view it. and we will respond to your legal queries within 48 hours.

About our author:

Hugh Pollard (Legal Consultant), has a BA LLB and 42 years’ experience in the legal field. 22 years as a practicing attorney and conveyancer; and 20 years as a Legal Consultant.

082-0932304 (Hugh’s Cell Number)

This email address is being protected from spambots. You need JavaScript enabled to view it.

www.legaladviceoffice.co.za

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