Documents considered by the Committee on 10 February 2016 - European Scrutiny Contents

4 Digital Single Market: Consumer contract rights for the supply of digital content

Committee's assessment Legally and politically important
Committee's decision(a) Not cleared from scrutiny; further information requested; drawn to the attention of the Business, Innovation and Skills Committee, the Culture Media and Sport Committee and the Justice Committee

(b) Cleared from scrutiny

Document details(a) Proposal for a Directive on certain aspects concerning contracts for the supply of digital content

(b) Commission Communication: Digital contracts for Europe — Unleashing the potential of e-commerce

Legal base(a) Article 114 TFEU; ordinary legislative procedure; QMV; (b) —
DepartmentBusiness, Innovation and Skills
Document Numbers(a) (37389), 15251/15 + ADDs 1-2, COM(15) 634

(b) (37391), 15261/15, COM(15) 633

Summary and Committee's conclusions

4.1 On 9 December 2015, the Commission published its first tranche of legislative proposals aimed at delivering the Commission's Digital Single Market Strategy[12], including two Directives on the supply of digital content (for example, streaming music) and the online sale of goods (for example, buying books online). These were accompanied by a Commission Communication: Digital contracts for Europe — Unleashing the potential of e-commerce (the "Digital Contracts Communication").

4.2 This Report chapter focuses on the draft Directive on the supply of online content and the Digital Contracts Communication (considered together in one Explanatory Memorandum). The draft Directive on the online sale of goods is the subject of a separate Memorandum and chapter.

4.3 The draft Directive proposes 'maximum' harmonisation in respect of certain contractual rights and remedies for the (business to consumer) supply of online content. This means that if the Directive is adopted, no Member State could give greater or lesser protection than set out in the Directive (such that certain aspects of consumer contract law would be fully harmonised across the EU).

4.4 The provisions of the draft Directive on online content are set out in detail below. However, key provisions and potential areas of divergence from the recently implemented Consumer Rights Act 2015 (CRA) in the UK include:

·  Rights and remedies in relation to digital content provided for non-monetary consideration: non-monetary 'payment' (for example, personal data) would attract quality standards and practices; and on termination of the contract, providers would have to stop using the personal data and give the consumer a means to retrieve content provided or generated by the consumer;

·  Suppliers' liability for defects: defects would always be presumed to be present on delivery, as digital content is not subject to wear and tear. Therefore:

·  if digital content is 'defective', it would not be up to the consumer to prove that the defect existed at the time of supply, but for the supplier to prove there was no such defect at the time of supply; and

·  consumers' rights to seek remedies for 'defective' digital content would not not subject to a time limit.

·  Consumers' rights to terminate contracts: Consumers would have the right to terminate long-term contracts and contracts to which suppliers make major changes.

4.5 The Minister for Skills at the Department for Business, Innovation and Skills (Nick Bowles) supports the Commission's prioritisation of this proposal as the Government has been pushing for such reforms and considers that it will deliver real benefits for the UK. However, he notes that more work will be needed in several areas to ensure that the final Directive is proportionate and does not impose undue costs on businesses, including SMEs.

4.6 The Committee is grateful to the Minister for his helpful Explanatory Memorandum on this technically complex, but legally and politically important draft Directive — one of the Commission's proposals aimed at implementing 'pillar one' of the Digital Single Market Strategy on 'better access to for consumers and businesses to online goods and services across Europe'.

4.7 We note that the Minister agrees with the Commission on the need to tackle certain contract law related barriers to cross-border e-commerce at an EU-wide level, particularly in light of growing fragmentation of digital content consumer contract rights law across Member States.

4.8 While we consider the proposal timely in the wider context of increasing demand for and consumption of digital content (both domestically and cross-border), we wholeheartedly agree with the Minister on the need for further work to be undertaken to:

·  clarify the scope of the Directive and its interaction with other EU rules on consumer protection law, and

·  ensure that the measures are proportionate and do not impose unnecessary burdens on businesses or have unintended consequences,

thereby increasing legal certainty while providing the flexibility necessary for business practices to adapt to innovations/rapid developments in the digital space, and complying with the Commission's wider Better Regulation principles.

