When nurseries can lawfully insist on payment and avoid providing refunds

With the Competition and Market Authority (the “CMA”) publishing its open letter to nurseries and childcare providers on 28 July 2020 and its more detailed consumer law guidance to nurseries in light of Covid-19, we explore in this article when and how these businesses can lawfully insist on payment and avoid refunding parents before briefly discussing cancellation terms in contracts with nurseries.

In a previous article we wrote about the CMA’s investigation into Covid-19 related cancellation and refund practices by consumer-facing businesses and in another article we discussed the CMA’s letter to the package holiday sector. Unlike the more than 100 businesses who received the CMA’s package holiday letter, it is unclear whether this early years sector letter has been directly sent to any specific nurseries or childcare providers or if it has just been published on the CMA’s website. If you have been contacted by the CMA directly or if you think the letter applies to your business, please read on and get in touch with one of our specialists for further assistance.

The CMA’s position on full refunds by nurseries

The CMA considers that a full refund should be provided by a nursery or childcare provider where parents pay for childcare services in advance but these services do not take place as contractually agreed. The CMA also considers that parents should not be required to pay for services that cannot be provided by the nursery at all or in the agreed form.

When nurseries can lawfully avoid fully refunding parents

The legal framework

As explained in our previous article, the terms of the contract between the nursery and parents must be considered first.Where a force majeure (i.e. unforeseen circumstances) 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) to provide childcare services and the agreed consequence is a relief from contractual obligations, then the position may well tip towards withholding refunds.

Assuming the contract allows a nursery to withhold refunds, the relevant terms must be analysed in case they 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 a term which has 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 nurseries or childcare providers to refuse full refunds to parents who have paid for childcare services 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 nurseries or childcare providers 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 nurseries or childcare providers 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, by specifically listing pandemics and other natural disasters , rather than there being a non-exhaustive list of possible force majeure events).

The CMA’s view

The CMA’s latest letter to the early years sector also indicates that it may be appropriate for nurseries or childcare providers to withhold full refunds where:

• some services or value have been provided to the parents/guardians;

• the contractual terms allow for a contribution to cover a nursery’s costs during a temporary service interruption or where services are provided in different ways to that which was originally envisaged (e.g. home learning support instead of normal, in-person care), provided (according to the CMA) such contribution:
  • is low, does not exceed the business’ direct unavoidable costs during the disruption period, and does not seek to cover costs reimbursed from elsewhere (e.g. from insurance payments or from the Government’s furlough scheme or other financial support schemes) - we consider that this contribution should actually be fair but not necessarily low, as suggested by the CMA;
  • applies for a specified and modest time period; and
  • stops being incurred where a consumer cancels the contract;

• nurseries and parents have agreed to revise contracts voluntarily, such as by agreeing that some payments should continue (provided the nursery does not unduly pressurise the parent/guardian or unilaterally impose new terms on them);

• nurseries and childcare providers can provide the agreed service but the parent/guardian decides they want to stop receiving it, provided such terms are brought to the parent’s/guardian’s attention, the applicable notice periods are no longer than reasonable for the business to find a replacement child, and reductions are offered to reflect lower business costs (if applicable) or if no service is provided during a cancellation period; or

• a child’s place in a nursery is safeguarded, provided there is a contractual basis for the fees and such fees are not the full, or substantially full, amount agreed.

Other circumstances where nurseries can lawfully avoid refunds

Whilst these exceptions to a full refund indicated by the CMA’s letter seem sensible, we consider that legally they can be construed more broadly and with fewer provisos than has been set out in the CMA’s letter. In addition, and further to these exceptions, it may well also be appropriate for nurseries or childcare providers to withhold full refunds where:

• prior to the force majeure event the parent/guardian had already cancelled because they no longer wanted to uphold their side of the bargain – perhaps they no longer wanted their child to attend that particular nursery;

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

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

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

• where the nursery or its directors are under other duties not to provide cash refunds, for example in an insolvency scenario.

Cancellation terms in contracts with nurseries

Aside from discussing refunds, the CMA also addresses cancellation by parents/guardians. The CMA appears to suggest that in order to be binding on parents/guardians, cancellation terms ‘must be brought to consumer’s attention’ and that cancellation notice periods should be no longer than reasonable for the nursery to find a replacement child. Whilst all terms in contracts between a parent/guardian and a nursery must be fair in accordance with the CRA 2015 (as discussed above), we are not aware of any specific legal obligation to bring cancellation terms to the parents’ attention where the contracts are agreed on the nursery’s premises or to have a notice period aligned with the time it takes a nursery to find a replacement child.

Different rules apply for contracts concluded online but for parents who contract with a nursery on a nursery’s premises, the Consumer Contracts (Information, Cancellation and Additional Charges) Regulations 2013 (the “CCRs”) do not require cancellation provisions to be brought to the parent’s attention. Instead, nurseries must provide parents with the information listed in Schedule 1 to the CCRs, which includes the nursery’s contact details and the main characteristics of the services to be provided. Moreover, the test for fairness under the CRA 2015 is whether a term, contrary to good faith, causes a significant imbalance to the consumer’s detriment; it is not a test of the time it takes a service provider to find a replacement customer (or child).

Nevertheless, businesses in the early years sector may wish to consider whether the cancellation periods specified in their contracts are fair. Excessively long cancellation periods, particularly where they apply regardless of the circumstances (for example, regardless of whether or not other children are on the waiting list and able to take up a place before expiry of the notice period), may be unfair.

If you want to discuss any of the matters addressed in this note, or your business has been approached by the CMA, please get in touch with one of our specialists.