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How to set up a fixed-term agreement that protects both the consumer and the supplier as per the CPA

The guidelines provided in the Consumer Protection Act (CPA) with regard to a fixed-term agreement or contract only apply to transactions entered into with a natural person, not with a juristic person (including a body corporate, partnership, association or trust).

What is the duration of a fixed-term agreement or contract?

The Consumer Protect Act (CPA) provides that the duration of the fixed-term agreement/contract may not exceed 24 months. There are, however, a few exceptions to this rule:

  • If there is a demonstrable financial benefit to the consumer and the longer period is expressly agreed with the consumer;
  • If the period differs for the specific type of agreement, consumer, sector or industry;
  • If the industry codes (a system for classifying industries and regulating relationships between persons conducting business in those industries) are different for the specific type of agreement, consumer, sector or industry.

The balancing act of the CPA

The values and principles of the CPA promote, amongst others, a free market system where the consumers within the system determine the price of goods and services based on supply and demand and have the right to choose suppliers freely without undue restrictions. The CPA also balances the protection of consumers, on one hand, and suppliers, on the other.

Fixed-term agreements/contracts have become a purposive and practical medium to aid in this balancing act. By providing consumers with the right to choose, they are allowed to select a supplier who sets terms, conditions and prices to which they can agree. By allowing suppliers to bind consumers to a fixed-term agreement for a specific service, the CPA protects the supplier against fluctuating demand, ensuring business for at least that fixed period.

Since the CPA protects both the consumer and supplier, it is important to remember that the CPA promotes a fair marketplace overall, therefore it is prohibited to unduly bind consumers to a specific supplier by means of a fixed-term agreement/contract in such a manner that they cannot terminate the agreement due to extreme cancellation penalties which prevent them from exercising their right to choose.

Alterations (i.e. price changes) to fixed-term agreements or contracts in terms of the CPA

Contract law encourages party autonomy and requires mutual consensus, which implies that the party to the agreement/contract accepts his/her duties, responsibilities and liabilities for the period of the agreement/contract. In the event of amendments, specifically on implied terms and conditions of the original agreement/contract, a new agreement/contract has been created that no longer reflects the intention of the parties at the time the original agreement/contract was entered into.

According to Magauta Mphahlele, Ombudsman for Consumer Goods and Services, making alterations mid-contract creates distrust on the part of consumers. If fixed-term agreements/contracts need to be amended, it is suggested that parties enter into new agreements/contracts rather than amend the existing ones in order to reflect the true intention of the parties at the time of signing. Should any material changes need to be effected in respect of any agreements/contracts concluded with consumers, consumers must be informed that they have the right to cancel the agreement/contract within 20 days without penalty. Providing consumers with the option of cancellation due to alteration of the agreement/contract is not per se required by the CPA but is covered by the broad values of contractual law in South Africa. One-sided or unilateral alteration of an agreement/contract would imply a breach of agreement/contract and therefore the consumer should be allowed to terminate the agreement/contract without any penalty.

Consumers’ right to cancel fixed-term agreements or contracts under the CPA

As previously mentioned, the CPA promotes a fair, accessible and sustainable marketplace for consumers; therefore, consumers have the right to cancel a fixed-term agreement/contract in order to participate in other market activities that better suit their needs. The CPA provides consumers with two options with regard to cancellation:

  1. Upon expiry of the agreement/contract

All consumers should have the option of cancelling a fixed-term agreement/contract upon expiry thereof (not to continue) without any explanation or penalty except if there are any outstanding fees for which the consumer is still liable.

  • Notice of expiry
  • According to the CPA, the consumer should receive a notice of expiry from the supplier at least 40 days, but not more than 80 days, prior to the expiry date.
  • The notice should include the option of either renewing the fixed-term agreement/contract or terminating the entire agreement/contract.
  • It should also indicate any applicable material changes that would apply after renewal.
  • Should the consumer not respond to such a notice, the agreement/contract would automatically continue on a month-to-month basis until the consumer makes the decision to renew or terminate the agreement/contract.
  1. Any other time

When cancelling the agreement/contract prior to expiry thereof for any reason other than amendment thereof by the supplier without the consent of the consumer (unilateral), the consumer should provide the supplier with 20 days’ written notice. The consumer will still be liable for payments up until the end of the cancellation period, which is subject to a reasonable cancellation penalty.

  • Reasonable cancellation penalty
  • Should a cancellation penalty be determined by a service provider, the factors provided by the CPA can be used to determine a reasonable cancellation penalty. The factors to consider are as follows:
    • The amount for which the consumer is still liable 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, or benefits accrued by the consumer because of the consumer entering into the consumer agreement;
    • The nature of the goods or services that were reserved or booked;
    • The period of notice of cancellation provided by the consumer;
    • The reasonable potential of the service provider, acting diligently, finding an alternative consumer between the time of receiving the cancellation notice and the time of the cancelled reservation; and
    • The general practice of the relevant industry.

Conclusion

Given the pursuit of equal bargaining power between the consumer and the supplier, it is important to ensure that consumer and supplier rights are recognised when entering into agreements/contracts. Agreements/contracts should at all times be drafted to be fair and reasonable to both parties in order to ultimately promote a fair marketplace for all.

Whilst the main focus of the CPA is on compliance, our approach at SERR Synergy is to implement compliance in such a way that it provides business value to our clients and allows for improvement in efficiencies and effectiveness by means of compliance requirements. We assist enterprises to conduct business in an ethical manner and to promote and protect the reputation of their businesses.

About the Author: Monique Rossouw completed her BConsumer Science degree at the University of Pretoria. She joined our team in July 2018 and currently holds the title of “Information Compliance Advisor”. She specialises in compliance with the Consumer Protection Act (CPA) as well as POPI and PAIA. This includes compiling legal compliance reports and developing policies along with the other assessment aspects relating to consumer protection legislation. She drafts and submits PAIA manuals to the Human Rights Commission and also compiles and implements Data and Information Protection Reports to identify risks associated with information security in each department of an organisation.  

Sources:

Consumer Protection Act 68 of 2008

https://www.researchgate.net/publication/282466620_Fairness_a_slippery_concept_The_common_law_of_contract_and_the_Consumer_Protection_Act_68_of_2008

 

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