Community Economic Development Fund

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COVID-19: What About Customer Deposits?

by Frederick Welk
CEDF Business Advisor

I've been taking calls from business owners worried about conflicts with customers over deposits for services they have ordered but now either don't want or the business is unable to provide. This is assuredly a time of high tension as businesses of all kinds try to protect their cash. Setting aside the philosophical discussion of how a generous refund policy can aid a business' reputation in the long run in normal times, it's important to understand what legal obligations might be in play now.  Of course, every situation and contract is different, but I reached out to David Dobin, principal with Cohen & Wolf, PC for some general guidance for small business owners.

CEDF: I can imagine an argument that deposits are held as security until the services are provided and the customer meets any of its own obligations. On the other hand, some might argue a deposit is earned immediately because it represents compensation for the potential opportunity cost of setting aside resources.

David Dobin: You are correct that every situation and contract is different and - especially under these emergency conditions - businesses should speak with an attorney to answer specific questions. Even under normal circumstances, disputes over whether a business is permitted to keep a customer’s deposit are common.

The first step in resolving a dispute over a deposit is to review the terms of the applicable contract. The contract may provide that the deposit is fully refundable, only refundable under certain conditions, or not refundable; or the contract may say nothing at all.  Even if the contract allows a business to keep a deposit, however, state and federal statutes and other principles of Connecticut law may forbid it. For instance, the Connecticut landlord-tenant statutes set forth specific rules on when, how much and under what circumstances a security deposit may be kept.  Also, while Connecticut law permits valid “liquidated damages” clauses, it prohibits imposition of a penalty for breach of contract as a violation of public policy. In fact, improperly keeping a deposit paid by a consumer may subject a business to liability under the Connecticut Unfair Trade Practices Act (CUTPA), and CUTPA requires every consumer to sign a statement in bold immediately following a liquidated damages provision which reads, “I ACKNOWLEDGE THAT THIS CONTRACT CONTAINS A LIQUIDATED DAMAGES PROVISION.” See Conn. Gen. Stat. § 42-150u.

A contract permitting a business to keep a deposit will violate public policy if the amount of the deposit is greatly disproportionate to the amount of the damage which would be sustained in the event of a breach of the contract.  Therefore, in determining whether a refund request must be honored, each business should consult with an attorney to consider its unique circumstances, including whether the customer is a consumer, when and why the refund is demanded, the expenses the business has already incurred, and the ability of the business to mitigate its damages by, for example, finding another customer.  

CEDF: What does the Uniform Commercial Code or Connecticut law have to say about when a deposit is earned by the company in a business agreement?  Is the situation only controlled by the language of the agreement or are there overriding obligations?  Seems like a good time to remember that important and owner-composed agreements would benefit from legal review.

DD: Article 2 of the Uniform Commercial Code (codified at Title 42a of the Connecticut General Statutes) governs contracts relating to the sale of goods. Oftentimes contracts will involve both the sale of goods and services, or the sale of goods to consumers, and other principles of law may apply.  As a result, the contract and all of the surrounding circumstances should be reviewed with an attorney to determine the rights to deposited funds. 

Under section 2-717 of Connecticut’s UCC, a contract allowing the business to retain a deposit must be “reasonable in the light of the anticipated or actual harm caused by the breach, the difficulties of proof of loss, and the inconvenience or nonfeasibility of otherwise obtaining an adequate remedy.”  In addition, section 2-615 excuses a seller from timely delivery if it has been made impracticable by an unforeseen occurrence or by a requirement to comply with applicable law.  These statutory provisions are consistent with other legal doctrines – described in response to the previous question – prohibiting contractual penalties and excusing parties from fully performing in the event of unforeseeable events. 

