House of Commons - Draft Consumer Rights Bill - Business, Innovation and Skills Committee

Draft Consumer Rights Bill - Business, Innovation and Skills Committee Contents

3 Part 1 of the draft Bill

Definition of a "consumer"

36. The draft Bill defines a "consumer" as "an individual acting for purposes that are wholly or mainly outside that person's trade, business, craft or profession".[46] This definition is used in both Part 1 of the draft Bill, relating to goods, digital content and services, and Part 2, relating to unfair terms in contracts. Therefore, consumer protections in the draft Bill do not apply to businesses or legally incorporated organisations.

37. Definitions of a "consumer" in current relevant legislation vary, depending on whether or not they derive from EU law. There are some similarities: both EU and domestic legislation require that, to qualify as a "consumer", a party to a contract must not be acting in the course of his or her business. However, under EU law, a "consumer" can only be an individual. Relevant domestic legislation uses a wider definition, to include an individual, company or other organisation where they are not acting in the course of their business.[47]

38. The definition of a "consumer" for the purposes of reform of UK consumer law was consulted on by the Government and the Law Commissions. The Law Commissions' 2005 Report on Unfair Terms in Contracts recommended that a "consumer" should be defined as "an individual who enters into the contract wholly or mainly for purposes unrelated to a business".[48] In its 2008 Consumer Law Review, the Government asked whether the definition of consumer should be extended to include small or micro-businesses. All business groups that responded were opposed to widening the definition in this way, questioning how a definition of "small business" would be drawn up and preferring the clarity of the current distinction between business and consumer.[49] That said, the Federation of Small Businesses told us of its concern that small and micro-businesses were excluded from the protections offered by the draft Bill, particularly because the bargaining power of those organisations in a contract may be similar to that of an individual consumer.[50] It has commissioned research to examine how small businesses behave as consumers and how legislators and regulators can help protect them from unfair practice.[51]

39. In 2012, the Government consulted on the proposed single definition of a "consumer" that appears in the draft Bill. The majority of respondents agreed with the proposed definition, citing the advantages of simplification and alignment with EU law.[52] The Law Commissions advised the Government that the definition of a "consumer" that is used in the draft Bill achieves clarity and simplicity and that the loss of protection resulting from the narrowing of the definition to exclude businesses making one-off transactions is "negligible".[53]

40. The proposed definition of "consumer" would align the definition in UK domestic law with EU law, in particular with the definition used in the Consumer Rights Directive.[54] The CRD is a maximum harmonisation directive which, the Government argued, gave "little scope" for variation of definitions.[55]

41. We conclude that the advantages of a simplified, clear and consistent definition of "consumer" justify the definition used in the draft Bill. However, we are mindful of the issues that small and micro businesses experience in relation to their bargaining power.

42. We recommend that the Government considers the case for small businesses to be treated as consumers.

43. We further recommend that the Government provides a substantive response to the research commissioned by the Federation of Small Businesses on small businesses as consumers.

Goods: Chapter 2 of the draft Bill

44. When consumers enter into a contract for the sale or supply of goods in the UK they have the benefit of several statutory rights which are "implied" into the contract between the consumer and the supplier. Implied terms are those which are not expressly set out in the contract, but still form part of the contract.[56]

45. Different statues apply to different types of transactions.[57] The Sale of Goods Act 1979 (SGA) implies the following terms into contracts for the sale of goods (that is, the supply of goods in exchange for money):

· The seller must have the rights to sell the goods;[58]

· The seller must transfer goods that conform with any description of them given;[59]

· The goods must be of satisfactory quality (which is determined by reference to the expectations of a reasonable person, taking into account the description, price and other relevant circumstances)[60]

· The goods must be reasonably fit for the purpose specified for them by the buyer;[61] and

· Where the goods are sold by sample they must conform to that sample.[62]

46. These rights are in effect contractual rights and if they are breached it would therefore be a breach of contract, and the consumer would be entitled to remedies. The SGA allows the consumer to reject faulty goods and claim a full refund (the "right to reject"). However, the right is lost once the consumer is deemed to have accepted the goods,[63] which may happen "after the lapse of a reasonable time".[64] Thereafter, the consumer has the right to damages only, under the principles of general contract law.[65]

47. The Consumer Sales Directive (CSD) was implemented in the UK in 2002 through amendments to the SGA and the Supply of Goods and Services Act 1982. The CSD introduced a separate regime of remedies, under which consumers may ask for a repair or replacement of faulty goods. If this is impossible or disproportionate, or if a repair or replacement cannot be provided without "unreasonable delay" or "significant inconvenience", the consumer may move to a second tier of remedies. The second tier remedies are rescission (that is, treating the contract as at an end), or reduction in price.[66]

THE EARLY RIGHT TO REJECT- CLAUSES 19, 20 AND 21

48. Under existing law, a consumer can reject faulty goods that they have bought within a "reasonable time".[67] However, case law on what amounts to a "reasonable time" is unclear.[68] The draft Bill would introduce a fixed period of 30 days in which a consumer may reject a faulty good.[69] This implements the recommendation of the Law Commissions for "a normal period of 30 days in which the right to reject should be exercised".[70]

49. The draft Bill provides that for perishable goods—which would reasonably be expected to perish after a shorter period—the time limit for rejection is the end of that shorter period, rather than the 30 day period.[71] An agreement between the consumer and the trader may allow the consumer to exercise the early right to reject later, but cannot shorten the 30 day period.[72] These exceptions to the 30 day period implement recommendations of the Law Commissions.[73]

50. The Law Commissions also recommended that where it is reasonably foreseeable by both the consumer and the trader that a longer period would be needed to inspect the goods and to try them out in practice, the consumer should be entitled to a longer period than 30 days.[74] Consumer representatives including Which? argued for the inclusion of this exception.[75] However, the Government did not include this in the draft Bill.

51. The Government said that including this exception in the draft Bill would "detract from the intended clarity" of the 30 day time limit and "introduce greater complexity" to the law.[76] Using the example of Christmas presents bought in November, the Minister said that "very often many retailers proactively offer, if something is not right, to provide a refund or exchange in a period much longer than 30 days".[77] It is clear therefore that the Government does not intend the 30 day time limit to prevent competitive positioning by retailers, who may offer more flexible arrangements to the benefit of consumers. We note that any agreement between the consumer and trader would be governed by clause 20(3) of the draft Bill, which allows such an agreement to extend the 30 day period but not shorten it.

52. Where the consumer requests or agrees to a repair or replacement of goods, the time period for early rejection is suspended whilst repairs or replacements take place.[78] Again, this follows a recommendation of the Law Commissions.[79]

53. We recognise that there are circumstances in which it would be appropriate to extend the 30 day time limit for the early right to reject goods, for example where it is reasonably foreseeable that a longer period would be needed to inspect the goods and to try them out in practice. We are not persuaded that the draft Bill would adequately protect consumers in such circumstances.

