Stephanie Limaco, Foreign Lawyer, Zaiwalla & Co.
Unfair terms in consumer contracts: the impact of the Covid-19 pandemic
Among the myriad issues arising from the Covid-19 pandemic, unfair terms in consumer contracts may have a significant potential impact for diverse commercial enterprises. Although there is a broad scope of protection against unfair terms in business-consumer relations, businesses should nevertheless review their contracts to assess and identify particular terms on which they may be unable to rely when faced with Covid-related disruption.
Protection against unfair contract terms in the Consumer Rights Act
The law is relatively straightforward. In general, a term is unfair (i.e. unenforceable) “if, contrary to the requirement of good faith, it causes a significant imbalance in the parties’ rights and obligations under the contract to the detriment of the consumer.” Whether a term is fair can be determined by considering “the nature of the subject matter of the contract”, and “by reference to all the circumstances existing when the term was agreed and to all of the other terms of the contract or of any other contract on which it depends.” 
Under the Consumer Rights Act 2015 (CRA), unfair terms include: 
- A term which inappropriately excludes or limits the legal rights of the consumer in case of non-performance by the trader of any of its contractual obligations.
- A term requiring excessive compensation from the consumer where the consumer decides not to conclude the contract with the trader.
- A term which authorises the trader to dissolve the contract on a discretionary basis where the same facility is not granted to the consumer.
- A term which enables the trader to alter the contract unilaterally without a valid reason which is specified in the contract.
These examples are not exhaustive. Other terms could be unfair if they meet the general CRA definition. Critically, the court has a duty to consider the fairness of a term on its own motion, even if neither party has raised the issue in proceedings. 
Impact of the Covid-19 outbreak on consumer contracts
The governmental response to Covid-19 has created significant, often sustained, disruption: forcing businesses to close (permanently or temporarily), reducing the provision of services because of social distancing, and decreasing product availability because of supply chain problems. Accordingly, many businesses have been unable to perform of fulfil their contracts with consumers.
In April 2020, the Competition & Markets Authority (CMA) established a Covid-19 Taskforce, in response to complaints about cancellations and refunds – most notably, weddings and private events, holiday accommodation, nurseries and childcare providers. 
The CMA also established an online service, enabling consumers to report businesses that were behaving unfairly during the pandemic. It indicated that enforcement action would be taken where evidence exists that businesses have breached consumer protection law. For example, the CMA has been investigating suspected breaches in the package holiday sector, including unfair cancellation practices and terms.
The CMA recently updated its Guidance, “Statement on coronavirus (Covid-19) consumer contracts, cancellations and refunds” (the Statement), to include interpretation on which terms are likely to be deemed unfair during the pandemic. Although this Guidance is non-binding, and the courts will decide how the law should be applied in each case, it would be prudent to follow it unless there is a reasonable justification for not doing so.
Non-refundable payments and fees
If a consumer contract can no longer be performed due to Covid-19 restrictions, it becomes frustrated. This has occurred, for example, with some weddings and civil partnership receptions: consumers who have paid in advance for services or goods which cannot be delivered are usually entitled to receive a full refund.
In ongoing contracts - where consumers receive continuous services via a regular payment, such as gym membership - they will normally have the right to withhold payment for services that are not provided, or cannot be used because of lockdown restrictions. 
The CMA considers that rights to a refund should apply even if the contract indicates that part of the payment is a non-refundable advance, because such a term would likely be unfair. A clause providing that no refund will be available if the contract is not performed due to coronavirus is unlikely to be enforceable.
Businesses should therefore take into account that a broad “no refunds” term will probably be considered as unfair, enabling consumers to complain. So too will clauses that have the effect of not refunding consumers for services not provided – for example, if the business wants to enforce a “30 days’ termination notice”, despite the consumer not being able to receive the service during those 30 days.
It is advisable for businesses not to enforce this kind of clause and to try to reach an agreement with the consumer instead. Credits, vouchers, and postponing the performance date of the service are potential alternatives to refunds that could be offered if the business is struggling with cash flow (see below).
Many businesses are drafting or amending their contracts with coronavirus in mind.
Notably, a term related to refunds is more likely to be fair if it puts “strict and narrow limits on the circumstances in which consumers’ rights to refunds are reduced” and only allows the business to keep “a limited amount for any costs it has already incurred in performing the specific contract”.
The contract should detail when the business can keep part of the payment in case the service could not be provided due to coronavirus, which amounts could be kept, and the relevant reasons that justify keeping such amounts. Examples of these reasons may be that some expenditure relating to personalised items may only be useful for the particular consumer signing the contract, or that the business may provide goods, or part of the services, that could be valuable for the consumer. Any amount retained by the business should be reasonable and justified.
