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If you run a service that depends upon customers making a booking or engaging 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 have a chance to render your services and receive the full profit that you expected. One way to protect your interests is to charge a cancellation fee, which is completely legal most of the time. 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 as a result of 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, such as cost of:

  • 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 in advance of a job. If a client is not at home to grant you entry to their home, you will be unable to render your services. You can charge a cancellation fee for: 

  • 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 that 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.

How Do Cancellation Fees Work?

Cancellation fees are just like any other clause of a contract. As the provider of a service, you can set the terms of your business. If a client or customer wants to enter into a transaction, they will need to agree to your chosen terms. To charge a cancellation fee, you simply need to detail the process and circumstances when it would apply within your cancellation policy.

More detailed terms will generally be easier to enforce. To ensure that you can recover any loss from a cancellation, it is best practice to put some kind of security into your billing process.

For example, you could: 

  • require a non-refundable 10% deposit upfront; or
  • record your clients’ credit card details and charge a 10% cancellation fee for any missed appointments.

You should clearly outline this in your cancellation policy.

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 already have access to the customer’s money, they could just 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, simply because the time and money you spend will outweigh the reward.

Unfair Contracts

Importantly, there are some situations where you may not be able to enforce a cancellation fee. Under Australian Consumer Law, a standard form contract will be unenforceable if it contains an “unfair term”.

A standard form contract is an agreement that customers receive without the opportunity for negotiation. Your terms and conditions would most likely be a standard form contract, unless you agree to individual terms with each client.

Therefore, your cancellation policy may be invalid if it is considered an unfair term.

What is an Unfair Term?

Your cancellation fee would be considered an unfair term if it:

  • causes a significant imbalance in your customer’s rights;
  • is not reasonable necessary to protect your legitimate interests;
  • would cause detriment to your customer.

This would make your cancellation fee unenforceable.

With this in mind, you should set your cancellation fees to reflect your reasonable costs incurred by the cancellation. 

For example, a 10% cancellation fee for a missed appointment would probably be reasonable while a 50% cancellation fee is not. Or, a four week cancellation period for a subscription might be reasonable, while a four month period would not be.

However, what is reasonable will ultimately depend on the circumstances of the situation. This is because some businesses and services will have more significant upfront costs to prepare for a client than others.

What if the Customer Cannot Control the Cancellation? 

You should also keep in mind that it may not be reasonable to charge a cancellation fee if a client was unable to make their appointment because of 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, if an extreme weather event might prevent a client from showing up to your place of business.

The law will prevent you from enforcing a frustrated contract.

Key Takeaways

To protect your business’ interests against customers cancelling your services on short notice, you should impose a cancellation fee in your terms and conditions. This should be clearly advertised to customers before they book with you. It is also a good idea to take some kind of deposit upfront, to save 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 condition, contact LegalVision’s contract lawyers on 1300 44 755 or fill out the form on this page.

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Simon Hillier | Disputes and Litigation Lawyer | LegalVision
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