54. We recommend that the Government reconsider an exception to the time limit for the early right to reject where it is reasonably foreseeable that the consumer would need a longer period to inspect the goods and to try them out in practice.

TIER 1 REMEDIES—REPAIRS AND REPLACEMENTS—CLAUSE 23

55. At present, once the consumer has requested the repair or replacement of a substandard good, and providing it is neither impossible nor disproportionate, the seller must carry out that remedy within a reasonable time and without significant inconvenience to the buyer. If a fault recurs or if a further fault develops, the trader is able to offer a further repair or replacement so long as the first repair or replacement was provided within a reasonable time and without significant inconvenience to the consumer.[80]

56. In their 2009 report on faulty goods, the Law Commissions concluded that there was widespread confusion and dissatisfaction about the remedies available under current law:

Consumers are particularly concerned about becoming locked into a cycle of failed repairs, because it is difficult to prove that an unreasonable delay or a significant inconvenience has been caused.[81]

57. The Law Commissions found that consumers who had accepted one replacement which was unsatisfactory would expect to receive a refund, since they are likely to have lost confidence in the product.[82] In its 2008 Report, the OFT found that consumers suffered financial and non-financial losses as a result of failed repairs and replacements.[83]

58. The Law Commissions recommended that after one failed repair or replacement, the consumer should be entitled to proceed to a second tier remedy.[84] The draft Bill implements that recommendation.[85] Alternative options rejected by the Government included a fixed limit of two repairs or a single replacement, and the disapplication of the limit on repairs which were minor in relation to the value of the product.[86] Which? the OFT and others argued for a fixed time limit within which repair or replacement must be carried out.[87]

59. We are satisfied that the draft Bill protects consumers from being trapped in a failed cycle of repairs or replacements through its fixed limit, which addresses the main concern of consumer representatives and the Law Commissions. On balance, we were not persuaded that a fixed time limit for repairs to be made would be workable or desirable because of the huge range of products and circumstances covered by this regime.

60. We conclude that the consumer should only have to accept one repair or replacement attempt before being able to move to Tier 2 remedies, since this would address the key consumer concern of being trapped in a cycle of failed repairs and replacements.

TIER 2 REMEDIES—RIGHT TO PRICE REDUCTION AND FINAL RIGHT TO REJECT—CLAUSE 24

61. Under existing law, where the Tier 1 remedies of repair and replacement are impossible or disproportionate, or where the seller has failed to carry out a Tier 1 remedy within a reasonable time or without significant inconvenience, the consumer may proceed to the second tier of remedies.[88] The Tier 2 remedies are:

· Reduction in price -which allows the consumer to keep the good and obtain a reduction in the purchase price; or

· Rescission -which allows the consumer to reject the good and obtain a refund. The refund may be reduced to take account of the use a consumer has had of the good is referred to as "deduction for use". There is currently no limit or guidance on the amount of the deduction or how it should be calculated.[89]

Proposals in the draft Bill

62. The draft Bill proposes that where a consumer (who is entitled to a Tier 2 remedy) chooses to obtain a refund and rejects the good within six months of purchase, the trader may not make a deduction for use.[90]

63. The draft Bill proposes one exception to this rule. Under the proposals, deduction for use may be made in the first six months where "robust independent evidence of the second hand value of the class of goods exists".[91] In order to prove a second hand value the trader is required to give the consumer "clear, independent evidence"[92] of the value of the goods in question (or similar goods if the consumer agrees that they are equivalent) and of "an active second hand market" for the goods.[93] If the goods have a proven second-hand value, the deduction for use cannot reduce the refund to the consumer below that value.[94]

64. The Government explained the rationale for this exception as follows:

This balances the interests of consumers who may have had limited and/or problematic use of the goods and the interests of businesses to not be obliged to compensate consumers beyond what goods are worth.

A secondary policy objective is to minimise undue costs to retailers in industries where goods deteriorate in value rapidly after purchase. Therefore, where robust, independent evidence of the second hand value of the class of goods exists, the retailer can make a deduction for use, even during the first six months, provided the refund is of at least that second hand value. We intend to state in guidance that it may be beneficial for industries that intend to rely on such evidence to seek an independent 'accreditation' of the evidence.[95]

Deduction for use—how much will it be used?

65. The Minister said that "where something is faulty within the first 30 days, you have the right to a full refund. In most cases, up to six months, that will also be the case".[96] The impact assessment, Explanatory Notes and the Minister's oral evidence use the motor industry as the Government's key example of when deduction for use would be envisaged.[97] The Minister said:

The second-hand market is useful for particular circumstances—I gave the example of the motor industry, which I think is the main example—where because we are limiting the repairs and replacement option after you have a fault in your goods to one repair or replacement, there is a concern from the manufacturers and the retailers of some very complex goods that that could be incredibly onerous for their business model[...] We have put in place this particular protection for industries like that, so we can make sure we have strong consumer protection across the board.[98]

66. Although the evidence for this policy is based on a survey of the motor industry, nothing on the face of the draft Bill or in the Explanatory Notes restricts deduction for use to cars, or even to a wider category of high value, complex goods which depreciate quickly. The British Retail Consortium said that "while the Government may expect the exception to be used only in the car industry" there was "no guarantee" of that.[99] In fact this is not the Government's expectation. The Government Response to consultations stated "the exception will not be limited to this [the motor] industry".[100]

67. The Government does not define or describe "an active second hand market". The lack of definition or guidance was identified as a risk by many of the submissions to our inquiry.[101] Neither the draft Bill nor the Explanatory Notes contain any wording to suggest that eBay and other online market sites cannot be used to provide evidence of either the value of the goods or of an active second hand market in those goods. Although the Government stated that "normally" there would be no deduction for use in the first six months,[102] in fact the draft Bill as it stands would allow deduction for use for almost any good in the first six months, since the second hand value of most goods and an active market in those goods can be shown through online market websites.

68. The Law Commissions' research on deduction for use found it to be an "inflammatory" topic with consumers:

Consumers felt that if they had been unfortunate enough to find themselves with a faulty product, and repairs and/or replacements had been unsuccessful, they would feel aggrieved if they were then charged for use of the product.[103]

69. This contradicts the Government's assertion that deduction for use "reflects what most ordinary, reasonable people would expect in the contract they enter into when they buy something".[104] The Law Commissions found that in order to proceed to second tier remedies, it was "highly likely" that the consumer would have suffered considerable delay and inconvenience and probably at least one attempt at repair or replacement.[105] The OFT argued that the introduction of a 30 day limit for the early right to reject would "significantly reduce consumers' rights" if not balanced by a final right to reject with no deduction for use.[106] Two-thirds of respondents to the Law Commissions' consultation were in favour of abolishing deduction for use in the event of rescission of the contract, for reasons of simplicity, and to reduce uncertainty and the potential for disputes.[107] The Law Commissions concluded that:

The deduction for use is uncertain and relatively rarely used. It adds complications to the law, and causes disputes as consumers retaliate with damages claims.[108]

