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ADVISORY NOTE 12: CANCELLATION OF CONTRACTS AND CHARGING OF PENALTIES

 

This note is provided by the office of the Consumer Goods and Services Ombudsman to guide suppliers and consumers as to their rights and obligations under the Consumer Protection Act (CPA) with regard to the cancellation of agreements, advance reservations, bookings or orders. [1]

 

Contents

ADVISORY NOTE 8: CANCELLATIONS...................................................... 1

Summary................................................................................................... 1

Introduction................................................................... Error! Bookmark not defined.

The Law.................................................................................................... 3

Common Law............................................................................................. 3

Consumer Protection Act............................................................................ 7

A supplier may cancel an agreement under the following circumstances:...... 10

Cancellation of booking/ order (Section 17)................................................ 11

Weddings and conference venue hire/ related services............................... 11

Cancellation of fixed term agreement (Section 14)...................................... 14

Gyms/ wellness/ health clubs..................................................................... 14

Calculation of penalty............................................................................... 18

Circumstances beyond a member’s control................................................ 18

Cell phones/ wireless devices.................................................................... 19

Calculation of penalty............................................................................... 20

Conclusion............................................................................................... 22

 

1.           Summary

 

1.1       In terms of South African common law, a person is bound by an agreement entered into by them unless there is a legal reason that enables them to cancel the agreement. But now, consumers no longer sign documents or enter into agreements at their own peril as the CPA provides them with the right to cancel an agreement under a closed list of circumstances.

 

1.2       There may however be financial consequences that follow the cancellation. The difficulty is that the guidance provided by the CPA as to how to calculate what is a fair charge that may be made for cancelling an order or agreement is in terms of broad principles rather than a set of specific requirements.

 

1.3       Guidance may be gained from decided cases when interpreting the CPA. The aim of damages arising from a breach of a contract, which is what a cancellation is, is to put the innocent party (the supplier) in the position that he or she would have been in had the contract been properly performed.

 

1.4       Care has to be taken to ensure that undue hardship is not imposed on the defaulting party and that losses are limited to those that flow from the breach and are not too remote. In deciding what charge is fair, the relevant consideration is whether the charge is out of proportion to the harm suffered by the innocent party, in which case it may be reduced to the extent that it considers fair.

 

1.5       This can be assessed in three ways:

 

·     By looking at comparable situations where the desired result was achieved;

·     By looking at the size of the specific penalty and the penalties in general in relation to the income and expenditure of the defendant; and

·     by exercising one’s sense of fairness and justice.

 

1.6       Where a breach of contract has occurred, the innocent party must take reasonable positive steps to mitigate or prevent the occurrence of losses, failing which his or her claim may be reduced or eliminated.

 

1.7       Any industry guidelines to suppliers as to appropriate cancellation policies should include:

 

•That the cancellation policy be appropriate to the type of service offered, with regard to the likelihood of being able to, with diligence, rebook the venue/ service;

•That any deposit taken be fair and reasonable and proportionate to the loss that a supplier is likely to suffer if the event/ service is cancelled;

•That provision is made for a stepped scale of forfeiture of a percentage of the deposit in proportion to the length of notice given, subject to the proviso that, in the event of the venue/ service being rebooked, the consumer will only be charged an administrative fee based on actual costs.

 

2.           Legal Considerations

 

2.1       The Common Law

 

2.1.1          In dealing with disputes, the CGSO may refer to the common law, to the extent it has not been overridden by the CPA.[2] The common law provides the backdrop to understanding and applying the CPA.

 

2.1.2          The principle of pacta sunt servanda (Latin for "agreements must be kept"[3]) is central to the law of contract. If one party to a contract seeks to cancel or be released from the contract without valid legal grounds and in the absence of a clause that permits cancellation, the other party, the innocent party, is entitled to sue the defaulting party either for the fulfilment of the contract or for cancellation and damages arising from the breach. Damages are aimed at putting the innocent party in the position that he or she would have been in had the contract been properly performed.[4]

 

2.1.3           Damages may be calculated according to the loss actually incurred because of the breach or the loss of profits that would, but for the breach, have been made in the future. When a breach of an agreement of lease gives rise to a valid cancellation thereof the ordinary measure of damages is the difference between the loss of rental income during the unexpired period thereof and the rental that a lessor obtains or can reasonably be expected to obtain from reletting the premises. [5]

 

2.1.4         

A claimant who has lost a bargain in respect of which he has an unlimited supply is entitled to the full loss of profits on the bargain.[6] The situation is different when the supplies are limited. Thus in Aucamp v Morton 1949 (3) SA 611 (A), where a tree feller was prevented from accessing a forest to complete a felling contract, the court held that the feller had not entirely lost the profit which he would have made out of particular contracts but that his making of profits from cutting and selling timber had been deferred for about 22 months owing to his operations in the forest having been stopped.

 

2.1.5          In Holmdene Brickworks (Pty) Ltd v Roberts Construction Co Ltd 1977 (3) SA 670 (A) at 687D-688A it was held:

 

“To ensure that undue hardship is not imposed on the defaulting party . . . the defaulting party’s liability is limited in terms of broad principles of causation and remoteness, to (a) those damages that flow naturally and generally from the kind of breach of contract in question and which the law presumes the parties contemplated as a probable result of the breach, and (b) those damages that, although caused by the breach of contract, are ordinarily regarded in law as being too remote to be recoverable unless, in the special circumstances attending the conclusion of the contract, the parties actually or presumptively contemplated that they would probably result from its breach…”

 

2.1.6            In terms of Roman-Dutch law, a penalty clause included in an agreement was enforceable so long as it was reasonable. This was the position in South Africa until the case of Pearl Assurance Co. v Union Government [1934] A.C. 570 (P.C.), in which our law was aligned with the English law approach, namely that penalty clauses were only permissible if they were merely a pre-estimate of damages and not a punishment.

