Refusing refunds in the face of the CMA’s latest guidance

United Kingdom

With the Government’s response to COVID-19 evolving rapidly, local lockdowns increasing, changing travel advice involving the addition and removal of countries from the quarantine list on a weekly basis, and a general continued sense of uncertainty, the Competition and Markets Authority (“CMA”) has issued further guidance on cancellations and refunds by consumer-facing businesses during the pandemic.

Here is our take on the principal changes in the guidance and the impact on the critical question for businesses – when can businesses legitimately refuse to give consumers refunds?

The new guidance forms part of the CMA’s COVID-19 investigation that we discussed here and replaces the guidance previously published on 30 April 2020.  It is in addition to sector-specific guidance that we have explored in separate articles regarding nurseries and certain holiday companies. At the same time, the CMA has also updated its package holiday sector investigation.

Package holiday update regarding group travel

The CMA has written to certain unnamed businesses to express concern that such businesses have claimed that they are exempt from the Package Travel and Linked Travel Arrangements Regulations 2018 (the “PTRs”) (as explored in our previous article) on the basis that the business did not contract directly with consumers, but with an organisation (such as a school, university team/society, social group or scouting group), therefore taking the arrangements outside of the normal protections provided by the PTRs.

As explored in our previous article, where contracts are entered into with businesses (or a person acting for a trade, business craft or profession) and the travel is booked in connection with that trade, business, craft or profession, the PTRs will not apply to that contract. However, contracts are not otherwise excluded from the PTRs simply because they are not made directly with individual consumers. The PTRs give rights to a “traveller” who is “entitled to travel on the basis of a contract concluded”, suggesting that the traveller does not have to conclude the contract personally.  If travel companies cannot rely on the general exclusion from the PTRs, they will need to consider the further potential exceptions raised in our previous article which may permit the refusal of refunds.

Changes in the CMA’s position on refunds more generally when contracts can’t be performed

The CMA’s position on full refunds

The CMA has confirmed that it expects consumers to be offered a full refund where a contract cannot go ahead as agreed due to COVID-19 lockdown laws, and consumers have paid in advance for goods or services which have not been provided, including where:

  • a business cancels without providing any of the agreed goods or services;
  • a consumer cannot receive the agreed goods or services because, for example, relevant lockdown laws have made it illegal to receive or use the goods or services (including local lockdowns and self-isolation requirements when returning from overseas travel); or
  • the service actually provided differs radically from what was originally agreed.

This is not markedly different from the CMA’s previous position, save for the inclusion of local lockdown and self-isolation following travel, which weren’t a feature of life back in April. However, it is far from certain that consumers should always be entitled to full refunds, particularly where their own actions, such as travelling abroad, have led to their inability to receive or use the goods or services. The CMA seems to acknowledge this in part. Given the frequency and rate at which self-isolation is being mandated when individuals return from overseas, it may well be reasonable to anticipate that any travel abroad at any time may be subject to mandatory self-isolation. Why should businesses be expected to cover the costs associated with a consumer’s own actions?

In terms of timing of refunds, the CMA accepts that businesses may take longer than normal but must nonetheless issue refunds promptly and without delay. Although the CMA does not expressly state this (and never would), it does indicate that there may be some leniency with statutory payment deadlines where a business is taking slightly longer than permitted to provide refunds, if refunds are in fact ultimately provided. The safest option is obviously to comply with all statutory deadlines.

Understandably, businesses are now seeking to protect their positions by including terms which restrict the ability of consumers to obtain refunds where lockdown laws prevent performance. The CMA is not a fan of such clauses, but in order for the clauses to have the best chance of being found to be enforceable, the provisions need to be clear and prominent. The narrower they are drafted, the higher the chance of businesses being able to rely on them. Even the CMA accepts that if a clause narrowly limits a consumer’s refund rights and allows the consumer to get most of their money back (with the business only withholding a limited amount for incurred costs), they will be enforceable.

The CMA’s position on refunding ongoing contracts

The position with ongoing contracts is more complex and the law far less clear. The CMA considers that:

  • consumers should normally receive a full or partial refund for paid-for services not provided or unable to be used due to lockdown laws;
  • consumers can normally withhold paying for services not provided or which cannot be used due to lockdown laws; and
  • businesses can require a small costs contribution until the service provision is resumed, provided that the contract terms clearly and fairly set this out and consumers can freely terminate if they do not wish to pay the contribution.