Methodology for calculating deduction for use

70. While the draft Bill proposes that deduction for use should "take account of the use the consumer has had of the goods",[109] and that the second hand value (if any) should operate as a minimum refund value,[110] the evidence we received suggested that the second hand value would become a guide rather than a minimum. The OFT said:

We are particularly concerned that this may incentivise businesses to routinely base any deduction on 'second hand value', and unreasonably withhold a full refund from consumers who have had little or no actual use from the products.[111]

71. The Government's impact assessment was not clear as to whether second hand value would operate as the minimum refund, or a guide for deductions:

Motor dealers already use second-hand values as a basis for estimating the deduction for use under the current law. Therefore, we expect there to be no systematic change in the level of deduction for use as a result of the new threshold.[112]

72. In evidence, the Minister used the example of a buying a new car, "as soon as it is driven off the forecourt new, it is much reduced in value already".[113] Due to the lack of clarity in the draft Bill, there is a clear risk that a consumer who had bought a brand new car which had turned out to be faulty within six months would, on exercising his or her final right to reject (following a failed repair) be refunded the second hand value of the car, or an amount based on that value. This means the consumer alone would suffer the loss represented by the difference between the price paid for the new car and the refund received of the second hand value of the car. This could apply, even though the refund would not necessarily bear any relation to the actual use the consumer had had of the car, and any intention or lack of intention to sell the car at that stage. The OFT said:

We also consider that this proposal would have a damaging impact in markets where the value of a good depreciates quickly. For example, the new car market where consumers stand to lose out significantly given the rapid depreciation of car values once they are classed as 'second hand'.[114]

73. The Government argued that consumers would be free to request further repairs rather than move to a Tier 2 remedy, "if that is their preference".[115] If a consumer opted to reject the good they may receive a reduced refund which did not reflect their actual use of the good. This may introduce the risk that consumers may be forced to accept further repairs from the trader rather than exercise their final right to reject. It further increases the risk of consumers being trapped in a cycle of failed repairs, an established cause of consumer detriment, because the deduction for use exemption and methodology in the draft Bill do not provide an effective remedy for the consumer.

74. The Law Commissions concluded that since the consumer had no intention to sell the good at the point of reaching a Tier 2 remedy, basing deduction for use on the lifespan of the good was the fairest method:

If, for example, the washing machine had an expected lifespan of five years and broke down after a year, the deduction should typically be 20% of the price. The consumer's loss is four years' loss of the washing machine, not the second-hand value after one year; he or she never intended to sell the machine at that point. We think that this is the best method of calculation.[116]

75. We note that deduction for use was an option in the Consumer Sales Directive which the UK chose to implement, but many member states did not.[117]

76. We conclude that neither the policy behind nor the drafting of the draft Bill's provisions on deduction for use is clear. We do not believe that the exception to the rule that there may not be deduction for use in the first six months is workable. Although the Government's evidence base and policy examples appear to rely exclusively on the motor industry, a second hand value and an active second hand value can be proven for almost any good. Therefore, there is a risk that deductions for use within six months will be routine and that consumers will be far less likely to receive full refunds.

77. As currently drafted, the proposals risk introducing unintended consequences. In particular, they risk establishing the second hand value of the goods as a standard, rather than a minimum, for the refund made to the consumer. Basing any deduction for use on retail value, when it is highly unlikely that the consumer would have intended to sell at that point, places an undue burden on consumers.

78. We recommend that clause 24(5) (which relates to the "deduction for use" that may be made if the consumer exercises the final right to reject) should be removed, in line with the recommendation of the Law Commissions.

79. Should the Government retain "deduction for use", we recommend that the proportion of any deduction should be based on the lifespan of the good, not on the retail or second hand market value, since the consumer would not have intended to sell the good at this stage.

Digital Content: Chapter 3 of the draft Bill

80. The draft Bill would create a new category of digital content in consumer law, and introduce new rights and remedies for that category.

DEFINITION OF 'DIGITAL CONTENT'

81. Digital content is defined using the definition in the Consumer Rights Directive,[118] as "data which are produced and supplied in digital form".[119] Recital 19 of the CRD supplements this definition:

Digital content means data which are produced and supplied in digital form, such as computer programs, applications, games, music videos or texts, irrespective of whether they are accessed through downloading or streaming, from a tangible medium or through any other means. […] If digital content is supplied on a tangible medium such as a CD or a DVD, it should be considered as goods… contracts for digital content which is not supplied on a tangible medium should be classified … neither as sales contracts nor as service contracts.[120]

82. There is a reserve power in the draft Bill to extend the scope of the digital content provisions. The Government said that this would be used "should there be evidence in future of detriment, for example where a consumer has given over valuable personal data in exchange for digital content".[121]

BACKGROUND

83. Existing consumer law largely pre-dates the digital content era. As a result, digital content may be treated as a good if it is provided in a physical format such as a CD or DVD. However, where such products are delivered via 'intangible media' (e.g. a digital file for software, games, music files, or films) they fall outside the conventional definition of goods. Therefore, there is a significant gap in consumer protection. Inconsistency occurs, for example, where a consumer purchasing a music CD has more protection than a consumer downloading the same music online.[122]

84. In 2012 the Government consulted on proposals to clarify consumer rights in relation to digital content. The consultation responses revealed widespread agreement between consumer and business representatives that the law in this area should be clarified; that proposals for digital content should be aligned as far as possible with the existing consumer rights framework; and that digital content should be treated as a bespoke category within the draft Bill.[123]

A BESPOKE REGIME FOR DIGITAL CONTENT

85. The draft Bill proposes to provide rights and remedies for digital content. While the proposed regime is bespoke (it is separate from provisions relating to goods and services), it is largely based on the existing quality rights which apply to goods, rather than to services. The Government argued that its research, and the approach taken by the countries that have legislated specifically for digital products, supports this approach.[124]

86. We received a considerable volume of written evidence expressing concerns about the treatment of digital content in the draft Bill. The Software Alliance,[125] British Sky Broadcasting,[126] and Symantec[127] argued that the draft Bill did not adequately engage with the characteristics of digital content. The Software Alliance asserted that "'digital content' is fundamentally not the same as physical goods so different rules are needed".[128] Views of business representatives were mixed: for example, the Federation of Small Businesses said that there was a risk that the proposals would make it harder to set up a business providing digital content,[129] while the British Retail Consortium believed that the proposals took "a common sense approach".[130]

87. We support the proposals to apply satisfactory quality rights to digital content. However, the evidence we received indicates that the Government has failed to communicate clearly its intention to create a bespoke set of rights and remedies for digital content. As a result, the industry remains confused about the intended flexibility of the proposed digital content regime. The Government will need to address this as a priority if it is to convince the industry of the merits of its proposals.

