Documents considered by the Committee on 13 March 2013 - European Scrutiny Committee Contents


1 Alternative dispute resolution for consumer disputes



(34689)



(34654)


Draft Directive on alternative dispute resolution for consumer disputes and amending Regulation (EC) No 2006/2004 and Directive 2009/22/EC (Directive on consumer ADR)

Draft Regulation on online dispute resolution for consumer disputes (Regulation on consumer ODR)

Legal baseArticle 114 TFEU; co-decision; QMV
DepartmentBusiness, Innovation and Skills
Basis of considerationEM of 26 February 2013
Previous Committee ReportNone; but see (33481) 17795/11 and (33482) 17815/11: HC 86-xxxii (2012-13), chapter 7 (13 February 2013); HC 86-xvi (2012-13), chapter 16 (24 October 2012); HC 86-iii (2012-13), chapter 11 (23 May 2012); HC 428-xlvi (2010-12), chapter 6 (11 January 2012)
Discussion in Council22 April 2013
Committee's assessmentLegally and politically important
Committee's decisionFor debate in European Committee C

Background

1.1 The Directive has the aim of enhancing the use of Alternative Dispute Resolution (ADR) for consumer disputes within the EU. It will not require parties to use ADR; it will simply increase the supply of quality ADR. It will do this by placing a requirement on Member States to ensure ADR that meets certain quality criteria is available for every possible contractual dispute between consumers and business. Member States will have to designate a Competent Authority to monitor standards of the entities that provide this ADR, so-called "ADR entities".

1.2 The Regulation will establish a European Online Dispute Resolution platform (ODR platform). This will be an interactive website which can be accessed free of charge in all official languages of the Union and will create a single point of entry to consumers and traders seeking out-of-court resolution of contractual disputes arising from online sales.

Previous scrutiny

1.3 In the conclusion to our last Report on these two proposals on 13 February we said as follows:

    "In a letter to the Minister dated 9 January we said "[i]n order to scrutinise the proposed amendments effectively, however, we ask you to deposit the revised texts with a full estimation of their national legal impact as soon as possible."

    "The Minister's letter of 6 February attaches the revised text agreed at COREPER, but does not deposit it, as asked. As a consequence, the revised texts are still not held under scrutiny by the Committee. Nor can the information in the Minister's letter be described as a full estimation of the national impact of the European Parliament's proposed amendments. This Minister's response is, therefore, disappointing.

    "We ask the Minister again to deposit the attachment to her letter as soon as possible, together with a Supplementary Explanatory Memorandum (SEM) that should explain, inter alia:

·  the basis for the Government's contention that Article 9c of the ADR Directive involves judicial cooperation based on mutual recognition and so requires a Treaty legal base of Article 81 TFEU;

·  the precise impact of Article 9c on national law and practice;

·  the precise changes to national law and practice necessary to implement Article 9c; and

·  an indication of the Government's view on whether to opt into Article 9c.

    "Regarding the last bullet point, we note that the Government's opt-in decision will have no formal consequences in Brussels as no other Member State accepts that the Title V opt-in applies. We will also be interested to understand how the Government contends that it will be able to opt into or out of a sub-paragraph of an operative paragraph of a draft Directive without a Title V legal base.

    "We may wish to debate the revised draft ADR Directive in European Committee, depending on the contents of the SEM, so we remind the Minister of the need for urgency in responding to the conclusions of this Report."

Explanatory Memorandum of 26 February 2013

1.4 The Minister for Employment Relations and Consumer Affairs at the Department for Business, Innovation and Skills (Jo Swinson) has submitted this further Explanatory Memorandum to provide an assessment of the substantive amendments that have been made to the Directive on consumer Alternative Dispute Resolution and the Regulation on consumer Online Dispute Resolution during the final stages of negotiations, and to our requests above.

LEGAL BASIS

1.5 The Directive has as its legal basis Article 114 TFEU which is the basis for "measures for the approximation of provisions laid down by law…in Member States which have as their object the establishment and functioning of the internal market".

1.6 Due to the addition of a provision (Article 9c of the ADR Directive) during the course of negotiations, that the UK Government believes triggers the UK's JHA Opt-in Protocol, the UK pushed for a Title V legal base (which refers to the section of the Treaty on the Functioning of the European Union which covers matters of freedom, security and justice, and encompasses Article 81 of this Treaty) to be recognised as an additional legal base for this Directive. Unfortunately the UK was isolated on this issue and was unable to secure the additional citation of a Title V legal base.

