The Consumer Goods and Services Ombudsman (CGSO) recently dealt with a complaint by a South African who claimed that their mobile provider charged an unreasonable cancellation penalty.
The cancellation penalty was largely made up of a subsidy claw-back attached to the phone, and the mobile provider argued that it was only able to offer a high-end phone if the customer did not cancel.
On 15 November 2017, the customer entered into a 24-month cellphone contract. However, the consumer elected to cancel the contract in June 2019, before the expiry date of November 2019, on the basis that the provider had unilaterally changed the terms and conditions of the contract by increasing the monthly contract fee.
The customer argued that the cancellation penalty charged by the provider is unreasonable and in breach of S14(2) of the Consumer Protection Act (CPA) read with regulation 5 in that it makes it impossible to cancel the contract as they would end up paying more than if they were to allow the contract to run to term.
The provider argued that the cancellation penalty is in terms of section 14(3)(b)(i) of the CPA which allows them to impose a cancellation penalty with respect to goods supplied, in contemplation of the agreement not enduring for its fixed term.
It said that the handset subsidy pricing model is dependent on consumers remaining in contract for the fixed term to enable a return on investment (ROI). A premature cancellation would, therefore, result in a loss of ROI.
Below is the provider’s proposed early termination fee and how it was calculated:
- Current month outstanding fees, i.e., any out-of-contract costs;
- 20-days’ notice period;
- The insurance value is calculated at the start date of the contract/contract term x remaining months of the contract;
- The insurance value is calculated at the start date of the contract/contract term x remaining months of the contract. The insurance value of this device at the start date of the contract was R15,389.00 (Samsung S8).
According to the provider, the customer is currently paying R634.63 per month.
With 4.15 months remaining on the contract, they would end up paying R2,633.71 if they allowed the contract to terminate at 24 months. If they cancel, the penalty would be R3,199.71 as per the calculation above.
What the CPA says
The CGSO noted the following sections in the Consumer Protection Act are important when considering this issue:
Section 14(3)(b)(i) – 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,
Regulation (5)(2) – For the purposes of section 14(3), a reasonable credit or charge as contemplated 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 consumer’s possession 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 the 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 services provider, acting diligently, to find an alternative consumer between the time of receiving the cancellation notice and the time of the cancelled reservation;
j) The general practice of the relevant industry.
Regulation (5)(3) – Notwithstanding sub-regulation (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.
The CGSO said that based on the reading of section 14 and more specifically section 14(3)(b)(i) read with regulation 5(2) and (3), it is of the view that the provider’s cancellation charge negates the right of the customer to cancel the contract, as provided for in the Act.
“It is our view that whatever method is used to calculate the cancellation charge, it must give a reasonable result that is demonstrably proportional to the actual loss suffered, and that complies with the CPA,” it said.
While the CGSO said it is not in a position to prescribe what a reasonable cancellation calculation should be for the provider’s customers,it said that the company should revise its cancellation policy to ensure that there is full and upfront disclosure in the subscriber agreement of the handset cost.
“The policy must further be fully compliant with the spirit and intent of section 14 read with regulation 5,” it said.
“In this regard, we are of the view that the cancellation policy will need to pay particular attention to the requirements of regulation 5(2) and 5(3), which requires the provider to cater for different circumstances of cancellation, and most importantly, not make it impossible for the consumer to exercise their right of cancellation.”