STATUTORY RIGHTS THAT THE DRAFT BILL WOULD APPLY TO DIGITAL CONTENT

Digital content to be of satisfactory quality—clause 36

88. The draft Bill would introduce a statutory right that digital content must be of satisfactory quality,[131] in line with the quality standard applied to goods.[132] Satisfactory quality is defined as meeting the standard that a reasonable person would regard as satisfactory.[133] In judging whether the digital content meets this standard, account will be taken of any description of the digital content, the price (if relevant) and all the other relevant circumstances (such as public statements on the specific characteristics of the digital content).[134]

89. The indicative list of the quality "aspects"[135] (that is, criteria) that may be relevant in determining whether goods are of satisfactory quality is reproduced in the draft Bill in respect of digital content. This includes fitness for purpose; freedom from minor defects; safety and durability.[136] However, the quality aspect "appearance and finish", which is included in the list of quality aspects for goods, is omitted for digital content. The Government concluded that it was not of direct relevance to digital products.[137] The Government explained the standard:

As with goods, this quality standard is flexible to allow for the many different types of digital content. For example, the reasonable expectations of quality for a 69p app would not be as high as for one worth £5.99. The clause also sets out other matters that can be taken into account when accessing the quality of the digital content, such as its state and condition, fitness for purpose and durability. This is not, however a comprehensive list.[138]

90. One of the key concerns of digital businesses and their representative bodies was that the differences between digital content and goods would "create real uncertainties" for businesses and consumers if a goods-style "satisfactory quality" standard was applied.[139] In relation to the indicative quality aspect "freedom from minor defects", the Government impact assessment stated:

Bugs are considered standard in digital content on issue and as such it is proposed that a reasonable person would expect a certain amount of bugs when purchasing digital content. Therefore the existence of bugs will not necessarily amount to a breach of the guarantee as to quality and fitness. However, as some forms of digital content, such as music, or e-books, can be expected to be of a very high quality, we will retain the 'freedom from minor defects' aspect of quality for digital content and clarify in guidance that bugs may be acceptable in some forms of content.[140]

91. The Association for UK Interactive Entertainment (UKIE), which represents businesses and organisations involved in games and interactive entertainment, said that it had engaged with the Government "from the very beginning of the discussion leading up to this Bill".[141] Even so, UKIE had concerns about the "freedom from minor defects" quality aspect:

The explanatory notes published alongside the draft Bill have accepted the point that games and other forms of complex digital content cannot be made subject to the 'freedom from minor flaws' quality standard (paragraph 141). This is a vital point that must be retained. The drafting of this paragraph should be amended, however. Where currently it states "e.g. a reasonable person may expect bugs in a complex new game on release, but not a more simple piece of software", it is not helpful to point to other software, which by its nature will also be relatively complex. Instead it should refer to, for example, "a simpler piece of content such as a music file".[142]

92. Concerns about the quality standard was a key issue raised by digital businesses and trade bodies. The Software Alliance said that "the requirement that digital content must be free from 'minor defects' [...] is simply not technologically possible", because of the complexity of digital content and the speed at which it is developed.[143] The Mobile Broadband Group also argued that "freedom from minor defects" quality aspect should be struck out.[144]

93. We believe that the Government's intention as to whether "freedom from minor defects" would be applicable depends on the complexity of the digital content. Stakeholders displayed very low awareness of the flexible nature of the quality standard, and did not appear to be aware that it would be qualified by "reasonableness". We conclude that to date the Government has not adequately communicated the intended flexibility of the quality standard applicable to digital content.

94. We agree with the Government that there are some circumstances in which a reasonable consumer might expect digital content to be free from minor defects. However, we do not believe that the draft Bill achieves adequate clarity on when this quality aspect will be relevant.

95. We recommend that the Government expressly state in the Explanatory Notes to clause 36 ('digital content to be of satisfactory quality') that the application of the quality aspect "freedom from minor defects" to digital content will depend on reasonable expectations of quality.

Digital content to be as described and rights to modify digital content—clauses 38 and 42

96. The draft Bill would introduce a right for traders and manufacturers to modify digital content after provision of that content to the consumer. The Government said:

This clause [42] therefore does not prevent a trader or a third party (such as the digital content manufacturer) updating digital content (without needing to request the consumer's permission), as long as the contract stated that such updates would be provided.[145]

97. Clause 42 provides that following any updates, the digital content must still meet the original quality rights. In other words, it must still be of satisfactory quality,[146] be fit for purpose[147] and match the description given.[148]

98. The draft Bill would bring in a right that the digital content must match any description of it given by the trader to the consumer,[149] and must also match any trial version.[150] Security software provider Symantec said:

Established industry practice is typically that trial software has (i) a limited lifetime but has full functionality; or (ii) an unlimited lifetime but with limited functionality. The draft Bill does not make this distinction and is therefore not in line with industry practice.[151]

99. We conclude that if clause 38 ('digital content to be as described') is implemented as it stands, there is a risk that traders and manufacturers of digital content will cease to provide trial versions that have only limited functionality.

100. We therefore recommend that the Government thoroughly examines market practice in this area to assess the impact of clause 38 ('digital content to be as described') on consumers and businesses.

Time when, and period for which, digital content is provided—clause 41

101. Clause 41 addresses the rights that apply to the services which surround digital content. In its 2012 consultation, the Government identified two categories of what it termed "digital content services":

"Enabling services", such as internet provision, are described by the Government as "essential for the delivery of digital content to the consumer, but operate[ing] independently of the supply of any individual digital content product."

"Related services" such as download or streaming of digital content are described as "offered by the supplier of the digital content itself and can be seen in many ways as intrinsic to the digital content product: often the consumer has no choice but to accept these "related services" in order to properly enjoy the digital content itself".[152]

102. The terms "related services" and "enabling services" are not used in the draft Bill or the Explanatory Notes but were used in the final impact assessment for digital content[153] as well as in the Government's 2012 consultation. They are used here to aid explanation of the Government's proposals.

103. Where the digital content fails to meet the quality rights because of a problem with the consumer's device or with the service provided by a trader with whom the consumer has chosen to contract (such as a network access provider, which is an "enabling service"), the trader providing the digital content would not be liable for a breach of quality rights. The provider of the enabling service may be liable if the consumer can prove that the service was not provided with reasonable care and skill, which is the current, fault-based liability standard applied to services.[154]

104. However, the draft Bill would apply a different liability standard to related services. Clause 41 would apply satisfactory quality rights to the digital content after any related services have been performed.[155] The Government proposes that where the digital content is substandard (that is to say that it is not of satisfactory quality, not fit for particular purpose or fails to meet the description) because of a problem with either the trader or an intermediary who is in the contractual control of the trader (either directly or indirectly), the trader would be liable for the breach of those rights.[156]

105. Therefore, if the digital content is substandard due to a problem with the related services, the trader may be liable even if the related service has been performed with reasonable care and skill. The Explanatory Notes state:

The intention of this clause is that digital content should meet the quality standards, be fit for purpose and match the description at the time it either reaches the consumer's device or reaches a trader with which the consumer contracts for the delivery of their digital content, whichever is sooner.[157]

Interactive digital content may be in breach of the rights in this Chapter [3] if the services that support their access are not working properly, as well as if the original content itself is substandard.[158]

[159]

106. Clause 41(3) is drafted to provide that satisfactory quality rights "apply in relation to the digital content on each occasion that it is transmitted back to the consumer". The impact assessment clarified:

So in practice, the trader will be liable for problems with the related service, which will be judged against a strict liability outcomes-based standard rather than the quality standard of "reasonable care and skill" which normally applies to services.[160]

107. The Government's 2012 consultation and final impact assessment explained the proposal to apply quality rights to digital content after the performance of surrounding services using the terms "related" and "enabling" services. We believe that those concepts do not cover the range of services that surround digital content.