1.7 Article 9c of the ADR Directive is a copy of Article 8 of the Mediation Directive (2008/52/EC). The Mediation Directive has as its legal base Article 61(c) of the Treaty establishing the European Community. [1] Article 61(c) provided that the Council should adopt measures in the field of judicial cooperation in civil matters as provided for in Article 65. Article 65 deals specifically with measures in the field of judicial cooperation in civil matters having cross-border implications. Article 65 is officially recognized as being the predecessor provision to Article 81 of the Treaty on the Functioning of the European Union.

1.8 The Government's view is that since Article 8 of the Mediation Directive has Article 61(c) as its legal base, the same provision found in Article 9c of the ADR Directive must be regarded as having the same legal base, which is now Article 81 TFEU.

1.9 Even in the absence of the citation of a Title V legal base, the UK Government believes that the inclusion of Article 9c in the Directive will trigger the UK's Opt-in Protocol. The Government position is that the UK Opt-in Protocol applies where a measure contains provisions pursuant to Title V, even in the absence of a Title V legal base. Whilst the UK is aware that this interpretation of the Protocol differs from that of the Commission, in cases where the UK nonetheless decides to opt-in, the difference of opinion is unlikely to result in a disagreement with the EU institutions. If the UK decides, however, that it does not intend to opt into the JHA components of this dossier, it will have to consider how to proceed, including the possibility of challenging the validity of the legal base before the ECJ.

1.10 The UK Government agrees with the broader policy position and is supportive of the overall objectives of the ADR/ODR proposals, but would welcome the views of the House of Commons European Scrutiny Committee and the House of Lords European Union Committee before reaching a formal decision on whether to opt-in.

IMPACT ON UK LAW

1.11 The ADR/ODR text agreed at trilogue negotiations provides that in relation to ADR procedures initiated by a consumer against a trader, the provisions of the ADR Directive will prevail over any other EU legislation (and therefore also the domestic legislation implementing this), and the Government will need to scan such domestic legislation to see whether it needs to be amended.

1.12 Article 9c of the Directive will require the UK to check, and if necessary, amend any national rules on limitation or prescription periods in relation to complaints made by consumers against traders. The current position set out in the Limitation Act 1980 is that, in the absence of fraud, concealment or mistake, a claimant has six years from the date of the breach of contract to bring a claim. As a result of the implementation of the Mediation Directive, in the case of certain cross-border disputes, if a mediation process has started within the six year window, but is still ongoing when the six year time period terminates, the window for bringing a claim is extended to eight weeks after the end of the mediation.

1.13 What Article 9c means is that the Government will need to provide that in the case of disputes that are within the scope of the ADR Directive where a consumer is the claimant, and a trader the defendant, this six year window will also need to be extended where an alternative dispute resolution process (be it mediation, arbitration, or any other form of alternative dispute resolution) has started, but is still ongoing when the six year time period terminates. Therefore Part II of the Limitation Act 1980 will need to be amended to include a section which extends the time period for bringing a claim in the case of the disputes covered by the ADR Directive (i.e. in the case of a dispute regarding a contract for the sale of goods or provision of services where the claimant is the consumer and the defendant is the trader).

1.14 The Government has not yet considered what an appropriate time extension would be but will cover this in the consultation exercise undertaken to implement the proposals.

1.15 Equivalent amendments will need to be made to the legislation of Scotland and Northern Ireland, and Gibraltar will also need to screen its legislation on this point. It is likely, for example, that the Prescription and Limitation (Scotland) Act 1973 will be affected. Scottish Government officials will be assessing the implications as part of the implementation process. Likewise, Part IV of the Limitation (Northern Ireland) Order 1989, the Foreign Limitation Periods Act 1984 and the Foreign Limitation Periods (Northern Ireland) Order 1983 may also need to be amended.

1.16 In the event that sector specific legislation regulates a subset of consumer - business contracts for the sale of goods or the supply of services, which sets out particular time limits on claims brought under these contracts, then these pieces of legislation will also need to be amended to permit an extension where the parties are engaging in ADR at the time that the statutory deadline for bringing a claim has passed. The Government is not currently aware of such legislation, but will do a more detailed trawl as part of the transposition process.

1.17 The legislative vehicle to effect these changes to the aforementioned pieces of legislation will be domestic Regulations made using the vires given in section 2(2) of the European Communities Act 1972.