 

2.1.7            The Conventional Penalties Act 15 of 1962[7] in effect overruled this decision by permitting contracting parties to agree in advance on the amount of damages that will be payable by the one to the other in the event of a breach of contract by means of a penalty stipulation, so long as the penalty is not out of proportion to the harm suffered by the innocent party. If the penalty is excessive, a court may reduce the penalty to the extent that it considers fair. A party may not claim both damages and a penalty[8], unless the contract expressly allows it.[9]The onus to disprove prejudice was suffered by the creditor rests on the debtor because the penalty clause the creditor seeks to enforce is in the creditor’s favour.[10]

 

2.1.8          In Van Staden v Central South African Lands and Mines 1969 (4) SA 349 (W) the Court determined that in interpreting section 3 of the Conventional Penalties Act:

 

“Everything that can reasonably be considered to harm or hurt, or be calculated to harm or hurt a creditor in his property, his person, his reputation, his work, his activities, his convenience, his mind, or in any way whatever interferes with his rightful interests as a result of the Act or omission of the debtor, must, if brought to the notice of the Court, be taken into account by the Court in deciding whether the penalty is, in terms of Section 3 of the Conventional Penalties Act, 15 of 1962, out of proportion to the prejudice suffered by the creditor”.

 

2.1.9         The case of Murcia Lands cc v Erinvale Country Estate Home Owners Association [2004] 4 All SA 656 (C) gives guidance as how to decide if a penalty is excessive:

 

“It seems to me that the question of whether the penalty was “out of proportion” to the prejudice can be assessed in three ways: by looking at comparable situations where the desired result was achieved; by looking at the size of this penalty and the penalties in general in relation to the income and expenditure of the defendant; and by exercising one’s sense of fairness and justice.”[11]

 

2.1.10          In Smit v Bester 1977 (4) SA 937 (A), the Appellate Division held that in a case where a court is concerned with a penalty under s 3 of the Conventional Penalties Act, the onus is on the debtor to show that the penalty is disproportionate to the prejudice suffered by the creditor and that it should thus be reduced, and to what extent. When the debtor prima facie provesmthat the penalty should be reduced then there is an onus on the creditor to rebut, so as to refute the prima facie case of the debtor.[12]

 

2.1.11          In Plumbago Financial Services (Pty) Ltd T/A Toshiba Rentals v Janap Joseph T/Project Finance 2008(3) SA 47 (CPD), the court held that “the best method of determining whether a penalty was excessive was to compare what the plaintiff's position would have been had the defendant not defaulted and what the plaintiff's position would be should it obtain judgment in the full sum sought.”[13]

 

2.1.12          The case concerns a claim for arrear and future rentals and certain ancillary claims by the lessor of photocopier machines arising out of the breach of the lease contract by the lessee. The court accepted that, had there been no defaults on the part of the lessee the lessor would have received the monthly instalments in respects of the equipment month by month over a period of five years.

 

2.1.13          The court took into consideration the amount of income earned by the lessor from the sale of one of the machines and the leasing out of the other and gave the benefit of this income to the lessee in the form of an abatement of the accelerated rentals as an equitable reduction of the penalty stipulations.

 

2.2       Duty to mitigate loss

 

2.2.1     Where a breach of contract has occurred, the innocent party must take reasonable positive steps to mitigate or prevent the occurrence of losses, failing which his or her claim may be reduced or eliminated.[14] This was explained in Thoroughbred Breeders' Association of South Africa v Price Waterhouse (416/99) [2001] ZASCA 82; [2001] 4 All SA 161 (A):[15]

 

“The negligence of a plaintiff could not ‘defeat’ his claim. The point was made by Watermeyer J in OK Bazaars (1929) Ltd and Others v Stern and Ekermans 1976 (2) SA 521 (C) at 528F. If his own negligence was held to be the true or real cause of his loss and he was non-suited on that account it was implicit that there never was a justifiable claim against the defendant. If he negligently failed to ‘mitigate’ his loss, that too did not ‘defeat’ his claim. It disabled him from pursuing a valid claim if the entire loss could have been avoided and merely reduced it if part of the loss could have been avoided.”

 

2.2.2     In Wilson v Spitze (539/87) [1989] ZASCA 11, the court cited with approval a passage from the Digest[16] in which Ulpian states that if the buyer of wine is in default the seller may hold back the wine or else sell the wine in good faith provided he mitigates the buyer's loss so far as he can without detriment to himself.

 

2.2.3     Sometimes a consumer may mitigate their loss by bringing in another contractor to finish an abandoned or improperly completed job, as long as the consumer can show that “the repairs effected were necessary and that the cost thereof was fair and reasonable.”[17]

 

2.2.4     A case in which the defendant was held not to have failed to mitigate the loss is Tremendous Property Investment, 8 CC and Another v Kenntner Wilderness Dune Development (Pty) Ltd (2433/2007) [2012] ZAWCHC 104 in which the plaintiff claimed the recovery of a deposit of R100 000,00 retained by the defendant under a forfeiture clause in a contract for the sale of land. The sale was not subject to a suspensive condition that a bond be obtained.

