With each new year, resolutions are made to become fitter and healthier, resulting in a large percentage of gym contracts being entered into across South Africa. However, resolutions are often short-lived and the business owner may receive requests for cancellation before the initial contract term has even expired. Informed members often invoking Section 14 of the Consumer Protection Act (CPA) when submitting such a request for cancellation.
Gyms that have entered into fixed terms contracts often tout discounted membership fees in order to entice potential members. The duration of such agreements is usually lengthy in order for the business to recoup its initial losses over the term of the agreement. Consequently, in the event of early termination, the business is unable to recover the full value of the contract. Business owners, therefore, seek to introduce penalties with the aim of mitigating the loss of anticipated income as well as deterring members from canceling their membership.
Despite consumers agreeing to the contract terms, penalty fees remain an issue of contention as the calculation of such ‘reasonable penalty’ is generally challenged by the consumer upon cancellation especially when advised that future loss of income is factored into calculating the penalty fee.
In determining the reasonableness of such inclusion we looked to Section 14(3)(a) of the CPA which provides that ‘the consumer remains liable to the supplier for any amounts owed to the supplier in terms of that agreement up to the date of cancellation’. From a supplier perspective, the interpretation of the aforementioned section appears straight forward, that is, the consumer contracted to be bound to the agreement and is therefore liable for damages sustained by the supplier, that is current and prospective losses, resulting from early termination.
When interpreting the application of the aforementioned section the Consumer Goods and Services Ombud (CGSO), in an Advisory Note, held that discounts granted may be factored in calculating the penalty fee. However, an issue in contention related to the inference that the penalty fee could only be calculated based on debts already incurred and therefore excluded future obligations, relying on the international approach to fair contractual terms.
Similarly, in a mediating a subsequent dispute, relating to the calculation of a cancellation penalty, the CGSO found the provisions of Section 14(3)(b)(i) and Regulation 5(2) of the CPA to an extent in conflict with the other. Stating that the aforementioned regulation exceeded the scope of Section 14(3)(b)(i) of the CPA. The CGSO further held that the provisions to be ambiguous and therefore reiterated that the CPA specifically provides that if any clause is deemed to have more than one meaning, the determining regulatory body must prefer that which best promotes the spirit of the Act. This essentially means promoting the interest of the consumer. In the aforementioned dispute, the CGSO found that it was not in the interest of the consumer to be bound to a long term agreement and held future loss of income to be excluded when calculating the penalty fee.
It is therefore clear that the reasonable man test is clearly not the sole factor in determining a cancellation penalty. It is therefore recommended that businesses re-evaluate their policies and said policies and is being challenged by the consumer.
ABOUT THE AUTHOR
Mariam Allie graduated with a BA(Law) LLB from the University of the Western Cape. She is an Attorney, Notary, and Conveyancer and currently practices as a legal advisor in the SEESA Consumer Protection & POPI department.