POLICY IMPLICATIONS

1.18 Now that trilogue negotiations have concluded, it is possible to provide a clearer summary of the implications of the Directive based on the agreed text.

1.19 This section lists the key areas in which substantive amendments have been made and the key issues that were agreed during the final stages of negotiations, at any time since the previous Supplementary Explanatory Memoranda were submitted.

Links to national justice systems (ADR Directive Article 9c)

1.20 The requirement to extend limitation and prescription periods is reasonable and its actual impact would be limited as the type of dispute in question is unlikely to reach court. The UK has already implemented a similar provision (Article 8 of the Mediation Directive) by way of the Cross-Border Mediation (EU Directive) Regulations 2011.

Information to consumers (ADR Directive Article 10 and ODR Regulation Article 13)

1.21 Businesses that are obliged to or voluntarily commit to use a specific ADR entity (or entities) will have to provide information on that ADR entity, including their address or website address. This information will have to be available on the business's website, and if applicable, in the general terms and conditions of sales or service contracts. The impact of this will be low, as most UK businesses who are obliged to use ADR already provide this kind of information in this manner.

1.22 In addition to this, in the event of an unresolved dispute, all businesses will have to provide information about an ADR entity (or entities) that could take on that dispute, and specify whether they will make use of that ADR entity to settle the dispute.

1.23 The ODR Regulation will oblige all EU online traders to provide a link to the ODR platform on their website. Traders who are obliged to use specific ADR entities to resolve disputes will have to provide further information about the platform in any applicable offers or terms and conditions. Furthermore, online intermediaries which traders use to sell goods or services will also have to provide a link to the ODR platform on their websites. These requirements to provide information are in addition to the information requirements of the ADR Directive.

1.24 The UK did not want the Directive to impose any information requirements on businesses that are not committed to using ADR, to avoid confusing consumers and placing burdens on business. The UK Government will work closely with business and consumer groups in an effort to minimise any potential disruption. Steps such as guidance on standard text will have to be considered.

Procedural Rules (ADR Directive Article 5(4))

1.25 Member States have been given the discretion to permit ADR entities to follow procedural rules which will allow them to reject cases on certain grounds. This Article is important as it will allow ADR entities to insist that consumers attempt to resolve their dispute directly with the business in the first instance, and will allow, amongst other things, ADR entities to reject vexatious complaints. These procedural rules clarify that ADR entities do not have to consider complaints that have already been considered by a different entity. This is to prevent consumers from submitting the same complaint to several ADR entities in an effort to secure a more favourable response.

1.26 In addition, ADR entities will be allowed to set time limits in which consumers have to submit a complaint, although these cannot be set at less than a year. Some UK ADR entities will only consider complaints submitted in a shorter time period so some changes to the rules of these bodies will be necessary, although the Government does not expect the impact to be significant.

1.27 In instances where an ADR entity rejects a complaint (on the basis of one of the permitted criteria) they will have to inform the consumer within three weeks of receiving the application.

Expertise, independence and impartiality (ADR Directive Article 6)

1.28 Article 6 sets a number of requirements to ensure that the persons employed by ADR entities have the necessary expertise to handle each case and are independent of the parties concerned. Where a potential conflict of interest arises, the ADR entity is obliged to find somebody else to handle that case or refer the parties to another ADR entity. If neither of these options is feasible then the potential conflict of interest must be disclosed to the parties involved in the complaint, who have the option to object to the case proceeding. This appears to strike a fair balance of ensuring case handlers are impartial and have the requisite knowledge, without imposing restrictions which would prevent ADR entities from functioning effectively.

"Single-trader" schemes (ADR Directive Articles 2(2) and 6(1b))

1.29 The proposals will allow "single-trader" schemes, whereby the person in charge of the dispute is employed exclusively by the trader, but only if permitted by a Member State. Should single-trader schemes be permitted then that State must ensure additional safeguards are met under Article 6 (1b), such as the length of employment allowed and that person being prohibited from taking another job with the trader for three years following them leaving their position as an ADR case handler.

1.30 Single-trader schemes do not exist in the UK. These provisions have been included to encapsulate other forms of ADR provided in other Member States, and the additional safeguards should ensure that UK consumers engaging these entities in other Member States will get an impartial service.

