Do You Need to Justify Your Cancellation Charges?

Lots of travellers have cancelled their package holidays over the last 15 months or so.  In many cases, tour operators have applied cancellation charges as per their Terms & Conditions; however a growing number of travellers and insurance companies are now challenging the amount of those cancellation charges, by asking tour operators to justify their fees.  In this article our Senior Associate, Nick Parkinson, looks at whether tour operators need to justify those fees and, if so, how they go about it. 

Reasonable Cancellation Fees

For the purpose of this article, we are not looking at situations where a customer seeks a full refund under the Package Travel Regulations 2018 (‘the Regulations’), whether due to ‘extraordinary circumstances’ at the place of destination or otherwise.  Here we are looking at situations where customers accept, in principle at least, that the tour operator can charge a cancellation fee, but they do not agree that the amount charged is ‘reasonable’.  Customers will typically say that the cancellations fees are excessive, disproportionate and request explanations and evidence to justify the amount of the cancellation charges.

Do We Need to Justify Our Cancellation Fees?

The short answer is, yes!  The Regulations specifically state tour operators must ‘provide a justification for the amount of the termination fee if the traveller so requests’.  This can be found at Regulation 12(6).

What If We Don’t Have Any Cancellation Fees Set Out In Our T&C’s?

You can still charge a cancellation fee; however this will be calculated based on the following formula:

Price of the package LESS any cost savings and income from any alternative deployment of the travel services.

However, it is of course standard practice in the industry to have a sliding scale of cancellation fees that increase as you get closer to the departure date.  These are known as ‘standard termination fees’ in the Regulation – and that where the main focus will be on for the purpose of this article.

Standard Cancellation Fees:  What Exactly Do We Need To Justify?

Strictly speaking, you do not need to justify or explain any of the figures that apply in relation to the particular booking in question.   For example, it doesn’t matter whether you have paid your suppliers, how much you have paid them or whether or not you can obtain a refund from them on any particular booking.  

What you actually need to justify and explain is how you calculated your ‘standard cancellation fees’ to start with.  This is because:

a) The cancellation charges came into force at the time the booking was made, not at the time the booking was cancelled, and

b) Your ‘standard cancellation fees’ are intended to cover a range of bookings to different destinations, with different suppliers and therefore come with different levels of financial exposure.  On one hand this creates a ‘swings and roundabouts’ effect where some cancellation fees, taken in isolation, may seem fairer than others.  On the other hand, this creates clarity and simplicity for both the consumer and the tour operator.  

That said, if the costs incurred with suppliers in relation to a specific cancellation are similar to, or even more than, your cancellation fees – you may prefer to provide those figures anyway.  You may find that simpler to explain, and it shows that you have nothing to hide.

So How Do I Justify The ‘Standard Cancellation Fees’?

Needless to say, you can’t turn up at court and say that you simply ‘plucked the figures out of the air’, or copied them from other competitors.  Broadly speaking, your explanation may go something like the below.  

Example Explanation

  • All of our packages include flights to the same location.  Airlines typically insist on full payment up front which is non-refundable if we cancel.  Flight costs average 25% of the total cost of our holidays;
  • For the rest of our suppliers, we worked out that their cancellation fees range from 10 – 30% of the total cost of the holiday if we cancel more than 60 days before departure – an average of 20%;
  • For cancellations more than 60 days before departure, we therefore apply a cancellation fee of 50% comprised of:
    • 25% for flight costs
    • 20% for other suppliers
    • 5% to cover our operational costs to facilitate the booking to that point
  • We review our cancellations fees every 12 months to ensure that they are still a fair reflection as to our commitments with our current range of suppliers.

This is of course is a purely fictional example, you should use whatever reasoning and figures apply to your company!  

So Can I Factor In Operational/Running Costs To My Cancellation Fees?

We are not aware of any binding legal authority that prohibits you as a tour operator from factoring operational/running costs into your cancellation fees, nor are we are aware of any authority that specifically permits it.  That said, we believe that there are compelling arguments to say that these costs should also be taken into account.  In fact, we recently handled a case all the way to court where the tour operator was able to justify the full amount of their cancellation fees, including an allowance for their operational/running costs.

So You Have Successful Defended Such Claims At Court?

Yes.  We recently dealt with the case of Ian Armstrong -v- Aardvark Safaris Ltd [Unreported, Brentford CC, 14 July 2021] in which:

  • The tour operator provided a detailed explanation as to how their formulated their cancellation policy;
  • Submissions were made to explain why it was reasonable to include operational/running costs in the cancellation charges;
  • The Claimant’s argument that the fees were unreasonable, referencing the Consumer Rights Act 2015, was not accepted;
  • The Claimant’s argument that the tour operator must prove the figures behind their cancellation policy, by providing documents such as contracts and invoices with suppliers, was not accepted.

The outcome?  The tour operator’s cancellation fees were deemed ‘reasonable’, and therefore ‘enforceable’.

Need Help Justifying Your Cancellation Fees?

With the sheer volume of cancellations over the last 15 months or so, compounded by the emergence of travel insurers now bringing ‘subrogated claims’, it is inevitable that tour operators will start to face more and challenges to their ‘standard cancellation fees’.  Explaining and justifying those fees, and defending such claims is not without its difficulties.  Hopefully this article will give you a good starting point to do so but, of course, if you do feel that you need legal assistance to make sure you ‘get it right’ – you know where to find us!

If you require further advice on any of the issues raised in this article, please get in touch with the author of this article, Nick@Travlaw.co.uk, or any member of the team at advice@travlaw.co.uk.

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