Seeking refunds for Covid-19 related cancellations: do businesses need to pay up?
03 JUL 2020
One of the many challenges faced by businesses during the Covid-19 pandemic has been the need to balance their commercial interests on one hand with the financial interests of their customers on the other.
It is particularly relevant in relation to consumers’ prepayments and deposits for events and services which businesses can no longer hold and perform due to the Government restrictions. Although the current lockdown will in many ways be eased from July 4th onwards, the significant remaining restrictions will keep affecting particular business activities in the months to come.
This article addresses what you should be doing with such consumer prepayments: whether you need to refund them when you cannot hold the event or perform the service and whether you can deduct any cancellation fees as per your standard T&Cs. These issues are especially pertinent to the businesses in the hospitality, travel and childcare sectors.
Do I have to pay out full refunds to my customers?
You should always first check whether the terms of your contract with customers specifically prohibit you from keeping the deposit or charging cancellation fees in case the contract is ended by either party. Even if the contract does not prohibit this, consumer protection law will often require you to refund the customer. Following many complaints, the Competition and Markets Authority (CMA) established a Covid-19 Taskforce and issued Guidance to businesses on how to best uphold consumer rights during this period.
Generally, most customers will be entitled to a full refund where:
- You have cancelled a consumer contract without providing any of the promised goods or services;
- You are not allowed to provide the service or hold the event due to the Government health and safety measures; or
- The customer cancelled or is prevented from receiving the service because doing so is not allowed under the Government health measures.
You therefore likely need to issue a full refund, even if it is a deposit or pre-payment that you described as non-refundable. Additionally, you should not be charging any admin or cancellation fees for processing refunds and should do so within a reasonable time (which may be longer given the pandemic context).
However, in limited scenarios, customers may be entitled only to a partial refund where:
- You already provided part of the service, in which case consumers can only claim a refund for the services not yet provided and need to pay for those they had already received;
- You have been prevented from providing the service by the Government restrictions, in which case you may be able to deduct from the prepayment a contribution to the direct costs you incurred in relation to their specific contract. This is subject to your duty to mitigate losses by claiming these costs elsewhere. According to the CMA Guidance, instances of this will be rare.
Can I offer vouchers or postpone the event or service instead?
Many businesses will prefer to offer credit to their customers through vouchers or re-bookings to a later date, since this ‘locks in’ customer funds which the business can then use freely.
It is perfectly acceptable to offer these to consumers, as long as they are offered as alternatives to a refund. Refunds should not be made more difficult to get than the other options, so any restrictions should be fair and clear to consumers. All options should be given similar prominence in your communication with customers. Businesses should not coerce customers into opting for vouchers or re-bookings but should instead focus on strengthening their relationships with customers and show how, by opting for a refund alternative, they could meaningfully contribute to the business with its pandemic recovery.
What about future contracts?
Now that Government restrictions are getting eased from July 4th onwards, many businesses have started accepting prepayments for future services and events they expect to perform later in the month. The Guidance advises that, although businesses should not accept payments for services which they are not certain they can provide, they can accept payments when if they reasonably expect that they will be able to provide the service.
As it currently stands, businesses may thus accept customer prepayments and deposits for services they will be able to perform after July 4th. However, should the situation change down the line and restrictions re-introduced, the above guidance on refunds would remain relevant.
What if the customer cancels for other, non-pandemic reasons?
If your customer ends the contract for a reason not related to Covid-19 (eg, they no longer need the service or event), refunds should be made in line with the contract’s usual terms and conditions (as long as they are fair and reasonable, in accordance with the consumer protection legislation)
Final points to keep in mind
- Even though it can be possible to agree to reschedule or postpone an event or service with your customers, their ‘consumer’ status means that you cannot exert any pressure on them to stop them from opting for a refund.
- You should update your customers on the ‘reasonable time’ it takes to process refunds and explain the timing of the process to them.
- Review any other onwards commercial contracts you have in order to limit your exposure to other business parties.
- Good market reputation is always important, so make sure that PR considerations play a role in dealing with your customers, even if this means incurring additional business costs.
- If you have not already, check what your current insurance covers in terms of pandemic-related business costs. Make sure to have relevant policies in place in the future.
Overall, consumer protection is a fact-sensitive area of the law, so each situation is likely to be different. If you need additional guidance and support with your contracts (Covid-19 related or otherwise), we are open for business as usual and are happy to advise. Please get in touch with our team at email@example.com.
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