108. Furthermore, the draft Bill does not use or define the terms "related" and "enabling" services, although it would draw a distinction between those categories. We conclude that the scope of the services that the Government intends to be subject to an outcomes-based liability standard is unclear and uncertain, and therefore that clause 41, as it stands, would be unworkable in practice.

109. We recommend that the Government should include in clause 41 clear definitions of the services which will be subject to an outcomes-based liability standard. Furthermore, it should be explicit in how these will be applied to "related" and "enabling" services, and to other services that surround interactive digital content.

110. UKIE said that the draft Bill did not provide "the necessary clarity over whether the different elements of their offerings will be subject to the services regime or the digital content regime".[161] UKIE provided examples of types of services that did not appear to be addressed by the clause 41:

There are other services offered around games - those which require a monthly subscription to play online, or 'cloud gaming' services which allow players to rent access to a game online for a certain period, for example. Does the entitlement to play under these models constitute the supply of digital content or services?[162]

111. Which? expressed concern that in situations with multiple service providers, it would be difficult for a consumer to prove who was liable for problems with the service delivery.[163] This is particularly relevant given the different liability standards that the draft Bill would apply to "related" and "enabling" services.

112. We believe a technical and legal distinction may be drawn between the application of an outcomes-based liability test (that is, the application of satisfactory quality rights) to digital content after the performance of "related services", and the application of that standard to the "related services" themselves. Given the different rights and remedies that apply to fault - based and outcomes - based liability standards, we conclude that clause 41 would be likely to increase uncertainty and confusion for traders and consumers.

113. We recommend that the Government clarifies the liability standard that is intended to apply to "related services" under the draft Bill.

114. The majority of responses from both business and consumer groups to the Government's consultation in 2012 agreed that the provider of a related service should have responsibility for ensuring that the digital content was of satisfactory quality once the related service had been performed.[164] Respondents to that consultation thought that it would be very difficult for consumers to prove that a related service was not provided with reasonable care and skill, and that it would be problematic for digital content and the related services surrounding it to be subject to different liability standards.[165] However, when asked to describe the impact of applying digital content quality standards to related services, almost all business representatives that responded thought that the proposals "had the potential for a real risk of confusion for business".[166] In response to our call for evidence, UKIE said:

We need to have a single regime that covers our consumer offerings as a whole. It does not benefit us—or consumers—if a single offering, such as a subscription that offers both content and services, is governed by different consumer law regimes, particularly where there is confusion over what part of that offering constitutes digital content and what constitutes the service element.[167]

115. The Government's impact assessment does not specifically address the potential cost to businesses of applying a satisfactory quality standard to related services. Under the proposals, a trader may be liable if a problem with services supplied by another supplier under the trader's control results in the digital content being substandard. We conclude that it is foreseeable that this reform may impact on business to business contracts, which may affect pricing and availability of digital content and services, which ultimately affects consumers as well as businesses.

116. We recommend that a full cost benefit analysis should be undertaken of the proposal to apply an outcomes-based liability standard to the services surrounding digital content described in clause 41.

117. Clause 41(3) applies to digital content that is of an interactive nature, for example massively multiplayer online games, or software accessed via the "Cloud". The use of interactive digital content requires repeated access to the internet with digital content being transferred between the internet and the consumer's device, through the provision of related services.[168] The draft Bill provides that in relation to such content, the consumer should have access for a reasonable period of time.[169]

118. Several respondents to our call for evidence expressed concern that the requirement for digital content to be available for a "reasonable period of time" would override express limitations brought to the consumer's attention before purchase.[170] We note that clause 41 is not included in clause 49, which sets out the provisions in relation to which the trader's liability cannot be excluded or restricted. Therefore, we believe that the requirement for digital content to be available for a "reasonable period of time" would not override express limitations in the contract. However, under the Unfair Terms provisions, any such term may be assessable for fairness.

119. We recommend that the Government clarifies how clause 41(3) (a) ('time when, and period for which, digital content is provided') is intended to operate.

STATUTORY REMEDIES

120. The remedies for faulty digital content differ from those for goods. Unlike faulty goods, which a consumer will be able to reject within 30 days and receive a full refund,[171] consumers will not automatically have a short-term right to reject faulty intangible digital content. The Government's argument is that this is because digital content is not provided on a tangible medium—where it is downloaded or streamed and therefore "cannot be returned in any meaningful sense".[172] However, consumers will have a short term right to reject digital content sold on a tangible medium (such as on a DVD or CD).[173]

121. The different remedies available for tangible and intangible digital content in the draft Bill would, if implemented, embed inconsistency into consumer law. Consumer groups argued that consumers experience intangible digital content in the same way as tangible digital content, as a good, and therefore would expect to be able to reject it and receive a refund if the statutory rights are not met. Which? said:

We believe that it is inappropriate for the law to deny consumers an appropriate remedy due to the perceived risk of certain behaviour from a minority of others. Further, where digital content is purchased that is not as described, a replacement or repair will often not be a suitable remedy.[174]

122. The Association for UK Interactive Entertainment took the same position:

We are also concerned about the decision to provide different rights to consumers where they buy the same digital content on a tangible disc rather than through a direct download. Although we appreciate that any decision on this problematic issue will create some uncertainty, we would like BIS to provide far more exploration of the possible consequences of what is being proposed.[175]

123. Where the trader does not have the right to provide the digital content (in breach of clause 43) the consumer has the right to a full refund.[176] This applies to both intangible and tangible digital content. There is no corresponding requirement for the consumer to return or delete the digital content.[177]

124. In response to its 2012 consultations, the Government stated:

If the trader does not have the right to provide the digital content, the consumer will have the right to an immediate refund. Digital content on a tangible medium, such as on a disk, will need to be made available to the trader (e.g. through return). For digital content that is not on a tangible medium, the consumer may be in breach of copyright law if they intentionally retain the digital content and continue to use it.[178]

125. In the Explanatory Notes, the Government stated:

The reasons there are no provisions on return or deletion are as follows. Firstly, the concept of return does not easily sit with digital content (data produced and supplied in digital form) and therefore to provide for a return of the digital content would not be practical. In relation to intellectual property rights, there are other rules that protect these property rights and the Bill's provisions in no way undermine those rules. Indeed, if anything, the provisions taken as a whole would support the intellectual property rights of others, since they will help to ensure that traders do not supply digital content where they do not have the right to do so.[179]

