Nasir Pasha & Matt Staub

Taking A Customer’s Money When You Know You Can’t Perform [e225]

The guys discuss a wedding venue that took deposits for weddings that were set for dates after the venue was going to close.  They also discuss return policies and good customer service.

Transcript:

NASIR: Welcome to our podcast where we cover business in the news and add our legal twist. My name is Nasir Pasha.
MATT: And I’m Matt Staub.
NASIR: And here we are today once again. We missed a whole week. But you didn’t record. I thought you were going to record by yourself or with your imaginary friend.
MATT: I did, but it was so bad that our editor refused to actually edit it and put it up.
NASIR: Oh, okay.
MATT: We’ll do the thing that the Wu Tang Clan did and put out one version of it of a CD that sold for $5 million or something crazy like that.
NASIR: I think that’s a great idea.
MATT: Yeah.
NASIR: But for right now it’s in the archives.
MATT: Yeah. Well, I mean, I think that’s what they did. They took something that was twenty years old or something like that and only produced one version and had an 88-year copyright on it and all this nonsense.
NASIR: Very good.
MATT: Well, speaking of nonsense – let’s see – I’m sure that probably applies.
NASIR: Yeah.
MATT: I would say that probably one of the most… People say the most important day – but I would say probably one of the most worrisome days – I mean, I guess I wasn’t too worried but I think a lot of people that put time and money into weddings, it’s probably one of the most stressful days they’re going to encounter just because so many things have to go right and everyone wants everything to be perfect and lots of people show up, everyone you know, things like that.
So, what if you put a deposit down on a wedding venue but the wedding venue didn’t exist by the time you had your wedding? Do you think that would be a problem?
NASIR: For me? No. I mean, I’m pretty resourceful. But, for most people, yes, of course, it would be.
MATT: Yeah. That’s basically what happened here and this was in Washington State. There was a bunch of couples. I mean, it was more than just one because I believe it was a bunch of them on this case here, but a bunch of couples put down money for this venue for wedding receptions. The problem is the people that operated the venue knew it was going to be shutting down but took the deposits anyway. I think these people probably found out prior to the wedding actually taking place because the venue shut down. I mean, maybe not for the ones right away, but for the ones down the road a little bit of notice, but still they took the deposits knowing that they weren’t going to be operating whenever that wedding date was set and probably what happened was the couples were more upset with the fact that they have to scramble and find another venue than the money side of it, but then, of course, the money side of it came into play as well and there was a pretty hefty default judgment for this venue that didn’t even show up to the hearing.
NASIR: What’s interesting, the reason they didn’t actually return these deposits is they depended upon this clause in their agreement which is basically force majeure which is a fancy word. I think it’s French but, for some reason, attorneys still use it. I’m sure it may have a Latin root of some sort which a lot of legal terms come from but usually it means some kind of act or force that’s outside the control of the parties. Usually, the legal term of “act of god” or some kind of war or riot or things like that – fire, hurricane, things like that – come into play which is why, apparently, what the company first did is they sent out an email basically saying that there was some kind of electrical fire therefore the venue is not available. We’re laughing because, later on, they found out that fire story was bogus and an email was later sent that says, “This was not a problem with the building. It was the landlord who chose to end our lease, ending our business.” I think it was a little more complicated than that and that’s why I believe – was it the attorney general of the state?
MATT: Yeah, it was.
NASIR: Yeah, the Washington State Attorney General who basically announced that they were able to get a $304,000 default judgment against these guys for taking these deposits knowing that these deposits would be kept and the venue would not be available because they already got a notice that the lease would be ending.
MATT: Yeah, and it was actually 59 customers.
NASIR: Ouch!
MATT: They ended up screwing over on this. Yeah, I mean, with that many people, I don’t see how you can just make up a story like, “Oh, there was a fire – electrical fire – and we can’t do it anymore.” You don’t think any of those 59 people are going to look into that? I mean, it just kind of seems doomed from the start which I believe this was also the couple that didn’t show up to the hearing and said they never received anything or am I making that up?
NASIR: They definitely got a default judgment so I think they did show up and you mentioned 59 customers, that’s about the total of about $50,000 of deposits were collected so, using my math, that’s just under $1,000 each, right? And so, I mean, that’s a sizeable amount for anyone. No one’s going to walk away from that amount of money – at least not silently.
