The Rise of Force Majeure Chargebacks
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 have spawned all sorts of new scenarios that have the potential to end in payment disputes and chargebacks.
One thing that many merchants are learning about for the first time, 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 soon 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 force majeure. It’s a French term 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 under the contract when some powerful, unforeseen occurrence—such as a natural disaster, social unrest, or pandemic—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?
In the wake of the coronavirus and the shutdowns and lockdowns imposed to contain it, many consumers are cancelling their plans to travel and attend events. Reservations, bookings, and prepaid tickets are going unused, some of which may have been subject to “no refund” policies or no-show clauses.
When these consumers are unable to get their money back from the merchant in these circumstances, they often turn to their card issuers to dispute the charges and demand a chargeback.
Usually, consumers are bound by the agreements they enter into with these merchants, and if they cancel a nonrefundable booking, well, that’s their tough luck. COVID-19 is causing some issuing banks and card networks to rethink this hardline policy and consider the pandemic as a force majeure event that upends the usual rules of order.
In other cases, merchants are finding that their terms-of-sale contracts include never-before-invoked force majeure clauses that are suddenly being used against them in 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, when 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 entitled 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.
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.
Even when no restrictions are in place and a customer is cancelling out of fear or caution over 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.
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, consumers 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.
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.