Select Committee on European Communities Second Report


Letter from Michael Wills MP, Parliamentary Under-Secretary of State for Small Firms, Trade and Industry, Department of Trade and Industry, to Lord Tordoff, Chairman of the Committee

  In your letter of 18 March[9] you asked me to explain the extent of any overlap between our proposed legislation on electronic commerce and the EU proposal for a Directive of Certain Legal Aspects of Electronic Commerce in the Internal Market. The Government has published the draft Bill today, so I can now give you the definitive answer promised in my letter to you of 1 April.

  The UK Electronic Communications Bill and the EU Directive are both aimed at promoting the development of electronic commerce, within the United Kingdom and within the EU internal market respectively. However, there is no specific overlap, on detail, between the Bill and the current draft of the Directive. As you know, the Government has set out the ambitious goal of developing the UK as the world's best environment for electronic trading by 2002. I regard e-commerce as an essentially global phenomenon and in drafting our domestic Bill, I can assure you that we have taken account of the Directive and other international developments. In the remainder of this letter I should like to clarify a number of areas where you might have expected to see more of an overlap.

  Article 7 of the draft Directive is intended to regulate unsolicited commercial communications by e-mail—usually known as "spam". In consulting on the Electronic Communications Bill, we asked whether respondents thought the solutions being developed by industry to combat spam were likely to be effective, or whether the Government should take further steps to regulate the use of spam. The majority of respondents argued that the Government should take a "watching brief" for the moment, which is what we have decided to do. The Government is supporting the work of the Direct Marketing Association (DMA) with its US counterpart to develop a world-wide e-mail preference scheme. The DTI will also be consulting on the implementation of the EU Distance Selling Directive (97/7/EC) which contains provisions enabling consumers to register their objection to receiving unsolicited e-mails sent for the purposes of distance selling, and to have their objections respected.

  Article 9 of the draft Directive deals with the treatment of electronic contracts, in particular the present draft says that "Member States shall ensure that their legislation allows contracts to be concluded electronically". The UK fully supports the intention behind this. However, the Government believes that it does not need to introduce specific legislation in this area. Our system of common law does not impose general requirements for contracts to be in writing (or indeed in any other form). Our law is already sufficiently flexible to allow contracts to be concluded electronically; indeed more and more people are making use of this flexibility. The Bill should accelerate this process as clause 7 specifically provides for the legal admissibility of electronic signatures. We have asked for article 9 of the Directive to be redrafted to read "member states shall ensure that contracts may be concluded by electronic means" to recognise the position in common law, but also to ensure that those Member States with civil law systems are obliged to amend their legislation to allow electronic contracting.

  For completeness, I should add that there are some specific requirements in our law for contracts to be in writing. A noteworthy example is section 53 of the law Property Act 1925 (c.20), which provides that contracts for sale of land should be in writing, signed by the person conveying the land. The Electronic Communications Bill provides for a general power (clause 8) which would allow existing statutory requirements to be extended to electronic communications. The Government intended to use this power, on a case-by-case basis after due consideration, to update the law to allow the use of electronic communications more generally except in those few instances where it would be inappropriate to do so.

  On a related topic, I should add that we have also taken steps to ensure that the draft Bill is consistent with, where appropriate, the current articles of the draft Electronic Signatures Directive, which I know you have also been studying. Although the Directive is still to be finally agreed (it will return to the European Parliament later in the year for a second reading) we have ensured that the current measures it contains concerning the legal recognition of electronic signatures and the accreditation of Certification Service Providers are implemented in the draft Bill.

  I hope you find this letter helpful, and I am sure you will not hesitate to contact me if you have further questions about either the draft Bill or the Directive.

23 July 1999

Letter from Patricia Hewitt MP, Minister for Small Business and E-Commerce, Department of Trade and Industry, to Lord Tordoff, Chairman of the Committee

  The proposal for a Directive on certain legal aspects of electronic commerce was discussed by the Commons European Scrutiny Committee following an explanatory memorandum submitted by the Department of Trade and Industry on 8 February. The Committee considered the Directive to be both legally and politically important, and wished to have a scrutiny debate on it in conjunction with a parallel debate on the Copyright Directive. This has been arranged for 27 October.

