The dangers of non-refundable deposits

Businesses imposing unfair terms on consumers risk finding them unenforceable and could suffer reputational damage, says Rolla Rostam

The problem

Cancellations and no-shows are a serious concern for most venues, especially where large bookings are concerned, such as weddings and birthdays. With the drop in value of the pound, we have already seen a slowdown in the trend of couples getting married abroad, and this is likely to continue as a result of the uncertainty in the airline industry.

The law

Given the imbalance in negotiating power, the law protects consumers who contract with businesses. The Unfair Terms in Consumer Contracts Regulations 1999 state (at Regulation 5) that a contractual term that has not been individually negotiated shall be regarded as unfair if it causes a significant imbalance
in the parties' rights and obligations to the detriment of the consumer.

In addition, the Consumer Rights Act 2015 includes a list (at Part 1 of Schedule 2) of the types of contract clauses that may be considered unfair. This includes (at paragraphs five and six of that list) terms that require, in the event of a cancellation or no-show by the consumer, a "disproportionately high" sum to be paid in compensation. This may include high deposits or situations in which the booking could have been resold.

Clearly, the law is telling businesses that, irrespective of any contractual terms to the contrary, where a consumer cancels a booking, the business may not be able to retain all the monies paid by the consumer in advance.

However, a business is entitled to hold back an amount that is reasonably needed to cover its net costs (for example, where food has been purchased in anticipation of catering) or the net loss of profit resulting directly from the cancellation. The retention of a genuine reservation fee may also be permissible if it is a small percentage of the overall price. Anything more may be at risk of being regarded as a penalty in disguise.

Checklist

In order to address this, consider the following steps and review each case individually:

• Terms and conditions should break down the deposit into its key elements:
  Reservation fees - a small percentage of the booking price;
  Advance payments - a true reflection of the expenses incurred in preparing for the booking (such as extra employees);
  Cancellation fees - a true estimate of the loss of profits that may be incurred as a result of a cancellation by a consumer.
• For the purpose of advance payments, some provision should be made for a partial refund where costs are not actually incurred. For the purpose of cancellation fees, these should be reduced to the extent that the business can make a profit on a rebooking or should be set on a reasonable sliding scale.
• Terms and conditions should be clear, transparent and easy to read and understand, to avoid the consumer being misled or confused.
• Employees should receive training and have clear guidelines on what to do when dealing with a cancellation by a consumer.

Beware

In an attempt to prevent companies from unfairly profiting from non-refundable deposits, the Competition and Markets Authority has issued guidance entitled Writing Fair Contracts: Guidance for Businesses. The authority has the power to investigate the use of unfair terms and take enforcement action, which could render contracts unenforceable and oblige a business to change its terms.

Businesses that try to impose unfair terms in contracts with consumers are at risk of not only finding their terms unenforceable, but also attracting the reputational damage of being seen as a ruthless enterprise.

Contact

Rolla Rostam is an associate at UK law firm TLT

rolla.rostam@tltsolicitors.com