4.9 In order for the Committee to be able to make a more informed assessment of the likely impacts of the Directive and the progress of negotiations, we ask the Minister:

·  to explain how adoption of the draft Directive in its current form would deviate from the recently implemented Consumer Rights Act (on an article by article basis) and what impacts this would have on a) consumers and b) businesses;

·  to set out stakeholders' reactions to the draft Directive and their key areas of concern or support;

·  to explain what work the Government considers necessary to assess the practical implications for consumers and businesses, and whether it intends to persuade the Commission to expand its own cost/benefits assessment in this respect; and

·  to specify what changes he hopes to secure during the negotiations, whether it has any red lines, and what the Government intends to do to marshal the support of other Member States in its efforts.

4.10 We ask for this response by 8 April after the proposed stakeholder conference the Department for Business, Innovation and Skills plans to hold in February.

4.11 The Committee also considers that complementary policies to the proposed maximum harmonisation measures that increase businesses' and consumers' understanding of their contract law rights and obligations and means of cross-border redress are key to ensuring the success of the proposed Directive. We ask the Minister to confirm whether he shares this view and what action(s) he considers necessary or outstanding. In this context, the Committee would be particularly interested to hear the Minister's views on the Commission's recent launch of an online dispute resolution platform (intended to address consumer concerns over rights of redress) and the proposed Consumer Protection Cooperation Regulation announced in the Digital Single Market Strategy (intended to clarify and develop the powers of enforcement authorities and improve the coordination of their market monitoring activities).

4.12 Pending the further information requested and progress updates from the Minister on developments, we retain the draft Directive — document (a) — under scrutiny and draw it to the attention of the Business, Innovation and Skills Committee, Justice Committee and Culture, Media and Sport Committee. We clear document (b) from scrutiny.

Full details of the documents: (a) Proposal for a Directive on certain aspects concerning contracts for the supply of digital content: (37389), 15251/15 + ADDs 1-2; COM(15) 634; (b) Commission Communication: Digital contracts for Europe — Unleashing the potential of e-commerce: (37391), 15261/15, COM(15) 633.


The Digital Single Market Strategy

4.13 The Digital Single Market Strategy set out an ambitious work programme of EU action in three 'pillars':

i)  reducing barriers to e-commerce;

ii)  setting the rules and frameworks in which digital networks and services can thrive; and

iii)  maximising the growth potential of the EU digital economy.

4.14 Actions envisaged under the first pillar included legislative proposals for simple and effective cross-border contract rules for online and digital purchases, alongside reforms to EU copyright law. A Regulation on the cross-border portability of online content services in the internal market — the first legislative proposal of the Commission's action plan to modernise EU copyright rules - was published on the same day as the proposed directive on contract rights and is the subject of a separate Report chapter.[13]

4.15 Other actions, intended to secure the creation of a genuine Digital Single Market, and considered complementary to these initiatives include cross-border portability, measures to improve price transparency and regulatory oversight on parcel delivery.


Previous attempts at harmonisation

4.16 This is not the first time that the Commission has attempted to harmonise contractual rights and obligations across the EU. There have been a series of attempts to achieve this in a more comprehensive way for more than ten years, the most recent being a Common European Sales Law (CESL). CESL — a draft Regulation — provided an 'optional instrument', which would neither replace nor harmonise national laws, but could be chosen as an alternative regime from those offered under national laws, if supply wished. It was opposed by several Member States, including the UK, and eventually abandoned for a number of reasons, including objections to the proposed legal base and concerns that an optional system would increase, not diminish, legal uncertainty. The House of Commons issued a Reasoned Opinion on 23 November 2011, objecting to the draft Regulation on the grounds that it did not met the requirements of a) being necessary, or b) producing clear benefits by reason of its scale and effect.[14]

Why maximum harmonisation?

4.17 The proposed Directive's approach of maximum harmonisation is similar to the approach taken under the Consumer Rights Directive, which has fully harmonised certain rules for the online sales of goods and supply of digital content (mainly with regard to pre-contractual information and the right of withdrawal or cancellation).

4.18 The Commission considers maximum harmonisation necessary in order to increase consumer trust in entering into transactions cross-border by providing uniform rules with clear consumer rights, and to reduce business costs resulting from the complexity and uncertainty arising from legal fragmentation in cross-border e-commerce rules. Consumers would not be subject to different levels of protection and businesses would not have to face different consumer mandatory rules resulting from the possibility of Member States being able to go beyond the minimum requirements set out by EU legislation. The Commission also expects maximum harmonisation to facilitate coordinated enforcement action by consumer protection cooperation authorities.