  In its comments on the proposal contained, the Committee asked the Minister to provide initial responses to the consultation and a draft Regulatory Impact Assessment. These are enclosed. The Committee also asked for responses to a number of questions.

(a)   "Does the draft achieve a satisfactory balance between the needs of industry and the rapid growth of the sector, and those of the consumer for basic standards of protection?"

  Industry and consumers have a common interest in measures which provide necessary protection and contribute to consumer confidence in e-commerce. The country of origin approach proposed in Article 3 of the draft directive has advantages for industry in so far as it would reduce the number of different national rules to which the trader would be subject. By introducing consistency and certainty into the legal framework for e-commerce, the directive will encourage innovation and investment leading to growth in e-commerce and European competitiveness. This approach has advantages for consumer protection, because enforcement action would normally be expected to be taken by the authority within whose jurisdiction a trader was established. The Commission intend that he Directive helps to maintain a high standard of consumer protection and the Government places importance on this objective.

  However, the Government believes that if a country of origin control is to be effective, consumers will need to be well informed about how the system works and the implications of the differences between Member States' national regimes. It is also necessary to address these differences directly. The Government would like to see further harmonisation of certain key pieces of EC consumer legislation which at present provides for a minimum level of harmonisation of Member States' rules. In addition, alternative forms of dispute resolution, for which Article 17 provides, and co-operation between national enforcement authorities in cross-border cases, for which Article 19 provides, will be increasingly important.

(b)   "Is the proposal sufficiently `light' or could it, as some fear, encourage E-commerce, such as electronic shopping, to remain with, or shift to service providers based in the United States or elsewhere outside the EC, as the Directive will not, of course, be applicable to third countries?"

  The draft Directive is intended to put in place a framework within which electronic commerce can operate within the internal market. In order to do this, there is a need to balance a variety of different interests: those of electronic traders, consumers, rights holders and rights users, for example. Nonetheless, it should be remembered that we aim to facilitate electronic commerce, not to prevent it. Therefore the Directive aims to cover only those aspects where greater legal clarity is vital for the development of electronic commerce—not those where it might be useful at some (unspecified) date in the future. It should also be noted that business-to-business traders can opt out of certain of the provisions of the Directive, where both parties agree. The draft Directive includes a series of arrangements for monitoring and reviewing market, legal and technological developments in order to adapt the framework as necessary in the future.

  The suggestion that the existence of this Directive may drive electronic traders to bases outside Europe appears unlikely. In order to provide goods or services from outside the EEA to a Member State, the trader must fulfil the provisions of the national legislation of the Member State concerned. It follows that electronic traders wishing to provide goods or services to the UK, and seeking to avoid legislation by being based outside the EEA, would nonetheless need to comply with the UK's legislation. Given this situation and the level of requirements included in the Directive, it is unlikely that a significant number of traders will change their country of establishment as a result of the Directive alone. It will remain highly important to give traders established in the EEA the confidence to develop strong e-commerce services.

(c)   "Article 3, which establishes the principle of home state control is, as the Commission makes clear, a key element of the proposal. It is founded on the principle that service providers are to be regulated by the Member State in which they are established, the `country of origin'. The Member State in which they provide services may interfere only on certain defined grounds. Application of this principle pre-supposes that the `country of origin' can be clearly established in law. We see a number of difficulties with this aspect of the proposal."

  I would agree that Article 3, read in isolation, is unclear. However, it must be read in conjunction with Recital 9, which clarifies the meaning of Article 3 by stating that "the competent Member State shall be the one in which the supplier has the centre of his activities", as opposed to the one in which the website is based. This should allow the establishment in law of the country of origin.

(d)   A second major area of difficulty arises in the provisions in Articles 12 to 15 where derogations for contracts concluded by electronic means allow for limited liability of intermediaries. These provisions appear to be a departure from current legal practice and we ask the Minister to explain to what extent privileged treatment of information service providers is justified. We also ask whether service providers believe these provisions, and those on country of origin, are workable";

  The effect of Articles 12-14 of the Draft E-Commerce Directive is broadly speaking to exclude or limit the liability of information service providers, other than for injunctive relief, in relation to certain types of activity ("mere conduit", caching and hosting) involved in the transmission of information, provided that the conditions outlined in those Articles are fulfilled. The aim is to limit the liability of information society service providers where illegal activity is initiated by third parties on-line in relation to the transmission of information. In such circumstances, the information society provider is said to be acting as an "intermediary".

