Frustrated contracts: the law is on your side over holiday refunds

Over the last few weeks Guardian Money has highlighted many excuses made by the travel industry, particularly airlines, when refusing refunds for Covid-19-related cancellations. One reader even wrote in about a battle for a refund from a hotel on a Scottish island to which non-residents cannot now take ferries.

There will doubtless be many cases taken on the consequences of the virus but the present law is quite simple. Once a contract becomes impossible to perform, due to the fault of neither party, it is treated as frustrated, meaning neither party is bound and any advance payments, including deposits, have to be refunded.

Impossibility has a broad meaning but includes the situation where performance would become illegal. This was decreed in 1917, where the building of a reservoir was halted by government wartime regulations. Perhaps not surprisingly, the builders were not liable for their failure to complete.

Travel being banned under the hastily passed Coronavirus Act, means the vast majority of UK holiday accommodation bookings cannot be performed legally even if the accommodation remains physically available. The non-availability of ferries or flights will make the situation even clearer in some cases.

Airlines cannot in such circumstances be made to pay compensation under EU regulation 261 or otherwise – but they cannot retain fares for flights that do not exist or insist on passengers rebooking. Some are making that the easiest option. EasyJet, although accepting its obligation to make refunds, requires passengers to phone its virtually unobtainable customer services department, while allowing those who want to rebook to do so very simply online.

Frustration does not just depend on illegality. With events being cancelled some months into the future, including August’s Edinburgh festival, hoteliers may hope that travel to the venue will no longer be against the law then and refuse cancellations. However, cases arising out of the postponement of Edward VII’s coronation in 1902 may oblige them to refund deposits. A Mr Henry who had booked rooms to watch it was entitled to his money back, although it would have been possible for him to occupy the rooms anyway. So long as the parties know what the purpose of the stay is, the cancellation of the event makes the contract impossible to perform as envisaged, as is likely to be the case where hotels market themselves and raise prices for a specific event.

Where the accommodation is abroad, like that of one reader who had been refused a refund even after a Spanish hotel closed completely, the contract may be subject to a foreign law. However, EU-wide consumer protection laws would mean a refund was due. In the US, where citing Article 2 of the Uniform Commercial Code may be helpful and in most English-speaking countries the same basic law of frustration applies.

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Some contracts contain clauses that specify what will happen in the event of force majeure. This is not defined in English law but according to the Dutch airline KLM’s conditions means “extraordinary and unforeseeable circumstances that are beyond the control of the party invoking it and which could not have been avoided despite all the care and attention exercised”. UK airlines do not generally include such a condition.

EasyJet’s obstruction of claims by customers for refunds, which they are clearly legally entitled to, is particularly galling. It paid a £174m dividend to shareholders on 19 March, 34% of which went to its founder Stelios Haji-Ioannou. The dividend was declared, giving shareholders a legal entitlement, on 27 February. By then there had been 288,000 coronavirus cases and 3,800 deaths worldwide. A competent board would have anticipated the risk that the virus would derail the company’s financial planning.

Would-be passengers may feel it an act of corporate cynicism to prioritise the payment of £60m to Haji-Ioannou, who has not been required to call a constantly engaged number to get his money, over the equally binding obligation to refund who may really need the cash.

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