 

2.2.5     The plaintiff paid the amount of R100 000, 00 but failed to provide a guarantee within the specified period and the defendant thereupon cancelled the contract. The plaintiff claimed the defendant failed to mitigate its damages in the light of the fact that:

 

1)           the plaintiff after cancellation of the contract, offered to purchase the property at the same price provided for in the cancelled contract of sale, but the defendant refused to accept such an offer; which in turn would have the effect of lessening the damages; and

2)           the defendant withdrew the property from the market.[18]

 

2.2.6     The court quoted the following passage from Western Credit Bank Ltd v Kajee 1967 (4) SA 386 (N) at 391 B-D:

 

"If the penalty is out of proportion to the prejudice, the Court will reduce the penalty to such an extent as it may consider equitable in the circumstances. The words 'out of proportion' do not postulate that the penalty must be outrageously excessive in relation to the prejudice for the Court to intervene. If that had been intended, the Legislature would have said so. What is contemplated, it seems to me, is that the penalty is to be reduced if it has no relation to the prejudice, if it is markedly, not infinitesimally, beyond the prejudice, if the excess is such that it would be unfair to the debtor not to reduce penalty; but otherwise, if the amount of the penalty approximates that of the prejudice, the penalty should be rewarded."

 

2.2.7     In the Tremendous Property case, the court considered the all the wasted costs occasioned by the cancellation, such as work performed in preparation for the transfer of the property and the spent by the defendant assisting the plaintiff’s consultants with the rezoning application and concluded that it was not clear or plain that the penalty was out of proportion to the prejudice suffered. Further, it held that the defendant was justified in refusing an offer which differed materially from the cancelled contract as no reasonable person in the circumstances of the defendant would have done anything more than it had. Accordingly, the plaintiff failed to discharge the onus of proving that the defendant failed to mitigate the damages and as such, the plaintiff was not entitled to the reduction of the penalty.

 

3.                The Consumer Protection Act

 

3.1       Consumers no longer sign documents or enter into agreements at their peril as the CPA provides them with the right to cancel an agreement under the following circumstances:

 

3.2       Timeshare Contracts

 

3.2.1           Neither the CPA nor the regulations state that an open-ended (evergreen) contract must have a cancellation clause giving the consumer the right to cancel. These types of contracts are common in the Timeshare Industry. The National Consumer Commission Report on Timeshare concluded:

 

“As the CPA does not provide for cancellation of non-fixed term contracts, the common law applies to the membership agreements, and accordingly the position in Plaaskem [see below] would prevail in a situation where a consumer wishes to cancel the contract…

 

Credit agreements are subject to the National Credit Act and the provisions of section 127 apply. This means consumers can cancel the credit agreement at any time with notice to the credit provider.[19]

 

3.2.2           Naude and de Stadler likewise argue for a right to terminate timeshare agreements in perpetuity:

 

Hopefully the Property Time-sharing Control Act[62] will be amended to provide effective consumer protection. In the meantime it should be noted that timeshare suppliers have tried to evade the provisions on unfair contract terms in the CPA by structuring their agreements as consumer credit agreements, to which the CPA does not apply (although the goods and services which form the subject of the credit agreement are subject to the CPA).If one accepts that a points-based timeshare agreement in perpetuity and a lease for the life of the lessee are subject to the CPA, does section 14 apply to such agreements? It is not entirely clear whether it could be argued that a contract for the life of the consumer or in perpetuity is a fixed-term agreement. Nevertheless, the purpose of section 14 applies even stronger to these long-term agreements. This may lead courts or the Tribunal to make an innovative order that the consumer has the rights in section 14 in relation to all long-term agreements that are not terminable upon notice.[20]

 

3.2.3           In the Supreme Court of Appeal case of Plaaskem (Pty) Ltd v Nippon Africa Chemicals (Pty) Ltd (574/13)[2014] ZASCA 73, the court held that in a commercial contract which did not contain a cancellation clause, there was a tacit clause: “The contract may be terminated by either party on reasonable written notice.”[21]

 

3.2.4           The case of Eric Mongoso Makah v Magic Vending (PTY) LTD[22] deals with the right of either party to cancel a contract where the other party is in breach thereof”

 

“In my view it is apparent from the reading of Section 14 of the CPA that a 20 day business day notice prevails in all contracts of a fixed period. The wording of Section 14(2) clearly singles out fixed term contracts as being the category of contract being applicable to the provisions thereof…

 

The lease agreement therefore does not contain a contractually agreed procedure for termination. It is trite that in the absence of such a procedure, a guilty party (the party who caused the breach of contract) must be given notice of cancellation in a clear and unequivocal manner. This notice, takes effect from the time it is communicated to the other party, with communication by a third party being sufficient.”

 

4.           Cancellation By Suppliers

 

4.1       A supplier may cancel an agreement under the following circumstances:

 

4.2       The rules relating to cancellation, where it is permitted, are straight forward but the calculation of permissible charges for damages presents a challenge in practice because of the generality of the provisions of section14(3)(b)(1) read with regulations 5(2)and (3)[23] (cancellation of fixed term contract) and section 17(4) (cancellation of advanced reservations, bookings and orders).

 

5.                Cancellation of Reservations, Bookings and Orders (Section 17)

 

5.1       Weddings and conference venue hire/ related services

 

5.1.2         Approximately 190 000 marriages take place in South Africa every year, of which about a third are religious marriages. The most popular months for marriages are December and November.[24] It is not known how many weddings are cancelled or postponed, but it is safe to assume that the figure is similar to that of the USA, 10-15% per annum.[25]

 

5.1.3             The cancellation of weddings creates problems for both the wedding venue management and the party that made the booking. It is necessary to find a fair balance between their competing interests: that of the venue to make a profit to enable it to stay in business and that of the booking party to receive back their money for which they perceive they have received little or no value, and the venue not to profit from their misfortune.