Clearly there are going to be exceptions to this. Why should a business be penalised where a consumer’s own actions, such as travelling abroad, means that they cannot use the services?  For instance, if a nursery remains open but a consumer’s child cannot attend as they are mandatorily self-isolating due to the consumer’s own choice to take a foreign holiday, why should the nursery have to foot the bill?

The CMA’s position on non-refundable payments and fees

The CMA considers that the above refund rules apply regardless of whether a particular payment is labelled as a non-refundable deposit or an advance payment, such as is commonly seen with holiday accommodation. They reach this conclusion by reasoning that the contract will have been frustrated and any terms permitting businesses to provide no service but keep consumers’ money will likely be unfair and, therefore, unenforceable under the Consumer Rights Act 2015.

The CMA also considers that businesses should not charge any form of administration fee (or equivalent) for processing refunds.

As is becoming the theme, the position is not necessarily as clear as the CMA makes out. For example, where consumers have a choice between refundable and non-refundable options, the options have been presented clearly and prominently, and the consumer opts to pay less for a non-refundable offering, businesses may be in a stronger position to refuse the refund. This is particularly the case where it is the consumer’s own actions that have prevented the contract being performed.

The CMA’s position on paying for future services

The CMA considers that businesses must not seek advance payments for services that they know they cannot provide.  The CMA suggests that this may occur where lockdown laws affecting the business’s ability to perform the services are currently in effect and are likely to remain in place when the contract is to be performed.

Whilst examples at the extremes will be easy to categorise, given the frequency in which lockdown laws have changed and are continuing to change, many contracts will fall within much more of a grey area. Understandably, many businesses will not be in a position to unilaterally waive their contractual rights to payment just because there is some uncertainty about the future. Some businesses will be relying on advance payments in order to provide their services (for example, where they need to buy materials in advance) so it would be unreasonable, and not in the consumer’s interest, to block such advance payments simply because there is a possibility of the Government imposing or maintaining lockdown laws in the future.

Cancellation

Cancellation relating to government guidance

The CMA accepts this is an extremely complex area. Outside of specific rules (for example those covering cancellations and refunds for package holidays (as explored in our previous article)), businesses may be well within their rights to treat cancellations by consumers due to non-binding government guidance as cancellations by choice, and therefore outside the scope of many of the rules relating to refunds addressed above. Every instance will need to be addressed on a case-by-case basis.

Cancellation under standard terms and conditions

The CMA’s view is that terms allowing businesses to cancel without providing any goods or services whilst keeping the consumer’s money are likely to be unfair and unenforceable - consumers should receive all their money back where a business cancels without providing any service and businesses should not impose disproportionately high charges on consumers who cancel contracts (for example, in response to Government guidance).

However, as with the refund circumstances addressed above, there will be instances where it is entirely appropriate to withhold full refunds following cancellation under standard terms and conditions. For example, where goods or services (such as personalised or bespoke goods or services) cannot be sold or supplied elsewhere, and businesses have incurred significant costs, refusal of refunds may be entirely justified. This will particularly be the case where the relevant terms have been clearly and prominently drawn to the consumer’s attention, and where cancellation is a result of the consumers’ own actions (due to, for example, travel choices).

The CMA’s own guidance does not go this far, but does accept that the following may be permissible:

  • a deposit retention where the deposit is a small percentage of the total price;
  • advance payments for future services should usually be refunded, but can be subject to deductions limited to costs that businesses reasonably incur;
  • cancellation charges should be limited to a genuine estimate of what a business will lose directly; and/or
  • businesses should not be compensated twice for the same loss (e.g. by retaining some advance payments and imposing a cancellation charge).

Whilst these considerations are helpful for understanding the CMA’s position, cancellation terms should be considered on a case-by-case basis.

In summary, this is a complex area with the only certainty being uncertainty. The CMA guidance can be a helpful starting point, but as the CMA regularly reminds us all, only a court can decide what the law actually is.  Please do contact one of our consumer law specialists for advice on your individual case, particularly if you are a package holiday provider who received a letter from the CMA.