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‘Getting Out’ of a Contract

- Featured article by LAWYERS-ONLINE.CO.ZA

When can you cancel a contract?

Have you ever entered into a fixed term contract or written agreement only to realise that after two months you would actually like to cancel it?

The Consumer Protection Act stipulates that fixed term agreements are contracts of a definite duration. Examples are cellular phone contracts, gym contracts, armed response / security contracts, educational institution contracts and property leases.

The Act provides that fixed - term consumer agreements must not exceed a certain maximum period. The regulations currently prescribe twenty four (24) months from the date of the consumer’s signature as the maximum period, unless such longer period is expressly agreed with the consumer and the supplier can show a demonstrable financial benefit to the consumer.

A consumer may cancel such an agreement before the agreed expiry date by giving the supplier twenty (20) business days written notice. No reasons for the cancellation are required.

A supplier may also terminate the agreement prior to the expiry date if t he consumer fails to remedy a material breach on his part, after having been placed on twenty (20) business days terms to do so.

In addition thereto the supplier may impose a “reasonable cancellation fee” on the consumer based on various factors determined by the Minister. This will be determined on a case to case basis.

Prior to the Regulations being effected there was a common assumption that a reasonable cancellation fee would be 10% of the value of the remainder of the consumer agreement.

Where an agreement is cancelled by either the consumer or supplier in terms of the above, the following will apply: - the consumer remains liable to the supplier for amounts owed up to the date of cancellation; and the supplier may impose a reasonable penalty or charg e for any goods supplied, services provided or discounts granted to the consumer in contemplation of the agreement running for its intended fixed term; and the supplier must credit the consumer with any amounts that remains the property of the consumer as of the date of the cancellation.

The following must be considered by the supplier in determining the reasonable cancellation fee or penalty: amount which the consumer is still liable for to the supplier up to the date of cancellation; value of the transact ion up to cancellation; value of the goods which will remain in the possession of the consumer after cancellation; value of the goods that are returned to the supplier; the duration of the consumer agreement as initially agreed; losses suffered by or bene fits accrued to the consumer as a result of the consumer entering into the agreement; nature of the goods or services; length of notice of cancellation provided by the consumer; reasonable potential for the service provider, acting diligently, to find an a lternative consumer; and the general practice of the relevant industry.

To conclude, the cancellation fee or penalty may not have the effect of negating the consumer’s right to cancel a fixed term agreement. In other words, the regulations specifically prohibit the supplier from charging the consumer the full amount owing in respect of the remainder of the contract or the full balance thereto.

Case Law examples include Sandown Travel (Pty) Ltd v Cricket South Africa. The plaintiff, a travel agency, and the defendant, Cricket South Africa, entered into a written travel management agreement in 2009.

The agreement required the plaintiff to render travel services to the defendant for a set fee per month; and was scheduled to continue for a period of two years , from 1 October 2009 to 30 September 2011.

In terms of the Agreement, the parties were required to give written notice of an intention to terminate the Agreement at least six months before the end of the Agreement (i.e. notice was to be given on or before 30 March 2011).

If the written notice was not given as aforesaid, the contract would automatically renew for another year, on the same terms and conditions, subject to the same six months' notice process applying to the new period.

On 6 April 2011 the de fendant informed the plaintiff in writing that it wished to terminate the Agreement on 30 September 2011. The plaintiff replied, informing the defendant that since it had failed to give a minimum of six months' notice as required in the Agreement, the Agre ement had been automatically renewed for a further year.

Despite the defendant's attitude, the plaintiff continued to provide travel services to the defendant to the end of September 2011, when the defendant refused to allow it to continue to do so.

On 10 October 2011 the plaintiff notified the defendant that its termination letter (of 6 April 2011) and the defendant's refusal to utilise the plaintiff's services constituted a repudiation of the Agreement, which repudiation the plaintiff accepted.

This judg ment holds a couple of important lessons for contracting parties. If an agreement requires a specific notice by a given date any other notice will not bring the contract to an end. Secondly if an innocent party in the face of repudiation of a contract initially keeps the contract alive but allows the other party the opportunity to repent, the innocent party may subsequently cancel the contract and claim damages.

The second example, Standard Bank of South Africa Limited v Hand, the applicant was a bank with whom the responde nt had contracted in terms of a vehicle and asset finance agreement.

In the present application, the bank sought confirmation of the cancellation of the agreement, and the authorisation of the attachment of the vehicle in question.

It was held that the critical question was whether the bank had p roved that it had cancelled the agreement. A party wishing to rely on the cancellation of an agreement because of breach must allege and prove the breach of the agreement; that the right to cancellation has occurred because the breach was material or in the event that the agreement contains a cancellation clause, that its provisions have been complied with; and that clear and unequivocal notice of rescission was conveyed to the other party, un less the agreement dispenses with such notice.

Examining the facts, the Court found that the applicant had failed to allege and prove that it had earned the right to cancel the agreement and that it had in fact lawfully cancelled the agreement. The application was dismissed.

Date: 21st January 2014
Legislation: Consumer Protection
Act Case Law: Sandown Travel (Pty) Ltd v Cricket South Africa 2011
Standard Bank of South Africa Limited v Hand 2010

Cancelling a Contract - Legal Information South Africa