UK consumer protection law

4.19 The UK has recently implemented legislation to deal with consumers' rights if they are supplied with defective goods or digital content as set out in the CRA. While the Netherlands and Ireland have adopted rules for the supply of digital content, the majority of Member States have not.

The Digital Contracts Communication of 9 December 2015

4.20 The Commission asserts that legal fragmentation in certain areas of contract law (for example in the remedies available to consumers who purchase defective tangible goods online or digital content) results in high costs for businesses (especially SMEs) selling in other EU Member States and low consumer trust.

4.21 It therefore considers that intervention at an EU level to:

    "fully harmonise in a targeted way the key mandatory rights and obligations of parties to a contract for the supply of digital content and the online sale of goods … will contribute to the faster growth of the Digital Single Market by":

·  reducing costs resulting from differences in contract law;

·  creating legal certainty for business and thereby encouraging them to engage in cross-border sales;

·  helping consumers to gain from online cross-border shopping in the EU;

·  reducing consumer detriment with respect to defective digital content; and

·  balancing the interests of consumers and business.

4.22 The Commission stresses that it has consulted a wide range of stakeholders on the draft Directives and "taken into account the lessons learnt from previous attempts to approximate contract laws", by proposing a Directive (which allows Member States "the freedom to adapt the implementation to their national law") on "targeted full harmonisation of mandatory consumer rights which remedy cross-border trade and address the urgency of acting on the online sphere".

4.23 The Commission also sets out its plans within the context of broader changes to EU consumer legislation resulting from its 'Regulatory Fitness and Performance Programme' (REFIT), including the Consumer Sales and Guarantee Directive and also stresses the need for ensuring consistency between 'online' and 'offline' rules.

The draft Directive

4.24 The draft Directive proposes a set of harmonised rights (to a maximum level) to consumers across the EU when they purchase digital content for a) money or b) in exchange for agreed access to their personal data or other information, in the event of a provider's failure to supply digital content a) altogether or b) in conformity with the contract. This means that if the Directive is adopted, no Member State can give greater or lesser protection than set out.


4.25 The aim of the proposal is to reduce barriers to growth of cross-border e-commerce in the EU and facilitate the creation of a well-functioning Digital Single Market. In particular, it intends to fill a regulatory gap in EU consumer protection measures for the supply of digital content (given the lack of protection or coverage in various Member States), create a level playing field and increase legal certainty for businesses irrespective of where they sell in the EU, and increase consumers' confidence that any problems that they may encounter with their digital content purchases will be resolved irrespective of where the content is bought in the EU.

Scope (Article 3)

·  Business to consumer (B2C): Covers business to consumer transactions only;

·  Digital content: The proposal covers all types of digital content (such as video, music, games, apps, and streamed content) provided for a) money or b) in exchange for agreed access to their personal data or other information (except where the data has been collected for the sole purpose of meeting legal requirements);

·  Mode of supply: It applies to content delivered on a physical format such as a DVD or CD and content delivered electronically, for example as a download. It is not intended to cover digital content which is integral to the operation and functioning of physical goods, for example washing machine programmes; these remain subject to existing measures that apply to goods;

·  Consistency with other EU rules: The draft Directive specified that in the event of conflict between the Directive and other EU act, the other EU act takes precedence. In particular, it clarifies that the Directive is without prejudice to the data protection rules; and

·  Exclusions: Services performed with a significant element of human intervention or contracts governing sectoral services such as healthcare, gambling or financial services are excluded.


4.26 Article 6 — conformity of the digital content with the contract: conformity with the contract will be assessed against what is promised in the contract, for example, as regards its quality, quantity, duration, compatibility and interoperability. In the absence of explicit (contractually set) benchmarks, the content must be 'fit for the purpose' for which digital content of that type and description would normally be used. It also clarifies that when the digital content is supplied over a period of time, the digital content must be in conformity with the contract throughout the duration of the contract and the version of digital content supplied to the consumer must also be the most recent version available at the time of conclusion of the contract.

