Are Non-refundable Deposits Legal?
Businesses should be aware of non-refundable deposits and what it means if you intend to use them. Find out more here.
What is a non-refundable deposit?
A non-refundable deposit is where a buyer pays a fixed fee before services are provided by a business. Generally, this fee cannot be returned to a buyer if they decide to cancel the service. For example, a photography business could ask you to pay $3000 for their services and $600 as a deposit. This fee arrangement is to protect the business from a ‘change of mind’. Businesses use non-refundable deposits as an extra layer of protection from any sudden cancellation of services. It is important to remember a non-refundable deposit should be reasonable and protect a legitimate business interest. Also, a retailer’s ‘no refund’ sign is different from a non-refundable deposit. Unlike a non-refundable deposit, this is illegal and in breach of the consumer guarantees outlined in the Australian Consumer Law (‘ACL’).
When does a non-refundable deposit become an ‘unfair’ contract term?
Non-refundable deposits are allowed when a buyer is aware of the fee prior to signing the contract. The fee should also not be an ‘unfair’ contract term. The non-refundable deposit should be in proportion to the business’ costs and time and not penalise the buyer as being ‘unfair’. An unfair contract is a contract between two parties that significantly benefits one person over the other. It is not necessary for all of the terms in a contract to be unfair. One clause can still be ‘unfair’ under the Australian Consumer Law (‘ACL’). If the term is unfair, it is excluded from the contract and the contract operates as normal without the clause.
When does a non-refundable deposit amount to misleading and deceptive conduct?
A non-refundable deposit could be misleading or deceptive if a buyer is not aware of the fee before entering into a transaction with the business. Therefore, the fee should not create a false impression that would mislead the ordinary consumer. The Federal Court rejected a claim by the Australian Competition and Consumer Commission (‘ACCC’) against TPG Internet Pty Ltd (‘TPG’). For background, the ACCC commenced proceedings against TPG for misleading and deceptive conduct and unfair contract terms in December 2018, in relation to ‘prepayments’ for terms in set out in their telecommunication services.
For businesses, the main questions to ask are:
- Is the customer aware of the non-refundable deposit fee?
- Does the non-refundable deposit fee clearly protect a legitimate business interest? (i.e. proportionate to the business expenses and time incurred)
What are the main takeaways for businesses?
Non-refundable deposits can be used by businesses when they are properly disclosed to the buyer before entering into the transaction. The total amount must also reflect a legitimate business interest. The deposit fee should therefore not ‘penalise’ consumers and not be significantly disproportionate to the actual business costs and time incurred for the services provided. It is important for businesses to stay vigilant and remain compliant with consumer regulation to avoid any potential disputes or incur heavy penalties. We suggest businesses to consult with one of Consumer Lawyers for tailored advice and assistance suited to your business needs.
Beatrice is a Legal Intern at Lawpath. She is currently in her final year of a combined degree in Law and Commerce at Macquarie University. Her main interest is Commercial Law.