 

5.1.4         For vendors in the wedding business, damages from a cancellation can range from losses on food that spoils, to alteration costs on gowns, to lost opportunities for booking another wedding. It can be particularly difficult for many vendors to prove monetary loss for missed opportunity because a certain weekend was popular or the vendor didn’t have time to hire adequate help.[26] By holding a date open, the vendor may have to turn down other bookings on that date. Further, by the time a contract is concluded with a couple, the vendor may have spent a considerable amount of time with them in addition to the costs of marketing.

 

5.1.5         Venue hire is time and date specific. For this reason section 17(4) permits factors such as the length of notice of cancellation provided by the consumer and the reasonable potential for the service provider, acting diligently, to find an alternative consumer and the general practice of the relevant industry to be taken into consideration in deciding whether a cancellation fee is fair.

 

5.1.6           We deal here with the cancellation termination of the contract by consumers for reasons other than a lack of performance by the supplier of its obligations (breach of contract).

 

5.2       The general practice of the relevant industry

 

5.2.1         As far as we have been able to establish, no guidelines have been provided by industry bodies as yet.

 

5.2.2          Cancellation policies vary according to the type of venue, depending on whether they cater for weddings only, also cater for other functions also or offer accommodation. The notice for accommodation is less than that for general function venues, while that for wedding dedicated venues is longer than the others. The reason for this is that weddings are generally booked well in advance, as is evident from the survey results below.[27]

 

5.2.3          Vendors must of course mitigate their losses by taking reasonable steps to find other customers willing to use the venue and services on the date that the cancelled event was supposed to take place. An interesting case that tests the boundaries of this concept was brought to our attention. In what might become a trend,[28] a jilted bridegroom who was refused a refund of his share of the deposit due to the shortness of the notice given to the venue, just 3 days. When he asked instead to have a party with his friends, the owner of the venue refused, saying it only permits the use of the venue for weddings.

 

5.2.4         Ordinarily, there could be no objection to an events venue manager restricting the type of use of the venue, so long as this is not discriminatory in terms of the Constitution or other legislation. Thus a venue is entitled to impose a dress code or standards of behaviour to create an image of exclusivity for which a segment of patrons would be prepared to pay a premium.[29] Not only might the holding of a raucous party dent this image, but there might notionally be a greater danger of a “stag” party getting out of hand and damage being caused.

 

5.2.5         Against this is the competing but restricted right of the consumer to get a refund or at least value for the money paid and to have his loss mitigated. Legally, the fact that the defaulting party offers the suggested means of mitigation of the loss should not be an impediment.[30] Is it then unreasonable for the venue owner to refuse permission for the venue to be used for a party? We are of the view that it might well be, particularly as this is likely to have been a once off occurrence which would not prevent the owner from continuing to enforce the bookings-for-weddings-only policy. Further, the venue owner could have added stipulations regarding behaviour at the party or even set a reasonable surcharge to provide heightened security measures, if the existing measures were less than those used by venues that cater for all types of events.

 

5.2.6         Vendors would be wise to keep a “stand by” register of clients that could possibly fill the accommodation in the event of a cancellation to mitigate their losses and in case they ever need to prove that their cancellation charge was justified. For the same reason, they should be able to show what losses or costs were incurred as a direct result of the cancellation, such as time spent with the couple, an apportionment of costs of marketing and administrative costs. They could also consider suggesting that couples take out appropriate cancellation insurance. That is not to say that a supplier can pass its legal liability to the consumer – that is prohibited by section 48(1)(c) – it can however itself obtain insurance cover for any loss it may suffer as a result of the CPA provisions regarding cancellation.

 

6.                Conclusion

 

6.1       A weddings or conference venue hire/ related services vendor is obliged to accept a cancellation of a booking but may protect itself by taking a deposit and withholding a fair amount from that as a cancellation charge. The case law regarding the Conventional Penalties Act provides a guide as to what a fair charge is, while other court decisions set out how a vendor/ supplier can discharge the obligation upon them to mitigate damages.

 

6.2       It would be advisable for the relevant industry bodies to provide guidelines to suppliers as to appropriate policies to put in place with regard to cancellations as the practice of an industry is one of the things that can be taken into consideration in establishing if a cancellation fee is reasonable. Any such industry practice would of course have to comply with the CPA

 

6.3       We suggest, based on our research, that the guidelines proposed include as a minimum the following:

 

·     That the cancellation policy be appropriate to the type of service offered, with regard to the likelihood of being able to, with diligence, rebook the venue/ service;

·     That any deposit taken be fair, reasonable and proportionate to the loss that a supplier is likely to suffer if the event/ service is cancelled;[31]

·     That provision is made for a graduated scale of forfeiture of a percentage of the deposit in proportion to the length of notice given, subject to the proviso that, in the event of the venue/ service being rebooked, the consumer will only be charged an administrative fee based on actual costs.

 

In the spirit of the CPA and in the interest of good customer relations and reputation, the cancellation terms and the provisions of section 17 of CPA should be brought to the attention of the couple before the booking is made.

 

7.                Cancellation of fixed term agreement (Section 14)

 

7.1       Gyms/ Wellness/ Health Clubs

 

7.1.1          The rise in chronic diseases, both nationally and internationally, and the identification of the lack of physical activity as a risk factor for many of these diseases leads to the conclusion that it is essential for South Africans to engage in physical activity and take responsibility for their health. One way of doing so if one lives in an urban area is to attend agym or health club. Gyms and health clubs reported provide services to just less than 2% of the South African population.[32]

 

7.1.2         While these facilities may provide a useful service, the business practices that some of them use nevertheless give rise to consumer complaints both here and overseas.[33] In our experience, consumers complain mainly about being locked into contracts i.e. not being permitted to cancel or terminate the contract within a fixed period or without having a large penalty imposed. Apart from losing interest in being a member, consumers seek to cancel their contracts because they can no longer afford the expense/ they are retrenched, they become ill or infirm or they move away.

