When it’s lawful to refuse refunds

Competition and Markets Authority (“CMA”) Covid-19 Taskforce Update

The CMA’s latest update on the Covid-19 cancellation practices of consumer-facing businesses comes around nine weeks since it launched its investigation as part of its Covid-19 taskforce. In our previous article we explored this investigation in detail, including the CMA’s enforcement approach. In this article we consider the CMA’s latest views, including its recent announcement regarding its investigation into the package holiday sector and the position it reached with two holiday letting businesses. We then go on to guide businesses on how to determine whether they are legally required to refund consumers, regardless of the sector in which they operate.

Undertakings agreed by Sykes and Vacation Rentals

Vacation Rentals and Sykes Cottages (“Sykes”) are two UK companies accounting for the majority of holiday lets complaints received by the CMA. Without legal proceedings being issued, they both entered into formal commitments with the CMA promising that they will offer full cash refunds to every affected consumer whose holidays were due to commence during the Government’s Covid-19 lockdown restrictions starting on 23 March 2020. Both companies have agreed to pay refunds within 30 days of acceptance and are under reporting obligations to the CMA. Readers should note that neither the terms of these undertakings nor even the fact that they were entered-into, indicate that the CMA was correct on its legal position, nor, the opposite. As the CMA likes to remind traders, “only the courts can decide what the law is” and the Undertakings themselves are not an admission of liability or wrong-doing.

However, scrutinising the subtle differences between the undertakings provides businesses with some useful pointers to consider their own positions with consumers:

• Offers from Sykes must remain open for acceptance for at least 30 days. If affected consumers fail to respond, a reminder must be sent 8 days before expiry of these 30 days, giving these consumers an additional 7 days to accept the offer. If, at the end of the offer period, the affected consumer has not accepted (or rebooked), they will automatically be given a voucher or credit note (at a prescribed value).

• Vacation Rentals, however, are not obliged to keep their offer open for a certain period, send reminders, or provide a voucher or credit note if the cash refund is not accepted. Whilst offers from Vacation Rentals could theoretically expire after a much shorter timeframe than those from Sykes, Vacation Rentals are obliged to use “best endeavours” (compared with “reasonable endeavours” for Sykes) to ensure that affected consumers accept the refund offer.

• Sykes must keep a notification on the “Covid-19 webpage of all its websites … and social media sites” until at least the earlier of 14 October 2020 or when no further refunds are due, the notification displayed by Vacation Rentals is not time-bound. The contents and location of this notification is unclear in both undertakings, particularly as “Covid-19 webpage” is undefined and open to interpretation.

• The drafting has also been refined in the later Sykes undertakings with tighter definitions of “Relevant Legislation”, “Vulnerable Person” and “Affected Consumer”. The Sykes undertaking also more prominently prevents Sykes from disputing relevant chargeback claims, an obligation buried within the definition of “Affected Consumer” in the Vacation Rentals’ undertakings. This perhaps signals a recognition by the CMA of the increased reliance by consumers during the Covid-19 pandemic on clawing back funds via the chargeback process.

These differences show that (as is the case in all CMA investigations) undertakings are a negotiated document – they are not a precise statement of obligations imposed by law. The CMA can, and often does, take a different approach between traders.

Package Holiday Providers

In light of the CMA’s recent open letter to package holiday businesses, before considering the general position applicable in most sectors, we first address the circumstances in which package holiday providers may lawfully resist refunding consumers.

The Package Travel and Linked Travel Arrangements Regulations 2018 (the “PTRs”) in effect inserts into all package travel contracts the right to a full refund within 14 days where:

• travellers terminate the contract because of “unavoidable and extraordinary circumstances” occurring at the destination (or its immediate vicinity), which significantly impact the package or getting to the destination (reg. 12(7)-(8), reg. 14(3)); or

• organisers terminate the contract where they cannot perform the contract because of “unavoidable and extraordinary circumstances” (reg. 13(2)-(3), reg. 14(3)).