MATT: Like I said, the money isn’t even probably the biggest issue. It’s these people have to find another venue. I mean, venues book up very far out in advance so, for some of these, I imagine some of these couples had dates that were coming pretty close to when this all occurred so they were probably really scrambling to find something. I think that’s the bigger damage here and I think that’s why they got hit – well, I don’t know if that’s why but it may be some of the reason they got hit with some of these penalties as well. I mean, obviously, they were fraudulent.
NASIR: That’s what I’m trying to look for here. We can talk a little bit about how to handle deposits and deposits can be non-refundable and there is a concept of force majeure that can come into play but that’s not what happened here and it’s hard to understand exactly the details of the lease but they were notified that their lease would be terminated May 21st meaning that was the last day that they could possibly play host to any events yet they were taking deposits for afterwards. To give them the benefit of the doubt, maybe they thought they were going to be able to renew or that they would able to, if they were behind, that they would be able to catch up with these current deposits. I don’t know. But there’s definitely some kind of level of misrepresentation or fraud that would go beyond just liability of the company but go towards these individual owners and that’s where the unfairness comes in. They know that this lease may be terminated; there’s a high likelihood of it, at least. They’re taking these deposits. When it’s terminated, they say, “Okay. Well, this is an act of god or force majeure and so therefore we’re going to keep the deposits.” That really seems like a fraudulent scheme to me.
MATT: Yeah, we don’t even get their full side of it because, like you said, it was default judgment. They weren’t going to come up with anything good if their plan before was just to say, “Oh, there was a fire. Everything’s cancelled. Sorry.” Like you said, keeping the deposit under normal circumstances would be fine. I mean, for wedding venues, once the people put in the money, not 100 percent of the couples end up going through with the wedding. That’s the reason those deposits are in place because, for some of these more expensive venues, you get the deposit and, if someone books a date and then they cancel towards the end, that’s one weekend or one Saturday or Sunday or what-have-you that you can’t have a wedding and you lose out on a lot of money which could be very valuable. I mean, you’re still getting some with the deposit but it’s a pretty big deal. That’s the reason those exist and those are find but not when you completely make up your own reasons or know that you’re not even going to be around when a lot of these were booked.
NASIR: Yeah. So, let’s talk about policies in general and start talking about force majeure. I think is an interesting kind of concept. A lot of these contracts do have this clause and it’ll say something like: “A party is not liable for these obligations if they can’t perform it because of some kind of flood or fire, act of god…” or whatever, right? Usually, it enumerates all these reasons. Let’s say these guys had something like that where, in the event that happens – a fire, for example, or the building becomes unavailable, for example, through some kind of outside third-party act – your deposit can’t be refunded still. That clause in itself may be problematic because it doesn’t seem sensible, but especially if they are the cause of the building not being available because they didn’t renew the lease or they don’t have any legal rights to the building or they set the fire or they pretend that there’s a fire and there’s not, that obviously doesn’t apply. There is a circumstance where force majeure may come into play and is a valuable tool but there are limits to it, just like anything else.
MATT: Yeah. I mean, the point is it’s something that’s beyond or outside the control of the company – whoever is contracting in the agreement.
NASIR: Yeah.
MATT: That was something that was completely within or presumably completely in their control. I think, if it wouldn’t have been, they would have argued that in the case that the attorney general brought and they didn’t so it makes me think that it was something that was within their control and it sounds like that’s the case.
NASIR: Yeah, and not only just control; they have to also timely notify the people that this may happen or if they had a likelihood or they had a foreseeability that this would actually happen, they had obligation to notify. These are all kind of common law provisions that aren’t going to be an agreement that are required when you have this type of clause.
MATT: Well, I don’t want to spend too much on specific contract clauses because I think that’s how we put people to sleep.
NASIR: Oh, I was actually sleep-talking right now.