 

7.1.3           We deal here with the cancellation termination of the contract by consumers for reasons other than a lack of performance by the supplier of its obligations (breach of contract). Thanks to the CPA[34], even if the gym contract is for a fixed period of time, the consumer may cancel it by giving the supplier 20 business days’ notice in writing or other recorded form. However, the consumer remains liable to the gym for any amounts owed in terms of the contract up to the date of the cancellation. Further, the supplier is entitled to impose a reasonable cancellation penalty with respect to any goods or services provided, or discounts granted, to the consumer “in contemplation of the agreement enduring for its intended fixed term”.[35]

 

7.1.4         Some guidance as to how to calculate the “reasonable cancellation penalty” is provided in Regulations 5(2). It lists the factors that must be taken 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 cancellation;

(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 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 of the relevant industry.

 

7.1.5          The wording of these provisions creates difficulties in their interpretation as section 14(3)(b)(i) and regulation 5(2) appear to be at variance with each other. The section states that the cancellation penalty is with regard 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,” whereas the regulation appears to be wider than this. This is expanded upon below.

 

7.1.6           The last part of section 14(3)(b)(i), which refers to the “discounts granted”, is easy enough to understand: it means that if any discount was provided on goods or services thanks to the length of the contract, there can be a recalculation based on what the consumer would have paid had a shorter period been agreed upon initially. An example regarding goods is a newspaper subscription that has the effect of reducing the price from R 5.00 per paper if bought daily to R 3.50 per paper over the course of a year. It would work the same way for services: Thus, if a once off visit to the gym would have cost R 200 but the bulk rate over 24 months was equivalent to R 100 per visit, the consumer could be held liable for a percentage of the difference in respect of the number of actual visits. The obvious practical problems with this example illustrate the danger of very broad, one-size-fits-all, legislative provisions such as those used in the CPA.

 

7.1.7           The first part of the sub-section is more difficult to understand: “the supplier may impose a reasonable cancellation penalty with respect to any goods supplied, services provided … to the consumer in contemplation of the agreement enduring for its intended fixed term”. With regard to” goods supplied,” it seems this would cover say a cell phone provided by a supplier in the belief that its cost would be recovered through subscription fees over a two year period, likewise a kit bag provided by a gym. It is more difficult to imagine a scenario relating to services that is not part and parcel of marketing or delivery of a product or services. Perhaps the sub-section means services such as the induction at the gym where a member of staff takes the measurements of the new member and shows them how to use the various exercise machines.

 

7.1.8          What seems clearer is that the subsection as a whole does not refer to loss of future profits. If future profits were being referred to, one would expect the CPA to use words such as “services yet to be provided/ which would have been provided in the future”, or “future access to services”, as is used in two places in section 63(1), and not the words ”services provided” that are used.

 

7.1.9          If future profits are excluded, it is a departure from the common law in respect of a breach of contract, which provides for the assessment of damages for breach in terms of actual as well as prospective losses.[36] In terms of the rules of the interpretation of statutes, there is a presumption that the legislation does not intend to change the existing law more that is necessary (Johannesburg Municipality v Cohen’s Trustees 1909 TS 811 @823), if it is not clear that it does intend to change it (Gordon v Standard Merchant Bank 1983 (3) SA 68 (A)). The wording of section 14(3)(b)(i) is, however, clear and accordingly the so called “golden rule” of interpretation comes into play. That is that the “plain meaning” of words must be given effect to unless that would result in absurd results (Venter v R 1907 TS 910 @914), which is not the case here.

 

7.1.10          Even if it was to be found that the exclusion of future profits is not clear and there is a possible meaning that includes future losses, the CPA itself instructs that if any of its provisions, read in their context, can reasonably be construed to have more than one meaning, the Tribunal or Court must prefer the meaning that best promotes the CPA’s spirit and purposes, and will best improve the realisation and enjoyment of consumer rights generally, and in particular by persons contemplated in section 3(1)(b)(the previously disadvantaged).[37]

 

7.1.11            Elsewhere the CPA refers to resolving any ambiguity or conflict in favour of the consumer.[38] As it would obviously favour the consumer not to be bound into a long term contract by virtue of a penalty clause relating to the loss of future fees, if there is any ambiguity in section 14(3)(b)(ii), the section must be construed to exclude the possibility of a supplier claiming for lost future earnings upon the consumer cancelling the agreement.

 

7.1.12            Regulation 5(2) is to an extent in apparent conflict with section 14(3)(b)(i) as its provisions are on the whole more appropriate to the calculation of a penalty in respect of future losses and the mitigation of those losses. Sub-regulations (g)- (j) have in fact been “cut and pasted” from section 17(4) of the CPA, which relates to the consumer’s right to cancel an advance reservation, booking or order. As they refer then to future losses, they go beyond the scope of section 14(3)(b)(i) and accordingly a court could rule that they are ultra vires (i.e. that they exceed the scope of the power to make regulations and are invalid).

 

7.2       As to the other sub-regulations:

 

7.2.1         Regulation 5(2)

 

(a)     the amount which the consumer is still liable for to the supplier up to the date of cancellation. This seems to go further than section 14(3)(a):

 

“[T]he consumer remains liable to the supplier for any amounts owed to the supplier in terms of that agreement up to the date of cancellation.”

 

7.2.2            The regulation appears to be ambiguous as it could refer both to liability for goods or services already received by the consumer by the time of the breach but for which they have not yet paid, or to liability flowing from the contractual commitment to purchase future or further goods and services. The section on the other hand seems, as explained above, only to apply to liability already incurred. Naturally, suppliers prefer an interpretation that permits them to claim for future income in terms of a contract.

