From staffing to supply chains, the effect COVID-19 has had on business operations is unprecedented. In a time of so much disruption and uncertainty, the last thing any business needs is the additional pressure of a consumer dispute, and the risk of reputational damage that may follow. Here we discuss the key considerations businesses should have in mind, when dealing with consumer contracts during this time.
The effect of consumer legislation
Any contract between a business and a consumer for the supply of goods and/or services will be subject to the provisions and implied terms in the Consumer Rights Act 2015 (“CRA”). The terms of the CRA cannot be excluded, and will apply irrespective of the terms of a contract and, in some cases, in direct contradiction of a contract’s terms.
The implied terms under the CRA in relation to goods include that they must be as described, and must match any sample or model seen or examined. This may be relevant if a business is struggling with its supply chain and is looking to make substitutions for products.
For services (for example, events, hospitality and childcare) the implied terms include that the services must be provided within a reasonable timeframe (unless the contract itself sets a timeframe, in which case that timeframe must be complied with) and that anything said or written to the consumer by the business, about the business or the service, will be included as a term of the contract if it is taken into account by the consumer. These implied terms may be relevant if, for example, the service cannot be performed until a later date due to the current restrictions in place by the Government.
Remedies available to consumers if the implied terms are invoked under the CRA include that the consumer can require the business to repeat the performance of the contract (i.e. by agreeing to re-schedule the service) or to require the business to provide a partial or full refund in respect of the parts of the contract which cannot be fulfilled, as promised. This could include a partial refund if a re-scheduled service is not, for example, on such a favourable date as originally contracted.
Unfair contract terms
The CRA also requires that certain terms in business to consumer contracts are fair and transparent; otherwise they may not be binding on the consumer. A term will be considered to be unfair if it causes significant imbalance in the parties’ rights and obligations under the contract to the detriment of the consumer. Whether a term is unfair, is a matter for the Court to determine, having referred to the wording of the contract and also the individual facts of the case. Schedule 2 of the CRA lists, by way of example, a number of terms which may be regarded as unfair, such as terms which:
1. permit the business to retain sums paid by the consumer in circumstances where the business is the party cancelling the contract; and
2. permit the business to charge disproportionate sums in compensation for services which have not been supplied if the consumer chooses to cancel the contract.
The CRA works in conjunction with the Consumer Protection from Unfair Trading Regulations 2008 (the “CPUTRs”), which make it a criminal offence for businesses to engage in certain, unfair commercial practices. Such practices include misleading a consumer as to their rights, and the use of undue influence to impair a consumer’s freedom of choice or conduct. Breaches of the provisions of the CPUTRs can incur sanctions including hefty fines as well as potential imprisonment.
Businesses should therefore be alive to the potential that attempting to withhold a consumer’s money, whether that be a deposit or pre-payment, following the cancellation of a consumer contract in the face of the Covid-19, may fall foul of the unfair contract terms test. This is especially relevant in circumstances where the business may be able to mitigate its losses by accessing Government relief and/or recovering the sums lost from its insurer.
Consumer and Markets Authority (“CMA”)
COVID-19 taskforce findings
In March 2020, the CMA set up a COVID-19 taskforce to monitor and take action against businesses seeking to exploit consumers in the face of COVID-19. In its publication on 24 April 2020, the CMA reported that it had received 21,000 COVID-19 related complaints between 10 March and 19 April 2020. These complaints related to 6000 private sector businesses in the UK, and 4 out of 5 of all complaints related to cancellations and refunds.
The CMA has stated that, if it finds that businesses are failing to comply with the law, it will take appropriate enforcement action which could include taking the business to court.
Practices of particular concern
The CMA’s key concerns relate to the following practices by businesses:
1. refusing refunds;
2. introducing unnecessary complexity into the process of obtaining refunds;
3. charging high administration or cancellation fees; and
4. pressuring consumers into accepting vouchers instead of cash refunds.
Sectors under scrutiny
The CMA has identified the following 3 sectors of particular concern, which it will tackle as a priority before moving on to consider other sectors:
1. weddings and private events;
2. holiday accommodation; and
3. nurseries and childcare providers.
The CMA has set out that it would expect a full refund to be offered if the contract is not performed as agreed, including where:
1. a business has cancelled a contract without providing any of the promised goods or services;
2. no service is provided by a business, because this is prevented by restrictions that apply during the current lockdown; or
3. a consumer cancels, or is prevented from receiving any services, because of the restrictions that apply during the current lockdown.
In most cases, the CMA states that this will apply to deposits, even if the business’ terms and conditions state that the deposit is non-refundable, and no admin fees can be charged for processing refunds.
Exceptions to refunds
The limited exceptions to the rule that consumers should be offered full refunds are as follows.
1. If there has been partial performance of the contract
If the consumer has already received some of the services they have paid for in advance, the CMA states that a deduction may be made, but the consumer should be refunded for those services not provided (at the very least). However, the CMA also states that it considers these cases are likely to be relatively rare; the deductions very limited; and will only apply where the business cannot recover the sums from elsewhere.
2. If the contract is ongoing and the service will be resumed
The CMA states that, in this circumstance, a business can require the consumer to pay a small contribution to its costs until the provision of services has resumed, but only where this is an explicit term of the contract. The CMA states that the starting point will still be a full refund.
Businesses should also note that the CMA explicitly states that businesses should not be allowed to profit by ‘double recovering’ their money from the Government and from customers.
Time limits for providing a refund
The CMA accepts that it may take longer than usual for businesses to process refunds. However, refunds must still be given within a reasonable time frame and not in breach of any statutory deadlines, for example those relating to package holidays, as well as the 14 day time-limit set out in section 56(4) of the CRA.
Credits and re-booking
The CMA states that consumers can be offered credits, vouchers, alternative dates and re-booking options; but that these should normally be offered in addition to a refund and consumers should not be misled or pressured into accepting such alternatives.
UK Cabinet Office – guidance on responsible contractual behaviour
On 7 May 2020, the Cabinet Office published a document entitled ‘Guidance on responsible contractual behaviour in the performance and enforcement of contracts impacted by the Covid-19 emergency’ (the “Cabinet Guidance”).
The opening paragraph of the Cabinet Guidance states that “parties to contracts should act responsibly and fairly, support the response to Covid-19 and protect jobs and the economy”.
The Cabinet Guidance goes on to list a number of areas in which it encourages parties to contracts to behave responsibly and fairly, including in relation to the return of deposits or part payments and in relation to requests for variations to contracts.
The Cabinet Guidance does explicitly state that it is not statutory, it does not override any relevant laws or the express provisions of contracts, and is only of general application. It is not clear if the Cabinet Guidance will be invoked in relation to consumer rights, but it is something which should be born in mind during the current climate.
The CMA and other consumer watchdogs, including organisations such as Which?, are keenly pursuing businesses seeking to deny consumers their statutory rights. The preservation of cash-flow is, of course, a key consideration for businesses at this time. However, whilst COVID-19 continues to have such a profound effect on individuals and households, the risk for reputational damage should not be underestimated by businesses. In order to avoid such a risk, businesses should seek expert advice in relation to consumer contracts before pursuing any course of action.