126. The inconsistency arises because the draft Bill does not give consumers a right to reject intangible digital content when the digital content does not conform to the contract (i.e. if it is not of satisfactory quality, fit for purpose, or does not match the description), and consumers are not entitled to a refund. The Government's justification is:

Unlike the remedies for goods, we do not propose to introduce a short term right-to-reject for faulty digital content when it is sold in intangible form (e.g. downloaded or streamed). Nor do we propose a second tier remedy of rescission of contract. This is primarily because digital content is very easily copied and can be very difficult to delete from a device altogether. In addition digital content not provided on a tangible medium cannot be meaningfully "returned" to the trader.[180]

127. Therefore, a consumer who has bought intangible digital content which turns out to be faulty only has the right to a full refund if the trader did not have the right to provide the digital content. If any of the other statutory rights are not met the consumer does not have access to a refund. The draft Bill does not provide a short-term right to reject or a second tier remedy of recession of contract for intangible digital content, which means that a consumer would not be able to obtain a refund if any other statutory right is breached, on the basis that intangible content cannot be returned.

128. The Government proposes to provide a right to a refund if the trader did not have the right to provide the digital content (whether tangible or intangible). There is no requirement on the consumer to return or delete the digital content, which is justified by the Government on the basis that "existing legislation adequately protects IP rights." However, consumers who have brought faulty intangible digital content will not have a right to reject, a decision that the Government justifies on the basis of potential threat to IP rights and copyright. We conclude that this is a clear inconsistency in the draft Bill.

129. To remedy the existing inconsistency in the draft Bill, there should be a short-term right to reject and a final right to reject in relation to intangible digital content. We recommend that the draft Bill states that there is an obligation on the consumer to delete the relevant intangible digital content. This would achieve consistency in the Bill which would be valuable for both consumers and businesses.

130. We do not consider that the case has been made to justify the Government's proposal to introduce varying remedies for tangible and intangible digital content, and to have inconsistent remedies for intangible content dependent on which statutory right has been breached. If the Government is to proceed with this approach it must set out in detail the evidence base for its proposals alongside legal advice on the risk to intellectual property rights.

131. There is no restriction in the number of repairs or replacements offered by the trader in relation to digital content.[181] If the consumer asks for a repair or replacement, a trader must do so within a reasonable time and without causing significant inconvenience to the consumer.[182] The Government argued that:

Restricting the number of repairs could create an incentive for some consumers to report minor problems with the digital content in order to accumulate a target number of 'repairs' and thus proceed to a price reduction. A strict limit on the number of repairs allowable could therefore have the effect of restricting the availability of this type of product or raising its cost to consumers.[183]

132. The evidence we received showed uncertainty among digital businesses and representatives to whether updates would be treated as repairs under the draft Bill.[184] This was a particular concern of providers of security software since their products require frequent updates. The Explanatory Notes clarify that the burden of proof is on the consumer to prove that the digital content is faulty.[185] Where the consumer has not identified a fault, and a general update is sent, this does not mean that the quality rights have been breached.[186]

133. UKIE was against defining when a repair attempt has been made in relation to substandard digital content, arguing that any definition "will be complicated in a world of universal patches and updates".[187] The BSA agreed that "repair" should not be defined:

The legislation does not define a specific mechanism to deliver a repair or a replacement. We agree with this approach. But if the Bill ultimately does include "repair or replacement" as a remedy for providers of dynamic, service-based content (we believe it should not), we strongly recommend that the Explanatory Note and implementing guidance recognise that the repair or replacement mechanisms may simply require that software developers build and release patches for significant known issues in good faith.[188]

Compensation for damage to device or to other digital content - clause 48

134. Clause 48 of the draft Bill provides that consumers would be entitled to seek compensation if the digital content causes damage to a device or other digital content that they own. The Alliance for Intellectual Property said:

From discussions with BIS officials we understand that this clause is to be amended to introduce similar remedial steps to allow for the trader to repair the device or digital content prior to being required to make a payment for damage, and also to ensure that any subsequent payment reflects the level of the damage caused. We support such amendments.[189]

135. To be entitled to compensation for damage caused by digital content, a consumer would have to prove that the trader failed to use reasonable care and skill in preventing such harm from occurring.[190] Therefore, clause 48 would require a similar standard of proof to that needed to establish a negligence claim (that the trader had breached a duty of care and skill which caused the consumer loss). Clause 48(2) would limit the type of loss that can be claimed to "replacing the device or digital content that is damaged" whereas the Explanatory Notes provide that the loss that could be claimed would be limited to "replacing the digital content".[191]

136. The Government must clarify whether or not a claim under clause 48 can include any device damaged by such content. This is not clear in the Explanatory Notes.

Cost to business: familiarisation costs and legal advice costs

137. The Government's impact assessment described the proposed reforms relating to digital content as "straightforward to explain" and said:

We do not think it will take more than 10-20 minutes for a staff member to become familiar with the changes specific to digital content.[192]

138. This assumption underpins the estimated familiarisation costs that businesses are expected to incur, with the Government's best estimate at £1.12m.[193] We have seen no evidence to suggest that businesses will be able to familiarise their staff with the changes specific to digital content in 10-20 minutes, and therefore we do not believe that the estimated familiarisation costs in the impact assessment are robust.

139. The impact assessment also stated that "the reforms do not represent significant legal change".[194] This belief underpins the Government's assumption that "there will only be a small increase in legal advice costs".[195] We have not seen any evidence to support this, but we did receive evidence to the contrary. UKIE said:

The legal status of these offerings will have far-reaching implications, such as in relation to the laws of VAT, duty, insolvency, retention of title and commercial agents.[196]

140. We believe that the complexity of the proposed digital content regime, especially in the inconsistency between the rights and remedies that the draft Bill would apply to tangible and intangible digital content, is likely to give rise to uncertainty amongst businesses, consumers, and their advisers. The Government's estimate that business staff would need only 10-20 minutes of familiarisation training in these reforms is not convincing.

141. We recommend that the Government clarify the proposals in relation to digital content to ensure that the familiarisation costs and legal costs incurred by businesses in respect of the draft Bill, are in line with the Government's estimates.

Services: Chapter 4 of the draft Bill

142. Under current law, in a contract between a business and a consumer for the supply of a service there is an implied term that the supplier will carry out the service with reasonable care and skill.[197] This is called a "fault-based" liability standard. The onus is on the consumer to prove that the trader supplying the service had acted negligently, resulting in a breach of contract. Compared with the "satisfactory quality" outcomes-based liability standard (currently applied to goods and proposed for digital content),[198] it is much harder for the consumer to prove that a service has not been provided with "reasonable care and skill". The consumer therefore has a much lower level of protection in relation to services than to goods.