  It is difficult to find off-line situations analogous to those of on-line intermediary service providers. Carriers of goods and broadcasters can immediately be distinguished in law for the degree of control or knowledge they may have over what is carried or broadcast. It is claimed that information service providers are not in a position to exercise such control or knowledge in relation to the information they carry unless the contents of a particular website are brought to their attention and they are put on notice with regard to the illegal activity. Furthermore, current legal practice does provide for limited liability in some areas, such as defamation. There continues to be a debate about the implications of the requirement in the directive that the service provider should take down information when he has "actual knowledge" of its illegality. However, service providers generally support both these provisions and those regarding the country of origin principle. Their primary reason for supporting the provisions of Articles 12-14 is that unlimited liability for actions which may be beyond their control would discourage both potential new market entrants and those already operating, whilst the country of origin approach is supported because it offers a more practical approach to compliance with European legislation than separate compliance with national regulations.

(e)   "A third major issue is that of the moment at which a contract is concluded. The Government needs to explain whether the application of the relevant provision will give a clear result on the question of whether the application of the relevant provision will give a clear regular on the question of where the contract is made. The Minister says that the result will differ from that which derives from ordinary contract law. We ask him to explain the intentions of the provision which appears to offer a recipient of a service grounds for claiming that he has not concluded a contract, which would not be available to him under ordinary contract law. Can the Minister justify the difference?"

  Under English law, all that is required for the conclusion of a contract is offer and acceptance. Under Article 11 there is a third step—the acknowledgement of receipt of the acceptance—known as the third click. A website could either be (a) an offer capable of being converted into an agreement by the offeree (customer), or (b) an invitation to treat, which is an advertisement that promotes the sale of products or services and is not an offer. The customer makes an offer to the supplier, who can then accept or reject the offer. In both (a) and (b) above, no acknowledgment of receipt of the acceptance is required. Under Article 11 the contract will not be concluded until acknowledgement of the receipt.

  The aim of this "third click" is to ensure that contracts are not concluded accidentally. Although this exceeds current contracts law, there is a case for it to ensure that an adequate balance is maintained between the providers and the recipients of a service. Nonetheless, it is uncertain whether the final Directive will maintain this approach. Member States are currently discussing a different approach to the conclusion of contracts, where the principles which should underlie the formulation of contracts would be laid down rather than specifying the time at which the contract is concluded.

  It will also be helpful for the Committee to be aware of the direction which discussions are taking in working group meetings. To this end, details of the individual articles are attached.
Commission's Amended Proposal (COM(99) 427 final) Summary of Member States' discussions to date
Article 1: Objective and Scope
Sets out the aims and scope of the Directive. Unchanged from the original proposal. Exclusions from scope now in new 1.4. Other exclusions have been suggested for financial services, pharmaceuticals, regulated professions, reasons of public security. A new recital will also be added specifying that the Directive cannot affect the principles of freedom of expression and freedom of the press. Some confusion remains about the application of the Directive—does it refer only to on-line activities, or is its scope wider?
Article 2: Definitions
The amended proposal contains an additional definition of "consumer", and refers to the definition of Information Society Services in the Transparency Directive. No major developments. A number of Member States have requested further definitions, notably of "intermediary" and "electronic commerce".
Article 3: Internal Market
The Commission's text remains identical to the original proposal. The Presidency propose to cut the comitology role of the Commission and puts the exclusions from the country of origin approach in 3.5. They propose that the list of possible derogations includes the "permissibility of unsolicited commercial communications . . .". The ability to take action against service providers which direct most of their activity at a MS but are established outside it would be stressed in a new recital.

