The future of fixed term agreements
According to the draft regulations to the Consumer Protection Act, 2008 (the Act), from 31 March 2011, suppliers of goods and services will not be permitted to conclude a fixed term agreement to supply goods and/or services to a consumer for a period exceeding 24 months from the date on which the consumer signs the agreement.
The Act, which is scheduled to come into full effect on 31 March 2011, also provides that a consumer may cancel a fixed term agreement at any time on 20 business days notice to the supplier. This spells the end of the common practice of locking consumers into one-sided agreements from which they are unable to escape!
However, if the consumer cancels a fixed term agreement and the supplier has supplied any goods or services or granted the consumer any discounts in contemplation of the agreement enduring for its full term, the draft regulations provide that the supplier may charge the consumer a cancellation penalty of up to 10% of the amount which the consumer would have had to pay for the remainder of the period of the agreement.
Suppliers will have to constantly monitor the expiry dates of each of their fixed term agreements as the Act provides that, at least 40 business days before the expiry of a fixed term agreement, the supplier must notify the consumer of the expiry date and the option to either renew or terminate the agreement with effect from such date. The supplier must simultaneously notify the consumer of any material changes to the fixed term agreement which it proposes should apply on renewal.
If the consumer does not elect to terminate or renew the fixed term agreement, after the expiry date, the agreement will continue on a month-to-month basis on the terms which the supplier proposed would apply if the consumer had renewed the agreement.
The supplier on the other hand may only cancel a fixed term agreement if the consumer commits a material breach of the agreement and does not remedy the breach within 20 business days after being requested by the supplier to do so.
Businesses will be relieved to know that these provisions of the Act do not apply to franchise agreements or fixed term agreements between juristic persons. In addition, they only apply to transactions which take place in the ordinary course of business in return for payment. So for example, if a landlord concludes a lease agreement with a natural person for a fixed period of time, but not in the course of the usual business carried on by the landlord, that lease will not be subject to these provisions of the Act.
Suppliers may wish to avoid the onerous provisions relating to fixed term supply agreements by concluding agreements for indefinite periods of time. However, suppliers must be aware that they will not be able to enforce agreements which contain unfair or unreasonable contract terms. Amongst other things, the draft regulations provide that an agreement which allows a supplier a right to terminate it without giving the consumer the same right will be deemed to be unfair and unreasonable.
The draft regulations to the Act were published in the Government Gazette on 29 November 2010 and the public has been invited to submit their comments on the draft regulations to the Minister of Trade and Industry on or before the 31 January 2011.
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