 

7.2.3            Returning to the consideration of the interpretation of section 14(3)(a), its plain meaning, that a consumer is liable only for debts already incurred (and by implication not for future obligations or commitments) is consistent with the international approach with respect to fair contractual terms. This means that to the extent that regulation 5(2)(a) goes further than that, it is not only ultra vires but also in itself unfair and it is unlikely to be applied by a Court or Tribunal.

 

7.3       Regulation 5(2)

 

(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 cancellation;

(d)    the value of the goods that are returned to the supplier;

(e)    the duration of the consumer agreement as initially agreed;

 

7.3.1                  These provisions seem to apply to calculating a penalty for loss of future profits, but they could also be used to calculate the adjustment in respect of discounts provided, so they are valid regulations and should be taken into consideration when calculating a penalty in respect of any goods supplied, services provided, or discounts granted.

 

7.4       Regulation 5(2)

 

(f)      losses suffered or benefits accrued by consumer as a result of the consumer entering into the consumer agreement;

 

7.4.1     It is not clear what the intention of this sub-regulation is or how “benefits accrued” differs from “the value of the transaction” in sub regulation (a). If the consumer has suffered losses, it would be more appropriate to cancel the contract for breach, in which case there would be no penalty payable by the consumer.

 

8.           Calculation of the Penalty

 

8.1       From the above discussion, it is clear that the scope for recovering a penalty is limited. Further, the guidelines provided in regulation 5(2) imply that a supplier may not merely predetermine a set penalty, say a percentage of the outstanding value of the contract. Rather, the supplier must treat each case on its merits in terms of the variables set out in the regulation.

 

8.2       This does not prevent the supplier from agreeing a sliding scale in respect of permitted penalty charges that relates to the period of the contract and the point at which it is cancelled. So long as, in accordance with the Conventional Penalties Act, the penalty is not out of proportion to the harm suffered by the supplier.[39] To further protect itself, the supplier could indicate in the contract that stipulated goods and services that are provided free in anticipation that the contract will run the full term agreed upon will be charged for if the contract is cancelled without justification within a stated period of time.

 

8.3       Once the penalty is calculated, it must be deducted from any amount paid in advance by the consumer and the balance paid over to the consumer in terms of section 14(3)(b)(ii). Regulation 5(3) prevents the supplier from charging a charge which would have the effect of negating the consumer's CPA right to cancel the agreement. Even where the CPA permits a penalty to be charged, this is subject to the supplier being under an obligation to mitigate its losses.[40]

 

9.                Circumstances Beyond the Supplier’s Control

 

9.1       Although it is now easier to escape a gym contract, it does seem harsh, if not a poor approach to customer relations, when the operators of gyms do not release from their contracts without any form of penalty those consumers/ members who move elsewhere, hit hard times or fall ill. [41] We endorse the following view expressed by the OFT in its guidance note referred to above:

 

5.5 The fairest terms allow members to transfer their membership or to cancel the contract without penalty if the member, for example, has to relocate, or has suffered redundancy, or has a medical condition that prevents his use of the gym. Such terms take positive account of the interests of the member.

 

9.2       The New Zealand Consumer Commission expressed a similar view in one of its decisions.[42]

 

10.       Conclusion

 

10.1   From the above discussion, it seems that a consumer may escape a fixed term gym contract with relative ease and without the threat of excessive penalties being imposed, particularly those associated with the loss of profits from the balance of the agreement: Future losses are not provided for in section 14 of the CPA.

 

10.2   All a consumer needs to do is give the supplier 20 business days’ notice in writing or other recorded manner and form. They will still be liable for any outstanding fees up to the date of cancellation and the payment of a reasonable cancellation penalty with respect to any goods supplied, services provided, or discounts granted, to the consumer in anticipation of the agreement running for the full period.

 

10.3   In calculating the penalty, the supplier must take into consideration:

 

(b)     the value of the transaction up to the date of cancellation;

(c)     the value of the goods which will remain in the possession of the consumer after cancellation;

(d)     the value of the goods that are returned to the supplier;

(e)     the duration of the consumer agreement as initially agreed.

 

10.4   It may be permissible for a supplier to agree up front with the consumer a sliding scale in respect of permitted penalty charges that relates to the period of the contract and the point at which it is cancelled, so long as the penalty is not out of proportion to the harm suffered by the supplier.

 

11.          Cell phones/ wireless devices

 

11.1   Almost 90% of the country’s population is covered by mobile telephone (cell phone) networks. With an estimated 39 million subscribers, South Africa is one of the fastest-growing mobile markets in the world.[43] While pay-as –you-go contracts are becoming increasingly popular, there are still many subscribers tied into fixed- term contracts. This office receives numerous complaints regarding the cancellation of such contracts, particularly that the penalties imposed upon cancellation are so high that they in effect trap the consumers.

 

11.2   The following view is expressed on the website fair contracts.org: [44]

 

“However, at any given time, most cell-phone users are in a “cell-phone jail.” They are locked into their cell-phone contracts, so they cannot behave like rational consumers in a market economy: they cannot go out and buy a new cell phone when there is a good deal; they cannot switch cell phone carriers if a competitor is offering a better deal. This is because cell-phone service providers usually charge “early termination fees” (ETFs) for cancelling service. The fee, which ranges from $175 to $200, is usually big enough to discourage users from cancelling or switching service providers.”

 

11.3   In one matter received by us, the consumer calculated that the amount demanded by the cell phone company actually exceeded what it would cost him were he merely to continue to pay the monthly subscription until the end of the contract period.

 

11.4   We deal here with the cancellation termination of the contract by consumers for reasons other than a lack of performance by the supplier of its obligations (breach of contract). As the right of a consumer to cancel a fixed-term contract is dealt with above in the section on gyms, it is not repeated in detail here.