Length of time for ADR/ODR procedures (ADR Directive Article 8 (d) and ODR Regulation Article 9(a))

1.31 It has been agreed that ADR entities will have 90 calendar days in which to complete their procedures, including any cases which have been processed using the ODR platform. This deadline can only be extended in the event of highly complex disputes, and in these circumstances, the ADR entity must inform the parties of any extension and how long it will be. The UK government agrees that ADR entities should attempt to resolve disputes within 90 days, but that it is important to allow scope to extend this deadline, to enable complex cases to be given proper consideration.

Role of competent authorities (Article 15)

1.32 The agreed text confirms that Member States can designate more than one competent authority to retain a list of ADR entities operating in that Member State, but that a single point of contact must be designated to relay the required information to the Commission at the required intervals. The text does not specify what form a competent authority must take. The UK Government had sought this flexibility during negotiations and will consider which bodies are best placed to act as Competent Authorities during implementation of the Directive.

1.33 Competent Authorities will be permitted to remove an ADR entity from the notified list if the ADR entity stops complying with the requirements of the Directive. Any ADR organisation which does not feature on the notified list is likely to find demand for its services reduced, so the UK Government believes that this risk of being struck off will be an adequate incentive to ensure ADR entities comply with the Directive.

Scope of the ODR regulation (ODR Regulation Article 2)

1.34 The scope of the ODR regulation includes both domestic and cross border disputes. It was argued that it can be difficult for a trader to identify whether a consumer is domestic or cross-border, so the Regulation should capture both to avoid the trader having to determine where the consumer is based and tailor the information they provide accordingly, at the outset of a transaction.

1.35 The UK Government believes that the platform will be of far more use in cross-border disputes, which will have use for the translation service offered and where the need to increase consumer confidence is greater. Extending the scope to domestic disputes will capture online traders who only provide a local service, who will have to provide a link to the ODR platform on their websites. It is difficult to see much benefit to local online traders from doing so, and the UK Government will explore ways to minimise any burdens or costs arising from this requirement.

The role of ODR contact points (ODR Regulation Article 6)

1.36 The UK Government had been concerned that extending the scope of the ODR regulation to domestic disputes was likely to impose significant burdens on ODR contact points, who will be required to provide support if requested by a party submitting a dispute via the ODR platform. The UK managed to negotiate that ODR contact points will only have to provide support when requested for domestic disputes if required to do so by Member States.

1.37 Some UK ADR entities such as the Financial Ombudsman Service deal with a large volume of domestic disputes. If even a fraction of these cases get channelled through the ODR platform then the potential workload for the UK ODR contact point could increase significantly. The UK Government will explore the prospect of allowing the ODR contact point to support domestic disputes when consulting on implementing the ADR/ODR proposals, and will consider options such as leaving it to the discretion of the contact point on a case-by-case basis.

IMPACT ASSESSMENT  

1.38 The following key issues that were agreed towards the close of negotiations are likely to alter the impact of the Directive and Regulation. BIS will carry out and consult on a full impact assessment when working on implementing the ADR and ODR texts.

Information to consumers

1.39 All businesses selling goods or services to consumers who are unable to resolve a dispute with a consumer, will face the cost of advising that consumer of an ADR entity which could handle the dispute and whether they intend to use that ADR entity. It is difficult to assess how many customer complaints remain unresolved and therefore how many businesses will be affected by this requirement. A Consumer Detriment Survey[2] estimates there were 15.7 million problems experienced by UK consumers over the previous 12 months and that consumers will complain to the business concerned in 41% of cases. Separate research[3] indicates that 46% of businesses are able to resolve more than 90% of their complaints by providing explanations to their customers. When the explanations fail businesses will often offer redress via repair or replacement, or provide information about ADR.

1.40 All online traders will also have to provide a link to the ODR platform, as will online intermediaries that traders use to sell goods and services. These will result in one-off costs for online traders and intermediaries. Online traders that are committed to using an ADR entity will have to provide further information about the ODR platform alongside a link to the ODR platform. The one-off costs of doing this should be minimal as the websites of these traders tend to already include information about the relevant ADR entity, which could be updated to include additional information about the ODR platform.

1.41 The ADR and ODR texts do not include a requirement to provide some of the information on paper and/or on invoices and receipts, as had been proposed at one point, which will help to minimise the costs of providing this information. Nevertheless, the UK Government will work with stakeholders to implement the information requirements in the least burdensome way (for example, by issuing guidance on standard wording).

