When is a Deposit Truly ‘Non-Refundable’?
The term, ‘non-refundable deposit’ is often used by business owners, but just because a deposit is referred to as ‘non-refundable’ does not mean that it actually is. Conversely, as a business owner, a deposit can be non-refundable if certain criteria are met.
Meeting the Non-Refundable Criteria
Business owners need to be careful in how they charge a non-refundable deposit to ensure that it meets the relevant criteria. Non-refundable deposits are intended to protect a business in circumstances of sudden cancellation and to compensate the business for the time, effort and money expended up to that point. Therefore, it is crucial for a business to ensure that the non-refundable deposit that they charge in these circumstances is reasonable and proportionate with reference to protecting their legitimate business interests and is not excessive or used as a ‘penalty’ against a customer or client. What will be considered reasonable and proportionate will depend on the specific circumstances and will be different on a case-by-case basis.
Documenting the Deposit Correctly
Not only does a business need to ensure that a non-refundable deposit is reasonable and proportionate in the circumstances, but they must also ensure they disclose all relevant information regarding the non-refundable deposit to their customers or clients. It is crucial for a business to disclose the terms of the non-refundable deposit in the correct way otherwise they may be seen to be engaging in misleading or deceptive conduct, which is against the law.
At a minimum, the business must disclose the terms of a non-refundable deposit in a Terms and Conditions document (or similar) which is provided to the customer or client at the time of, or prior to, engaging them.
Even better, the business should also seek to obtain an acknowledgement from the client or customer that the non-refundable deposit is reasonable and proportionate in protecting the business’ legitimate business interests. Again, this can be incorporated into the Terms and Conditions document being used by the business. You can also reiterate this to the client or customer when you request the payment of the deposit from them. Transparency is key!
But how does it work in real life?
By way of an example – let’s say you are a photographer who charges $300 for a photo shoot, with a non-refundable deposit of $100 payable prior to confirming the booking. Your Terms and Conditions (which your client signed and returned prior to engaging you) stats that the deposit is non-refundable and outlines that it is calculated with reference to the actual costs that your business incurs. Your client cancels the booking two days before the shoot. They allege that your business cannot retain the non-refundable deposit. In these circumstances, whether you can retain the deposit would depend on (as a minimum):
- Whether your Terms and Conditions properly explain that the deposit is non-refundable;
- Whether you have properly engaged your client/customer (by providing them the Terms and Conditions and making sure they have read and acknowledged them);
- Whether the amount of the non-refundable deposit is reasonable, with reference to the actual costs that your business has incurred (including things like time involved in making the booking, the loss of profit if you are unable to re-book the session, any others costs that you have incurred etc.); and
- Whether the non-refundable deposit is proportionate to the overall cost of the product or service that you are providing.
Without knowing any further information, on the above facts alone, it would appear that the deposit would be non-refundable, as the document requirements appear to have been met and $100 may likely be considered to be a reasonable and proportionate amount.
What happens if a business fails to disclose the terms of the non-refundable deposit or doesn’t take the time to ensure they are charging a reasonable and proportionate amount? The customer or client may be entitled to get that deposit back and the business will not be entitled to be compensated for the loss they have suffered for the time, effort and costs incurred up until that point in time.
What Every Business Should Do
If you are a business owner who wants to charge non-refundable deposits, then you should obtain advice from a specialist business lawyer regarding the drafting of your Terms and Conditions and an assessment of the reasonableness of the amount that you want to charge. Unfortunately, this is another circumstance where you cannot use terms that you have sourced from Google, as they are not customised to your business, which will affect the likelihood of the enforceability of the provisions.