4.27 Article 9 — burden of proof/supplier's liability for non-conformity: the burden of proof for a lack of conformity with the contract lies with the supplier, unless the consumers' digital environment is not compatible with the digital content. This reversal of the burden of proof is not limited in time as the Commission's explanatory memorandum specifies that digital content is not subject to wear and tear.

4.28 Articles 12 and 13 — remedies and termination for lack of conformity: In the case of failure to deliver, the consumer has the right to terminate the contract and obtain a refund (if no money has been paid by the consumer the supplier must refrain from any further use of the personal or other data the consumer has provided under the terms of the contract). In the event that the digital content does not conform to the contract the consumer is entitled to have the content repaired or replaced within a reasonable time, free of charge and without any significant inconvenience to the consumer. Where this is not possible or it would be of disproportionate cost to the supplier the consumer can terminate the contract and receive a refund or a proportionate reduction in price. Further use of consumer data is prohibited and the consumer is entitled to the return of any data they have provided or produced in the course of using the digital content.

4.29 Article 16 — Consumers' rights to terminate long-term contracts: Consumers have the right to terminate long-term contracts.

The Minister's Explanatory Memorandum of 5 January 2016

Policy implications

4.30 The Minister broadly welcomes the proposed Directive, considering it will deliver real benefits for the UK, as it is expected to confer and harmonise certain contractual rights and obligations on consumers and businesses buying and selling digital content across the EU — thereby 'levelling the playing field' and encouraging cross-border e-commerce:

    "The UK Government has asked the EU to take bold steps to create a Digital Single Market that delivers for consumers and entrepreneurs trying to break into new markets. We therefore welcome the ambitious proposals on consumer protection that will deliver real benefits, and contribute to a Digital Single Market.

    "This proposal on digital content means that for the first time consumers will have a clear set of rights when they buy digital content across the EU, and that business will have a single set of rules and obligations wherever in the EU they market and sell digital content. The UK has led the way in this area, introducing the first bespoke consumer rights in Europe covering the purchase of digital content. The Commission has identified that a lack of clearly harmonised rules in this area has already led to fragmentation across the Member States. By legislating now, the EU will deal with these disparities and prevent further differences of approach."

4.31 He stresses that for the reasons outlined above, the Government is "more strongly in favour of achieving good progress on this directive than on the proposal on online and other distance sales of tangible goods".

4.32 While the Minister raises concerns in relation to the scope and proportionality of the proposed measures and notes possible overlaps with existing EU rules in related areas, he that such concerns can be resolved during negotiations. Given the detail of his commentary, the text is reproduced for ease of reference below:

    "The proposal reflects in good part the approach to digital content already in place in the UK and we are therefore supportive of the overall approach and much of the detail. However, it differs in some important respects, giving rise to concerns about its proportionality, practicality, and relationship with existing EU rules in related areas. We are confident that our concerns can be resolved satisfactorily in the course of refining and clarifying the text during negotiations.

    "The main policy concerns for the UK are as follows:


    "The proposal seeks to include "free" digital content, that is, content which is provided in return, not for money but for the agreement to provide access to the consumer's personal and other data. While we have no fundamental objection to this (in the Consumer Rights Act 2015 we provided for the option to extend the UK regime to "free" content in the event that there is sufficient evidence of consumer detriment). However, we do need to ensure that the conditions under which consumer agreement is provided are clear and that the obligations and remedies proposed are proportionate and do not unduly inhibit this often low margin but very innovative business model.

    "The Commission seeks to extend the definition of digital content into certain types of digital service, some of which are clear, for example cloud storage and movie streaming; but the full extent in respect of communications services is not. There are already EU rules on electronic communication services and these rules and others, for example the E-commerce directive, are being reviewed or are in discussion. Their subject matter may abut or overlap with that of the proposal although "electronic communication services as defined in Directive 2002/21/EC" (the Framework Directive) is exempted. There is for example, uncertainty about the extent to which pay TV is included in the scope of the proposal. We want to avoid any overlap and to achieve more clarity as to the services covered.

    "Data protection

    "The remedies in the proposal include rules on what happens to data provided by consumers and collected by the trader. Although the proposal says it is without prejudice to the protection of individuals with regard to the processing of personal data we want to avoid any confusion with or unjustified extension of the already comprehensive EU rules in this area, including the recently agreed General Data Protection Regulation (GDPR).

