A Cancellation Contract: What it is and When to Use it

If you are a service provider and work with client’s in a one-to-one capacity, then it can sometimes be difficult to terminate a business relationship. But this can happen in a variety of situations, such as if you are a wedding photographer and the bride and groom have decided to postpone their nuptials and you will not be available on the rescheduled date. Or perhaps they have chosen to outright cancel their wedding.

If this happens, then you may need to use a cancellation contract to clarify the terms of the cancellation. 

What is a Cancellation Contract?

A cancellation contract is exactly what it sounds like. It is a legal document and written contract (also sometimes comes in the form of a “cancellation form”) that clarifies what happens when your pre-existing service contracts must be canceled or terminated. Negotiating cancellation rights is far easier than having to deal with a lawsuit for breach of contract or even a credit card refund or chargeback.

The best practice when you know that you will be canceling a contract is to email your client a copy of your cancellation agreement so that everyone is in agreement on what the termination will look like, what fees will be refunded and what will happen to any existing work product.

In many situations, you may not think a cancellation contract is necessary because of the terms of the contract you already have in place, but you should probably send one out anyway so that you don’t run into a problem with a client having “termination remorse” several weeks later when they realize that they didn’t get a full refund (even though they weren’t legally entitled to one).

A cancellation contract may be necessary in a variety of other different situations as outlined below.

When is a Cancellation Contract Necessary?

A a general rule, a cancellation contract is a good idea in three primary situations. Either the language in your contract terms regarding cancellation or termination is vague, there is a difference of opinion between you and your client about what should happen when the contract is terminated, or something happens that is out of your control and unanticipated at the time you entered the contract (hello COVID?) and which necessitates a cancellation.

Let’s take each of these situations one at a time.

Your Contractual Language is Vague

Try as we might, even the best of us screw up our contracts from time to time with vague language. This frequently happens when there is a lot of excitement between two parties to work together and the contract is more of an afterthought than a true contract. 

Alternatively, this can happen if you or your client cobbled together a contract without putting much thought into it and now you have an issue that was not anticipated.

The best way to avoid these situations is to create a proper services contract BEFORE you need it with a client. You can either hire a lawyer to draft this contract for you, or you can use a lawyer-drafted DIY template. 

RECOMMENDED RESOURCE: Client Contract Template and Service Agreement

Regardless of which option you choose, having a solid professional services agreement in place ahead of time can help you avoid messy break-ups with clients.

There is a Difference of Option Between You and Your Client

Although a difference of opinion is often tied to vague and unclear contractual language, more often than not, although you do have a clearly worded contract, but the client just doesn’t like what the language says.

In these situations, they will try to play on the inequity of the situation and get you to agree to a refund that you are not contractually obligated to pay.

Rather than simply waive the language of your contract, the better option is to draft a cancellation contract that supersedes the original contract and spells out exactly what happens because the original contract is being canceled. By using a cancellation contract such as this, you reduce the likelihood that a client will sue you for a refund of the fees they paid you.

RELATED RESOURCE: Cancellation Agreement Template

Arguably, the client will realize they got a good deal and will be happy that they walked away from the contract without suffering any other financial losses.

There was an Unanticipated Event that Terminated the Contract

The last situation that can arise is something completely unexpected to both parties. COVID was the perfect example of this, and although enough time has passed COVID is no longer a Force Majeure event, we can’t say for sure what the next unanticipated event could be that would cause many contracts to terminate. 

My best recommendation to my legal clients is that they have a solid Force Majeure clause in place in their contracts. 

But even with a clause like this, a cancellation contract may still be required. If there is enough money at stake, even in the event of an unforeseen occurrence, many clients won’t just walk away from their contracts without some form of financial remuneration. A cancellation contract can assist with this.

What Language Should You Put in Your Cancellation Contract?

As mentioned above, you should make clear that the cancellation contract supersedes any previously entered professional services contract that you may have entered into with the client. You should include the date of the contract and a brief description of what you were supposed to do under the terms of that original contract. 

In addition, you should outline what fees were paid, as well as what refunds are due (or are not due as the case may be) and reference the appropriate language from the original contract.

