In Short
- A cancellation fee is legal and enforceable if it reflects genuine losses to your business, such as wasted costs or lost profit.
- To charge a cancellation fee, it must be clearly stated in your terms or a cancellation policy that customers see before they book.
- Under Australian Consumer Law, cancellation fees must be fair and not impose an unreasonable burden on the customer, especially in small business contracts.
Tips for Businesses
Be transparent about your cancellation fees; make sure they are clearly displayed on your website, booking pages, and confirmation messages. Use upfront deposits or card pre-authorisation to help enforce your policy. Review your terms regularly to ensure they comply with unfair contract laws. When in doubt, seek legal advice to avoid penalties or disputes.
Table of Contents
If you run a service where customers make a booking or engage your business for a certain period, you may understand the frustrations of cancellations. It can be frustrating to dedicate time and resources to securing a client, only to have them back out of the deal before you can render your services and receive the full profit you expected. One way to protect your interests is to charge a cancellation fee. This article will explain how cancellation fees work and how you can use them effectively.
What are Cancellation Fees?
A cancellation fee is a sum of money charged to a customer who has enlisted your services but failed to complete their end of the agreement.
If you provide an appointment-based service where clients book individual time slots, you can charge a cancellation fee for late cancellations and no-shows. This refers to businesses such as:
- restaurants;
- hotels;
- beauty parlours; and
- cleaning services.
Alternatively, if you offer a subscription-based service, you can set a minimum term and an associated fee to end the term early. This could include products like:
- gym memberships;
- music streaming services;
- phone plans; and
- software packages.
Calculating Cancellation Fees
For an early cancellation fee to be valid, it must be a genuine reflection of the reasonable costs you have suffered due to the cancellation. If the fee overly burdens your customer, it may be considered a penalty and be invalid. You can calculate a reasonable cancellation fee by identifying your wasted costs or your lost net profit.
Wasted Costs
Wasted costs could include any money that you spend in preparation for the booking or service that you will not be able to recover as a result of the cancellation. This might include the cost of the following:
- administration to set the booking;
- preparing to render your services; and
- any services performed up until the point of termination.
For example, you might run a wall repair service that needs to pre-mix plaster two hours before a job. If a client is not at home to grant you entry, you will be unable to render your services. In this case, you could charge a cancellation fee for the following:
- the sum of your transport;
- the plaster you prepared for the job; and
- setting a booking with the customer.
Lost Net Profit
Lost net profit refers to the unpaid amount you would have earned had the booking or subscription proceeded, minus any costs you would have incurred in performing the rest of the contract.
For example, your fully-booked hotel might receive a last-minute cancellation. Your cancellation fee might be the total cost of the hotel room minus the costs the guest would have incurred during their stay, such as cleaning the room after their departure.
Calculating Your Cancellation Fees in Advance
You may want to set out your cancellation fees in advance. You can do this by having a cancellation policy in place that determines what cancellation fees are payable and when. This is often better for both you and your customers because it offers more certainty and transparency.
If your business faces higher wasted costs and lost net profits from last-minute cancellations, you might want to charge a cancellation fee based on the amount of notice a customer gives you.
For example, if you operate a restaurant, you might charge a higher cancellation fee for same-day cancellations to reflect the decreased likelihood of rebooking that table and wasted food preparation costs. Since you are more likely to rebook a table with more notice, you might charge a lower cancellation fee for cancellations made 24 to 48 hours in advance.
Otherwise, if your wasted costs and lost net profit are mostly the same regardless of when the customer cancels, it may be better to charge a fixed cancellation fee.
Continue reading this article below the formHow Do Cancellation Fees Work?
Cancellation fees are just like any other clause of a contract. As a service provider, you can set the terms of your business. If a client or customer wants to enter into a transaction, they must agree to your chosen terms. To charge a cancellation fee, you must clearly set out the process and circumstances in your terms and conditions or a relevant policy, such as a cancellation policy. More detailed terms will generally be easier to enforce.
If the money is already in your bank account, you will not face any difficulties trying to chase your customers for the cancellation fee. Clearly, stipulating the amount of the cancellation fee and the circumstances in which you will charge it will also ensure that they do not have any legal cause to claim their money back.
