The COVID-19 global health emergency has significantly impacted the ability of Australian businesses to supply services to consumers.
Businesses that provide services aimed at enjoyment, relaxation, pleasure and entertainment are facing unprecedented delays and cancellations. These include services provided by travel agents, hotels, cruise ship operators, airlines, event and wedding planners, spa-operators and businesses offering other travel and recreational services.
Many businesses are struggling for clarity in relation to their obligations to provide refunds to consumers.
This article sets out some important considerations for businesses who are considering their refund obligations to consumers and also looking to review their existing consumer contracts.
- The consumer guarantees apply to most services which are of a kind ordinarily acquired for personal, domestic or household use.
- With limited exceptions, they cannot be excluded, restricted or modified by contract.
- A right to a refund may exist independently of the contract between the supplier and the consumer.
- Outside the consumer guarantees, suppliers are generally obliged to provide a refund for cancelled services unless the terms of the contract with the consumer provides otherwise.
- Suppliers ought to consider whether terms of their consumer contracts which provide for less than a full refund could be affected by the unfair contracts term regime.
- It is important that businesses abide by their refund policy and be careful that they do not mislead consumers or make false representations as to the circumstances in which a consumer is entitled to a refund.
Refunds and consumer guarantees
The Australian Consumer Law (ACL) provides consumers with guarantees that services supplied by suppliers will:
- be rendered with due care and skill
- be fit for a purpose made known to the supplier
- be of such a nature, quality, state or condition that they might reasonably be expected to achieve a result desired by the consumer which the consumer made known to the supplier and
- be supplied within a reasonable time (if the time is not agreed by the consumer and supplier).
The consumer guarantees apply to most services which are of a kind ordinarily acquired for personal, domestic or household use.1
Suppliers may be required to provide a refund where there has been a failure to comply with a consumer guarantee. A full refund, or a refund of the difference between the sale price and the value of the services delivered, must be provided when a failure cannot be remedied by the supplier or there is a ‘major failure’.2
A ‘major failure’ includes where services are substantially unfit for purpose and unable to be remedied within a reasonable time to make them fit for such a purpose.3
For example, river cruise services are commonly purchased by consumers who wish to visit many destinations but only wish to use a single mode of transport. If a river cruise service is disrupted by poor weather and the supplier replaces the cruise ship with buses on certain legs of the tour, the services delivered to the consumer may be substantially unfit for purpose. Consequently, there may have been a ‘major failure’ to comply with the consumer guarantees.
Another example is where an elderly consumer books a package holiday from a travel agent but prior to departure the travel agent cancels the holiday. The travel agent is only able to offer a similar package holiday the following year. A ‘reasonable time’ for a supplier to provide a remedy depends on the circumstances of each case. Waiting for the following year’s tour may not be a remedy of the services within a reasonable time for the elderly consumer.
Generally, the consumer guarantees cannot be excluded, restricted or modified by contract, meaning the right to a full refund exists independently of the contract with the consumer and regardless of what the contract says.4 However, there are some circumstances provided for in the ACL where a consumer’s right to a refund may be affected by the terms of their contract.
For example, a contract for the supply of ‘recreational services’ to a consumer may include terms excluding, restricting or modifying liability for personal injury arising from breaches of the consumer guarantees (to the extent that the personal injury is not caused by the reckless conduct of the supplier).5
Further, a contract for the supply of services not of a kind ordinarily acquired for personal, domestic or household use, may include terms limiting the supplier’s liability for breaches of the consumer guarantees to supplying the services again or paying the cost of supplying the services again.6
When are full refunds not required?
The ACL provides a number of exceptions to when a customer is entitled to remedies for a failure to comply with a consumer guarantee.7 Relevantly, an exception applies where a failure to comply with the consumer guarantees relating to services (other than the guarantee of due care and skill) occurs only because of the action, default, omission or representation of a person other than the supplier.
In those circumstances, a consumer may not bring an action against the supplier for the failure to comply.8 The consumer’s right to a refund will be governed by the contract with the supplier subject to certain limitations discussed below.
Whether current COVID-19 public health restrictions implemented by national and state governments are capable of attracting this limitation to consumer claims for breaches of the guarantees has not yet been tested before the courts. Whether a supplier could rely on the exception depends on the circumstances of each case, including whether there are other causes of the failure of the supplier to comply with the guarantees.
The ACCC has provided guidance that appears to suggest that COVID-19 health restrictions are likely to attract the limitation.9 However, that guidance will not prevent consumers bringing claims for full refunds and other remedies for breaches of the consumer guarantees. Nor will it preclude the ACCC or any other regulator taking action in the future.
