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Contract cancellation penalty

Discussion in 'Business Fundamentals' started by PerfiCut Inc., Sep 28, 2010.

  1. PerfiCut Inc.

    PerfiCut Inc. Senior Member
    from Eastern
    Messages: 161

    I know many of you use seasonal contracts, however, we do not. We prefer to bill per event but secure long term contracts.

    My question is regarding contract termination penalties. We currently have a 10 day cancellation notice clause, which is fine for most of our clients. My concern lately is that many of our new contracts are for large properties, 5 - 20 acres in size. Some of these require a significant amount of legistical planning to establish coverage. I want to secure out expenses involved with this by removing 10 day cancellation clause, and requiring these contracts be on an annual basis.

    Since we bill per event, what would be an exceptable penalty for early cancellation by a client for a large property of such magnitude? My initial though was to calculate the annual number of snowfall events, and prorate that number by the number of months remaining in the season.

    Your thoughts?
  2. TCLA

    TCLA 2000 Club Member
    Messages: 2,707

    We have a 30 day out (for both parties), and we have no penalty for cancellations...good luck collecting a nickel from them for anything after the cancellation date.

    From their prospective, why would they pay you anything if the determination has been made to cancel/fire you? Most likely you're being terminated for service related issues. Pretty unusual changing service providers midstream unless there are real issues.
  3. PerfiCut Inc.

    PerfiCut Inc. Senior Member
    from Eastern
    Messages: 161

    Im not concerned about contract termination due to work failures. This is already covered. Perhaps my previous post was winded and confusing.

    In short, what I am concerned about is the client terminating the contract early because they found someone cheaper. On a small job it's not a big deal. But on a property where I assign 4 or 5 loaders, 40+ tons of bulk salt, half a dozen blowers, skid steers and other items are placed on location and remain their during the season. I surely don't want them coming to me mid season, saying, oh yea, by the way, we want to take advantage of your 7 day or 30 day cancellation clause, because we found someone else who is cheaper.

    We were a good example of that last year with one of the properties we picked up mid season. The customer got their bill in december and was displeased with it, so they contacted us. We signed a contract with them beginning Jan 1st.

    I dont want the customer cancelling our contract just because they found someone else who might be cheaper.

    No different than renting an apartment. You pay a security deposit for a years lease. If you move to another apartment before your lease is up, because it's cheaper, you forfeit your security deposit, and or pay a penalty.
    Last edited: Sep 28, 2010
  4. TCLA

    TCLA 2000 Club Member
    Messages: 2,707

    You're concerned that this will happen to you.

    Yet you just justified yourself doing this to someone else.....

  5. wizardsr

    wizardsr PlowSite.com Addict
    Messages: 1,584

    Without a cancellation clause, your contract is invalid. You have to have a cancellation clause (30 days is typical) for your contract to be legally binding. Ours are all 30 days without penalty. I would guess many customers would be scared away by a contract with a monetary cancellation penalty.
  6. PerfiCut Inc.

    PerfiCut Inc. Senior Member
    from Eastern
    Messages: 161

    Unfortunately for him there was more to the story than his demise. So, no... I have no guilt about it. In fact, he is going to lose the landscape contract as well since he can't keep up with that either.
  7. TCLA

    TCLA 2000 Club Member
    Messages: 2,707

    The contract should provide a level of comfort with equal options for both parties.(unless of course it's a USM contract).

    I'm of the mindset that imposing a penalty for cancellation will backfire. It's not too difficult to see that most will be reluctant to agree with such a clause.

    Ask your most closest client (the one you have the best relationship with) their opinion of this and if they would sign it. I'm sure they will completely agree with your security concerns, but I'm willing to bet the barn they will not sign it. It would be a foolish move on their part.

    Change your 10 day to 30 days....but don't shoot yourself in the foot.

    Good luck to you sir!
  8. Scottscape

    Scottscape Senior Member
    Messages: 662

    there is no way that I will have over 20k in salt stored, equipment dedicated to there property and let them cancel mid season. I always have a cancellation fee and everyone agrees to it or I don't provide them service.
  9. TCLA

    TCLA 2000 Club Member
    Messages: 2,707

    Not hard to find others with greater exposure, but good for you! We can't get away with that here...

    Just another example how things vary greatly from area to area.
  10. buckwheat_la

    buckwheat_la 2000 Club Member
    Messages: 2,254

    Instead of a contract cancellation clause, what about a contract non preformance clause? our largest client contract has a part giving reason why we can be fired, and a 3 strike rule built into it, otherwise it states that the contract is valid for the entire season. Also when calculating a cancellation fee, make sure you don't get greedy, only calculate for the expenses you are out, that way a judge can look at it and say that you are owed that money because you have to pay it out on behalf of the cancelled contract. I wouldn't go looking for your profit margins.
  11. elite1msmith

    elite1msmith 2000 Club Member
    from chicago
    Messages: 2,762

    Not true at all, contract is binding and is legal. The difference being, with a clause, it states exactly what will happen in the event that it's cancelled. With no clause, it's open to the judges interpretation and what they think is fair, and an "industry standard"..... Which means your not getting anything

    You can write in a clause that states if they cancel, and you get paid just as if u did the work, minus expenses. But if they are canceling because they are not happy with your work, good luck getting a judge to buy that. Best thing like stated above is to have a set I. Writing system of how complaints are handled in the event they aren't happy with your work, and then if they want to cancel due to poor work....this way if they fail to report or have you correct the items, they can't cancel for no reason, and if they find a cheaper guy they can't blame it on your work
  12. BigLou80

    BigLou80 Senior Member
    Messages: 558

    YUP! Welcome to business, when you go in to business your authorizing people to steal from you!

    IN Massachusetts, its illegal to collect a penalty for contract cancellation alone. You can try to collect for proven damages but good luck proving it until winters over and its going to cost you more to collect then its worth.

    Same goes for his security deposit statement. If your a Taxachusetts land lord the security deposit is for that and that alone, you can keep it to off set anything but damages. A landlord friend of mine had a tenant not pay his last 3 months rent so he tired to keep his security deposit. The tenant took him to court and the magistrate told the land lord he had to return the security deposit and was welcome to file suit against the tenant for the missing rent.

    Your best bet is to try a 60 or even 90 day notice period and hope for the best. The reality is Massachusetts is if they want out there is very little you can do to stop them. Same applies if you want out. The are benefits to you of a short cancellation period if you need out for non payment or some other reason. My construction contracts are written in such a way that I can be out in under two weeks if need be. I serve them notice of breach of contract and after five days I am all done.

    Even if you get them to agree to a penalty (because you can put anything you want in to a contract, just because they sign it doesn't meant it will be upheld in court) what are you going to do if they say " so sue me" Court is expensive and time consuming. you can accrue $10,000 in legal fees in a few weeks and having it resolved in 6 months would be considered speedy. Awards of legal fees are somewhat rare in breach of contract suits.

    Finally, if you or anybody else is going to put even mildly questionable clauses in to their contracts ( we all do it) there should be a clause that state " if any clause or part of this contract is deemed invalid in a court of law that shall not invalidate any other part of this contract"