For new contracts, the pandemic can no longer be regarded as an unforeseeable event; it is foreseeable that there may be future lockdowns or special rules. Businesses must therefore consider the potential consequences of such events and include reasonable provisions in their contracts about what will happen as a result.
As indicated in the Statement, these terms need to be clearly and prominently set out in the contract.
Credits, vouchers and other alternatives to refunds
As an alternative to refunds, businesses can offer credits, vouchers, re-booking or re-scheduling. However, where consumers are entitled to receive a refund, businesses should not mislead or pressure them to accept these alternatives, nor give them the impression that they are not entitled to a refund.
The CMA Taskforce has received many complaints from people who have been forced to accept vouchers for holiday accommodation which can only be used at a more expensive time period.
A term that forces a consumer to accept these alternatives instead of a cash refund may well be considered unfair.
There are alternative agreements to be reached with consumers beyond refunds. Businesses may offer incentives to encourage consumers to accept these alternatives, such as providing an additional service, or giving them flexibility as to when they can use it. Some airlines, for example, have let consumers postpone flights at their convenience. Another option might be to let the consumer transfer the benefit of the service to someone else.
Partially affected contracts
If the contract is partially affected, so that the service can be provided with only minor differences, then it can continue and the consumer would, at best, be entitled to a price reduction in relation to those elements that have been modified or not provided.
Change of contractual terms
The CMA Guidance indicates that businesses might potentially rely on “variation clauses” to amend the terms of their existing consumer contracts in order to deal with Covid-related issues. These clauses are likely to be unfair if they allow the trader unilaterally to change relevant aspects of the contract, exempt the trader from providing the consumer with reasonable notice of the changes, or where the consumer does not have a right to cancel the contract.
A business cannot decide, by itself, to make substantial changes in how the contract was to be performed, even in the context of the pandemic. Again, it is advisable to try to reach an agreement with the consumer on how best to adapt the contract to this new situation.
Early cancellation related to government guidance
The Statement recognises that there may be occasions where the service can be provided as agreed, but the business or consumer does not want to continue because of government guidance, which “might be a mixture of what you must do and what you should do”. That is, it may, or may not, contain legal restrictions. If it does not, the position is more legally complex.
Depending on whether the contract could be considered as frustrated, different consequences apply. If it is, the consumer is normally entitled to a full refund; if not, then the terms and conditions on cancellation and refunds apply - if they are fair.
The CMA considers that cancellation charges “should be limited to a genuine estimate of what a business will lose directly”, and that businesses “should not be compensated twice for the same loss”. Therefore, it is not justifiable for businesses to charge excessive amounts or the full-service price, in the event of early cancellation by the consumer as a result of government guidance.
In such cases, it is advisable to provide an explanation of the cancellation charge, and the costs or losses that it covers. Furthermore, businesses should not make the cancellation of the services unreasonably difficult, e.g. by setting excessively long waiting times for cancellation.
Businesses should look very carefully at their contractual terms to see how these may assist in dealing with Covid-19 restrictions, and any consequent impact. However, in the performance of consumer contracts, it would also be prudent to assess if any of those terms could be considered as unfair. The CMA Statement provides helpful guidance, considering its potential enforcement powers. However, if there is any doubt, it is advisable to err on the side of caution, and potentially seek specialist advice.
 CRA 2015, s. 62(4).
 CRA 2015, s. 62(5)(a).
 CRA 2015, s. 62(5)(b).
 CRA 2015, Schedule 2, Part 1
 CRA 2015, s. 71.
 CMA, Press Release, Covid-19: CMA to investigate cancellation policy concerns, 30 April 2020, available at: https://www.gov.uk/government/news/covid-19-cma-to-investigate-cancellation-policy-concerns
 The online system is available at: https://www.coronavirus-business-complaint.service.gov.uk/
 CMA, Update on the work of the CMA’s Taskforce, published on 3 July 2020, available at: https://www.gov.uk/government/publications/cma-coronavirus-taskforce-update-3-july-2020/update-on-the-work-of-the-cmas-taskforce
 CMA, Covid-19 cancellations: package holidays, updated on 23 October 2020, available at: https://www.gov.uk/cma-cases/covid-19-cancellations-package-holidays
 CMA, Guidance, Statement on coronavirus (Covid-19), consumer contracts, cancellations and refunds, updated on 28 August 2020, available at: https://www.gov.uk/government/publications/cma-to-investigate-concerns-about-cancellation-policies-during-the-coronavirus-covid-19-pandemic/the-coronavirus-covid-19-pandemic-consumer-contracts-cancellation-and-refunds
 CMA Statement.
 CMA, Press Release, Covid-19: CMA to investigate cancellation policy concerns, 30 April 2020
 CMA Statement.
 CMA Statement.