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Contract 101: Cooling Off Period


It is important to remember that usually signing a contract binds you to that deal. As a consumer, you cannot escape your contractual obligations just because you change your mind or have buyer’s remorse. However, consumer protection laws and cooling-off periods can provide a way out in particular situations.

A cooling-off period in a contract in certain contracts for sales allows the parties to back out and cancel for any reason. The reason can be anything, even a change of heart is a justifiable reason. Set forth by the Federal Trade Commission (FTC), this cooling-off rule gives consumers up to three days to cancel sales of certain goods and services. Sellers of these goods are required by the FTC to honor this cooling-off period. Sales made by telephone, mail, or the Internet are also subject to FTC rules regarding refunds and returns. Federal law also provides a cooling-off period for borrowers refinancing a mortgage or taking out a home equity loan. Some states also have laws about canceling contracts and state-specific cooling-off periods.

State Specific Rules

In California, there is a right to cancel certain types of contracts within a certain time period for any reason. (The cooling-off periods can also be referred to as a “grace period.”) There are no cancellation fees associated with cooling-off periods, however you may be required to pay a prorated amount for any time or services you used before cancelling.

Cooling-off periods are not required in contracts and they cannot be implied. Only certain types of contracts have cooling-off periods, and they have to be expressly stated in a contract to be valid. You may still be able to back out of a contract that does not call for a cooling off period for instance, a contract may have a cancellation fee provision or other conditional provisions that allow for cancellation of the contract.

Just like California, Texas does not provide a statutory right to cancel a contract or return a purchase because you change your mind. State law grants a cooling-off period, also called a “right of rescission,” in some specific instances. All deals that are not made at the seller's place of business are subject to the three-day right of rescission law. This means that if a consumer purchases something from a door-to-door salesman, at a convention center, or from a stand set up in a hotel conference room, this law applies. It does not, however, apply to purchases under the value of $25 or to transactions in which somebody buys insurance.

Canceling a Sale During the Cooling Off Period

To cancel a sale under the cooling-off period rule, a buyer has to fill out a cancellation form. The completed form must then be sent to the seller at the address provided on the form before the end of the three-day period in order for the buyer to be entitled to receive a refund from the seller. Some states allow for buyer's remorse using the cooling off period for canceling contracts for things like gym memberships, dating services, and weight loss programs.

Exceptions to the Cooling Off Period Rule

FTC provides that certain types of sales can’t be canceled, even if they take place in places normally covered by the Rule. The Cooling-Off Rule does not cover sales that are:

  • under $25 for sales made at your home;
  • under $130 for sales made at temporary locations;
  • for goods or services not primarily intended for personal, family, or household purposes. (The Rule applies to courses of instruction or training.);
  • made entirely online, or by mail or telephone;
  • the result of prior negotiations at the seller's permanent place of business where the goods are sold regularly;
  • needed to meet an emergency;
  • made as part of your request for the seller to do repairs or maintenance on your personal property (purchases made beyond the maintenance or repair request are covered).

Also exempt from the Cooling-Off Rule are sales that involve:

  • real estate, insurance, or securities;
  • automobiles, vans, trucks, or other motor vehicles sold at temporary locations if the seller has at least one permanent place of business;
  • arts or crafts sold at fairs or places like shopping malls, civic centers, and schools.

How to Protect Yourself

Whenever you are going to make a big-ticket purchase, there are a number of tips that you should follow in order to protect yourself:

  • Ensure that you have copies of all relevant and important documentation for your records.
  • Make sure that all terms and prices are in writing.
  • If you decide you want to cancel the contract, send the cancellation papers via certified mail with a return receipt requested.
  • Have an attorney look over the contract before you sign it.

This overview is intended as general information on the subject only. If you would like to know more about the tailored counsel that we at VLF can provide for your specific executive compensation or severance situation, please do not hesitate to contact us directly.

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