 

11.5   To recap, in terms of the CPA,[45] the consumer may cancel the contract by giving the supplier 20 business days’ notice in writing or other recorded form. The consumer remains liable to the cell phone company, however, for any amounts owed in terms of the contract up to the date of the cancellation. Further, the supplier is entitled to impose a reasonable cancellation penalty with respect to any goods or services provided, or discounts granted, to the consumer “in contemplation of the agreement enduring for its intended fixed term”.[46] Some guidance as to how to calculate the “reasonable cancellation penalty” is provided in Regulations 5(2).

 

12        Calculation of the Penalty

 

12.1   For the reasons previously stated in the section on gyms, the cell phone service providers may not recoup any amount as damages for future losses such as monthly subscriptions and anticipated profits from usage of the service. They may only recover amounts already due and payable (already owing to them) and charge a penalty in respect of three specific type ofloss suffered by them:

 

1)       goods provided (cell phone, tablet or other wireless device);

2)       services provided (it is difficult to conceive of any service that is provided in anticipation of the contract running its course but for which there is no up-front charge);

3)       discounts granted (the cheaper rate or price that the consumer benefitted from).

 

12.2       The Goods Provided

 

12.2.1          In calculating the penalty, the supplier must in terms of regulation 5(2) consider:

 

·     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; and

·     the duration of the consumer agreement as initially agreed.

 

12.2.2        This is a calculation that is readily capable of being reduced to an online application (app) of the sort available in the USA.[47] In Canada, section 16 of Bill 60, Wireless Services Agreements Act, 2013 very helpfully provides a formula.[48]

 

12.2.3          In effect this formula prorates the value over the length of the initial contract period, in line with the approach taken in USA.[49] In that country, in various class action cases, the courts ruled that service providers could not collect millions of dollars of unpaid early termination fees. A similar approach was espoused by the Law Commission in the UK: “An early termination charge in a mobile phone contract, for example, might be quite fair if it simply recouped the cost of the handset supplied.”[50]

 

12.3   Value of the Goods

 

12.3.1          It is not clear whether the value of the goods is the value at time of purchase, rather than the market value at time on cancellation. This gives rise to the question, what is the value based on: the retail price of the cell phone at time of sale or the wholesale value (cost to the supplier)? In the USA, service providers subsidise the cost of cell phones.[51] The Federal Communications Commission has expressed the view that the ETF is meant to recoup the wholesale cost of the phone over the life of the contract.[52]

 

12.4   Discounts Granted

 

12.4.1          Here the concept is simpler, but the practical application is not. The words “discounts granted to the consumer in contemplation of the agreement enduring for its intended fixed term” would apply to a reduction in the per-minute billing rate in consideration of the “bulk” usage over the agreed period. It might also apply to any discount on the price of the cell phone/ other equipment. For this reason, it would be best to treat V in the proposed formula above as usual retail price to keep it simple.

 

12.4.2          Calculating the actual number of minutes used over the actual duration of the contract in order to establish the extent of any discount might present technical challenges and costly administrative nightmares. To avoid these difficulties, a supplier could agree up front with consumers a sliding scale in respect of permitted penalty charges that relates to discounts and the period of the contract and the point at which it is cancelled.

 

12.4.3             Whatever method is used must give a reasonable result that is demonstrably proportional to the actual loss suffered. Although there is at present no specific requirement under the CPA similar to that imposed by the National Credit Act to inform consumers at the start of the contract precisely what their liabilities are and what it will cost to cancel the contract at any given time, the spirit of the CPA encompasses suppliers providing consumers with all the necessary facts before they sign the contract. This is to enable them to make informed decisions. The trend internationally is to encourage such disclosure.[53]

 

12.4.4          Locally, section 43 of the Electronic Communications and Transactions Act 25 of 2002 makes it obligatory to inform a consumer of:

 

(n) the return, exchange and refund policy of that supplier;…; and

(r) the rights of consumers in terms of section 44 [cancellation], where applicable.

…

(3)       If a supplier fails to comply with the provisions of subsection (1) or (2), the consumer may cancel the transaction within 14 days of receiving the goods or services under the transaction.

(4)       If a transaction is cancelled in terms of subsection (3)—

 

(a)         the consumer must return the performance of the supplier or, where applicable, cease using the services performed; and

(b)         the supplier must refund all payments made by the consumer minus the direct cost of returning the goods.

 

12.4.5           As with gym contracts, the supplier may not charge a charge which would have the effect of negating the consumer's CPA right to cancel the agreement. Further, the supplier is under an obligation to mitigate its losses.

 

13.    Conclusion

 

13.1    A consumer is no longer tied in to a fixed term cell phone contract but may cancel, subject to the payment of a penalty, but not in respect of the loss of profits from the balance of the agreement: Future losses are not provided for in section 14 of the CPA.

 

13.2    All a consumer needs to do is give the supplier 20 business days’ notice in writing or other recorded manner and form. They will still be liable for any outstanding fees up to the date of cancellation and the payment of a reasonable cancellation penalty with respect to any goods supplied, services provided, or discounts granted, to the consumer in anticipation of the agreement running for the full period.

 

13.3    In calculating the penalty, the supplier must take into consideration:

 

a)       the value of the transaction up to the date of cancellation;

b)      the value of the goods which will remain in the possession of the consumer after cancellation;

c)       the value of the goods that are returned to the supplier;

d)      the duration of the consumer agreement as initially agreed.

 

13.4    It may be permissible for a supplier to agree up front with the consumer a sliding scale in respect of permitted penalty charges that relates to the period of the contract and the point at which it is cancelled, so long as the penalty is not out of proportion to the harm suffered by the supplier.

