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Cancellation Charges In Contracts – Are They Legal?

Contracts have serious legal implications and should not be entered into lightly. All contracts should provide a mechanism for cancellation and set out clearly the likely consequences for each party.

A party should be aware that once a contract is entered into, if there is a cancellation, then they may incur cancellation charges, which are meant to compensation the other party for any losses suffered.

However, a major problem can arise when the cancellation charges become disproportionate to any loss suffered and instead of being compensatory will become penal.

Cooling Off Period

If you have entered into a contract at a distance (e.g. over the telephone or on the internet), you are have a statutory right under the Consumer Contracts (Information, Cancellation and Additional Charges) Regulations 2013 to cancel the contract within 14 days if you change your mind.

You should obtain a refund of any monies but may be charged minimal costs for things such as the costs of returning the goods.

There are exceptions to this right, for example if you are paying for accommodation or transport of goods.

Cancellation Charges

Beyond the cooling off period, a contract will specify what charges will be incurred for a contractual cancellation.

The cancellation charges should cover actual losses to a business resulting directly from a cancellation. Calculation of these charges should be clearly set out in advance.

The Competition and Markets Authority (CMA) considers that in most cases, in order to be fair:

  • cancellation charges should be limited to a genuine estimate of what a business will lose directly
  • businesses should not be compensated twice for the same loss (e.g. by retaining some advance payments and imposing a cancellation charge)

Business should take reasonable steps to mitigate their losses.

If a cancellation charge represents an excessive penalty for breaching the contract, then this could be found to be an ‘unfair’ term in the contract which is not enforceable in law under the Consumer Rights Act 2015.

COVID related cancellations

In recent times, we have seen an unprecedented amount of consumer contracts which has had to be cancelled as a result of COVID, including weddings, events, and holidays.

The CMA has issued guidance (Statement on coronavirus (COVID-19), consumer contracts, cancellations and refunds) (updated in August 2020) which states:

Where a consumer cancels a contract, for example in response to government guidance, they should not face disproportionately high charges for doing so, and it is important that businesses respect government guidance and treat consumers who cancel because of it fairly.

Terms which say no refund is available in any circumstances, or that a consumer must pay in full if they cancel early – without taking into account any savings to the business for not having to provide the service or being able to sell to another customer – are likely to be unfair.

Recourse and remedies

If you think that a contractual cancellation clause is disproportionate and therefore unfair, you have a number of avenues to pursue, including:

  1. A complaint to the CMA
  2. A court claim to recover any money wrongly retained
  3. A report to Trading Standards

In serious cases of misleading information (for example, stating that there is no right to a refund), this could carry criminal sanctions if there has been a breach of the Consumer Protection from Unfair Trading Regulations 2008.

Commercial Customers

We have seen that there is an inordinate amount of legislation to protect individual consumers but what a commercial customer?

The case of Blu-Sky Solutions Limited v Be Caring Limited (2021) involved a social care provider who contracted for 800 mobile phones for a minimum term of 48 months for a monthly rental of £9,600. In less than 2 weeks of the contract being entered into, Be Caring sought to cancel. An invoice for a cancellation fee of £180,000 (£225 for each of the 800 mobiles) was sent by Blu-Sky and proceedings were issued when this went unpaid.

The judge found that the ‘administration charge’ for cancellation was particularly onerous because:

a) The sum of the “administration charge” bore no relationship to any administration costs incurred or likely to be incurred; and

b) The sum under the relevant clause was out of all proportion to any reasonable pre-estimate of its loss resulting from a cancellation.

As they were onerous, he also found that they had not been fairly and reasonably bought to the attention of the other party.

These clauses were found to be unenforceable as they were basically penalty clauses.

Word of Caution

Cancellation clauses and charges are legitimate and useful clauses to have in a contract. But you must ensure that the charges are fair and proportionate in achieving their intended purpose.

Otherwise there is a real risk that they would be void and unenforceable and you will be left out of pocket without any reasonable compensation for losses actually suffered.

Make sure you are read and are clear of the consequences of cancellation before you contractually bind yourself. If in doubt seek legal advice and get the terms in the contract checked.

If you are in need of specialist legal advice about your contract, cancellation charges or any other contract dispute call our highly experienced Contract Dispute Solicitors on 0808 296 4769 who will be able to assist. Alternatively, you can request a call back online.