FAQs – contracts for goods and services

Since the onset of the coronavirus outbreak, we have been contacted by a number of businesses that deal with consumers, who have been concerned about the provisions of their standard terms which allow for cancellation or postponement.  They have also been unsure about their obligations in relation to deposits paid by customers.

Contracts with consumers give rise to different legal considerations to those between businesses.  The contractual relationship between a business and a consumer is regulated by the Consumer Rights Act 2015 (“the CRA”). The CRA protects consumers, as the party with the least bargaining power in the transaction, from terms which are ‘unfair’.  So even provisions that are expressly included in standard terms and conditions may be deemed to be unenforceable if they are weighted too heavily in favour of the business.

The Competition and Markets Authority (CMA) has issued comprehensive guidance about the requirement of fairness in contracts with consumers.  According to this guidance, a provision is likely to be unfair if it simply allows a business to unilaterally cancel a contract, and limits the business’ obligations to the return of any deposit paid if such right is exercised.  This is because such provisions give the business an excessive amount of discretion, and fail to recognise that the cancellation might cause the consumer to incur irrecoverable costs and expenses with third parties.  In some situations, such as a contract for the provision of a wedding venue, these additional costs could be very substantial.

However, the CMA guidance suggests that a term which allows the business to cancel or postpone performance of a contract, and limit its liability to the return of deposits paid, is more likely to be enforceable if it is drafted so that it only applies when performance of the contract is impossible or impractical for reasons outside of the trader’s control.

The law also requires that contracts with consumers are written in clear and jargon free language.  Use of language like “force majeure”, to describe situations beyond their control in which the business might wish to postpone performance of a contract, should be avoided.

Clauses that give a blanket entitlement to a trader to cancel a contract and retain deposits paid are likely to be unfair – it would be unfair to a consumer to lose their deposit if the contract is terminated without any fault on their part, and if they had received no benefit for the payments made.

Clearly, cancelling and postponing is bad for business. But in the context of the coronavirus pandemic, having a clear and enforceable contractual right to do so becomes very important.  Where a business has to cancel for reasons beyond its control, it is particularly important for its liability to the customer to be limited to the repayment of the deposit.

It is therefore important for businesses to review their terms and conditions.  Whilst it is probably too late to try to change them for bookings and orders already taken, businesses need to understand the contractual background to the process of managing the consequences of the COVID-19 outbreak.  A clause in a set of terms and conditions that has been drafted in a way that is too broad or vague, could actually be unenforceable, leaving the business exposed and unable to deal with an unexpected challenge such as COVID-19.

Furthermore, it seems possible that COVID-19 will be with us for quite some time to come, and so we would recommend that businesses ensure that going forward their standard terms contain proportionate, fair and enforceable provisions that will enable them to manage the consequences of any future outbreaks.

Please also see our guidance on frustration of contracts here.

For further information, please get in touch.