Consumer contracts: advance payments and cancellation charges – a reminder

29 November 2018

Businesses need to ensure that the terms of their consumer contracts are fair; it’s a requirement of the Consumer Rights Act 2015. A consumer is an individual who isn’t acting wholly or mainly in connection with their trade, business, craft or profession. Terms are unfair when they operate too heavily in favour of a business and, if a court finds them unfair, they will be unenforceable against a consumer.

The question of fairness is particularly important when thinking about how much a business can charge a consumer before the product is supplied, and where that consumer brings a contract to an early end. For example, a consumer books a venue for a wedding reception and the venue spends time and money preparing for the event only for the consumer to cancel four weeks before the big day. In these circumstances what, legitimately, can the venue ask the consumer to pay upfront and what can it recover from the consumer on cancellation?

Whether an advance payment or a cancellation charge is fair will depend on the nature of the product being provided and will vary from business to business. The points below indicate some practices which are likely to be unfair and the approach businesses could adopt:

  • non-refundable deposits which are more than a small percentage of the total price payable could be unfair. They should reflect the amount required by a business in order for a consumer to reserve the product in question. The purpose of a deposit isn’t to cover the costs incurred by the business in commencing the supply of a product
  • any advance payment should reflect the actual costs a business will incur in commencing the supply of the product (for example, the cost of materials), or there is a risk such payments could be unfair. All terms relating to advance payments should clearly set out the amount due in advance and the total amount which will be due
  • non-refundable advance payments and cancellation charges which cover all of businesses’ costs and loss of profit will probably be considered unfair. Instead, they should reflect either the businesses’ actual net costs or net loss of profit resulting directly from the cancellation
  • the use of a sliding scale of cancellation charges (either set amounts or fixed percentages of the total price) will only be fair where the amounts charged are a genuine pre-estimate of the businesses’ costs, or losses, arising directly from the cancellation. A term which allows a business to recover more than its losses will likely be unfair.

Businesses that trade on unfair terms are not only susceptible to challenges from consumers, but also to enforcement action by the Competition and Markets Authority or Trading Standards. Breach of consumer law carries not only civil, but also criminal liability, not to mention potential reputational damage. It is, therefore, crucial businesses take a pro-active approach to ensuring compliance.

For further details please contact Edward Bouckley or a member of Birketts Corporate Team. Law covered as at November 2018.