Event canceled: What do you do when customers want their deposits back?

As a result of COVID-19, many business owners here in South Florida, especially those in hospitality, are grappling with many unknown questions. Business owners are trying to figure when they’ll be able to reopen and what their operations will look like in our “new normal.” In addition to those questions, many business owners are trying to navigate their contractual obligations for the summertime.

What happens when a customer reaches out tomorrow to tell you (the business owner) that they are no longer interested in the services you agreed to provide in the summertime, and they’d like a full refund on their deposit? I advocate entering these discussions from a practical perspective, which may save you time, money and perhaps most importantly, your reputation.

To illustrate the above, let’s take the universally relatable example of a wedding. A couple engaged in 2019 decided to get married in the summer of 2020. The pair subsequently hired various service providers for the festivities, such as a venue (hotel) and numerous vendors (flowers, caterer, photography, lighting and music). Let’s assume the couple executed a written agreement with each service provider that called for a 20% nonrefundable deposit upon execution of the agreement, with the remainder being paid on the day of the wedding.

Conventional wisdom says that the first question a business owner should ask is, “Well, what does the contract say? If the contract states that the deposit is nonrefundable, then isn’t that the answer here?” Although that might be true, there are various legal arguments a customer could raise that may allow for not only the cancellation of the event, but the return of the “nonrefundable” deposit, such as force majeure, frustration of purpose, or impossibility. In this situation, the practical question to ask yourself is this: “How can I come up with a solution that satisfies both the customer and my business, while protecting my brand and reputation?”

If you’re the caterer in the above example and the couple agreed to pay you $50,000 to cater the food and alcohol for their wedding in June — and they provided you with 20% upon execution of the agreement ($10,000) and that’s what they are requesting back — then you really have three options:

▪ The first might be called the “MMA Approach.” In this approach, you’re committed to the battle. You refuse to return the deposit citing the terms of the contract. What you may not consider is that $10,000 may be just enough money for them to bring a legal action against you. Litigation is costly and will not only impact your wallet, but may also negatively affect your reputation in the community;

▪ Option 2: the “CAR(e) Approach” — the Customer is Always Right. You opt to provide them with a full refund. Although your business may need the money, so perhaps does the couple. You had little to no sunk costs associated with the wedding since it wasn’t until June. The couple now thinks the world of your business. They vow to use you when “life returns to normal” and will sing your praises in the community; or

▪ The third option is the “WITT Approach — We’re In This Together.” You acknowledge the uncertainly of the event and how you’d understand them not feeling comfortable with 200 or more people in a room. However, you also point to the contract and note that you had some sunk costs associated with the wedding. As a compromise, you suggest the following: Although the deposit is nonrefundable, you’d be willing to return a portion of the deposit (perhaps half). You want to avoid any kind of dispute and think this is a reasonable solution that provides the couple with some relief, while also maintaining your own business needs.

In the end, I can’t tell you which route makes the most sense for your business. Solutions are always the goal; being practical at the off-set may end up “netting” you with the best results.

Corporate and transactional attorney Andrew Cromer is a partner with AXS Law Group in Wynwood. andrew@axslawgroup.com.

▪ This opinion piece was written for Business Monday in the Miami Herald.

This story was originally published May 15, 2020 at 6:00 AM with the headline "Event canceled: What do you do when customers want their deposits back?."