Article 4: Principle excluding prior authorisation
The Commission's amended proposal is unchanged from the original, and ensures that information society services cannot be made subject to prior authorisation.
Section 1: Establishment and Information requirements
Proposed new recital in recognition of Portugal's hybrid post/e-mail system. This Article is intended to outlaw compulsory authorisation procedures rather than voluntary procedures such as that envisaged in the draft directive on electronic signatures.
Article 5: General Information to be provided
The Commission's amended proposal makes two substantive changes from the original, stressing that this is without prejudice to the Distance Selling Directive (DSD) and giving more precise details of the information to be provided. Likely to agree that this Directive is additional to other information requirements in Community law, rather than referring directly to the DSD. It will also be made clearer that these are minimum requirements, which can be made more stringent at a national level—although the Council Legal Service has indicated that a separate minimum harmonisation clause would be necessary to give this force.
Section Two
Article 6: Information to be provided
The Commission's amended proposal again stresses that this is without prejudice to DSD, and is reworded to make clear that the applicable jurisdiction is that of the Member State in which the service provider is established.
Commercial Communications
As for the previous article, the Presidency wants to clarify that this is additional to other community law, and that these are minimum requirements. The word "authorised" may be replaced by "permitted" in an attempt to stress that an authorisation procedure is not required for promotional offers and competitions.

Article 7: Unsolicited commercial communication
The Commission's amended proposal contains a provision put forward by the European Parliament requiring direct marketers to consult registers for unsolicited commercial communications by e-mail Some Member States have requested a Community-wide ban on "spamming", whilst others prefer the opt-out approach already established in Directives 97/7 and 97/66 (minimum harmonisation on the basis of an opt-out). The Presidency incline to make clear that this is additional to other Community law (and hence the opt-out registers as above), and, as for the previous article, replace "authorised" with "permitted".
Article 8: Regulated Professions
The Commission has not amended its original proposal. As in the previous two articles, "authorised" may be replaced with "permitted". In addition, the Commission's powers under 8.3 are likely to be reduced considerably. To provide a definition of "regulated profession", the definition from Directive 89/48 (recognition of higher education diplomas) may be moved from the recitals to the main text. Separately, there has been some support for the deletion of 8.2, and six Member States suggest the deletion of 8.3.
Section Three
Article 9: Treatment of contracts
The Commission's amended proposal was only altered in terms of a decrease in comitology.
Contracts concluded by electronic means
The Presidency propose slightly extending the list of areas to which this Article need not apply, taking in "contracts that create or transfer rights in real estate, except for rental rights" and "contracts of suretyship granted and collateral furnished by natural persons". The UK would prefer not to lengthen the list of exclusions, and would currently envisage implementing the Directive without recourse to any of these. However, some other Member States disagree, with further exemptions being suggested for contracts requiring the involvement of a court or others with a public function, contracts concluded under oath, employment contracts and contracts requiring the physical presence of the parties. The Presidency would also extend the reporting requirements on Member States who choose not to allow the conclusion of contracts electronically in these areas.

Article 10: Information to be provided
The Commission's amended text has not seen any alterations to this Article from the original. General approach is one of clarification, excluding e-mail from this area (analogous to postal contracts) and more precision as regards the details of the information to be provided.
Article 11: Moment at which the contract is concluded
Commission text tries to amalgamate two approaches; it identifies the moment of conclusion of a contract and sets out the principles which underlie contract formation. Tendency towards setting out the principles rather identifying moment of conclusion of contract. Again, e-mail contracts likely to be excluded.
Section Four
Liability of Intermediary Service Providers
Article 12: Mere conduit
Commission text unchanged.Much discussion, few changes—new Recital including stressing that injunctions can still be taken out. A number of MSs want the conditions to be tighter.
Article 13: Caching
Commission text unchanged.As above, but with a few minor changes (eg recognising that courts might not be sole enforcing body). Some MSs want this to be merged with Article 12. Addition of 13.2 allowing for injunctions.
Article 14: Hosting
Commission text unchanged.A few clarifying changes likely. Again, some support for tightening up conditions. Addition of 14.2 allowing for injunctions.
Article 15: No obligation to monitor
Now covers Article 13, as well as 12 and 14. Addition of "general" to title. Moves 15.2 into recital.
Article 16: Codes of conduct
Commission draft involves consumer associations in drawing up codes of conduct and adds more topics for codes.
Has been suggested that this should be removed from the Directive entirely, since all is voluntary. Support for referring to special needs of the blind and disabled.
Article 17: Out of court dispute settlements
Unchanged.More of this may be put on a voluntary basis. Still some concern about the amount of information which MSs might need to transfer to the Commission. Also some concern at the detail of 17.2; eg, adversarial techniques don't fit well with ombudsmen.

