Cancellations due to government guidance – a grey area for contractual frustration

Covid-19 has ushered in a raft of unique legal complications which divide opinion among lawyers and policy makers. Many of these are borne from the grey area that lies between government guidance and government law.

One particularly contentious result of this is contract frustration.

In situations where a contract cannot legally be performed as agreed or at all, due to lockdown laws, the CMA has made its position very clear: the contract is frustrated and, generally speaking, a consumer will be entitled to a refund for sums paid in advance for goods or services not received.

The position is more complex where the contract can be performed but either the business or the consumer do not want to proceed with the contract, because of government guidance.

Technically, government guidance does not constitute law.

For example, if a consumer is contacted by a test and trace contact tracer and instructed to self-isolate then they must do so by law, and they risk significant fines if they fail to so. If, however, the consumer receives a notification to self-isolate through the NHS’s COVID-19 mobile app, this is not a legal requirement.

This has consequences for a consumer’s right to cancel a contract. As a failure to follow government guidance does not constitute a breach of a legal requirement, an argument that a contract is frustrated due to government guidance is much more difficult because the contract can still be legally performed.

Whilst clearly more difficult, the CMA’s view is that a court could nevertheless still find that a contract is frustrated if advice or guidance means that the consumer will be at serious risk if the contract proceeded. The determination of whether a contract is frustrated will, as ever, depend on the facts of each case.

In the absence of frustration, the applicable terms and conditions on cancellation and refunds will apply. The obvious caveat is that those terms and conditions must not be unfair to the consumer, and must also be considered in light of the CMA’s expectations on businesses with regards to refunds during the Covid-19 pandemic. The CMA considers that in most cases, in order to be fair:

• non-refundable deposits should only be a small percentage of the total price
• advance payments for future services should usually be refunded (and any deductions should be limited to those costs that a business has already reasonably incurred in connection with that contract)
• cancellation charges should be limited to a genuine estimate of what a business will lose as a direct result of the cancellation
• businesses should not be compensated twice for the same loss (e.g. by retaining some advance payments and imposing a cancellation charge).

The CMA has felt compelled to make clear that it is important for businesses and consumers to follow government guidance. If by complying with government guidance a consumer is adversely impacted, the CMA’s view is that businesses should treat consumer customers fairly and responsibly which includes trying to find a mutually acceptable solution.

For more information on this or for advice, please contact Kevin Mahoney on 07741 907 454 or at kmahoney@ hcrlaw.com