 

Please direct any requests for clarification to info@cgso.org.za Consumer Goods and Services Ombudsman

Revised March 2021

Annexure “A”

 

CONVENTIONAL PENALTIES ACT NO. 15 OF 1962

 

1.           Stipulations for penalties in case of breach of contract to be enforceable.

 

(1)       A stipulation, hereinafter referred to as a penalty stipulation, whereby it is provided that any person shall, in respect of an act or omission in conflict with a contractual obligation, be liable to pay a sum of money or to deliver or perform anything for the benefit of any other person, hereinafter referred to as a creditor, either by way of a penalty or as liquidated damages, shall, subject to the provisions of this Act, be capable of being enforced in any competent court.

 

(2)       Any sum of money for the payment of which or anything for the delivery or performance of which a person may so become liable, is in this Act referred to as a penalty.

 

2.           Prohibition on cumulation of remedies and limitation on recovery of penalties in respect of defects or delay.

 

(1)       A creditor shall not be entitled to recover in respect of an act or omission which is the subject of a penalty stipulation, both the penalty and damages, or, except where the relevant contract expressly so provides, to recover damages in lieu of the penalty.

 

(2)       A person who accepts or is obliged to accept defective or non-timeous performance shall not be entitled to recover a penalty in respect of the defect or delay, unless the penalty was expressly stipulated for in respect of that defect or delay.

 

3.           Reduction of excessive penalty.—If upon the hearing of a claim for a penalty, 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, the court may reduce the penalty to such extent as it may consider equitable in the circumstances: Provided that in determining the extent of such prejudice the court shall take into consideration not only the creditor’s proprietary interest, but every other rightful interest which may be affected by the act or omission in question.

 

4.           Provisions as to penalty stipulations also apply in respect of forfeiture stipulations.—A stipulation whereby it is provided that upon withdrawal from an agreement by a party thereto under circumstances specified therein, any other party thereto shall forfeit the right to claim restitution of anything performed by him in terms of the agreement, or shall, notwithstanding the withdrawal, remain liable for the performance of anything thereunder, shall have effect to the extent and subject to the conditions prescribed in sections one to three, inclusive, as if it were a penalty stipulation.

 

Annexure “B”

 

CONSUMER PROTECTION ACT

 

Section 14 (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;

 

Regulation 5(2) For purposes of section 14(3), a 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 cancellation;

(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 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 of the relevant industry.

 

(3)        Notwithstanding subregulation (2) above, the supplier may not charge a charge which would have the effect of negating the consumer's right to cancel a fixed term consumer agreement as afforded to the consumer by the Act.

 

Section 17(3) A supplier who makes a commitment or accepts a reservation to supply goods or services on a later date may—

 

(a)      require payment of a reasonable deposit in advance; and

(b)     impose a reasonable charge for cancellation of the order or reservation, subject to subsection (5).

 

(4)        For the purposes of this section, a charge is unreasonable if it exceeds a fair amount in the circumstances, having regard to—

 

(a)      the nature of the goods or services that were reserved or booked;

(b)     the length of notice of cancellation provided by the consumer;

(c)      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

(d)     the general practice of the relevant industry.

 

Section 49 (1) Any notice to consumers or provision of a consumer agreement that purports to—

 

(a)     limit in any way the risk or liability of the supplier or any other person;

(b)     constitute an assumption of risk or liability by the consumer;

(c)     impose an obligation on the consumer to indemnify the supplier or any other person for any cause; or

(d)     be an acknowledgement of any fact by the consumer,

must be drawn to the attention of the consumer in a manner and form that satisfies the formal requirements of subsections (3) to (5).

…

(3)        A provision, condition or notice contemplated in subsection (1) or (2) must be written in plain language, as described in section 22.

 

(4)        The fact, nature and effect of the provision or notice contemplated in subsection (1) must be drawn to the attention of the consumer—

 

(a)     in a conspicuous manner and form that is likely to attract the attention of an ordinarily alert consumer, having regard to the circumstances; and

(b)     before the earlier of the time at which the consumer—

 

(i)           enters into the transaction or agreement, begins to engage in the activity, or enters or gains access to the facility; or

(ii)         is required or expected to offer consideration for the transaction or agreement.

 

 

Section 64. (1) If, in terms of any agreement, a consumer agrees or is required to pay—

 

(a) a one-time or periodic membership fee or any similar charge; or

(b) any amount in respect of services or access to services to be provided at a date more than 25 business days after the payment is made, other than by way of a prepayment device contemplated in section 63, the amount so paid remains the property of the consumer until the supplier makes a charge against it in accordance with subsection (2).

Regulation 44(3)

 

A term of a consumer agreement subject to the provisions of subregulation (1) is presumed to be unfair if it has the purpose or effect of-

 

(h) allowing the supplier to increase the price agreed with the consumer when the agreement was concluded without giving the consumer the right to terminate the agreement;

…

(k) allowing the supplier to terminate the agreement at will where the same right is not granted to the consumer;

 

(I) enabling the supplier to terminate an open-ended agreement without reasonable notice except where the consumer has committed a material breach of contract;

…

(q) allowing the supplier to retain a payment by the consumer where the latter fails to conclude or perform the agreement, without giving the consumer the right to be compensated in the same amount if the supplier fails to conclude or perform the agreement (without depriving the consumer of the right to claim damages as an alternative);

 

(r) requiring any consumer who fails to fulfil his or her obligation to pay damages which significantly exceed the harm suffered by the supplier.

 

(s) permitting the supplier, upon termination of the agreement by either party, to demand unreasonably high remuneration for the use of a thing or right, or for performance made, or

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