Procedural rules

1.42 Some ADR entities set time limits of less than a year in which consumers are allowed to submit disputes. For example, Ombudsman Services (which covers complaints in sectors such as energy) currently has a nine-month deadline for submitting disputes. The Directive says that consumers must be given at least a year to submit a dispute. This will lead to some entities having to change their rules and may lead to them dealing with a higher volume of disputes, which would increase their costs.

1.43 ADR entities will have to inform the relevant parties if they are rejecting a complaint within three weeks. This could increase costs for some entities as they may need more resources in order to process rejected claims in time.

Independence requirements

1.44 Where conflicts of interest are identified, ADR entities may face additional costs in finding another case handler or ADR entity to look after a dispute, or in consulting the relevant parties about the potential conflict of interest.

FINANCIAL IMPLICATIONS

1.45 In summary there will be: the costs to public funds of designating a Competent Authority to monitor standards of ADR; the costs of enforcing the requirements on businesses to provide certain information to consumers; and the cost of ensuring the existence of an ODR contact point and two ODR advisors to support disputes submitted via the ODR platform.

1.46 An assessment will have to be made during the implementation process of whether the UK would need to establish additional ADR to meet the requirements of the Directive. The Government's call for evidence suggested that any gaps in coverage could be met by existing bodies, and this will be explored in more detail during implementation.

1.47 The following key issues which were agreed during the final stages of negotiations will change the financial implications of the Directive and Regulation:

·  Procedural rules: allowing ADR entities to dismiss disputes that are not suitable for ADR will prevent the UK Government from having to ensure there is quality ADR available to deal with such disputes;

·  Competent Authorities: having the freedom to designate different Competent Authorities for different sectors or geographical areas will help to keep the costs of doing so down;

·  Compliance: relying on removing ADR entities from the notified list of ADR entities to ensure compliance with the Directive and Regulation, as opposed to laying down specific penalties, will help minimise costs; and

·  ODR contact points: allowing ODR contact points to focus on cross border disputes will help minimise their case load and reduce costs.

TIMETABLE

1.48 The texts for the ADR Directive and ODR Regulation have been agreed by the European Commission, European Parliament (EP) and European Council at trilogue negotiations in December 2012. These texts were subsequently endorsed by Member States at a Committee of Permanent Representatives (COREPER) meeting on 12 December and the EP's Internal Market and Consumer Affairs Committee (IMCO) on 18 December.

1.49 The EP is set to vote on these proposals on 12 March. It is anticipated that the Irish Presidency will schedule a Council vote on these texts at either an Agrifish Council meeting on 22 April or a Competitiveness Council meeting on 29 May. As all parties are satisfied with the outcomes of negotiations the Government fully expects the texts to be approved by both the EP and Council.

Conclusion

1.50 We thank the Minister for a very helpful Explanatory Memorandum.

1.51 In our opinion the Government's argument for the necessity of a Title V legal base is strengthened by the precedent that exactly the same provision on limitation and prescription periods appears in the Mediation Directive, except that it is based on the precursor to Article 81 TFEU. Be that as it may, we understand that the widely held view in the Council and the European Parliament was that, although the measure touches upon an area of civil law, it does not automatically trigger the application of Article 81, which concerns judicial cooperation in civil matters. All other parties in the negotiations felt that the single market legal base, Article 114 TFEU, remained appropriate.

1.52 In the absence of a Title V legal base, and consistent with views we have often expressed, we do not consider the opt-in Protocol applies. Accordingly, the Government has no scope for opting in or out.

1.53 We think the considerable administrative, financial and legal impact of the final drafts of these two proposals, weighed against the increased protection for consumers, could usefully be aired in a debate in European Committee C. The debate should also explore the unwelcome precedent set by a measure such as Article 9c, which will require a significant change to civil legal procedural rules, being adopted without a Title V legal base thereby removing the UK's discretion not to be legally bound by it. We will be interested to know whether the Government will consider a legal challenge.

1.54 The debate should be held in good time for the proposals to clear scrutiny before they are adopted by the Council on 22 April.





1   The Mediation Directive also cites Article 67(5) but that merely sets out that the Directive was approved by means of the institutional co-decision process, and is therefore not relevant to the analysis of the legal base of the ADR Directive. Back

2   Consumer Detriment 2012 report prepared for Consumer Focus by TNS BMRB (published October 2012). Back

3   IFF Consumer Rights and Business Practice Report for the Department for Business, Innovation and Skills (to be published spring 2013). Back


 
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