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Dealing with deposits

View profile for Tanya Shillingford
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No-shows are a headache for the restaurant sector. Not only are they frustrating but they also place a financial burden upon businesses, particularly when extra costs have been incurred, such as staff and supplies, to account for a specific number of bookings. In response to this, businesses are looking at different ways to attempt to combat no-shows and cancellations. In March 2019 Open Table launched its “book responsibly” campaign which bans users from their account if they fail to make a reservation four times within a twelve month period. An increasing number of businesses are also requiring customers to pay a deposit, or give their card details at the time of booking, to act as a disincentive. However, what is the legal position regarding deposits, and how should businesses use them?

The Legal Position

The first question to consider is whether there is a legal relationship between the customer and the restaurant as only then will the customer be contractually bound to honour the booking. To illustrate this, if a customer books a table at a restaurant for 7pm, it gets to 7:30pm and they have failed to arrive, what can the restaurant do? In these circumstances…nothing. There is no legal relationship between the parties so the restaurant will be left without recourse and will have to bear the costs.

For there to be a valid, enforceable contract between the parties, one of the requirements is that there must be consideration. Consideration is essentially a promise in exchange for a promise and therefore in exchange for the restaurant taking the customer’s booking, the customer must be giving/promising the restaurant something in return. The most common form of consideration is money.

By taking a deposit from a customer, say of £10, this would satisfy the requirement of consideration and would mean a customer would be contractually bound to honour the booking and failure to do so would result in the customer breaching the contract. A customer providing their card details can also count as valid consideration as a company’s cancellation policy may set out that this represents a promise to pay if the customer fails to make their booking.

Cancellation Policies

If a business is contemplating taking deposits from customers, it is essential that it has an effective cancellation policy in place which customers need to be aware of at the time of booking.

This should:

  • set out the circumstances when a deposit will be retained/card will be charged and the amount the business will retain;
  • if the deposit is to be made up of several amounts i.e. a reservation fee, a cancellation fee etc. separate out these amounts clearly; and
  • ensure the policy is clear, simple and easy to understand for customers.

Businesses also need to be aware that customers are protected under the Consumer Rights Act 2015 against unfair contractual terms in contracts with businesses and therefore the cancellation policy must not include any terms which may be regarded as unfair.

Examples of unfair terms may include:

  • disproportionately high deposits/charges;
  • keeping payments for costs when this could lead to double compensation; and
  • making any cancellations non-refundable regardless of the reason for/time of cancelling.

If a term is regarded as unfair this can lead to a contract being deemed unenforceable or enforcement action being taken by the Competition and Markets Authority.

Final Note

Deposits may be an effective disincentive for customers. However, businesses need to ensure they think carefully about the terms of their cancellation policies to avoid falling foul of legislation. 

This article was written by Tanya Shillingford, Partner, Corporate, and Tom Boersma, Associate, Corporate, with assistance from Esme Moss, Trainee Solicitor.

This guide is for general information and interest only and should not be relied upon as providing specific legal advice. If you require any further information about the issues raised in this article please contact the author or call 0207 404 0606 and ask to speak to your usual Goodman Derrick contact.

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