In July 2016, I wrote an article about Protecting Consumer Pre-Payments When Retailers Go Under and the report produced by The Law Commission in this regard. I thought that I would revisit the pre-payment topic, as the vulnerability of store cards and other pre-payments, has been highlighted once again, by the administration of House of Fraser.
The gift card issue
During the administration of BHS, gift cards could be redeemed for value, provided that an equivalent amount would be spent in cash. However, the administrators of House of Fraser have advised gift cardholders that they are creditors of the company in administration, and should lodge claims for the value of the gift cards. This means that if there is any money available within the administration for payment to unsecured creditors, the gift card holders will receive a payment likely to be worth only pence for every £ shown on their gift card.
Why is the position different? The administrators of BHS were able to offer value for the gift cards, as the BHS stores continued to trade whilst in administration. As such, the administrators could reimburse customers through stock sales. On the other hand, House of Fraser was sold almost immediately upon being placed into administration, which means that the question whether or not the gift cards can be redeemed is not a matter for the administrators, but for the new owner, Sports Direct, to decide. Sports Direct is legally entitled to take the position, because it did not receive the payment for the gift cards it is not obliged to honour them. I understand that Sports Direct is currently silent on the matter, which does not bode well for those who have a gift card in their possession.
Meanwhile, under new ownership, House of Fraser has taken a hard line in relation to goods ordered online prior to the administration, but not delivered. The online customers have been told by Sports Direct not to expect a refund.
Lost pre-payments do not only affect online purchasers. A couple phoned in to Jeremy Vine on his radio show last week, discussing how they had purchased a bespoke couch from House of Fraser before it went into administration and paid £1,700 for this in cash. The couch was manufactured to order, and is now sitting in a warehouse. However, House of Fraser has told the couple, that unless they make payment again, the company is not willing to deliver the couch.
The couple’s experience and that of the online shoppers’ highlights that pre-payments made to retailers who subsequently go under will be lost, in circumstances where ownership in the goods remains with the retailer until delivery of the goods to the customer.
What to do?
I would advise anyone who has been affected by this, to contact their card provider to ascertain if they can assist. Under the Consumer Credit Act 1974, a credit card issuer has an obligation to refund pre-payments for undelivered goods with a value of more than £100 and less than £30,000. In relation to all card payments, irrespective of value and whether made by debit or credit card, card schemes such as VISA and MasterCard, voluntarily provide a “chargeback” system. Under the system, the card issuer can ask the merchant acquirer (which processes payments on behalf of retailers) to reverse a payment made by card.
I would also stress that where possible, high value online purchases and other pre-payments should be made by credit cards to take advantage of the Consumer Credit Act protection and not to treat gift cards as cash. Whilst I fully appreciate why someone would choose to buy someone a gift card, rather than give cash, the person receiving the gift card should spent the card as soon as possible.
In the meantime, as at the date of the Law Commission’s annual report for 2017-2018, the recommendations made in its Report on Consumer Prepayments on Retailer Insolvency, is still awaiting the Government’s response. If the recommendation to make changes to the rules on when consumers acquire ownership of goods had been implemented, then the outcome for the House of Fraser online shoppers and the couple who purchased the couch may have been different. The Consumer Rights Act 2015 currently provides that ownership passes when the parties intend it to pass by reference to their conduct and contract terms. As illustrated in this article, the contractual terms are likely to provide for ownership to pass on delivery, rather than payment.