“Unavoidable and extraordinary circumstances” are situations beyond the relevant party’s control, the consequences of which could not have been avoided even if all reasonable measures had been taken.

When can package holiday providers refuse full cash refunds?

Whilst Covid-19 may have been an “unavoidable and extraordinary circumstance” preventing some package holidays going ahead and therefore triggering full refund obligations, this will no longer be (or indeed never was) the case in all instances, with borders now re-opening, quarantine rules relaxing and the introduction of government-led tourism incentives (such as the UK Government’s recently announced VAT reduction for most tourism and hospitality-related activities). This is a particularly important consideration where packages or travel are not impacted, but individuals simply choose not to go on the holiday. Whilst travellers may still be able to cancel, in these circumstances any refund may legitimately be subject to deduction of an “an appropriate and justifiable termination fee to the organiser”, which may well be significant if irrecoverable costs have been incurred by the organiser.

It is also important to note that not all holidays are caught by the PTRs. They only apply to “package” “travel services” booked since 1 July 2018, which broadly includes traditional off-the-peg, tailored, all-inclusive and click-through packages with at least two “travel services” (being transport, accommodation, motor rentals and other tourist services (e.g. concerts, excursions, sporting equipment rental, spa treatments and guided tours)). Whilst this is a wide definition, the following are examples that would not be caught by the PTRs:

• holidays with constituent parts booked completely separately through separate businesses (and are therefore not “packages”).Where a holidaymaker is encouraged in a confirmation email after booking a travel service to book another travel service via a link to a different business’s website, this may be a “linked travel arrangement”, benefiting from the information, insolvency and liability for booking errors provisions, but not the termination and refund protections, under the PTRs;

• packages for less than 24 hours (unless there is overnight accommodation);

• packages offered occasionally on a not-for-profit basis; and

• most business travel packages (on the basis that they are between a trader and somebody acting for a trade, business, craft or profession who books travel arrangements in connection with that trade, business, craft or profession).

Alternatives to refunds

If a refund is due under the regulations, it must be paid promptly (and, in any event, within 14 days). However, these requirements do not seem to necessarily prohibit alternative offers being made to holidaymakers alongside the full refund offer. For instance, vouchers, discounts, credit notes or holiday upgrades worth more than the cash refund could be offered to individuals, which they could choose to accept instead of a cash refund.

When can consumer-facing businesses in other sectors refuse full cash refunds to consumers?

We are all too familiar with weddings, events and childcare being cancelled due to Covid-19 and the difficulties that many businesses face balancing survival (including remaining solvent, offering future services and providing jobs) with frustrated consumers demanding refunds. We set out below the circumstances where withholding a full refund is lawful in most other sectors.

The starting point for consideration is the terms of the contract. Where a force majeure clause exists, Covid-19 falls within the definition of a force majeure event, there is a causal link between Covid-19 and non-performance of the contractual obligation(s) and the agreed consequence is a relief from contractual obligations, then the position may well tip towards withholding refunds.

Assuming the contractual framework entitles a business to withhold refunds, consideration does need to be given to whether any terms relied on are unfair, within the meaning of Part 2 of the Consumer Rights Act 2015 (the “CRA 2015”). Unfair terms are terms which, contrary to good faith, cause a significant imbalance to the consumer’s detriment (section 62(4)), and where a term is found to be unfair, section 62(1) will render that term unenforceable. Some examples of terms which may be unenforceable are set out in a grey-list in Part 1 of Schedule 2 of the CRA 2015. Aptly named as a “grey-list” these terms are not definitely unfair and so unenforceable, nor, are they certainly free from the risk of being unfair.

One example in the grey-list is terms which have the object or effect of “permitting the trader to retain the sums paid for services not yet supplied by the trader where it is the trader who dissolves the contract”. It, therefore, could be challenging for consumer-facing businesses to refuse full cash refunds to consumers who have paid for a service which they have not and will not receive. This is supported by the CMA’s own (non-legally binding) Unfair Contract Terms Guidance, which states that terms are likely to be considered unfair if they seek to exclude “a refund of prepayments made under a contract which does not go ahead, or which ends before any significant benefit is enjoyed by the consumer” and that terms are likely to be unfair if they “could allow retention of prepayment for which the consumer has received no benefit”.

