The Consumer Protection Act - Automatic Renewal of Contracts

The automatic-renewal clause within contracts in South Africa is fairly commonplace. This clause is often included in fixed-term contracts and refers to the instant renewal of one’s contract upon reaching its expiry date. This will occur unless proper cancellation is effected by the Consumer prior to expiry.

This type of renewal has recently made headlines in South Africa specifically in terms of gym membership contracts. Members to gyms have found that even once their contract has expired, the gym is still deducting money from their account monthly; alternatively members are suddenly being faced with massive bills months (and in some cases years) after they believed their contract to have expired, only to discover somewhere in the small print of their contract they had consented to automatic renewal of the contract.

This approach, however, is set to change with the implementation of the new Consumer Protection Act, which is expected to come into force on 1 April 2011.

Section 14 of the Act, titled “Expiry and renewal of fixed-term agreements” deals specifically with automatic-renewals of fixed term contracts. Before exploring the intricacies of Section 14, it is important to realise that this Section does not apply to transactions between juristic entities (i.e. to contracts between two companies) and only regulates fixed-term contracts where at least one of the parties is a natural person. The following provisions are of particular importance:

Duration of a fixed-term contract:

The Act allows for the maximum period for a fixed-term contract to be determined. Currently this period hasn’t been decided upon; however provision is made for it to be regulated.

Cancellation:

Both the Supplier and the Consumer are able to cancel the fixed-term contract. It is also important to realise that neither party may contract out of their rights to terminate the contract.

• Consumers may cancel upon the expiry of the agreement; alternatively at any other time (which includes prior to the expiry of the fixed-term contract) by giving the Supplier 20 business days’ notice in writing (or any other recorded form). In the latter case the Consumer: may be liable for a “reasonable cancellation penalty”, which would be to cover any loss the Supplier experienced in expecting the contract to last for the fixed period; and entitled to be credited by the Supplier with any amount that belongs to the Consumer (for example, if the Consumer had paid in advance).
• The Supplier is entitled to cancel the agreement if the Consumer is in a material breach. The Supplier must give the Consumer 20 business days written notice of the breach, if the Consumer doesn’t rectify the failure within this time, the Supplier may cancel.

Notification:

The Supplier is obliged to give the Consumer written or any other recordable form of notification of the pending expiry of the fixed-term contract. Notice must be given 40 to 80 business days before the expiration of the contract. The Supplier must also include in the Notice: any material changes to the agreement, should the agreement be renewed; as well as the options available to the Consumer in terms of renewal (automatic renewal; termination; fixed-term renewal).

Automatic Renewal:

Upon the expiration of the fixed term Contact, it will automatically be renewed on a month to month basis, subject to the updated material terms which were given to the Consumer by way of Notification.

This shall occur, unless: the Consumer directs the Supplier to terminate the contract on the expiry date; alternatively agrees to the renewal of the agreement for a further fixed term.

QUICK NOTE:

Enforcement of auto-renewal clauses in Supplier’s contracts with Consumers (natural persons) will be subject to the Consumer Protection Act coming into force in April 2011.

• The maximum term of a contract will be regulated by the Act.
• Parties may not contract out of their rights to terminate a contract.
• Consumers may terminate at the end of the contract term or earlier by providing 20 business days’ notice.
• A reasonable cancellation penalty may be applied by the Supplier in the case of early termination.
• The Supplier must notify the Consumer of the pending expiry of the contract and the Consumer’s options in terms of renewal of the contract. Unless the Consumer agrees to the renewal of the contract for a further fixed term, the contract will be renewed on a month to month basis subject to the updated terms and conditions as provided by way of the notification specified above.

Clients (Suppliers) are urged to:

• review the contracts entered into with their Customers (Consumers), and ensure that there are no terms in violation of the Act, for instance Consumers contracting out of their right to terminate;
• draft a standard notification letter to be sent out to Customers prior to the expiry of the contract indicating the Customer’s renewal options, any amendments to the contract terms, and how the Customer should procedurally communicate with the Supplier to indicate termination or renewal of the contract;
• put in place Customer management procedures and processes in line with the requirements of the CPA;
• maintain proper records of costs attached to signing up a Customer in order to substantiate a penalty that may be applied for the Customer’s early termination; and
• review business models that are dependent on Customer’s entering into fixed term contracts or automatic renewal of contracts for feasibility.

Article written by: Katherine Thompson, Chetty Law - Technology and Innovation Law, www.chettylaw.co.za, email: katherine@chettylaw.co.za.

Please Note: The content of this article does not constitute legal advice. Specific queries should be directed to Chetty Law or other suitably qualified attorneys in order to obtain relevant specific and/or appropriate legal advice.