Article 18: Court Actions
Unchanged.18.2 MSs appear content with the principle.
Article 19: Co-operation between authorities
Unchanged.Much concern from MSs at the scope and potential burden of this article, although the powers of the Commission likely to be reduced.
Article 20: Electronic Media
Unchanged.Likely to be deleted, with agreement from all MSs and the Commission.
Article 21: Sanctions
Unchanged.Some reduction in notification requirements. MSs generally content with this, but some linguistic work is still required.
Article 22: Exclusions and derogations
Slight expansion.Deleted (moved into Articles 1 and 3).
Article 23: Committee
Article 24: Re-examination
More detail of what reports must contain. Hardly discussed, but unlikely to change significantly.
Article 25: Implementation
Unchanged.Wide support for implementation period of 18 months or more.
Article 26: Entry into force
Article 27: Addresses
18 October 1999

Letter from Lord Tordoff, Chairman of the Committee, to Michael Wills Esq MP, Parliamentary Under Secretary of State for Small Firms, Trade and Industry, Department of Trade and Industry

  Sub-Committee E considered the Commission's revised proposal for a Directive regulating certain legal aspects of electronic commerce at its meeting on 27 October. The Sub-Committee would welcome clarification of two points in the amended version.

  First, Article 5 sets out the general information to be provided to any recipient of Information Society services. Under Article 5(2), if service providers refer to prices or other essential terms and conditions, then these must be indicated "accurately and unequivocally" and include "all additional costs". The obligation in Article 5(2) would seem to fall short of a mandatory requirement to provide the essential terms and conditions at the pre-contract stage. Article 11 determines the moment at which a contract is concluded. Under Article 11(2), there is an obligation to make certain information available before concluding a contract. It is not clear that this obligation extends to the final sentence of Article 11(2) on contract terms and conditions. Article 5, but not Article 11, is made expressly subject to the obligations created by the Distance Selling Directive. Does the draft Directive or any other Community legislation, such as the Distance Selling Directive, require the service provider to disclose essential terms and conditions before a contract is concluded, or is this determined solely by the domestic law of the place in which the service provider is established?

  Secondly, the amended text of Article 7(2) precludes service providers from sending by e-mail unsolicited commercial communications (electronic junk mail) to individuals who have "opted-out" by registering their objection. You state in your Explanatory Memorandum that this provision "allows for the creation of an opt-out register for those not wishing to receive such communications". The Commission's commentary on the text states that Article 7(2) "establishes the obligation for Member States to ensure that opt-out registers are made available to consumers". Recital 11, to which the Commission also refers, would seem to fall short of an obligation to create an opt-out register if one does not already exist. The Sub-Committee would welcome your views on the effect of Article 7(2), in particular whether the reference to the Distance Selling Directive is such as to require Member States to establish opt-out registers.

  The Sub-Committee notes that no changes have been proposed to the country of origin principle in Article 3. It would seem from various press reports that the precise scope and effects of Article 3 have given rise to some confusion. Article 22(2) states that Article 3 does not apply, inter alia, to contractual obligations in consumer contracts. This would suggest that Article 3 might contain a choice of law rule in relation to non-consumer transactions. Yet Recital 7 states that the Directive "does not aim to establish specific rules on private international law relating to conflicts of law or jurisdiction and is not a substitute for the relevant international conventions". It would seem then that the Brussels and Lugano Conventions on jurisdiction and enforcement of judgements and the Rome Convention on applicable law would continue to apply.

  The Sub-Committee would be grateful for a fuller explanation of the intended scope and effects of the country of origin principle in Article 3. In particular, what are the implications of Article 3(1) and (3) for determining the applicable law in consumer and non-consumer electronic transactions, and does Recital 7 mean that rules on jurisdiction and enforcement of electronic contracts will continue to be governed by the Brussels and Lugano Conventions?

  The Committee is content, subject to clarification of the above points, to clear the draft from scrutiny but wishes to be kept informed of further developments.

28 October 1999

Letter from Patricia Hewitt MP, Minister for Small Business and E-Commerce, Department of Trade and Industry, to Lord Tordoff, Chairman of the Committee

  Thank you for your letter of 28 October concerning the Sub-Committee's consideration of the above revised proposal for a Directive, in which you raised further questions in three areas, namely the manner in which Article 5 and 11 of the Directive relate to each other and to other Community legislation on disclosure of essential terms and conditions; the relationship between Article 7(2) and the Distance Selling Directive on opt-out schemes for unsolicited e-mails; and the relationship between Article 3 of the Directive and private international law.

