Termination Of Agreements And Reasonable Costs

Msizi Mhlongo | SchoemanLaw Inc  

Category: Litigation and Alternative Dispute Resolution  

Introduction:  

Loadshedding and the resulting economic crises have caused serious disruptions to businesses and individual lives. Due to economic pressures, many individuals and entities are forced to terminate agreements they had entered into, and consequently, they find themselves being held liable for early termination costs.  

What is the legal position of a party that is seeking the early termination of an agreement?  

The Consumer Protection Act 68 of 2008 and its Regulations, the common law principle of pacta sunt servanda all apply to and bind consumer agreements entered by parties in South Africa.  

The Consumer Protection Act: 

The Consumer Protection Act applies to all transactions and agreements other than transactions entered into between juristic entities and commercial agreements.1  

Parties to consumer agreements may terminate them at any time after they have entered into an agreement by giving the supplier 20 business days’ notice in writing. The consumer remains liable to the supplier for amounts owed in terms of the agreement until the date of termination.  

Upon termination of a consumer agreement as contemplated above, the consumer remains liable to the supplier for any amounts owed to the supplier in terms of that agreement up to the date of termination. 

The supplier 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, and must credit the consumer with any amount that remains the property of the consumer as of the date of cancellation, as prescribed in terms of the subsection.2 

The termination costs must be reasonable, taking the Regulations in terms of the Consumer Protection Act into account.  

Consumer Protection Act: Regulations: 

For purposes of calculating reasonable cancellation costs by a supplier, a reasonable credit or charge as contemplated above may not exceed a reasonable amount, taking into account the following: 

• The amount which the consumer is still liable for to the supplier up to the date of cancellation and 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 and losses suffered or benefits accrued by the consumer as a result of the consumer entering into the consumer agreement; 
• The nature of the goods or services that were reserved or booked; the length of notice of cancellation provided by the consumer; 
• 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,  
• The general practice of the relevant industry.3 

Notwithstanding the 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 Act.4 

The Common Law Principle Of Pacta Sunt Servanda:  

The principle of pacta sunt servanda 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 claim from 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, in essence, the innocent party may not impose a termination penalty that is disproportionately excessive compared to the loss suffered.  

The Conventional Penalties Act:  

Similar to the common law position above, the Conventional Penalties Act requires termination penalties imposed on a party to be proportional to the loss suffered, subject to the individual merits of the prejudice suffered.  

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”. 

Conclusion:  

A consumer may terminate an agreement in terms of the Consumer Protection Act, but he or she remains liable for termination costs. The supplier may then charge reasonable termination costs up to the date of termination. The termination costs should not negate the consumer’s right to terminate an agreement as afforded to him by the Consumer Protection Act and its Regulations, read with the Conventional Penalties Act. Contact an expert at Schoemanlaw Inc. for your contractual needs. 

Msizi Mhlongo | SchoemanLaw Inc 

https://schoemanlaw.co.za/our-services/civil-litigation-and-alternative-dispute-resolution/