Summary
- Businesses offering booking or subscription services may charge cancellation fees to recover losses when customers cancel early, provided the fee is proportionate to actual losses incurred.
- Cancellation fees must comply with consumer law, including the 14-day cooling-off period applicable to most distance and off-premises contracts in the UK.
- Businesses should consider waiving fees where cancellation results from circumstances beyond the customer’s control, such as a medical emergency or natural disaster.
- This article is a plain-English guide to cancellation fees in contracts, written for business owners operating in the UK.
- It was produced by LegalVision, a commercial law firm that specialises in advising clients on contract law and consumer rights.
Tips for Businesses
Ensure your cancellation fee clause is clearly written into your contract before services begin. Set fees proportionate to your actual losses. Review whether your contracts qualify as distance or off-premises agreements, as cooling-off rights will apply. Consider a waiver policy for genuine emergencies to reduce disputes.
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.
Download this free Supplier Contracts Checklist to ensure your contracts will meet your business’ needs.
When Can a Cancellation Fee Become Unenforceable?
Not every cancellation fee will hold up legally. Under the Consumer Rights Act 2015, a term in a consumer contract may be unfair if it creates a significant imbalance between you and your customer.
A cancellation fee is more likely to be considered unfair if it:
- is disproportionately high compared to your actual losses;
- was not clearly brought to the customer’s attention before they agreed; or
- penalises the customer rather than compensating for your genuine losses.
Unfair terms are not binding on the consumer. This means a court can refuse to enforce them.
To protect your business, make sure your cancellation fee:
- reflects your real financial losses;
- is written in plain, clear language; and
- is prominently displayed before the customer commits.
A well-drafted cancellation clause is your strongest protection if a dispute arises.
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.
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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.
Yes, you can charge a fixed fee, a percentage of the total contract value, or the actual losses incurred. The fee must reflect your genuine losses.
Yes, businesses can waive fees where cancellation resulted from circumstances beyond the customer’s control, such as a medical emergency or natural disaster.
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