  Article 5(2) of the Directive provides for Member States' legislation to require service providers to ensure that information supplied electronically with regard to prices and other essential terms and conditions relating to the provision of services is "indicated accurately and unequivocally". This is a requirement about the content of such information. Article 11(2), on the other hand, requires contract terms and conditions to be provided in a way that allows them to be stored and reproduced. This is a requirement about the form of the information. These requirements are all additional to those contained in other Community instruments, particularly the Distance Selling Directive and the draft Directive on the Distance Selling of Financial Services, insofar as electronic commerce falls within the scope of those Directives. (I should point out that Article 5 of the draft Directive on Electronic Commerce is not subject to but without prejudice to the Distance Selling Directive.) The additional nature of the requirements of the Directive has been considered at some length in Council Working Group, and the Commission and Presidency are assessing ways in which this can be made more clear in future texts. Discussions in the Council Working Group have now moved away from attempting to identify the moment of conclusion of a contract, however, in favour of an approach which specifies the principles to be applied in national law which governs the conclusion of the contract. This would result in the moment of conclusion of the contracts being determined by the governing Member State law. The same principle is applied to the rules of pre-contractual disclosure about which you ask; where Article 3 results in the governing law being the law of the service provider's home state, the law will determine whether terms and conditions need to be disclosed before conclusion of the contract. Since, however, Article 4 of the Distance Selling Directive requires the consumer to be provided with certain information in a clear and comprehensible way prior to the conclusion of any distance contract, the same rules will apply in the law of all Member States, irrespective of which law applied in the particular case.

  Article 7(2) requires Member States to take measures to ensure that service providers consult and respect the opt-out registers in which people can register. The requirement to set up opt-out registers stems from Article 10.2 of the Distance Selling Directive, which requires that means of distance communications which allow individual communication, other than faxes and automated calling machines (where opt-in is required), should only be used where there is no clear objection from the consumer; this requires at least opt-out and permits opt-in. We will shortly be consulting on the question of opt-in or opt-out in the context of the implementation of the Distance Selling Directive, and we shall take account of the views of interested parties before coming to conclusions. Article 7(2) of the E-Commerce Directive does not in itself require the operation of an opt-out register within the UK. The majority of Member States seem to be taking the line in Working Group that the proposed Article 7(2) is unnecessary, and that it is better to rely on the provisions of the Distance Selling and the Telecoms Data Protection and Privacy Directives (97/7/EC and 97/66/EC) without further provision.

  The third issue you raised was that of the relationship between Article 3 and the Conventions on applicable law and jurisdiction. Much of the public comment by third parties and press reporting has been confused or inaccurate. The Government is still in the process of establishing its policy on this area. It has been assisted in this process by a seminar which took place on 15 October, and by the Commission hearings on the topic on 4-5 November. However, we have taken a position in negotiations on the Directive that supports the Commission's view that paragraphs 1 and 2 of Article 3 do not affect the designation of competent courts, express choice of the law applicable to the contract or the law applicable to consumer contracts, and that where provisions of the applicable law designated by rules of private international law in other cases are incompatible with the law of the service provider's home state, the provisions of that law will take precedence.

22 November 1999

Letter from Patricia Hewitt MP, Minister for Small Business and E-Commerce Department of Trade and Industry, to Lord Tordoff, Chairman of the Committee

  1.  It appears increasingly probable that a common position on the above Directive will be reached at the Internal Market Council on 7 December. In the light of this, and given that a text of the Directive will not be produced until after COREPER on the evening of 1 December—the same day as the Commons Committee holds its final meeting before the IMC, I am writing to inform you of amendments to the Directive which have been made since the texts were debated in European Standing Committee C of the House of Commons on 27 October.

  2.  Three Explanatory Memoranda on the Directive have been submitted and cleared. The most recent two, submitted on 18 October 1999 and 20 September 1999 were cleared in the Commons by the debate referred to above, and in the Lords by a letter from Lord Tordoff of 28 October as regards the EM of 20 September, which cleared the EMs subject to a response to further questions, which I provided on 2 November.

