Guidance issued by the CAA on Atol refunds for customers of failed retailer Freedom Direct could be used to defend Travel Republic against claims it broke the rules.

The leading online retailer is facing prosecution by the CAA on 20 counts of breaking the law by selling package holidays without a licence. A second preliminary hearing is due to take place on Wednesday.

The CAA previously insisted government guidance issued last year made it almost impossible to legally sell separate components of a holiday together without a licence.

But in clause 3 of its own guidance to clients of Freedom, which had an Atol, it states it will not pay out for clients booked on split contracts.

Leading travel accountant Chris Photi described this clause as “unprecedented” and claimed it appeared to contradict its stance against Travel Republic (read his comments here).

Abta has estimated 75% of claims from Freedom’s 10,000 customers with forward bookings will be dealt with by credit and debit card firms.

TTG has been told that many retailers, like Freedom, were also pressured to get Atols to cover business that they have since been legally advised did not require a licence.

On April 1, 2008, bonding was effectively scrapped for Atol holders and a £1 per person Atol Protection Contribution brought in to replenish the indebted Air Travel Trust Fund. This fund is now heading for bankruptcy following the collapse of XL Leisure Group last September if APC is not increased to £3. A consultation has started.

“The CAA wants it both ways,” said one retailer.

“Last year it was saying if it looks and barks like a package, it is a package; that was when it wanted as many £1s in as possible. Now, when it has to pay out, it’s in the CAA’s interests to say you don’t need an Atol for that sort of business.”

A CAA spokesman said the guidance it issued was intended solely to funnel customers’ claims to the right place. He said he would be “surprised” if it was considered to have set a precedent that could be used in court and insisted the Travel Republic case will “bring more clarity”.

“It’s vital for the public to know if they are covered or not. Fundamentally, our line is to ask your agent,” said the spokesman.

• Credit card firms' fury at travel sector (14 May 2009)
• Travel Republic boss pleads not guilty (11 Mar 2009)
• Abta slams CAA's 'confusing' XL payouts (11 Feb 2009)