Avoiding unfair contract terms
If the consumer guarantees do not apply to the services or a consumer is left without remedy due to reasons beyond the control of the supplier,10 suppliers will generally be obliged to provide a full refund to a consumer for cancelled services unless the terms of the contract between them provides otherwise.
Many contracts between suppliers and consumers provide for less than a full refund in certain circumstances (for example, if the consumer chooses to cancel the services).
If businesses use ‘standard form’ consumer contracts and provide for less than a full refund in certain circumstances, they ought to consider the application of the unfair contracts regime. The regime provides that any term in a standard form consumer contract that is unfair is void and unenforceable.11
A term is unfair if it satisfies the following three criteria: (1) it would cause a significant imbalance in the parties’ rights and obligations; (2) is not reasonably necessary to protect the legitimate interests of the party benefitting from the term; and (3) would cause detriment to a party if it were relied upon.12
A term which provides for less than a full refund where services have been cancelled as a result of events outside the control of either party might be said to cause a significant imbalance of the contractual rights and obligations of the parties in the favour of the supplier (criterion 1) and a financial detriment to the consumer (criterion 3).
In that case, businesses should give careful consideration as to whether such a term is reasonably necessary to protect its legitimate interests (criterion 2).
If a term is challenged by a consumer, the term is presumed not to be reasonably necessary unless the party benefitting from the clause can prove otherwise.
Businesses reviewing or drafting terms which provide for less than a full refund ought to consider the following:
- Whether the clause is necessary.
- If it is, clearly identify the legitimate interests the clause is designed to protect and ensure that the business has a clear justification about why it is necessary to protect those interests.
- Ensure that the consequences of the clause are reasonable and justifiable relative to the interest to be protected.
- Ensure that the clause is transparent and made obvious to consumers when entering into the contract (see our discussion on transparency below).
- Consider whether there are any other terms in the contract which may mitigate any substantive unfairness.
While it is ultimately a matter for a court to decide whether the interests identified by the business are legitimate and whether the clause is reasonably necessary, the steps above will assist suppliers in identifying potential risks with their consumer contract terms.
Transparency of the contract terms
An important factor in determining the unfairness of a term is how transparent it is. For the purpose of the unfair contract terms regime, a term will be transparent if it expressed in reasonably plain language and presented clearly to the customer before or at the time of signing the contract.13
It is important that appropriate prominence be given to terms which might operate disadvantageously to customers. This can be done, for example, by restating or summarising the important clauses and displaying them prominently to a customer before they give their assent to the agreement.
Click boxes that, for example, state the customer has “read and understood” the terms (which appear on a different webpage that the customer is not required to navigate to during the contract process) may not be sufficient to bring the provision to the customer’s attention and therefore may not be transparent and, some instances, may not be incorporated into the agreement with the customer.
Avoiding misleading conduct in relation to refunds
The ACL prohibits a person in trade or commerce engaging in misleading or deceptive conduct or conduct that is likely to mislead or deceive. Suppliers should consider whether their refund terms could be misleading or deceptive.14 In some circumstances, the refund policy may form part of the contract between the supplier and the consumer.
If a supplier publishes a refund policy, it ought to ensure that it abides by that policy. If it does not, consumers may claim they have been misled as to the circumstances in which they are entitled to a refund. Failure to abide by the refund policy may also be a breach of contract if the policy has been incorporated into the contract.
A refund policy must not mislead consumers as to their statutory rights to a refund or other remedy under the ACL.15 For instance, the agreement must not purport to exclude, restrict or modify the consumer guarantees. There are significant penalties for businesses who contravene these provisions of the ACL.
Things to remember when reviewing your refund policy
A right to a refund may exist independently of the contract between the supplier and the consumer. The consumer guarantees apply to most services which are of a kind ordinarily acquired for personal, domestic or household use. With limited exceptions, they cannot be excluded, restricted or modified by contract.
Outside the consumer guarantees, suppliers are generally obliged to provide a refund for cancelled services unless the terms of the contract with the consumer provides otherwise.
Suppliers ought to consider whether terms of their consumer contracts which provide for less than a full refund could be affected by the unfair contracts term regime. Suppliers ought to consider what steps might be taken to reduce the risks of a contract term being declared void and unenforceable.
It is important that businesses abide by their refund policy and be careful that they do not mislead consumers or make false representations as to the circumstances in which a consumer is entitled to a refund.
We are able to assist with reviewing consumer contract terms and responding to inquiries made by regulators in relation to consumer contracts.