Nevertheless, even the CMA considers that terms allowing businesses to fail to meet certain contractual obligations and avoid liability may be fair (and, therefore, lawful) where they:

• are narrow in effect (so they do not distort the balance of the contract to the consumer’s disadvantage);

• are qualified so consumers know exactly when and how they could be affected (i.e. the exact circumstances in which it can be used could be specified and the consequences); and

• require the trader to give notice of their proposal to rely on the term to the consumer’s detriment.

This, coupled with the terms listed in Part 1 of Schedule 2 of the CRA 2015 being a grey-list which, as we underline above, are not necessarily unfair but are dependent on the particular contract, suggests that there are circumstances where consumer-facing businesses may legitimately fail to provide a service and withhold refunds. Otherwise such a term would have been in the list of certainly unfair terms.

It favours the business seeking to withhold refunds if the force majeure provision meets the above conditions, is clearly drafted in plain English (e.g. the term “force majeure” is not used, or if it is used, is also explained in plain English), is drawn to the consumer’s attention and contains prominent and adequate information regarding the circumstances in which it could be used (for example, if pandemics or other natural disasters are specifically listed, rather than there being a non-exhaustive list of possible force majeure events).

It may also be appropriate for consumer-facing businesses to withhold full refunds where:

• some services or value have been provided to the consumer;

• prior to the force majeure event the consumer had already tried to cancel because they no longer wanted to uphold their side of the bargain – perhaps the wedding was already called-off;

• the provision of services can be reasonably delayed or postponed to another date;

• it would be appropriate and reasonable to delay the provision of a full refund;

• there was a prominent option for the consumer to at the time pay more for a fully-refundable booking but instead chose knowingly to take the risk of a non-cancellable booking;

• the consumer would face little or no detriment in receiving a voucher or credit note instead of a full refund;

• it would be appropriate to deduct a contribution to costs incurred by the business where it cannot recover the costs elsewhere;

• the consumer has already been, or will be, compensated by a third party (for example, by a credit card provider or insurer); or

• where the business or its directors are under other duties not to provide cash refunds, for example in an insolvency scenario (in the holiday package sector, however, organisers are obliged to provide effective security to cover full refunds to all holidaymakers in the event of their insolvency (reg. 19(1), PTRs)).

In relation to this last point, the recent reports of ‘Tribal Clash’, the beach fitness company “facing bankruptcy” with no “cash reserves to refund 100% of … customers” after cancelling events due to Covid-19, is yet another example of a consumer-facing businesses who cannot provide cash refunds at this point. If the CMA insists on these businesses providing full cash refunds, they may ultimately push businesses into insolvency and hinder or prevent consumers receiving anything back. If this approach is taken with all businesses, entire industries could collapse, reducing competition, preventing consumers receiving certain services in the future, and risking many jobs. Given the wide-ranging duties and obligations owed by directors of companies facing insolvency situations, such an approach may also open directors up to potential personal liability, notwithstanding the recent changes brought about by the Corporate Insolvency and Governance Act 2020, passed into law last month.

Vouchers, credit notes or delayed or partial refunds seem, in these circumstances, a significantly better outcome for consumers, workers, businesses, directors and industries than a general approach to require cash refunds in all circumstances.

As explored in our previous article, whilst the CMA considers that deductions from refunds should be “rare” and will “usually be limited”, even the CMA is not ruling out that there will be instances where refunds will legitimately be refused. Business are therefore well advised to equip themselves with strong arguments to justify deductions, and to defend the position to consumers and the CMA.

For assistance on this or any other consumer law issue (including if you are concerned that the CMA may target your business or if you are one of the hundred or so package holiday providers who received a letter from the CMA), please do not hesitate to contact one of our specialists.