COVID-19: Cancellations, Credits and Refunds – Legal Implications for Consumers and Businesses

Background

The COVID-19 coronavirus pandemic has led to countless cancellations for bookings and reservations across the country and around the world, majorly affecting air travel, accommodation, venue hire and vehicle rentals among other sectors. While some businesses have offered refunds to consumers, others have instead offered credits or sometimes nothing. The confusion this has generated has not been helped by the varying consumer protection laws in other countries.

This article will address some of the legal issues and grey areas related to cancellations and the potential rights and obligations you may have as a consumer or business owner.

Guidance from the Commerce Commission

On 15 April 2020, the Commerce Commission published helpful guidance for consumers and businesses in response to COVID-19. Among other things, the Commerce Commission’s guidance stresses the importance of looking at the terms and conditions of a contract, to determine whether any legal entitlement to a credit or refund exists. While each contract is different, many contracts will contain terms dealing with cancellation and some may also deal with frustration and force majeure events (e.g. natural disasters, war, etc.) such as COVID-19 specifically.

The legal distinction between cancellation and frustration is important. While both cancellation and frustration result in the contract being ended or terminated, frustration specifically refers to situations where it is impossible for the contract to be performed, “not just difficult, expensive or inconvenient to do so”. In some cases, providing a credit to use at a later date may be enough to prevent the contract from being frustrated but this will depend on the specific circumstances of each case.

Cancellation suggests there was a choice by one party or both to end the contract while frustration suggests there was no choice. Due to external factors outside the control of either party, the contract cannot be performed and therefore must end. Because of this, frustration is more likely to provide a better outcome than cancellation for the consumer.

If a contract becomes frustrated (or is likely to become frustrated) and the contract does not outline what happens in that situation, the consumer is entitled to a refund, minus any reasonable expenses already incurred by the other party. Any cancellation fees written into the contract should only apply to cancellation scenarios.

Events such as COVID-19 can blur the boundaries between cancellation and frustration. But before concluding that a contract is frustrated, both parties should consider options that would allow for the contract to be performed, even if not in the way originally envisioned.

Unfair Terms

The general rule is that the agreed terms and conditions of the contract will prevail but there are exceptions to this rule. For example, the Fair Trading Act 1986 (“FTA”) prohibits unfair terms such as terms that penalise, or have the effect of penalising one party for terminating the contract.

There may be situations where overly high or unreasonable cancellation fees may be unfair and in breach of the FTA. Similarly, if the contract allows for one party but not the other to modify the terms of the contract, this would likely be in breach of the FTA.

Other questionable terms include “non-refundable” bookings with no ability to change dates or redeem a credit. If the seller is wishing to invoke such a term, they must be ready and able to perform their side of the contract.

In short, just because a term or condition is written into the contract does not necessarily mean that it will be legally effective.

Circumstances when a credit may be inappropriate

The terms and conditions of a contract may limit the options available to consumers dissatisfied with a credit but there are some circumstances where a credit may be inappropriate.

One scenario would be where the business is no longer able to provide the good or service paid for. For example, if an airline sees a drop in demand for flights to a certain destination, they may decide to cancel all flights to that destination for the foreseeable future. For a passenger who purchased a ticket to that destination and for a specific purpose, a credit to spend on another ticket to a different destination is unlikely to be appropriate.

While it is important that both consumers and businesses try to be as flexible as possible, consumers should not be forced to accept a credit in situations where the credit offered is for something substantially different to what was originally paid for.

Cancellations Prior to Lockdown

In many cases, the Government’s lockdown restrictions have directly caused contracts to be unable to be performed, without fault by either of the contracting parties.

More difficult cases arise where the lockdown restrictions have not directly caused contracts to be unperformed, particularly where one party has made a choice to cancel the contract prior to the restrictions taking effect. This may be the consumer concerned about his/her health and safety or the business concerned about the health and safety of its staff and others.

In cases where it was foreseeable that the contract would be unable to be performed due to the lockdown restrictions, the law of frustration likely applies but this may not be clear-cut. Similarly, cancellations post-lockdown may also lack the sufficient cause-and-effect connection to justify termination of the contract. In these cases, the other party may be able to make a claim for breach of contract.

Consumer Protection Overseas

The New Zealand legal position described above differs from that in other countries, including the United States and countries in the European Union. For flights cancelled due to COVID-19, in these countries there are stronger consumer protection laws which require airlines to give passengers refunds for their tickets. This is an entitlement irrespective of the contractual terms and conditions agreed to.

Rules will likely vary between different countries and industries but it is worth keeping in mind that if you made a purchase with an overseas business or travel agent, you may be able to get a better result under the local laws of that country than under New Zealand law. There are certain practical difficulties in invoking laws outside New Zealand but it may be as simple as contacting the business or travel agent directly.

In the long-term, the current influx of consumer-related issues brought to surface by COVID-19 raises the question of whether New Zealand is doing enough to protect its consumers.

Summary

If you are unsure about your rights and/or obligations, the starting point is to look at the terms and conditions. Although many contracts will contain relatively clear terms and conditions regarding the availability of refunds and credits in situations such as COVID-19, as discussed above there are several grey areas to be cautious of.

It is in the interests of both consumers and businesses to be flexible but no party should be forced to bend over backwards. Despite the dramatic socioeconomic changes we are experiencing, the fundamental legal rights and obligations of New Zealand consumers and businesses have not changed.

In the event that you have a dispute that cannot be resolved with the other party directly and your claim is less than $30,000, you can make an application to the Disputes Tribunal which is a non-lawyer avenue, that may be able to help. The Disputes Tribunal includes buying goods or services but may not extend to complicated matters.

If you would like specific legal advice on your rights and/or obligations or legal representation for a potentially larger claim, please call us or send us an enquiry.