As a result of the COVID-19 pandemic, the Governor of Connecticut has issued a number of emergency orders including rules that close businesses, prohibit people from congregating and suspend court and other legal deadlines.  These orders may make it impossible or impracticable for both businesses and customers to fulfill their obligations under a contract – giving both sides an argument that they are entitled to the deposit.  Businesses are therefore encouraged to try to amicably resolve disputes caused by a government-ordered shutdown by coming up with creative alternate solutions so that the parties can both get the benefit of the original contract.  In doing so, businesses should reach out to their attorneys to better understand their contracts and potential liability when dealing with deposit disputes and, for the future, review their contracts to ensure they include language favorably allocating the risks of such unforeseeable events.

CEDF: What about businesses like caterers that customarily use deposit money to buy the food in advance that must be prepared for an event?  Does this intention have to be spelled out in the contract?

DD: It is always recommended that the contract clearly describe the circumstances in which the deposit is refundable, make clear that the parties intend that the deposit reasonably approximates the business’s damages in the event of a breach, and what the deposit is going to be used for (such as food expenses). The agreement should also include the date after which it is too late to demand a full refund because of expenses that the business is expected to incur. For instance, if a refund is demanded at such a late time that a caterer has already incurred expenses to buy food and other items in advance, and those can’t be used for other events, then the law against “penalties” may not require a total refund of the deposit. 

The current emergency circumstances, however, require other legal principles to be considered. Many contracts have “force majeure” clauses. These contractual provisions prohibit contracting parties from requiring each other to perform in the event of unforeseen and unexpected situations like hurricanes, tornados and natural disasters. In those situations, neither party has a right to insist on performance and the contract may be refundable no matter what the other provisions of the contract say. Even without a “force majeure” provision, other legal doctrines forgive a breach of contract if it is objectively impossible to do so or the purpose of the contract is frustrated.  Although these doctrines are more difficult to prove, they may affect the ultimate question of whether a deposit can be kept or should be returned.  For this reason, a business faced with these difficult questions should speak with an attorney.

CEDF: So, as difficult as this might be for small businesses, isn't the best practice to consider deposits as a liability because it might have to be returned, rather than co-mingle it with normal business working capital and spend it before the services are delivered?

DD: In light of the law against unenforceable penalties in contracts and legal principles that excuse performance when doing so would be impossible or impracticable, businesses should be mindful that not all deposits are non-refundable (even when the contracts appear to make them so). Their finances, including how and when deposited funds are spent, should therefore be adjusted accordingly. For specific questions on how to account for deposited funds, businesses should contact their accountants.

David Dobin is a principal of Cohen and Wolf, P.C. and represents individuals, businesses and condominium associations in a variety of litigation matters, including debt collection actions, trademark disputes, foreclosure defense and prosecution, contract disputes, business tort claims, breach of fiduciary duty claims, mechanic’s lien foreclosures, eviction actions, premises liability matters and other various complex commercial litigation matters.  

The information provided above does not, and is not intended to, constitute legal advice. Readers of this article should contact their attorney to obtain advice with respect to any particular legal matter.

Emergency Legislation Brings New Employer Mandates

By Stuart Katz

On March 18, the U.S. Senate approved the final versions of an Emergency Family and Medical Leave Act and Paid Sick Leave Act.  Both were signed by President Trump and will be effective no later than April 2, 2020

The Emergency Family and Medical Leave Act applies to all employers with fewer than 500 employees. 

  • Under the new law, employers are required to provide up to 12 weeks of job-protected FMLA to employees who have been employed for at least 30 days. 
  • This leave must be provided only to employees who are unable to work at the business or remotely due to the need to care for a child whose school is closed or whose care provider is unavailable due to the coronavirus.  (A draft version of the law had much wider applicability.)
  • The first 10 days of the leave can be unpaid. Employees may substitute paid time off (vacation, sick, personal, etc.) but may not be required to do so.
  • After the first two weeks, employers are required to pay the employee at 2/3 the employee’s regular rate of pay for the remaining 10 weeks.
  • This payment is limited to a maximum of $200 per day ($10,000 in total). 