If you did not use a legal contract from One Stop Legal, then you should review your original contract and look for terms such as:

  • Forfeit
  • Refund
  • Non-refundable
  • Liquidated damages
  • Reasonable Time
  • Retainer
  • Earned upon receipt

If you are not sure whether a refund is legally owed or not, then we recommend you consult with a lawyer that can review your existing contract and give you some guidance.

If you will not be providing a refund, here is some sample language that you can use for your cancellation contract:

“Company has a no refund policy due to the nature and scope of the services it provides. Pursuant to [insert paragraph or section of contract], there is no refund of any fees paid by the client. The client may, however, apply any fees paid towards future services with the Company. To take advantage of this clause, the client must reschedule within [time frame] or else they will forfeit all fees paid to the Company.”

The problem with this language is that if you are asking a client to sign a cancellation contract, they will often be expecting some type of refund. And if you read my post on agreements vs. contracts, you already know that for a contract to be valid, there must be some sort of reciprocal consideration.

In the case of a cancellation contract, the consideration is often that you are providing a partial refund when you were not otherwise obligated to.

When you are providing a full cash refund

If you determine that a full refund is necessary and appropriate, or that one is demanded by the client, there here is some sample language that you can use in your cancellation contract:

“Company shall refund the full fee paid by the Client, and hereby waives any future payments owed under the Contract for Services dated [insert date]. Company shall issue the refund within [number of business days after signing] after all parties have executed this agreement. Payment shall be sent via [refund to credit card/check/Venmo/etc.] The Client understands and agrees that should they desire to re-engage the services of the Company, they must sign a new Services Contract and pay a new fee under the Company’s existing fee schedule. Clients further understand that any special discounts they may have received under the previous services agreement are null and void and will not be applied to a future services agreement.”

Although a full refund is rare, this language will help to protect you in the event that the client attempts to use the previous agreement they signed to negotiate a new contract.

A full refund frequently occurs when a service provider has determined that they no longer wish to work with a certain client and giving a full refund, although not required under the terms of their original contract, is easier than having to deal with the headache that is the soon-to-be former client.

When you are providing a partial refund

The most likely scenario is a partial refund. This is where you, as the service provider, keep a certain portion of the fees paid to compensate you for work that has already been performed, and you refund the amount that was not yet earned, even though it was paid in advance.

“The Company shall provide a partial refund of fees paid in the amount of [amount of refund], and hereby waives any future payments owed under the Contract for Services dated [insert date]. Payment shall be sent via [refund to credit card/check/Venmo/etc.] within [number of calendar days after signing] after all parties have executed this agreement. The Client understands and agrees that should they desire to re-engage the services of the Company, they must sign a new Services Contract and pay a new fee under the Company’s existing fee schedule. Clients further understand that any special discounts they may have received under the previous services agreement are null and void and will not be applied to a future services agreement.”

Other Legal Clauses You Should Include in a Cancellation Contract

Although the refund clause is arguably the most important part of your written agreement, there are a number of other legal clauses (i.e. paragraphs) that you should include in your agreement. Here are some of the most important clauses.

Release of Future Obligations

You want to make sure that your cancellation clause contains language that releases you, as the provider of services under the original contract, from any further obligation or liability to perform services. You would be amazed at how many clients think that although they negotiated a refund from you, you are still on the hook to provide them with services. You want to make sure that your cancellation contract is crystal clear on this very important point.

Mutual Release

A mutual release is likely the second most important clause after the refund clause. This is a short paragraph that says that both you and your client promise not to sue one another for anything related to the previous contract you signed. They can’t sue you for bad work (although I’m sure you would dispute that) and you can’t sue them for non-payment. 

Confidentiality

You definitely don’t want your client posting your cancellation agreement online for all the world to see. This is important because you may treat different clients differently – different payment plans, different cancellation terms, etc. And you don’t want a different client seeing this cancellation contract and getting upset because they didn’t get the same deal or otherwise use this contract as leverage in a current cancellation negotiation.

Ownership of Intellectual Property and Work Product

This is a clause that details what happens to any existing work product or intellectual property that was generated by you as a result of the original client engagement. Will you keep this information and data or will it be transferred to the Client? This is something that you should clearly make part of your cancellation contract.

