Complete guide: How to legally protect your business financially from cancellations
We all know it, it’s been a trying year for business owners.
And with the world still not quite back to normal yet, you’re likely to still find clients and customers requesting cancellations.
So in an effort to lend a hand, we thought we’d create a complete guide to legally protecting your business from cancellations.
This advice comes directly from our practicing shop attorney Paige Hulse who has helped a number of her clients personally navigate client cancellations due to COVID.
legally protect your business from cancellations
We’ll first start with the steps you may take now in preparation for cancellations before they even happen, and then go into what to do when the email inevitably lands in your inbox requesting a cancellation from your client.
Preparation steps to take in advance of cancellation requests
Step 1. Review your current contract for important cancellation language
There’s a situation we’ve seen frequently occurring during COVID, it looks a little something like this:
A client requests a cancellation, the business owner talks to an attorney about how to best move forward, and the attorney recommends the business owner has their client sign a cancellation agreement. The business owner asks the client to sign the cancellation agreement and the client refuses. Because the requirement of signing a cancellation agreement was not stated as a step that must be taken in order to cancel in the original client contract, the business owner is left in a bind.
The best step you can take now is to ensure your current client contract is very clear on the steps that must be taken when a client wishes to cancel.
What step should you get your client to take when they wish to cancel?
Have them sign a separate cancellation agreement.
So, bringing us back to this first step, you want to check over your current client contract and see what the cancellation section says.
You want it to state that in order for a client to cancel, they must sign a cancellation agreement.
Why is signing a separate cancellation agreement better than changing the current client contract?
1. You can get into a very extended legal battle over whether you amended or modified your contract correctly which is costly, time-consuming, and, obviously, is a less-than-stellar client experience. This often means days arguing in court, which is exactly what you want to avoid.
2. Judges know you should have a cancellation agreement to prove that the service has indeed been canceled instead of a string of emails that turns into a he-said, she-said situation.
Many business owners have lost cases because they couldn’t get their clients to sign a cancellation agreement.
So the bottom line is, the very first step you want to take in preparation for cancellations is to check if your current contract states that in order for a client to cancel, they must sign a separate cancellation agreement.
If your current contract doesn’t state that or you feel it’s not up to snuff, you may browse our attorney-prepared, peer-reviewed client agreements here. All of our shop’s client agreements come with correct language in the cancellation provision that protects you from exactly this issue.
And what about that all-important cancellation agreement we’ve been discussing?
You may find that in our shop titled ‘The Termination Agreement’. (If you’re also predicting you’ll be doing some rescheduling with clients, you may get both the Termination Agreement and the Rescheduling Agreement together in a bundle.)
Before we move onto step 2, there’s one other important aspect you should look for in your cancellation provision in your current client contract. It needs to be specific.
Specify the amount of notice required in days, as well as that it must be in written format (not just verbally).
Step 2. Optimize your cancellation provision to protect your business financially
The second important piece to protecting your business from cancellations is that you have a section within your cancellation provision about what happens to payments.
Of course, in your contract, you likely have a section related to the client paying for your services (eg. four payments at 25%) on certain dates.
But it’s important you set similar milestones related to finances also in the cancellation section of your contract.
For example, we suggest having a tiered cancellation payment provision.
Creating cancellation payment milestones
You often see something like this with hotels:
“If you cancel between 0-7 days before your visit, 0% is refunded. If you cancel between 7 - 29 days before your visit, 50% is refunded. If you cancel more than 30 days before your visit, 100% is refunded.”
Be sure your cancellation provision is similarly specific in what happens financially for your clients in tiers of X number of days out from an event/the project starting.
For wedding professionals who book clients a year out, we suggest breaking the cancellation payments provision into 4 payments of 25%.
For example, if the couple cancels between months 1-3, the 25% deposit is retained by you the business owner, and all future payments must not be made.
If the couple cancels between months 3-6 and has paid 50%, the 50% is retained by the business owner and the remaining 50% payments must not be made.
If the couple cancels between months 6-9 and has paid 75%, the 75% is retained by the business owner, and the remaining 25% of payments must not be made.
Finally, if the event is canceled, the one exception is for the final payment, we recommend business owners don’t retain the final 25% payment and waive the final payment/refund it to the couple.
Why structure it this way?
In court, the judge would be looking for what payments are reasonable/how much expense & work you the business owner have done/incurred up until that point. And the refund must be relative and reasonable to the work done/costs incurred.
This can be a little different for different wedding industry professionals, like say a wedding planner versus a wedding photographer.
A wedding planner has clearly done the lion’s share of their work by the time the event occurs, whereas a wedding photographer’s primary work takes place at the event itself.
