A contract is essentially a legally binding agreement. Once a contract has been formed, a business should be able to take steps to protect itself against losses it suffers as a result of a cancellation by the other party.
1. Incorporation of Terms of Business
The first step is for a clear and unequivocable cancellation clause to be included in the business’ Terms of Business.
The cancellation clause should set out clearly how and when the contract can be cancelled and what the consequences of cancellation at any given time will be for each party.
In order for a business to be able to rely upon its Terms of Business, the Terms of Business and the particular clause must have been incorporated into the contract.
2. Consumers – Cooling Off Period
In relation to most types of contract, if a consumer has entered into a contract with you at a distance (eg on the internet or over the telephone) then they have the right to cancel the contract within 14 days should they change their mind.
This right is set out in the Consumer Contracts (Information, Cancellation and Additional Charges) Regulations 2013.
3. Cancellation Charges
If the contract is with another business or the consumer seeks to cancel the contract after the 14-day cooling off period, then in order for a cancellation fee to be enforceable, it must not amount to a penalty.
Essentially, what this means is that the cancellation fee has to have a legitimate purpose in that it must have been calculated with a view to compensating the business for the losses it has suffered or will suffer as a result of the cancellation. The cancellation fee will need to represent a genuine pre-estimate of loss.
The courts have held that cancellation fees have been unenforceable where they have been considered to be “unconscionable” or “exorbitant” or “extravagantly disproportionate to the interests being protected”.
If you require further information, please contact Anna Barnes in our Dispute Resolution Team (lab@salehs.co.uk or 0161 434 9991).