  3.  I had hoped to provide a further Explanatory Memorandum on the text to be discussed, and probably voted on, at the Internal Market Council. However, the earliest that such a text will be available is 2 December, which would not allow sufficient time for the Committees to consider and clear it. In this letter, I therefore aim to provide a summary of the amendments which have been agreed to the Directive since the texts on which the scrutiny debate was based were produced, and indication of what we might expect to result from the discussions of COREPER and an indication of the UK's intentions in the event of a vote.

  4.  Article 1 of the Directive remains largely unchanged. A further provision has been added in Article 1.5, which states that this Directive does not affect measures taken in order to promote cultural and linguistic diversity. Such measures must be "in the respect of" (ie in conformity with) Community law, and hence must not act as a restriction to the freedom to provide services. Article 2 is also largely unchanged. At the request of the UK, a definition of "regulated professions" has been added (in order to clarify Article 8); a further amendment has been made to the definition of "coordinated field", which gives a much clearer indication of what is and what is not covered by the Directive. The text of Article 3 is similar to that contained in the Presidency's amended proposal.

  5.  Articles 4 and 5, concerning establishment and information requirements, have remained unchanged in substance, although the wording has been altered slightly. Article 6 falls into the same category, whilst Article 7 closely follows the amended proposal put forward by the Commission. Article 8 is also similar, although the Commission's powers here are reduced somewhat. Article 9, covering treatment of contracts, has seen a number of technical amendments, but the main changes here have been to the list of areas in which Member States are allowed not to permit the formation of electronic contracts, which have been narrowed somewhat. As a counterbalance to this, Member States are required regularly to produce a report justifying why they continue to disallow the formation of such contracts. Article 10 remains close to the original text, but its requirements have been increased slightly, such that service providers must now indicate the languages offered for the conclusion of the contract; they must also make terms and conditions available in a way which enables the recipient to store and reproduce them. A further exclusion has seen e-mail contracts excluded from these requirements. Article 11 has been retitled "Placement of the order", in recognition of the fact that it no longer seeks to identify the moment of conclusion of a contract. The text follows that of the amended Presidency text, with the only differences involving the deletion of some text in the interests of clarity.

  6.  Articles 12-15, limiting the liability of intermediary service providers, have changed little. It is anticipated that these will be discussed further in COREPER, and possibly at the Internal Market Council. Substantive change has been made to Article 15, however. The reference to the permissibility of monitoring requirements has been moved into a Recital, whilst a new 15.2bis attempts to allay the concerns of some Member States by making clear that Member States may establish obligations for Information Society service providers promptly to inform the competent public authorities of alleged illegal activities undertaken by recipients of their service.

  7.  Provisions regarding codes of conduct, out-of-court dispute settlements, court action and sanctions (Articles 16, 17, 18, 21/20) have remained largely unchanged. Article 19 (Co-operation) has been amended, with a commensurate reduction in the Commission's powers. Article 22, laying down a Committee procedure, has been deleted, pending COREPER discussion of this. The remaining Articles remain unchanged.

  8.  In general terms, the most recent text of the Directive is very close to the amended Commission and Presidency drafts. It continues to follow the original approach of regulating only where necessary and aiming to ensure that existing frameworks are amended to fit with electronic commerce, rather than attempting the reverse. The points likely to be discussed in most detail in COREPER revolve around three issues:

    —  the country of origin principle;

    —  the inclusion of criminal liability within the scope of the Directive;

    —  the proposal to exclude some or all Financial Services from some or all of the Directive.


  9.  On the country of principle, a minority of Member States continue to call for a clause making the Directive "without prejudice to private international law". This would have a far-reaching and damaging effect on the country of origin rule. While the text of the Directive has an effect on the application of the Brussels and Rome Conventions for consumer contract obligations, the addition of a "without prejudice to private international law" clause would allow the law on non-contractual obligations to override the internal market principle of the Directive. These non-contractual obligations include unfair competition laws, negligent statements in advertising and libel. The current text envisages a scenario where, in the event of a cross-border dispute where private international law indicates that host state law should apply, any rule of that law will be disapplied if it is more disadvantageous to the service provider than the equivalent home state rule. A "without prejudice to private international law" clause would result in service providers being subject to a range of different national rules of law within the EU more disadvantageous than rules of their own law. There is a recognition that in some instances it is necessary to apply all the rules of the host state law, and this is covered by Annex I of the Directive. These instances are clearly defined, however, such that service providers will be aware of the application of all relevant rules of the law of the countries to which they are selling. I believe that this approach, which aims to give businesses legal certainty and thus safeguard the Single Market, whilst also ensuring that consumers are protected adequately, is appropriate, and the UK will continue to support it.


