Cancelled Hire & Event Deposit Refunds: UK Law on Frustrated Contracts

Many hire and event companies face major financial stress when clients demand the refund of deposits for upcoming hires or events due to unforeseen, unavoidable cancellations (such as government lockdowns or unexpected legal restrictions).

To help you navigate these tricky situations, this guide explains the legal framework in the UK regarding deposits taken, expenses incurred and what refunds are legally required.

What is a Frustrated Contract?

Under UK law, a contract can be discharged as being “frustrated” when an unforeseen event occurs after the contract is formed that makes performing the contract completely impossible, illegal or radically different from what both parties originally agreed to. In these scenarios, neither party is at fault.

The purpose of the frustration doctrine is to avoid commercial injustice when circumstances shift significantly. When a frustrating event occurs, the contract is automatically terminated, and both parties are released from their future obligations without requiring any further action.

For a contract to be legally classified as frustrated, it must meet the following strict criteria:

• The unexpected event must occur after the contract has been officially formed.
  
• The event must make the performance of the contract fundamentally different from what was envisioned.
  
• Neither party can be at fault for the event.
  
• The event must render performance of the contract impossible, illegal or radically different from what was contemplated at the time of signing.

How Deposits and Expenses Are Treated

If you have taken a deposit and the hire contract or event has to be cancelled due to a frustrating event, under UK law you must refund the client, less any expenses you have already incurred and less charges for any work you have already completed.

This is governed by The Law Reform (Frustrated Contracts) Act 1943. Here is how that applies in the real world:

• Work Already Completed: If you were hired to supply a custom conference set, you are legally entitled to retain the costs and the profit for building that set (assuming it has already been built and cannot be repurposed or reused for another job).
  
• Non-Refundable Supplier Fees: If you had to pay external cancellation charges to subcontractors or suppliers where you are not entitled to a refund yourself, you are allowed to retain those exact costs from the client’s deposit.
  
• Supplier Insolvency: If you paid a deposit forward to another third-party supplier who subsequently went bust due to the crisis, you can legally retain that expense as well.

Force Majeure Clauses

If your hire contract contains a robust Force Majeure clause that explicitly outlines the exact issues causing the cancellation, the doctrine of frustration will generally not apply. In this case, the terms of your contract take precedence, allowing you to retain the deposit according to your agreed terms.

However, keep in mind that it still might be possible for a client to challenge this and raise the issue of a frustrated contract in court depending on how the clause is worded.

Jurisdiction

Please note that this specifically reflects UK Law and applies within the United Kingdom. However, because these principles are rooted in historic British common law, similar rules may apply in certain Commonwealth countries and jurisdictions where the relevant legal frameworks were established prior to independence.

Legal Disclaimer: This article provides general information and guidance regarding UK contract law. It does not constitute formal legal advice and may not apply to your specific commercial agreements or unique situation. We highly recommend that you obtain professional legal counsel before taking any formal action regarding client deposits or contract cancellations.