No Chargebacks

If you accept credit cards in your business, you want to include language in your contract cancellation form that states that the client will not initiate a chargeback, and that if they do you may use the language of this contract to dispute that chargeback.

Representations and Warranties

A representation and warranties clause states that everyone has the legal capacity to enter into your cancellation contract and that they understand what the contract means.

*Quick Note: Make sure that the same people that signed the original services agreement are the parties that sign the cancellation agreement. I could envision a situation where a parent signs a photography contract on behalf of a bride, but the bride is the one working with you as the service provider. When it comes time to negotiate the cancellation, you want to have the parent sign the cancellation agreement, NOT the bride. 

Venue and Jurisdiction

As always, you want to make sure that you have control over where any disputes would be litigated. We recommend that you choose the state court closest your place of business. This is especially important if the contract is being fulfilled in a different state or jurisdiction from where you live. This clause will also dictate which state law will apply to your contract.

Severability

This is a clause that I put into all of my contracts that says that if a court of law invalidates a portion or several parts of the contract, the remainder of the contract remains valid. 

Counterparts/Facsimile Signatures

In the old days of executing contracts, when people could not sign together in person (which is very common), they would sign a signature page and fax it to the other party at the same time that the other party is faxing them a copy of their signature. In the end, both parties would have a faxed copy of the contract including the other party’s signature, which is legally binding and valid.

Before faxes existed, this would be done using snail mail!

In today’s digital world, we recommend using a service such as Docusign, Pandadoc, or Hellosign to sign your contracts electronically. 

This clause states that electronic and/or faxed/scanned signatures are completely valid and binding just as if everyone were signing a paper version of the contract.

Rights You are Giving Up By Cancelling Your Contract

You should understand that when a client attempts to get out of a contract, whether because of buyer's remorse or for another reason, they are effectively making a material breach of the contract they entered into.

There are situations when negotiating a cancellation is not in your best interest, regardless of the reason. In these situations, or if you are in doubt about whether you should negotiate a contract cancellation, we recommend you consult with a lawyer to get a legal opinion regarding your contractual rights and options.

A little money invested now can save you a lot of money and headaches later on.

Should You include Non-Disparagement Language in Your Cancellation Contract?

A common question clients ask is whether it is appropriate to add “non-disparagement” language to your cancellation contract.

The point of this language is to keep clients from writing a bad online review about you as the services provider. 

I don’t recommend adding non-disparagement language to contracts with individual clients for several reasons.

The first reason is that it will draw attention to the fact that you don’t want the client leaving you a bad review online. Ultimately, this language is likely unenforceable in court as a violation of the client’s First Amendment rights and public policy, and is more likely to entice the client to leave a negative review than if you leave the language out entirely.

Second, as mentioned above, a client is going to do and say what they are going to do and say online anyway. The way you combat negative reviews is by going over and above to deliver exceptional service to clients, even after they have terminated your services. 

I strongly recommend you read the book Hug Your Haters (affiliate link) by Jay Baer to learn more about how to handle negative reviews online. 

Alternatively, if you are working in a Business to Business (B2B) setting, then a non-disparagement clause may be appropriate and useful. I recommend that you speak with your lawyer about when and how to incorporate a non-disparagement clause into your contracts.

Federal Law Surrounding Contract Cancellations

It should be noted that some contracts, such as lending contracts, real estate contracts, installment contracts, door sales agreements, and certain sale of goods contracts, have mandatory contract termination and cancellation periods, as well as strict time limits for termination under Federal Law. Failure to follow these rules could void your contract.

They may also require written notice and an attached notice of cancellation form to go along with the contract.

However, this article assumes that you are a service provider such as a photographer or web designer, and consumer protection laws are not triggered.

This is not Legal Advice

I realize it goes without saying, but One Stop Legal is not a law firm, and no attorney-client relationship is formed just because you have read this post. This post is for informational purposes only, and if you require additional legal support or advice you may click here to schedule a strategy session with a lawyer from The Hart Law Firm, P.A.

If you require additional legal expertise or legal resources, please contact our sister law firm for help negotiating your contracts or for assistance with any of your business related legal needs. Stop worrying about the legal stuff and hire a business lawyer instead.

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