    "Standards and Remedies

    "Currently the proposal departs from the usual provisions which set the standards which can be expected of products (fit for purpose, as described, and, of a quality which could reasonably be expected in the circumstances). While fit for purpose would be a standard under the proposal we would prefer to see quality as a measure of conformity with the contract as well, particularly if "free" content remains within scope. The necessary remedies for which business is liable should be commensurate with perceived consumer loss or failure to meet expectations, which would likely be lower in the case of free content. In this respect this proposal is not in line with the proposal on online and other distance sale of goods, although the Commission's Communication specifically states that the two should be as closely aligned as possible.

    "The proposed rules on the return of consumer data to the consumer in the event the contract is terminated appear to be very broad and potentially onerous for business. While ensuring that the consumer has access to data and content they have produced or stored in the course of using digital content is not unreasonable, the extent of this obligation as described in the proposal appears to cover data which would be difficult for the trader to retrieve and which would appear to be of little practical use to the consumer. We want practical and proportionate remedies."


4.33 The Minister does not consider that there will be any significant financial implications for Government spending on implementing the Directive as the "contractual rights proposed in the Directive are already in place to a large extent in the UK".

4.34 However, he acknowledges that further work will need to be done "as consultation progresses to understand and reflect potential costs and benefits to Government, business and consumers".


4.35 The Minister lists the stakeholders his Department has met with, but does not provide any detail on whether they support or oppose the proposed Directive (and their reasons):

    "BIS officials have met and corresponded with key stakeholders including Which?, the CBI, the Federation of Small Business, the British Retail Consortium, tech-UK (a body representing digital content suppliers and developers), the Law Society and the Competition and Markets Authority and will continue to do so throughout the negotiation process.

    "As part of our ongoing engagement, BIS plans to hold a stakeholder conference in February to provide the Commission with a chance to explain its approach and to provide stakeholders with the opportunity to discuss this and the proposal on contracts for the online and other distance sale of tangible goods."


4.36 The Minister refers to, but does not provide any detailed commentary on, the Commission's Impact Assessment. The Government's Impact Assessment Checklist, which covers both this proposed Directive and the one of the online sale of goods is available online[15].



4.37 The Minister agrees with the Commission's assessment that only action at an EU level on cross-border contractual rights in relation to the purchase and supply of digital content can effectively overcome fragmentation in the internal market, and in this content the proposed Directive is therefore justified in accordance with the principle of subsidiarity set out in Article 5 of the Treaty of the Functioning of the European Union:

    "The Commission's objective in introducing this proposal is to create a single set of consumer rights across the EU to fully harmonise contractual rights and obligations which are relevant to cross-border trade. This will contribute to the completion of the Internal Market by removing fragmentation resulting from different interpretations of existing EU legislation to digital content and caused by the development of Member States' domestic law in this area. The Commission states that this fragmentation creates important barriers to cross-border trade. This fragmentation cannot be addressed through uncoordinated actions by Member States. Furthermore, the Commission contends that coordinated legislation is needed to address new market developments and regulatory gaps in order to prevent further legal fragmentation.

    "The Government accepts that the establishment of a clear and harmonised framework for consumer rights in respect of the supply of digital content in the EU will require action at EU level and cannot be achieved by Member States on their own."

Impact on UK law

4.38 The Minister notes that the proposed Directive proposes maximum harmonisation in certain aspects of consumer protection law for digital content, which will impact on UK law. In particular, the recently adopted and implemented Consumer Rights Act 2015 will need to be amended to implement the Directive. However, he does not consider that major changes to UK law will be required, as the proposed Directive largely mirrors that of existing UK law:

    "Chapter 3 of the Consumer Rights Act 2015 regulates consumer rights in respect of the supply of digital content in the UK. Implementing the proposed directive will result in changes to this legislation. In some respects it is likely that the effect of the Act will change, for example to account for the application of the proposal to a wider range of digital products and services. Nevertheless, the proposal is to a large extent based on UK experience in this area, and as we do not anticipate major changes in the substance of the rights on offer during the negotiation, many aspects could remain unchanged.