Therefore a wedding photographer might need to be more flexible on those 3rd and 4th milestones, whereas a venue or planner, they have a much more solid argument that they had upfront costs and therefore those 3rd and 4th payments are deserved based on a costs analysis of offering their services.
With all the above mentioned in place, you’ll have set yourself up for a much more clear & convincing argument if you ever need to make one in front of a judge.
In our experience, we’ve found that when a business owner steps 1 and 2 in place and their client gets a lawyer involved, once the lawyer sees that the business owner has everything we’ve mentioned, the lawyer knows fighting the case will extremely difficult to win and likely not worth the fight.
Step 3. Inspect & fix your force majeure provision
If you’ve correctly completed steps 1 and 2 an opposing lawyer knows they’re unlikely to win a case against you related to the cancellation provision. The next place they’ll look is at your force majeure provision.
Therefore the smartest thing a business owner can do in the event of force majeure is to make sure that the provision lists ‘pandemic’ and ‘epidemic.’
Here’s a list of what to check for in your force majeure provision.
Your force majeure provision should state:
Lists ‘pandemic’ and ‘epidemic’
What happens if one party believes a force majeure event has occurred
How that notice should be provided
What happens to refunds
What happens if you and your client disagree if a force majeure event has occurred?
Let’s talk about what force majeure is in order to get our answer.
Force majeure: A superior force that prevents the purpose of the contract from being able to occur.
Therefore, the way to protect your business from this issue is to make sure you have something in your contract which states the purpose of the contract.
That’s why in all of our client contracts we have a seemingly obvious line that states the purpose of the contract.
If you have a contract not purchased from our shop, be sure to go look it over now to ensure there’s a statement in the contract about the purpose of the contract, as this is essential to force majeure disagreements. And click on the image below to grab our Force Majeure Provision Free Contract Language.
What about rescheduling fees?
From a business strategy perspective, it’s a good idea to have a rescheduling fee stated in the contract.
However, the purpose of this is more to be used as a bargaining chip rather than actually an income generator.
When you have a rescheduling fee stated in your contract and you’re discussing canceling and/or rescheduling with your client, if they’re leaning towards canceling, you could for example offer to waive the rescheduling fee if they choose to reschedule as opposed to cancel.
One extra tip for you that we see business owners make mistakes on often is that in your rescheduling agreement, you need to state the amount of your rescheduling fee in your Conditions Precedent section.
(Again, if you bought the rescheduling agreement contract from us, this has already been taken care of.)
How much should the rescheduling fee be?
A question we get often is what should the specific amount of the rescheduling fee be.
This is something that there’s no legal precedent on, so it’s something really up to the business professionals.
We suggest determining your fee depending on a few things: when your clients are rescheduling to (eg. same calendar year or the next year), how much the fees for your services are in the first place (do you charge $500 for your service or $10,000 for your service?) and what others in your industry/area are doing.
Remember, for every cost that you cause your client to incur, you need to be able to have a black-and-white spreadsheet demonstrating why it’s reasonable because if you’re in court, that’s what a judge is going to ask for.
So when determining your fee, think about if you were presenting that argument spreadsheet-in-hand to a judge, what would seem reasonable?
What about if you, the business owner, want to cancel?
On the flip side, what if you’re working with a nightmare client and YOU want to cancel the contract with the client?
(Again, if you have your client contract from our shop, we include just that in every one of our client agreements.)
If you don’t have a contract from us, here’s what to look for: look at your termination provision. This is the section that allows you, the business owner, to cancel for whatever reason.
It’s similar to a client canceling in that the provision should state “Here’s how much notice needs to be provided, here’s how much money the client gets back/you get to retain, etc.”
The difference with a client canceling is that if you the vendor are canceling, you need to be more lenient on refunds. While we still recommend you keep the non-refundable deposit/initial payment, you may need to be more lenient on the other remaining payments.
The bottom line of all of this however though is, when negotiating refunds, do anything you can to negotiate and avoid court, which could in a worst-case scenario mean giving back the initial deposit.
And finally, we’ve talked a lot about the prep for cancellations and common canceling questions, but what do you do when a client actually sends you that email requesting to cancel?
We’ll discuss that next.
Step-by-step:
What to do when a client requests to cancel:
Step 1. Have your client sign a cancellation/rescheduling agreement. (You can purchase a bundle of both of those agreements here if you don’t already have them.)
Step 2. You the business owner need to sign the agreement too (this is often forgotten).
Step 3. Money needs to change hands based on what’s stated in the contract.
Step 4. Review your contract again and make sure there are no loose ends. For example, if you’re a wedding planner who has placed orders for your client, cancel those orders.
contracts mentioned in this post
find this post helpful? pin it now.
Find this post helpful? You’ll also love these…
What Needs to be in a Cancellation or Rescheduling Agreement?
Force Majeure Checklist: Your Contract MUST Satisfy This Test!