In contrast, if you do not have access to the customer’s money, they could ignore you when you ask them to pay a cancellation fee. Although you would have the legal right to that money, you will likely face difficulties enforcing it. Small claims are rarely worth pursuing in court because the time and money you spend will outweigh the reward.
How Should I Display My Cancellation Policy?
Cancellation fees are more likely to be enforceable and fair when they are displayed transparently. You should avoid burying cancellation terms in lengthy terms of business or using complex language that may confuse customers.
To make sure that your customers are aware of your cancellation fees, you should display your cancellation policy where your customers will actually see it.
For example, you could:
- include a summary of your cancellation policy at the top of your terms of business; or
- display your cancellation policy on your website, through an easily accessible link on the homepage.
If you are providing an appointment-based service, you could also display a link to your cancellation policy on the booking page and in all booking confirmations and reminder communications.
Whether you include your cancellation policy in your terms of business or as a standalone document, you should make sure that you clearly outline when a cancellation fee will be charged, how you will process the charge (such as through a deposit or pre-authorised card), and how much the cancellation fee will be.
Unfair Contracts
Under the Australian Consumer Law (ACL), you cannot draft unfair contract terms into your business agreements. The rule applies to standard form contracts entered into or renewed on or after November 2016, where:
- at least one of the parties to the contract is a small business (employs less than 100 people or has less than a $10 million annual turnover); orand
- it is for the supply of goods or services or the sale or grant of an interest in land.
Additionally, new laws that took effect in November 2023 have increased the penalties for unfair contract terms. Under these new laws, a contract can still be considered standard form if minor changes have been made to it in the course of negotiations.
A contract term is unfair if it:
- causes a significant imbalance in the parties’ rights and obligations, where one party may have the right to terminate the contract or unilaterally vary the terms;
- is not reasonably necessary to protect the legitimate interests of the party taking advantage of the term; and
- causes financial or other detriment to a small business if it is relied on.
When deciding whether a term is unfair, the court considers many factors, including:
- how transparent the term is;
- other terms in the contract; and
- the overall rights and obligations of each party under the contract.
What Happens if My Cancellation Fee is Unfair?
If a court decides that a certain contract term is unfair, the term becomes ‘void’ and, therefore, unenforceable. The Australian Competition and Consumer Commission (ACCC) can also impose large fines on your business for non-compliance with the unfair contract terms regime.
What if the Customer Cannot Control the Cancellation?
Remember that it may not always be reasonable to charge a cancellation fee. Indeed, there will be times when a client cannot make their appointment for issues outside of their control. This is known as a frustrated contract, which occurs when the parties cannot perform their original agreement because of an incident that neither party is responsible for.
For example, extreme weather might prevent a client from showing up to your place of business. The law will prevent you from enforcing a frustrated contract.
Whether you’re a small business owner or the Chief Financial Officer of an ASX-listed company, one fact remains: your customers need to pay you.
This manual aims to help business owners, financial controllers and credit managers best manage and recover their debt.
Key Takeaways
Having a well-drafted cancellation fee can protect your business’ interests against customers cancelling your services on short notice. You should clearly advertise your cancellation policy before or at the time customers make a booking with your business. It can also be helpful to take a deposit up front to avoid the hassle of chasing a cancellation fee. Finally, your cancellation fee must be reasonable and reflect the actual costs you suffer as a result of the cancellation.
If you need legal advice regarding your cancellation policy or terms and conditions, 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 1300 544 755 or visit our membership page.
Frequently Asked Questions
You can calculate a reasonable cancellation fee by identifying your wasted costs or your lost net profit. Wasted costs could include any amount that you spend in preparation for the booking or service that you will not be able to recover as a result of the cancellation. Lost net profit refers to the unpaid amount you would have earned had the booking or subscription proceeded, minus any costs you would have incurred in performing the rest of the contract.
Under the Australian Consumer Law (ACL), you cannot draft unfair contract terms into your business agreements. If your cancellation policy causes a significant imbalance in your customers’ obligations and is not reasonably necessary to protect your business interests, it might be unfair.
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