Table of Contents
In Short
- Cancellation fees are charges imposed when a contract is terminated early or without following the agreed terms.
- These fees serve as compensation for the losses incurred due to the cancellation.
- Clearly defining cancellation fees in contracts helps manage expectations and reduces disputes.
Tips for Businesses
When drafting contracts, include clear terms about cancellation fees to protect your business from unexpected losses. Ensure these terms are understood by all parties to prevent disputes. Regularly review and update contract terms to adapt to changing business environments and ensure their enforceability under current laws.
If you operate a business with a booking service, it can be very frustrating when customers cancel their bookings. This is because last-minute cancellations can cost your business time and money, especially if you invest significant resources into preparing services for your clients. When this happens, cancellation fees are a legal means to ensure you do not experience losses from customers backing out of agreements early. This article will outline when and how to charge a contract cancellation fee.
What is a Contract Cancellation Fee?
You can charge a cancellation fee when another person to your contract wishes to end the agreement before its scheduled end date. In business settings, many businesses that take bookings for holidays, flights or services use cancellation fees to ensure they do not lose earnings from that cancellation.
Known as termination fees, cancellation fees also encourage people to honour a contract for its duration. They are usually issued against the party who wants to end the agreement early. Importantly, they require that person to pay a fee to ensure your business does not lose out on expected earnings.
Can My Business Charge a Cancellation Fee?
Businesses that engage in booking or reservation-based services will commonly use cancellation fees. For example, you may want to use a cancellation fee if your business provides:
- holiday or travel reservations;
- hotel bookings;
- restaurant reservations;
- delivery services;
- specialised events-based services, such as a photography service; or
- ticketing services.
Examples
You will also often see cancellation fees used in subscription-based services or general contracts for service performance.
Your business may want to use a cancellation fee if you provide:
- mobile phone plans;
- an internet streaming service;
- a gym service;
- goods via a subscription service, for example, grocery delivery services like HelloFresh; or
- software services.
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Consumer Rights
Although businesses can charge cancellation fees, you will need to make sure that it is not done in violation of consumer laws. Consumer laws outline strict guidelines on refunds for consumers.
The UK has a 14-day cooling-off period for most distance off-premises contracts.
What is the Difference Between an On-Premises, Off-Premises and Distance Contract?
An on-premises contract refers to an agreement in which a customer makes a purchase directly at your business’s physical location, such as by walking into a physical shop and making a purchase.
A distance contract covers contracts that are made online or over the phone. It is important to note that it must be part of an organised distance sales scheme. For example, if your business takes orders for your goods in-store but allows a customer to make a one-off order over the phone, it will not be considered a distance contract.
Cooling-Off Period
For most distance and off-premises contracts, consumers have a 14-calendar-day cooling-off period. During this period, they can cancel their order without explanation and are entitled to a full refund, which includes the full cost of standard delivery.
The cooling-off period for goods starts the day after the consumer receives them. For multiple goods ordered in one order but delivered separately, it runs from the day after the last item is received. For services, it starts the day after the contract is entered into.
Use this checklist to ensure your supplier contracts contain all necessary terms.
Key Takeaways
If your business operates a booking or subscription service, you may charge cancellation fees if your customers want to cancel the service before the agreement is supposed to end. As such, cancellation fees can deter customers from ending a contract early and ensure you recover any losses incurred when preparing to provide them with that service. You can calculate a cancellation fee in several ways, but it is essential to remember that the fee must be proportionate to the losses you incurred from that termination.
Furthermore, there may be occasions when enforcing a cancellation policy would be unreasonable because the customer experienced frustrating circumstances they could not control. As a result, you should seek legal advice when drafting and enforcing a cancellation fee policy.
If you need advice on how your business can recoup fees from cancellations, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
A consumer is an individual who acts for purposes wholly or mainly outside their trade, business, craft, or profession. A trader acts for the purposes relating to that person’s trade, business, craft or profession, whether acting personally or through another person acting in the trader’s name or on the trader’s behalf.
Examples include contracts for passenger transport services and the supply of medicinal products administered by or prescribed by a prescriber.
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