MATT: We’ll veer back around. I think, obviously, there should have been some sort of return of their deposits but I think return policies in general can be a very valuable tool for businesses if done right. I mean, just think – and I can’t remember if we’ve talked about this on the podcast before – certain companies have such good return policies that consumers go to those businesses strictly for the return policy. If it’s between two places like Nordstrom, for example, their return policy is well-known as just being you can return something – you know, a piece of clothing that you buy – any time, essentially. I don’t know if they give you a refund or something of similar value or what the deal is but they’ll give you your money back in one form or another. And so, these can be such huge positives for companies. On the flip side, it can be a big negative too if you’re on the other end of it and your return policy is terrible or if you’re like Ulta that kept someone’s sales tax on return – well, I think they ended up giving it back to him but at least when somebody went to return something at Ulta which is a cosmetics store or I don’t know how to describe it.
NASIR: Yeah, Ulta Beauty I think is the name.
MATT: Yeah.
NASIR: Interesting enough, they didn’t refund the sales tax. They ended up giving some kind of gift card, but technically didn’t return the sales tax still which I’m sure the gift card would have been more than the sales tax but, still, they should give cash back, really. That’s the general rule. Generally, when someone returns something with the receipt, it states specific that you have to give back the sales tax. But there are some rules in other states that sometimes, if you don’t have the receipt, then technically they can give you cash back but they don’t have to refund you the sales tax and it’s very state-specific on that.
MATT: Yeah. I mean, sales tax is a state issue so it’s obviously going to vary a lot state by state but, regardless of what the law is, I mean, it’s just good business, you know, costs a lot more to get a new customer than to keep a…
NASIR: Oh, and that’s absolutely true.
MATT: Yeah. And so, why not just keep the customers that you have? Make them happy, you know? It’d be a different story if you went to Ulta and you were like, “Oh, there’s something wrong with this empty bottle of shampoo that I used all up and I’m returning it.” Or if you’re at a restaurant and you’re like, “Oh, this steak was terrible,” and you ate all of it. “It wasn’t cooked correctly but I still ate all of it.” Restaurants are pretty good about that, too. Or can be.
NASIR: Yeah. Well, I get frustrated with restaurants in that respect. Sometimes, the food is just so horrible and you want to return it or maybe they give you the wrong thing but it’s just sitting there and you know they’re going to throw it away and you’re hungry and now you have to, like, okay, to be appropriate, you have to not eat it but anyway… So, I notice that also a lot of online retailers that have really good return policies are also very popular in the sense that, especially if you’re buying clothing and shoes and things like that, people like to try it on and return it. If you don’t have a really good return policy, then buying stuff online becomes not as attractive.
MATT: Zappos, I believe, is one of the online companies that’s really known for their no-shipping return policy.
NASIR: And there’s been other companies that have followed suit and I think that’s a very effective way to handle it because, by the way, refunds and exchanges, for the most part, there’s no law that requires a merchant to give refunds or exchanges. Now, there are state-specific rules. Like in California, the retailers who have a policy of not providing a cash refund or exchange, et cetera, with a proof of purchase within seven days of purchase must inform the consumers about the refund policies very specifically. But, other than that, these retailers don’t have to do that. Having these refunds and exchanges, it should be definitely a written policy – number one. Number two, you should have one. I think it’s in the course of business. It should be pretty clear. I know there’s a lot of fine print associated with it but simple is better when it comes to communicating with your consumers, for sure.
MATT: Yeah, I think that’s what it comes down to. At the end of the day, it’s just whether there’s a law or not, it’s just good business practice to do a refund or a return as long as it makes sense.
NASIR: It has to be a cost of doing business that you’re going to lose some on certain transactions where the customer is not happy. Unless you just have a crappy product which sometimes you can’t allow returns there because then you’re just going to get a lot of returns and then you should be questioning the quality of your product, frankly.
MATT: Yeah, I think everyone’s probably had good and bad experiences with this.
NASIR: Some lessons learned is, if you’re closing your venue, don’t lie and say you’ve had a fire and collect deposits otherwise, and that’s the only take-home that I can think of.
MATT: I was going to say, “Don’t get married,” and you won’t have to run into the problem. That’s our two takeaways for this week.
NASIR: Ah. All right, thanks for joining us, everyone.
MATT: Yeah, keep it sound, keep it smart.

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