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Profit Loss And Contract Dispute

Following on from a recent blog post, I wanted to discuss what a company can claim if someone cancels a contract.

I have seen many contracts which have cancellation clauses setting out that the party must pay 100% of the contract price if they cancel within 1 month. Any contract which is for a certain term is applicable here.

Say Mr A enters into a contract with a hotel to have his wedding at their venue. He is going to pay them £20,000 for room hire, a DJ, food and drink etc. Mr A however unfortunately has an argument with the bride to be and they cancel the wedding.

The hotel are informed and send Mr A an invoice for £20,000 because there is a clause in the contract signed by Mr A that termination within 3 months attracts 100% termination fee.

Is Mr A duty bound to pay the hotel? The answer is yes – he is duty bound to pay them something (probably) but certainly not the full amount. The reason for this is that the Hotel can only sue for their losses. Their losses are the profit they would have made from Mr A – not the whole contract price.

Further, if the Hotel had managed to rebook the venue for the same date, any losses would be minimal and would depend solely on the food and drink ordered at the new wedding compared to the old wedding. If the new wedding ordered less then there would still be a claim for loss of profit, albeit, a very small claim.

What is profit?

Profit is what is left after all of your overheads have been deducted. In the Hotel’s case, the overheads would be, employee wages, lighting, heating, mortgage or rent payments for the building etc etc. With food and drink – only the profit element could be taken into account (a pub normally makes about £0.10p on a pint of beer so profit is low).

So, the Hotel demands payment from Mr A. What should he do? The best thing he can do is write a letter to the hotel, setting out that in accordance with the contract he is liable to pay only for their loss of profit. Ask the hotel to provide proof of their profit margins after all overheads have been taken into account. As a rule of thumb, profit will be in the region of 10% of the overall contract value.

If you find yourself in a similar situation, seek legal advice as soon as possible as there are distinct litigation advantages of making properly worded offers to settle prior to proceedings being issued.

Richard Howlett - Solicitor

Richard Howlett - Solicitor

Richard Howlett is a solicitor at Selachii LLP in London - info@selachii.co.uk - 02077925649

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