One of the most common questions I get from consumers relates to whether suppliers can refuse to let them cancel fixed term agreements. In fact, it has happened to me a couple of times too: I am thinking of that gym contract I have never used or of switching to another mobile network operator. When consumers attempt to cancel these contracts they are often told that they can only do so by giving notice on a very specific date prior to the renewal date, that they are too late and that the contract has already renewed for another fixed term and/or if they do cancel they will be faced with significant cancellation charges.

The CPA contains some very specific provisions about fixed term agreements. Specifically, it provides that:

  • consumers can cancel any fixed term agreement for no reason, by giving 20 business days’ notice; and
  • fixed term agreements can no longer automatically renew for the entire period just because the consumer did not inform the supplier of his or her intention not to renew.

There are two limitations. Firstly, these two principles only apply in respect of ‘fixed term agreements’. A fixed term agreement is an agreement which is meant to endure until a specific date. The termination date will either be indicated in the agreement (i.e. ‘this agreement will terminate on 1 September 2013’) or the termination date will be discernible from the agreement (i.e. ‘this agreement will terminate one year after the date on which it was signed’). Secondly, these two principles will only apply in agreements between natural and juristic persons. If the agreement is between two businesses, the consumer does not have these rights and the supplier is free to impose different terms.

So, suppliers can no longer stop consumers from cancelling a fixed term agreement on 20 business days’ notice, and, save for a reasonable cancellation penalty, that right cannot be limited. This reasonable cancellation penalty must be in relation to ‘any goods supplied, services provided, or discounts granted to the consumer in contemplation of the agreement enduring for its fixed term, if any’ (see section 14(3)(b)(i)). This means that the supplier cannot charge a penalty if, for example, no such discount was granted to the consumer; i.e. the supplier cannot charge a penalty simply to recoup the loss of profits or to discourage the consumer from cancelling, if no such discount was granted, goods supplied or services provided.

In addition there are various factors in regulation 5(2) which can be taken into account when determining whether a cancellation penalty applies. They include the value of the transaction up to cancellation, the duration of the agreement, the nature of the goods or services etc. In particular, the supplier cannot charge a cancellation penalty which has ‘the effect of negating the consumer’s right to cancel a fixed term agreement’ (regulation 5(3)). This means that the cancellation penalty cannot be equal to the remaining payments which the consumer would have made.

Apart from cancelling on 20 business days’ notice, the consumer can cancel the agreement ‘upon the expiry of its fixed term, without penalty or charge’ (section 14(2)(b)(i)(aa)). In addition, suppliers are required to remind consumers (between 80 and 40 days before the termination date) of the ‘impending expiry date’ and inform them of their right to terminate (section 14(2)(c)). Automatic renewals for the entire term of the agreement are no longer permitted. If the consumer fails to choose between terminating or renewing the agreement, the agreement continues on a month-to-month basis (section 14(2)(d)). So, this means that an agreement which only gives the consumer a limited window period within which to cancel the agreement failing which it will renew automatically, is not legal.

So last week, I tried to cancel a fixed term agreement for the supply of access to wireless internet and a modem on a 24 month contract. In response I received the following e-mail:

‘Kindly advised that you’re on a 24 months contract which expires end of November 2013;   to terminate the contract as an early termination you’ll be compelled to pay penalty within the CPA Act which consists of:
a)    Only 25% of the remainder of the contract
b)  The difference between a new hardware VS and a 2nd hand hardware (to recover the cost of the hardware)
c)    Arrange the collection of the company’s hardware

Otherwise you can request to cancel the contract anytime in October 2013 and will be scheduled for end of contract. ’ (sic)

Here are my comments:

  • Whether 25% of the remainder of the contract is reasonable or not, I cannot say. The company will have to be able to show that the penalty is related to a discount or services given in contemplation of the agreement running its full course and that it is reasonable. The fact that there were only two months remaining on the contract would suggest that charging a quarter of the price is excessive.
  • It is not reasonable to expect me to compensate the company for the depreciation of the modem in value. The use of the modem was taken into account when calculating the price. In this particular case I had already been using (and paying) for the modem for 46 months (the contract had already been renewed once). The supplier would have to show the exact amount which they are losing as a result of my early cancellation.

(This article originally appeared in the August/September 2013 issue of the Consumer Law Review, which is published by Juta & Co. You can subscribe to it by creating a profile at Back issues are available under ‘Newsletters’.)