Many of us have a cellphone contract. Many of us want to make that commitment to sign up for a gym membership and get fit. And there are many that are renting under a one year lease. These are all examples of fixed term contracts – agreements that operate for a defined duration. Fixed term contracts play a major role in our lives. The only problem is that in life, circumstances can change over the period of operation of a particular fixed term contract. Circumstances might change to such an extent that you might need to cancel one of these agreements. It is important to understand what the law says about fixed term contracts and your right to cancel.
Fixed term contracts are governed by the Consumer Protection Act (section 14). Section 14 applies to where a consumer (a natural person including sole proprietorship) is the subject of the agreement. The section provides for a maximum time period for fixed contracts that may be prescribed in the regulations. Currently, there is a prescribed maximum time of 24 months from the date of the consumer’s signature, unless the consumer agrees to a longer period and the supplier can show a demonstrable financial benefit to the consumer.
Can I cancel a fixed term contract?
As a consumer, you may cancel a fixed term contract before the agreed expiry date by giving the supplier 20 business days written notice. You do not need to give reasons for the cancellation. You have this right despite anything to the contrary in your fixed term agreement. However, you will still be liable to the supplier for any amounts owed in terms of that agreement up until the date of cancellation. The supplier may also impose a reasonable cancellation penalty in contemplation of the agreement enduring for the intended fixed term. What is more, the supplier must credit you, the consumer, with any amount that remains your property as of the date of cancellation.
Is my cancellation penalty unfair?
So the caveat to cancelling the fixed term contract is the cancellation penalty. Anyone who has cancelled a fixed term contract has probably been upset with the cancellation penalty (let’s be honest!). And many may feel that the amount is unfair. But the problem is that most are not aware of what a “reasonable” cancellation penalty means. If you can grasp what considerations go into determining a reasonable cancellation penalty, you will have the tools to determine whether your rights are being infringed or not.
What follows is the list of considerations for determining a reasonable cancellation penalty. Let this tool be a starting point in understanding whether the cancellation penalty is acceptable. Be sure to get legal help before acting!
In determining a reasonable cancellation penalty, the supplier must consider:
- the amount which the consumer is still liable for to the supplier up to the date of cancellation;
- the value of the transaction up to 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 by or benefits accrued to the consumer as a result of the consumer entering into the agreement;
- the nature of the goods or services;
- the length of notice of cancellation provided by the consumer;
- the reasonable potential for the service provider, acting diligently, to find an alternative consumer; and
- the general practice of the relevant industry.
The cancellation penalty must not have the effect of negating your right to cancel the fixed term contract. In other words, the cancellation penalty cannot amount to you paying off what you owe for the remainder of the contract.
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