Are 36 month fixed term contracts legal?

Consumers are wondering if 36 month fixed term contracts are legal as the Consumer Protection Act limits them to 24 months. The short answer is yes, but only in certain circumstances, such as you must get a financial benefit from choosing a longer term.

The section in the Consumer Protection Act (CPA) about fixed term contracts was actually included because consumers complained so much about longer terms. Fixed term contracts are valid for a certain time and are usually entered for cell phones, gyms, satellite surveillance for your car and security services.

Section 14 and regulation 5 of the CPA determines the maximum duration of these contracts. According to regulation 5 companies are not allowed to offer fixed term contracts for longer than 24 months, unless you agree to it and the company can demonstrate that it will benefit you financially.

The company must also tell you that you will be charged a cancellation fee if you want to cancel before the contract expires.

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Only if you agree to longer period

Gerhard van der Merwe, senior associate at Trudie Broekmann Attorneys, who specialises in consumer law, says the service provider is only allowed to contract with a consumer for longer than 24 months if the consumer specifically agrees to the longer period.

“It is the duty of the service provider to prove the consumer agreed to the longer period and therefore, the contract should contain a consent term and only if the consumer has signed next to that term to indicate agreement, will the longer period be binding on the consumer.”

If you take out the contract over the phone, the service provider must record the conversation and be able to give you a copy to prove that you agreed to the longer term and understood the terms and conditions.

The service provider must also prove that the longer period has a demonstrable financial benefit to the consumer.

Getting out of a 36 month contract

If you want to get out of the 36 month contract early, you will have to follow the same process as you would with a 24 month contract. Van der Merwe says you can cancel a 36 month contract early by giving the service provider a written notice that you will cancel in 20 business days’ time.

“You will have to pay the usual fees up to the cancellation date – in other words, the 20th business day after you delivered the notice (20 business days is about 30 days). Then you will still be liable for the rest of the cost of the phone handset unless you give it back or you already paid it off.

“The service provider will charge you a ‘cancellation charge’ reflecting that cost and that will have to be paid in a lumpsum. This fee must also be reasonable, taking into account factors such as the value of the goods returned to the service provider, the value of the transaction up to the cancellation and the value of the goods that you will keep.”

However, the supplier is not allowed to charge a fee which would have the effect of cancelling your right to cancel the agreement, he says.

Section 14 determines that you can cancel a fixed term contract when it expires and that the supplier cannot charge you for that, except the last amount you still owe. The service provider must also notify you in writing 40 to 80 days before the contract expires that it will expire and indicate if the current price will be changed if you renew the contract. You can also continue with the contract on a month-to-month basis depending on important changes such as price.

Is a 36 month contract better than a 24 month contract for the same phone? Van der Merwe says it may make your monthly payment lower, but with the longer contract, it is likely you will end up paying more for the same phone. Therefore, you must do your calculations carefully before you sign up for the longer contract.

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How much do you pay for cancelling?

According to section 14 the service provider must calculate the amount by considering:

• the amount you still owe up to the date of cancellation
• the value of the transaction up to cancellation
• the value of the goods which will remain in your possession, such as a cell phone
• the value of the goods returned to the supplier
• the duration of the agreement initially agreed on
• your losses or benefits as a result of entering into the agreement
• the nature of the goods or services
• the length of notice of cancellation you provide
• the reasonable potential for the supplier to find another consumer to enter into an agreement with between the time of receiving the cancellation and the time of the cancellation, while acting diligently
• the general practice of the relevant industry.

The service provider is therefore not allowed to force you to pay the full amount for the months that are left and also not to charge a cancellation fee that makes it impossible for you to cancel.

Is the service provider allowed to cancel the contract?

Service providers usually cancel your contract if you do not adhere to your duties in the contract, such as paying your account on time every month. The service provider must notify you if the contract will be cancelled and can then cancel it within 20 days if you do not pay the arrears amount of adhere to other terms in the contract.

ALSO READ: Consumer Protection Act and your rights

When does section 14 not apply?

Section 14 is not appliable to agreements between companies or between individuals. Agreements between you and your bank, franchise agreements and fixed term investments are also excluded.

Cooling-off period

If you entered into a fixed term agreement after someone called you as part of direct marketing and you did not call to enquire first, you have five working days to cancel the contract inwriting without paying a penalty.