    "The supply of digital content is also regulated by the Consumer Contracts (information, Cancellation and Additional Charges) Regulations 2013 (SI 2013/3134) which implements the Consumer Rights Directive (2011/83/EU). The regulations provide for rights to pre-contractual information and withdrawal rights in respect of distance sales and sales away from business premises. As the proposed directive is without prejudice to existing EU law, which takes precedence, we do not envisage any significant change to these regulations.

    "The proposal is intended as a full harmonisation measure. The UK would not be able to maintain more or less stringent requirements in relation to matters falling within the scope of the proposed Directive than those set out in the proposal. It will be necessary to review legislation in the UK which covers matters falling within the scope, such as the abovementioned Act, to determine the extent to which they impose more or less stringent requirements.

    "We envisage being able to implement this Directive by means of secondary legislation under the section 2(2) powers of the European Communities Act 1972."

Fundamental rights analysis

4.39 The Minister notes that certain fundamental rights under the European Charter of Fundamental Rights will be engaged, in particular Articles 7 and 8 (the right to respect for private and family life and the protection of personal data), Article 16 (the freedom to conduct a business) and Article 38 (consumer protection), but that that the interference is justified as it does not go beyond what is necessary to fulfil a legitimate objective to ensure free cross-border movement of digital content and services:

    "A thriving cross-border e-commerce sector can bring benefits to businesses and consumers, supporting the rights in Article 16 (freedom to conduct a business) and 38 (consumer protection). The Government agrees with the Commission that a set of fully harmonised rules for digital services, including digital content, will contribute to the freedom to conduct a business by facilitating the sale of digital content cross-border. The Government also agrees that fully harmonised law on digital content would support consumer protection if it is set at a sufficiently high level.

    "The proposals also engage the right to the protection of personal data (Article 8). It is proposed that in the event that the contract is terminated the supplier should delete all personal data or render it anonymous. [The Government is satisfied this is consistent with the protection of individuals with regard to the processing of personal data as set out in Directive 95/46/EC and Directive 2002/58/EC].

    "Lastly the proposal that a consumer may be required to cooperate with the supplier by allowing virtual access to the consumer's digital environment engages right to a private life, confidentiality of communications and the protection of the consumer's personal data. The Commission recognise that this should only be permitted in exceptional and duly justified circumstances where there is no alternative means which would be less intrusive. The Government is of the view that this is a proportionate mechanism to determine conformity with the contract in circumstances where the burden of proof is on the supplier."

4.40 The Minister does not refer to Article 47 (right to an effective remedy) in his Explanatory Memorandum, as referenced in the Commission's own explanatory memorandum of the proposal.


4.41 The Minister states that the Dutch Presidency is scheduling Working Group discussions at the end of January and that

    "the proposal will be presented to an informal Justice and Home Affairs Council on 25-26 January 2016 for initial views of Ministers, and for likely discussion in the May Competitiveness Council."

4.42 While the Minister considers that negotiations will progress faster than the Directive on online sales of goods (as there is largely a 'blank canvas' to work from as the majority of Member States do not have a contractual framework in place in relation to digital content, as opposed to the online or distance sales of tangible goods), he considers agreement before mid-2017 unlikely:

    "Although this proposal was published at the same time as the proposal for directive on the online and other distance sales of tangible goods (15252/15), they are not intrinsically linked and seem unlikely to run to the same timetable. Given the lack of existing coverage of digital content in many Member States we would anticipate that negotiations on this proposal could progress more rapidly than on the proposal for the online and other distance sales of tangible goods (15252/15). In any case we would not expect trade-offs between the two. Nevertheless, we expect the negotiations to carry over to the Slovakian Presidency and they could still be on the table during the UK Presidency in 2017."

4.43 The Minister is not able to provide any information on the European Parliament's expected timetable for consideration of the proposal, but expects it "is likely to become clear in early 2016".

Previous Committee Reports


12   See Fifth Report HC 342-v (2015-16) Chapter 4 (14 October 2015) and Tenth Report HC 342-x (2015-16) Chapter 7 (25 November 2015) for further information. Back

13   See (37394), 15302/15: Eighteenth Report HC 342-xvii (2015-16), Chapter 3 (13 January 2016) for further details. Back

14   Reasoned Opinion of the House of Commons concerning a draft Regulation on a Common European Sales Law for the European Union (23 November 2011). Back

15   Impact Assessment Checklist Back

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