143. The current law for services includes both liability based on fault and liability determined on the basis of whether the expected outcome has been achieved. A 2010 report commissioned by Department for Business, Innovation and Skills examined the law of services liability in detail and found that "there are different substantive standards for different services".[199] The applicable standard usually depends on whether it is a "pure" services contract (that is, provision of services that do not involve the manufacture, construction or supply of goods) or where it is a "mixed" contract, which involves the supply, manufacture or construction of goods as well as services.[200]

144. The courts have been willing to imply a wider range of implied terms through common law to some but not necessarily all mixed contracts (including contracts for the supply of software, installation services and design and build).[201] In cases involving goods, whatever other standard may apply, the fault-based standard will apply as a minimum to the service element. In addition to the fault-based standard, outcomes-based standards (from the implied terms applicable to goods) may also apply.[202]

145. It can be very difficult for consumers to prove that a service has not been performed with reasonable care and skill, particularly when the service is technical. A further problem arises when the service is performed with reasonable care and skill, but the end result does not meet reasonable expectations. The Government's consultation said:

From the consumer's perspective the test for whether the service has been performed well will be the same as for goods—whether the property works properly and does what was intended (is the window clean? does the car run? is the washing machine hooked up properly? ). But the service provider may be able to escape liability if the consumer fails to prove absence of reasonable care and skill.[203]

146. Determination of the applicable liability standard is important because the rights and remedies that consumers have under sale of services contracts are very different to those available under a sale of goods contract. Currently, even if the consumer can prove that the trader failed to exercise reasonable care and skill in providing a service, the consumer has no automatic right to end the contract. The most likely remedy for the consumer at this point is damages. Under existing law, the consumer has no statutory right to require the trader to re-perform the service.[204]

147. Submissions by attendees at a Ministerial roundtable held in May 2013 showed that there is evidence of consumer detriment in the services sector.[205] 21% of all issues that were reported to Citizens Advice's Consumer Service helpline concerned "substandard services".[206] Which?'s evidence said that 40% of British consumers had made a complaint about a service in the last 12 months and that 40% of complaints in the services sector in the last 12 months were not resolved by the provider.[207]

STATUTORY RIGHTS THAT THE DRAFT BILL WOULD APPLY TO SERVICES

Service to be performed with reasonable care and skill - clause 51

148. The draft Bill would apply a statutory right that services under a contract between a trader and a consumer must be provided with reasonable care and skill.[208] The Government consulted on changing the liability standard for services from one based on fault (lack of reasonable care and skill) to one of strict liability (an outcomes-based or "satisfactory quality" test), or supplementing the current fault-based test with a strict liability variant.[209]

149. The Government's response to its 2012 consultations does not contain any detail on the proposals to apply an outcomes-based standard, merely stating that responses revealed a wide range of views and that the Government's intention was to "conduct further discussions with stakeholders before making a decision".[210] The draft Bill also includes a term which states that nothing in the provisions on Services affects any rule of law imposing a stricter duty on the trader.[211] Therefore, the courts, where appropriate, would be able to imply an outcomes-based liability standard into contracts for services.

150. The main concern in the evidence we received on the provisions in the draft Bill relating to services was that the fault standard of liability did not provide sufficient consumer protection. Consumer groups argued that consumer behaviour is based on reasonably expected outcomes and that it was extremely difficult for consumers to prove that a service had not been provided with reasonable care and skill. Which? argued that as well as improving protections, an outcomes-based standard would "create a simple message for both business and consumers—that all purchases must be of satisfactory quality".[212] This would support the Government's core objective of clarifying consumer law. The OFT said that a new 'outcomes-based' quality standard for services "could have addressed difficulties consumers experience in service contracts that go wrong".[213]

151. Business representatives were divided on the draft Bill's retention of a fault-based liability standard for services. BRC expressed "regret" that remedies for goods and services were not fully aligned in the draft Bill.[214] That said, the CBI believed it would be "difficult" to apply an outcomes-based liability standard to services.[215]

152. The most common argument deployed against adoption of an outcomes-based liability standard for services was that there was a risk of traders being held to unrealistic standards.[216] As an example, the Law Society argued that consumer expectations in respect of services without a physical product, for example a beauty treatment or language lessons, would be "subjective" and highly variable.[217]

153. The majority of evidence we received on this issue did not demonstrate awareness that an outcomes-based liability standard is strongly qualified by what is "reasonable", that is, what the reasonable expectations of a consumer would be in the circumstances.[218] A 2010 report commissioned by DBIS on consumer law (the '2010 report') said:

We are not asking the very difficult questions as to when a doctor should cure a patient, a lawyer should win a case for a client or a teacher should ensure exam success. We are, rather, simply asking whether the quality of the service matches up to what can reasonably be expected; given what is normally provided and given the particular circumstances of the case.[219]

154. The flexible nature of an outcomes-based standard is especially relevant in its application to pure services and particularly professional services. Several submissions of evidence suggested that it would be very difficult to apply an outcomes-based standard to many professional services. CBI expressed concern that a financial services provider could be deemed to have failed to reach a satisfactory quality standard because "subsequent unforeseeable economic changes can negatively alter the effectiveness of advice on a range of services".[220] The 2010 report explained how the flexibility of an outcomes-based standard, qualified by reasonableness, would apply in practice:

It is unlikely that a professional service provider such as a lawyer or medical practitioner will ever be taken to have guaranteed the success of the work undertaken on behalf of a client or patient; because of the future uncertainty association with the type of work undertaken.[221]

155. The evidence we received made only brief reference to sector specific requirements. The Law Society's Consumer Law Reform Reference Group expressed concern that the liability standard for services must dovetail with sector specific regulation and guidance. In particular, it argued that legal services could be excluded from legislation that applied an outcomes-based standard on the basis that legal services are subject to their own regulatory regimes.[222]

156. Some professions are moving to outcomes-focused regulation. For example, all firms regulated by the Solicitors Regulatory Authority (SRA) in England and Wales are subject to its outcomes-focused regulation, implemented in October 2011.[223] The SRA's Code of Conduct suggests that "agreeing an appropriate level of service"[224] with the client may show that the solicitor has acted in an outcomes-focused manner. The SRA explained that outcomes-focused regulation "places a primacy, not simply on compliance with rules, but on achieving the required outcomes for clients".[225] As regulators increasingly adopt outcomes-based standards, it is arguable that a statutory guarantee of reasonable care and skill does not dovetail with sector specific regulation. This risks confusion and uncertainty for consumers about the standards of service that they can and should expect.

