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A business cancellation policy or clause in your terms and conditions are essential for business operation. If your customers cancel and you spent money and time only to lose it, it may be a good idea to consider a clear cancellation policy. You can include this in your terms and conditions, and include what fees the customer will need to forfeit if they cancel.

For example, suppose a customer does not turn up to their appointment or needs to cancel a booking at short notice. In that case, the purpose of a late cancellation fee is to recoup some of the lost revenue you would have received if the customer attended their appointment or went ahead with their booking. You must inform customers of when they can cancel an appointment or booking without incurring a fee. This article will explore some essential things you should consider and include in your cancellation policy.

When Your Business Needs to Cancel

There may be circumstances where you may need to cancel the delivery of your services to customers. If you need to cancel, you must include this clearly in the cancellation policy or terms and conditions. In addition, you will need to clearly state what will happen to your customer’s booking if you cancel. Some options you may want to consider include:

  • trying to book the customer in for another time slot within the next six months and use any money the customer has paid as a credit towards the next booking;
  • offer them a refund for any money they have paid; or
  • offer them a credit for them to use in the next 12 months. 

 When Your Customer Wants to Cancel

You must clearly state the timeframe within which a customer can cancel without a penalty. You may want to have a tiered timeframe for cancellation where you may refund a customer for a portion of the fees they have paid. For example:

  • outside of four weeks of the booking, the customer will receive a refund of all monies they have paid;    
  • within one to four weeks of the booking, the customer will forfeit their deposit; and      
  • within one week of the booking the customer will forfeit a certain percentage of the fees payable.

You may also want to consider including a provision if something that is not in the customer’s control causes them to cancel. For example, becoming ill or an emergency arising. If this happens, you may have a slightly different arrangement that you will need to outline in your cancellation terms. You can also use your discretion to waive cancellation fees in certain circumstances.

Is the Cancellation Fee a Penalty?

When considering what cancellation fees are fair, you need to be aware that the cancellation fee may be seen as a penalty. This is when it penalises one party but not the other. In this case, the court may deem it to be an unfair contract term. Australian Consumer Law prohibits unfair contract terms, which can be void and unenforceable. When deciding on an appropriate cancellation fee, you need to consider the loss your business is likely to suffer due to customer cancellation. The cancellation fee needs to be a genuine pre-estimate of your loss. This is something you should also include in your cancellation terms to make it clear that the customer acknowledges that the cancellation fees are a genuine pre-estimate of your loss.

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What Is a Genuine Pre-Estimate of Your Loss?

You can calculate a genuine pre-estimate of your loss by using either your ‘lost net profit’ or your ‘wasted costs’.

Wasted costs include fees and upfront costs for preparing or setting up the contract. This includes the cost of performing the service under the contract up to the date of termination, excluding any costs or overhead costs you would incur regardless of cancellation. For example, you may have paid a deposit to a caterer who would be providing catering at your customer’s event. Or perhaps you had started preparing decorations for the event. In this case, these could be considered wasted costs. If you incur these costs the week before the booking, you may want to include this as the cancellation fee for cancellations in the week before the booking.

Lost net profit is the unpaid amount of the contract price less the costs you would have incurred in performing the remainder of the contract. 

Key Takeaways

Cancellation provisions or policies are imperative for your business to run smoothly and potentially profitably if you are likely to suffer loss if your customers cancel. When considering appropriate cancellation terms, you need to consider:

  • the cancellation process if you need to cancel;
  • cancellation timeframes and fees forfeited if the customer needs to cancel; and
  • whether any cancellation fees charged to the customer would be a genuine pre-estimate of your loss.

If you need assistance preparing an effective cancellation policy or a cancellation clause for your terms and conditions, contact LegalVision’s contract lawyers on 1300 544 755 or fill out the form on this page. 

Frequently Asked Questions 

What is a penalty clause?

This is when the clause penalises one party but not the other. To avoid this, the cancellation clause must outline a genuine pre-estimate of loss. To do this, use either your ‘lost net profit’ or your ‘wasted costs’ to calculate the cancellation fee.

What if my business needs to cancel?

If you need to cancel, you must include this clearly in the cancellation policy or terms and conditions. In addition, you will need to clearly state what will happen to your customer’s booking if you cancel.

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