Contract cancellation costs consumers

Johannesburg, 19 Mar 2013

SA's largest cellular provider, Vodacom, argues that 75% of the balance of a contract is a reasonable cancellation fee.

SA's largest cellphone operator, Vodacom, argues it is justified in charging contract subscribers 75% of the balance of the contract as an early cancellation fee, under a vague term in consumer law.

Under the Consumer Protection Act (CPA), which has been in effect for almost two years, companies can charge a "reasonable" fee, taking several factors into account, when customers want to get out of contracts early.

However, in the cellular sector, Vodacom seems to be charging the highest amount, as it imposes a 75% penalty across the board for early cancellations, while Cell C charges for the balance of the handset, and MTN charges one month and a handset cancellation fee.

Vodacom is SA's largest cellphone provider and has 5.9 million contract subscribers, while MTN has four million fixed-term customers.

No definition

Ebrahim Mohamed, acting national consumer commissioner, says the 75% fee seems excessive. He adds that the question is how it is justified.

Mohamed tells ITWeb that the matter of the cancellation fee needs to be tested at some point in the courts as it is currently wide open, as "reasonable" is not defined.

What the CPA says:

Upon cancellation of a consumer agreement as contemplated in subsection (1)(b):

(a) 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; and

(b) The supplier

(i) 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, if any; and

(ii) Must credit the consumer with any amount that remains the property of the consumer as of the date of cancellation, as prescribed in terms of subsection (4).

Subsection four refers to the regulations, which state:

A reasonable credit or charge as contemplated in section 14(4}(c} 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;

(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 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 service provider, acting diligently, to find an alternative consumer between the time of receiving the cancellation notice and the time of the cancelled reservation; and

(j) The general practice of the relevant industry.

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.

A complaint would need to be lodged with the National Consumer Commission, says Mohamed. He adds that, while the commission has the power to investigate such terms and conditions, it is currently over-stretched and does not want to commit to something it cannot deliver on.

Nicholas Hall, an attorney with Michalsons Attorneys, says if contracts are cancelled closer to the end date, operators could be justified in charging a higher penalty as there is less prejudice to the consumer. However, he says 75% seems excessive and could be open to a challenge from consumers. "Seventy-five percent is a bit of a reach."

The big issue with cancellation fees is that it is not prescribed, and the definition of reasonable includes a number of factors, the big issue being an industry standard, says Hall. He comments that the fee sounds like Vodacom is pushing its luck, which it is entitled to do until there is a determination of reasonableness.

Hall says the question of what is reasonable will have to be settled through a test case. While the sector cannot charge 100%, it is up to the industry players to find a common ground, and the circumstances of each contract need to be taken into account.

"The problem is we need someone who is prepared to make a fight and put in the effort."

Varying charges

Nomsa Thusi, Vodacom executive head of media relating to products and services, says its approach is to provide a transparent model by charging 75% on the balance of subscription. "This is much more simple and easy to understand since there's no debate on the value of the handset - whether it's the cost price, a discounted retail value or full retail value."

Vodacom's cancellation fee, three-quarters of the balance of subscription, includes the device offered with the subscription, says Thusi. If subscribers opt for a more expensive device, there will be an additional monthly pay-in over and above the normal subscription fees, she adds.

Subscription fees include the device costs and other costs invested in providing the service to the customer, notes Thusi. "These include licensing fees to host subscribers on the network, provisioning and de-provisioning costs, and costs to service subscribers such as call centre support."

Thusi adds: "We effectively provide our customers a 25% reduction on the balance of subscription charges in line with the guidelines provided by the CPA to process a premature cancellation."

According to the CPA, general industry practice should also taken into account.

MTN, SA's second-largest operator, says its early termination fee is based on the remaining retail value of the handset plus one month's subscription fee. MTN is confident its formula is in line with CPA regulations, which gives guidance for determining a reasonable cancellation penalty, says Eleanor Potter, GM Branded Channel at MTN SA.

Cell C's executive head of communications, Karin Fourie, says its fee is based on the outstanding value of the handset that has been supplied to the consumer. Virgin Mobile also only charges pro rata for the device, it has previously said.