157. The 2010 report considered several possible models for reform in relation to the rights and remedies applied for services contracts. In New Zealand, the Consumer Guarantees Act (CGA) applies an outcomes-based liability standard to services by specifying that the service, and any product resulting from the service, must be fit for purpose and of such a nature or quality that it can reasonably be expected to achieve any particular result.[226] The 2010 report found that that there was "no evidence" that the CGA had "damaged consumer confidence or reduced knowledge or engagement with the law".[227] The 2010 report concluded that the benefits of moving to an outcomes-based standard for services, qualified by what was "reasonable", was the best policy choice.[228]

158. Neither the consultation, nor the impact assessment, nor the Government Response to consultations assessed the costs and benefits of applying an outcomes-base standard to services. In her letter of 20 September 2013, the Minister said that "it has proved difficult to assess the cost implications" of reforming the liability standard.[229] The Government's consultation asked:

"Would the introduction of a satisfactory quality standard as described in the proposals make you change the way you deal with your customers and any problems which may arise?"[230]

159. The Government summarised the views of business and trade as follows:

Respondents told us that they already endeavoured to at least meet the standard set out in the proposals [satisfactory quality] and usually exceeded it, so did not anticipate a change in how they dealt with problems.[231]

160. Since the courts have been willing to imply outcomes-based implied terms to some services contracts,[232] it could be argued that the draft Bill's retention of fault-based liability for services through a statutory guarantee does not accurately reflect the complexity of the current law of services liability. This argument is strengthened by the proposals in the draft Bill to apply satisfactory quality rights to digital content after performance of any related service.[233]

161. We have seen strong evidence of consumer detriment as a result of services that do not meet consumer expectations.[234] For many services, it will be extremely difficult for the consumer to judge whether the service has been provided with reasonable care and skill, and even where the service meets the requisite standard, the consumer may still be left with an unsatisfactory result and no access to redress.

162. We believe that the potential benefits of adopting an additional outcomes-based liability standard for services are significant for businesses and consumers. One of the risks of creating a statutory right that services must be provided with reasonable care and skill is that this is seen by traders and consumers as a standard to meet to ensure compliance, rather than as a statutory minimum. We have considered the circumstances in which the courts have been willing to imply outcomes-based terms into services contracts, and we are not persuaded that the Government has done enough to assess the potential risk that standards of service provision will be subject to downward pressure by the introduction of the statutory guarantee.

163. In conclusion, we do not believe that the Government has given due consideration to adoption of an outcomes-based liability standard for services. Specifically, the Government has not addressed the options and recommendations on this issue set out in the 2010 report it commissioned on reform of consumer law. There is a lack of detailed analysis in the Government Response to consultations and in the impact assessment on this issue. Consequently, the evidence we received shows very low awareness amongst stakeholders of the flexible nature of outcomes-based liability standards.

164. The proposals in the draft Bill to apply such an outcomes-based standard to related services surrounding digital content strengthens the argument for the Government to look again at the liability standard it is proposing for services. We believe the draft Bill risks creation of a statutory two tiered approach to services liability. This risks widening the existing gap between consumer expectations and consumer protection in relation to services, and exacerbating uncertainty and confusion for consumers and businesses.

165. We recommend that the draft Bill should apply an additional outcomes-based liability standard to services that requires service provision to achieve the stated result, or one which could reasonably be expected, as well as to any product resulting from the service. This would simplify and align UK consumer law, and increase certainty and confidence among consumers and businesses.

STATUTORY REMEDIES

Right to repeat performance (clause 57) and right to price reduction (clause 58)

166. The draft Bill would create statutory remedies in respect of services. If the service is not performed with reasonable care and skill, or if the service is not performed in line with information provided concerning the service, the consumer has the right to ask for a repeat performance (Tier 1 remedy).[235] If repeat performance is impossible or not done within a reasonable time and without significant inconvenience to the consumer, the consumer has the right to a reduction in price (Tier 2 remedy).[236] The consumer also has the right to a reduction in price if the service is not performed in line with information provided concerning the trader, or if the service is not performed in a reasonable time.[237] In these circumstances, the consumer may move straight to Tier 2 remedies.

167. Which? argued that the remedies regime for services should be brought more into line with that of goods. It submitted that where the consumer was entitled to a price reduction, the calculation should be based on the value received by the consumer under the contract, not the costs incurred by the trader. This would, Which? argued, prevent any price reduction being linked solely to the element of the contract that had not been performed with reasonable skill and care. However, Which? saw that there was a risk that this could be operated as a loophole by unscrupulous traders to limit their liability by dividing up the provision of the service into its component parts.[238]

168. The OFT said that that the provisions on price reduction were "likely to have a negative impact on the level of consumer protection available".[239] Which? agreed and argued that the right to a price reduction should make it clear that the price reduction by the trader could be as much as a full refund to the consumer, for instance where the repeat performance has obtained no benefit or no meaningful benefit for a consumer.[240]

169. The Government's impact assessment identified a risk that the proposals if implemented might result in fewer businesses offering refunds:

In response to the Government consultation, business have told us that a full refund will normally be more expensive to the trader than correcting or re-performing the inadequate service, some of those businesses currently offering a full refund may switch to the cheaper statutory remedies.[241]

170. The Government has identified a risk that businesses that currently offer a full refund could be incentivised to switch to the proposed statutory remedies which offer less protection for the consumer. We note that for services, as with goods, there was similar evidence of consumers bring trapped in a failed cycle of repairs or replacement services. We conclude that, if implemented without acceptance of our recommendations, clause 57 ('right to repeat performance') and clause 58 ('right to price reduction') could result in increased consumer detriment.

171. We recommend that where there is to be a price reduction (clause 58), this should be calculated based on the value received by the consumer under the contract, not the costs incurred by the trader. This means that any price reduction should not be linked solely to the element of the contract that has not been performed with reasonable skill and care, as that will not provide appropriate redress to the consumer.

172. We recommend that the Bill should clarify that in appropriate circumstances a price reduction could be as much as a full refund, in particular where the consumer has obtained no benefit or no substantial or meaningful benefit under a contract for services.

46 Clause 2(3), see also clause 64(9) Back

47 Department for Business, Innovation and Skills, Enhancing consumer confidence by clarifying consumer law: consultation on the supply of goods, services and digital content July 2012, paragraphs 4.25-4.27 Back

48 The Law Commissions, Unfair Terms in Consumer Contracts: Advice to the Department for Business, Innovation and Skills, March 2013, paragraph 7.100 Back

49 Department for Business, Innovation and Skills , Consumer law review: Summary of Responses, July 2009, paragraph 26 Back

50 See Q84 and Ev 69 Back

51 Ev 69 Back

52 Department for Business, Innovation and Skills, Consumer Rights Bill: Supply of digital content, Final Impact Assessment, June 2013, paragraphs 46-47, page 4 Back

53 The Law Commissions, Unfair Terms in Consumer Contracts: Advice to the Department for Business, Innovation and Skills, March 2013, paragraph 7.113 (See paragraphs 7.111-7.116 for detailed analysis of potential loss of protections in relation to unfair terms in consumer contracts) Back

54 See above Back

55 Explanatory Notes, paragraph 35 Back

56 Explanatory Notes, paragraph 43 Back

57 Ibid., paragraph 42 Back