CMA: Deposits, advance payment and cancellation chargesBack
Deposits are a customer’s way of reserving your goods or services. Advance payments help you to pay your business’s actual costs during a contract.
If your customer cancels and it’s not your fault, you’ve got the right to protect yourself, but what you keep must take into account what your business is actually losing as a result. It must not be excessive.
A term saying no refund is available in any circumstances is likely to be unfair. Where there is no fault by your customer and the contract is ended by you, your customer may well have a right to a refund.
Tips for writing fair terms
For example, your terms are more likely to be fair if:
Deposits and advance payments
a deposit is just to reserve the goods/services and is no more than a small percentage of the total price
advance payments reflect your expenses in carrying out the contract, and leave customers with a reasonable amount to still pay on completion
you hold any advance payments in a secure scheme so they are safely held until any dispute with a customer is resolved
customers don’t lose large advance payments they’ve paid up-front if they cancel, in all circumstances
when you are not at fault, you only seek to recover losses that you have reasonably incurred
you set non-refundable payments or cancellation charges so they reflect a genuine estimate of what you will lose directly because of the customer cancellation
Be clear with customers up-front about your deposits, advance payments and cancellation charges. Provide details of when these are required and why.
Terms that may be unfair include:
Making any substantial advance payments or deposits non-refundable, regardless of the customer’s reason for cancelling.
Example: “If you cancel the event, we cannot provide a refund in any circumstances.”
Keeping payments to cover your costs and loss of profit when this could mean you get compensated for the same loss twice.
Example: “If you cancel this contract without justification, you must reimburse all of our expenses together with the anticipated gross profit had the contract been completed.”
Keeping all of a customer’s advance payments if they cancel when you are not at fault, even though you could reasonably reduce your losses (eg by re-selling what they have ordered and paid for).
Example: “If you cancel your trip, all advance payments are non-refundable regardless of the time of cancellation.”