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As a business owner, you put a large amount of effort into providing services and arranging bookings or appointments for your customers. It can be incredibly frustrating to dedicate this time to a customer, only to have them cancel their booking before you receive profit. To ease this frustration, you may want to consider charging a cancellation fee. However, there are circumstances where this may be unenforceable. This article will detail:

  • what a cancellation fee is; and
  • the circumstances when you can, and cannot, charge your clients a fee for cancelling.

What Is a Cancellation Fee?

A cancellation fee is an amount of money charged to a customer who fails to attend their booked appointment or complete their end of the service agreement. These fees are typical for appointment-based services. The types of businesses that more typically charge for late cancellations or no-shows are:

  • restaurants;
  • hairdressers; 
  • doctors and medical practitioners; 
  • personal trainers; and 
  • hotels.

When Can a Business Charge a Cancellation Fee?

As a business owner, you may decide to charge a cancellation fee to your client or customer. Your right to charge this fee is because your client has technically breached their contract with your business. When a client makes an appointment, your business and your client enter into a contract to provide your services. The customer fails to uphold their obligation to receive and pay for these services when they cancel the appointment or booking. 

However, you are only entitled to charge the client a fee for this breach if it is reasonable. Usually, it is reasonable if you (as the service provider) have suffered a loss due to the cancellation.

For example, it would be reasonable if your client cancels an appointment at short notice. ‘Short notice’ could include on the date on the booking or within 24 hours of the appointment. Likewise, if you have already spent time and resources preparing for this client, charging them a cancellation fee would be reasonable. This fee would be a fixed amount or a percentage of the service’s cost. However, be sure to specify this amount or percentage to your client or customer. Further, it is common for businesses to charge the fee to their client’s bank account or credit card. 

If you wish to charge this type of fee, you must make it known to your customers or clients. You must also state how much you are planning to charge. Doing so will assist in the fee being reasonable. You may wish to make your customers aware of it through a specific provision in your service agreement or terms and conditions. 

Requirements to Charge a Cancellation Fee

Different kinds of services have different requirements for when it is reasonable to charge a cancellation fee. For example, a business that provides layby sales (when a customer pays a deposit for an item and the shop puts that item aside whilst the customer pays the full amount) may only charge a fee if:

  • the agreement governing the layby sale has been cancelled (either by the consumer or the supplier); 
  • the agreement provides that a cancellation charge is payable; and 
  • the supplier of the item has not breached the agreement.

You should ensure that your cancellation fee complies with the requirements applicable to your line of business. 

When Can a Business Not Charge a Cancellation Fee?

Your business cannot charge a cancellation fee where it is unreasonable. It will be unreasonable to charge your clients if:

  • the term governing the fee in your service agreement is unfair;
  • your client or customer had a right to cancel the appointment, booking or service; or
  • the agreement governing the provision of your services becomes frustrated. 

Unfair Term

The term that contains your cancellation fee procedure may be unfair if it:

  • causes a significant imbalance between you and your customers’ rights and obligations;
  • is not reasonably necessary to protect your business’ interests; and
  • would cause detriment to your customer if you enforced it. 

For example, your terms and conditions specify that your business can cancel a booking at any time. However, the provision states that a customer must pay 80% of the service’s cost to cancel the appointment. This is an unfair contract term, and your business cannot enforce it. Likewise, if your business charges unreasonable cancellation fees if your client wishes to change their appointment slot, this too would be unfair. 

Right to Cancel

There are instances where your customers have a right to cancel their booking or appointment. In these situations, your business cannot charge that client a cancellation fee.

For example, a client is entitled to cancel their ongoing appointments for your services, say as a gym instructor or hairdresser, if you have failed to conduct these services with reasonable care and skill. You would not be entitled to charge that customer with a fee for cancelling, as they have a legal right to cancel.

Frustration

A customer may be unable to attend and pay for your service due to an extenuating circumstance or issues outside of their control. In such instances, your contract with that client may be frustrated. Your client is entitled to cancel a frustrated contract, and you cannot charge them a cancellation fee. 

For example, a natural disaster or instance of extreme weather may prevent your customer from attending their appointment. If you want to charge this type of fee in exceptional circumstances, you should assess this on a case by case basis. 

Key Takeaways 

To reduce the issues that accompany a client cancellation, you may want to consider setting up a cancellation fee as a clause in your service agreement. However, it is crucial that you clearly advertise this fee to your customers and only impose it where reasonable. If you need any legal advice regarding your cancellation policy, contact LegalVision’s contract lawyers on 0800 005 570 or complete the form on this page.

FAQs

What is a cancellation policy?

A cancellation policy dictates the amount of money that gets charged to a customer who has enlisted in a business’s services but fails to attend the specified slot or complete their end of the agreement.

Can you charge a cancellation fee?

New Zealand businesses are entitled to charge a cancellation fee where it is reasonable to do so.

When is it unreasonable to charge a cancellation fee?

It will be unreasonable for your business to charge a cancellation fee when: the cancellation fee provision is an unfair term; your customer has a right to cancel; or when the contract with your customer is frustrated. 

What is a cancellation fee period?

A cancellation fee period is a period in which your client or customer can cancel their booking or appointment without your business charging them a fee for doing so.

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