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It looked to me like the 5% was if you were returning the item unopened (a restocking fee), rather than returning for cause.
The existing refund policy does say 7 days, which I have always thought was absurdly short. Even in the US, most vendors give you 30 days. In this case, however, the vendor has been making undelivered/undeliverable promises since before shipment, which I think ought to extend the refund period automatically. Someone more familiar with UK/EU law would need to look at this, though.
Does UK/EU law provide for the vendor paying your shipping? This seems like a gray area to me. Maybe a compromise would be to provide the full refund (less wear and tear, if necessary), ask the customer to pay shipping, but offer a credit for shipping costs toward any future purchase at iRex, e.g. a new model that meets specs. I know this may not seem completely fair to the customers, but I don't think iRex intended to ship a model that would make customers unhappy, either. They might go for this sort of solution to try to encourage some of their first generation buyers to give them another chance later.
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