There are very limited exceptions to the law. For example, for employers with fewer than 25 employees, there may be a waiver of the job-protection requirement to reinstate an employee if the position has been eliminated due to business circumstances resulting from the pandemic.

The Emergency Paid Sick Leave Act also applies to employers with fewer than 500 employees. Under this new law, employers are required to provide two weeks of paid sick time to employees who are unable to work or telework for one of the following reasons:

  1. The employee is subject to a federal, state or local quarantine or isolation order relating to Covid-19;
  2. The employee has been advised by a health care provider to self-quarantine due to Covid-19;
  3. The employee has sought a medical diagnosis resulting from symptoms of Covid-19;
  4. The employee is caring for an individual subject to a quarantine order;
  5. The employee is caring for the employee’s own child whose school is closed, or whose care provider is unavailable due to Covid-19*; or
  6. The employee is experiencing any other substantially similar condition specified by the Department of Health and Human Services.

If the employees takes leave for reasons 1-3, the payment is limited to a maximum of $511 per day.  If the employee takes leave for reasons 4-6, payment is limited to a maximum of $200 per day. (*Two weeks of leave for reason #5 aligns with the first two weeks of Emergency FMLA discussed above.) Employers are prohibited from retaliating against any employee who takes such a leave.

Subject to the specific conditions of forthcoming Treasury Department regulations, 100% of the emergency FMLA and paid sick leave wages may be reimbursed via payroll tax credits. Details to follow.

Given the circumstances, employers should immediately prepare to implement these emergency laws, and create forms and processes for doing so, if needed.

Stuart M. Katz is a principal of Cohen and Wolf and chair of the firm's Litigation group. He is a member of the firm's Employment & Labor practice group, and chairs the firm's Diversity & Inclusion committee. Stuart represents employers of all sizes in defending discrimination and harassment suits and litigating restrictive covenant, breach of contract, business tort and wage claims. He has been named "Lawyer of the Year" for Employment Law (Management) (2018) and for Employment Law (Individuals) (2016) by the Best Lawyers in Americafor the Stamford, Connecticut metro area. He routinely provides guidance to employers and employees regarding personnel policies, handbooks and employee discipline.

COVID-19: Negotiate a Rent Abatement or Deferral in your Lease

By Jeff Grandfield

I am speaking hourly with business owners that have dwindling revenues or no revenue in the face of the COVID-19 pandemic. Business owners are looking everywhere on how to maintain sales as much as possible and/or reduce overhead expenses. With monthly rental payments typically being one of the largest expenses for business owners, this is a good place to start.

While no landlord wants to see their revenues (rent payments) go down there is hope for rent assistance now! Here are just a few tips to consider:

Be Proactive -- Do not sit back until you have lost money for weeks or months, reach out to your landlord now. In addition to delaying the benefit you may receive you can be sure that your landlord is receiving multiple requests for rental assistance and if you do not get to the table you may risk the landlord assuming you are not in need of this assistance and have more difficulties getting help.

Be Prepared -- In order to obtain rental assistance, your landlord may request information including the status of your business (are you opened or closed), current and past sales numbers to show the impact on your business, whether you have any insurances to cover business losses and other steps you are taking to maintain sales or reduce costs. Having this information ready may expedite any assistance you receive.

Be Flexible -- It's important to differentiate between a rent abatement (forgiveness of all or part of your future rents) and rent deferral (unpaid rent is payable at a future date). While getting all your rent abated for a period of time is certainly the best circumstance, having a partial abatement or deferral may be the difference between closing and continuing operations long term.

At the end of the day, if a landlord has to choose between seeing your business close down or giving you rental assistance, many landlords will elect to work with tenant to hope to secure long term rent payments.

Jeff Grandfield of The Lease Coach is a commercial lease consultant who works exclusively for tenants. Jeff is a professional speaker and co-author with Dale Willerton of Negotiating Commercial Leases & Renewals for Dummies (Wiley, 2013). Jeff can be reached at

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