The Rise of Force Majeure Chargebacks
Table of Contents
- When does force majeure apply to chargebacks?
- Special rules for force majeure chargebacks
- Can merchants prevent force majeure disputes?
- Prevent chargebacks, protect your business
- Is force majeure the same as an act of God?
In recent memory, few things have had as big an impact on the world of chargebacks as the COVID-19 pandemic. The disruptions to travel, business, and commerce spawned all sorts of new scenarios that have the potential to end in payment disputes and chargebacks.
One thing that many merchants learned about for the first time last year, especially in the travel industry, is the concept of force majeure chargebacks. You’re not likely to find this term in any reason codes or card network regulations, but that doesn’t mean you won’t encounter it. What do merchants need to know about force majeure chargebacks?
If you’ve had to spend any time dealing with contract law, you may already be familiar with the term force majeure. It’s a French phrase that translates to “superior strength,” and it refers to external events or circumstances beyond the control of the parties bound under a contract. A force majeure clause releases both parties from their obligations when some powerful, unforeseen occurrence prevents the terms of the contract from being fulfilled.
Needless to say, 2020 has had no shortage of events that would qualify under most force majeure clauses, and 2021 may contain its share as well. But nothing has had as direct, far-reaching, and widespread impacts on merchants as the COVID-19 pandemic, and that’s what has so many consumers and payment industry professionals talking about force majeure.
Many payment disputes are being raised as a direct consequence of cancellations and restrictions caused by the pandemic, some of which fall outside of the rules for what constitutes a legitimate chargeback—and force majeure is being invoked to justify them.
When does force majeure apply to chargebacks?
With the initial global spread of the coronavirus and the shutdowns and lockdowns imposed to contain it, many consumers canceled their plans to travel and attend events. Reservations, bookings, and prepaid tickets went unused, some of which may have been subject to “no refund” policies or no-show clauses.
When customers are unable to get their money back from the merchant in these circumstances, they often turn to their card issuers to dispute the charges.
Usually, customers are bound by the agreements they enter into with these merchants. If something comes up and they need to cancel a nonrefundable booking, well, that’s their tough luck. COVID-19, however, has caused some issuing banks and card networks to rethink this hardline policy and consider recognizing the pandemic as a force majeure event that upends the usual rules of these contracts.
In other cases, merchants are finding that some of their own contracts include force majeure clauses that have never before been invoked. Since force majeure clauses are a fairly common and usually harmless addition to contracts of any kind, they may be found in terms of service agreements with customers, vendor contracts, and nearly any other type of contract involved in doing business. These clauses are typically intended to protect all parties in a contract, since depending on the specific circumstances resulting from whatever disaster qualifies as force majeure, there's no telling which party might be affected and how.
Unfortunately, many merchants who have these clauses in their customer agreements are now finding that customers are using force majeure as justification for their disputes.
In theory, merchants should not have to worry about the idea of force majeure subjecting them to chargebacks that would ordinarily be illegitimate, unless they do include specific language that refers to it in the agreements they enter into with their customers.
However, if payment disputes are taken into arbitration with the card networks, there is a risk that given the extraordinary circumstances of the coronavirus pandemic, the ideas underpinning force majeure may influence the arbiters to side with the cardholder.
Special rules for force majeure chargebacks
Merchants should always educate themselves about international, state, and local laws that may affect their dealings with customers in a dispute situation. In the United Kingdom, for example, Section 75 of the Consumer Credit Act of 1974 entitles consumers to a refund when a travel provider is unwilling or unable to uphold the terms of their contract—even if this is because of an unforeseen event like the pandemic. Section 75 claims are not treated as chargebacks, but are handled as their own separate process.
Given the uniqueness of the COVID-19 crisis and the many unprecedented circumstances it has brought about, merchants should be careful about taking a hardline stance in disputes with their customers over issues that can be directly linked to the pandemic.
Even if the issuers and card networks don’t bend the rules for their cardholders, lawsuits—even class-action suits—remain an option on the table for frustrated consumers.
In fact, several class-action lawsuits against airlines have already been decided in court, and several more are still in progress. In some cases, the lawsuits were dismissed because the airline in question issued refunds to all effected customers. United Airlines, however, tried to invoke force majeure itself in defending itself from such a lawsuit. It argued that because the pandemic constituted force majeure, the airline was justified in offering people who had tickets on cancelled flights credit instead of a full refund. United's motion to dismiss the case based on this argument was denied, and the lawsuit is ongoing.
Can merchants prevent force majeure disputes?
One evergreen rule about chargebacks is that a refund is always less damaging and costly than a chargeback. The best way to avoid force majeure chargebacks is to avoid getting into protracted disputes with your customers, especially over cancellations or no-shows caused due to pandemic-related closures or restrictions.
The airline lawsuits mentioned previously are the perfect example of this. The airlines who issued full refunds to their customers avoided a long fight in the courts over class-action lawsuits. The one who refused to issue refunds will have to battle it out with expensive lawyers.
Even when no restrictions are in place and a customer is cancelling out of fear or caution regarding the virus, it may not be a good idea to demand payment for goods or services that the customer cannot receive or use. The revenue you keep may be significantly offset by the loss of that customer’s future business and any damage to your reputation that they might cause by speaking out about their treatment.
Given the circumstances, most people are likely to be sympathetic to someone cancelling an event or travel due to the virus, and not very sympathetic toward a business who refuses that person a refund. Stories about airline customers who were refused refunds made national news last year, and you don't want your jilted customers being talked about on cable TV or spreading their stories far and wide through social media.
The best approach is to work constructively with your customers to find a solution that is acceptable to them. That may be an offer to reschedule at a later date, or it may be a full no-strings-attached refund. Now more than ever, customers are hoping to find compassionate and flexible customer service as they struggle to negotiate the hardships wrought by the pandemic. Don’t add to their stress—offer a solution that makes them happy and you can avoid chargebacks and strengthen your customer relationships in one fell swoop.
Prevent chargebacks, protect your business
Travel, hospitality, and entertainment merchants have been hit hard by the COVID-19 pandemic, and it’s understandably tempting to try to fight hard to hold on to revenue to which you have a valid legal claim, even if the customer—through no fault of their own—isn’t getting what they paid for. But this is a short-sighted strategy that could cost you lots of business in the future.
Rather than wait to see if force majeure might be invoked against you, consider it in play already and work on finding ways to accommodate customers who, like the travel industry, are under tremendous burdens from the many difficulties caused by the pandemic. They’ll remember how well you treated them—and you’ll avoid expensive and time-consuming chargeback battles.
The best ways to handle these extreme circumstances are also some of the best ways to handle chargebacks in general:
- Make sure your customer service is available 24/7 if possible, and be flexible in dealing with issues customers present.
- Have a generous refund policy. With all the fees and other costs and consequences associated with a chargeback, a refund is almost always the better option.
- Communicate with your customers clearly to manage their expectations and keep them up to date on what's happening with their purchase.
By following the best practices for dealing with chargebacks, your business can be prepared for any issues that customers might face, even ones as big as a global pandemic. And if you need some professional assistance, Chargeback Gurus is always here to help.
Is force majeure the same as an act of God?