  10.  As already mentioned, Article 12-14 limit the liability of intermediary service providers. This limitation applies both to civil and to criminal law. Concerns have been expressed about the competence of the Commission to put forward legislation in the field of criminal law, since this is an area where Member States retain competence. The UK requested an opinion on this from the Council Legal Service, which concluded that criminal law is only covered to the extent necessary to ensure the functioning of the single market, which is the objective of the Directive. Furthermore, a new Recital to the Directive makes clear that the aim of the Directive is solely to stimulate free movement of cross-border information society services and does not harmonise criminal law by setting specific rules on offences, sanctions or procedures. I believe that it is indeed necessary for the Directive to affect criminal law to the extent that it does currently, and therefore do not wish these Articles to be amended.

  A further proposal supported by some Member States is the inclusion of a knowledge test in Article 12 for "mere conduit" service providers. This proposal appears to represent a faulty understanding of the technological processes involved in such provision of services, and the safeguards for Member States' existing powers in Article 15.2bis and Article 3.5. It would not normally be technically possible for a provider to have such knowledge. If he did, as a result of deliberate collaboration with a recipient of the service, in order to undertake illegal activities, the third recital indicates that he would be excluded from the exemption. The UK will continue to oppose moves to exclude criminal law from the effect of the Directive.


  11.  A number of Member States continue to press for the ability to take measures for "investor protection" within the Directive. An initial request for a complete exclusion from the scope of the Directive has now been moderated to being a request for an ability to derogate under Article 3.5. The ability to derogate on consumer protection grounds already exists here however, and the greater scope that "investor protection" would offer to those wishing to derogate could have serious implications for the single market in financial services. The UK will therefore continue to oppose this proposal, but we will support an expected parallel proposal for a declaration asking the Commission to consider this question in its Green Paper on E-Commerce and Financial Services, publication of which is expected in April 2000.

  12.  Europe has a great opportunity to increase its competitiveness through the use of electronic commerce. Provided that the text of the draft E-Commerce Directive presented to the Internal Market Council continues to reflect Europe's wish to make the most of this opportunity, we intend, in the event of a vote, to support agreement on the Directive.

30 November 1999

Letter from Lord Tordoff, Chairman of the Committee, to Patricia Hewitt MP, Minister for Small Business and E-Commerce, Department of Trade and Industry

  Thank you for your letter of 22 November clarifying a number of points raised by Sub-Committee E in relation to the Commission's amended Electronic Commerce Directive. The Committee considered your response and an unofficial Presidency draft of the Directive at its meeting on 1 December. The Committee also had before it your letter of 30 November explaining that the Internal Market Council on 7 December is likely to reach a common position on the Directive. As a text of the Directive to be agreed at the Council will not be available until shortly before that meeting, your letter provides a summary of recent amendments and the key outstanding issues.

  The Committee only received a copy of your letter shortly before its meeting on 1 December and so had little opportunity to consider its content and implications. The Committee acknowledges that the pressure for agreement is particularly intense at the end of a Presidency and it does not wish to impose unnecessary obstacles to securing a common position on an important Single Market initiative. If, however, the Committee is to continue to perform an effective scrutiny function it must have sufficient time to examine proposals thoroughly.

  The Committee notes, first of all, that the unsigned Explanatory Memorandum accompanying the unofficial Presidency draft highlights amendments affecting both the form and substance of the Directive. It would seem, however, that this text has been superseded and no longer reflects the current state of negotiation. Your letter of 30 November states that, in general terms, the most recent text of the Directive is very close to the amended Commission and Presidency drafts. Yet there are, in the Committee's view, some important differences between these two drafts. One example is the re-drafting of Article 11 to establish general principles for the formation and conclusion of electronic contracts rather than the specific steps required to conclude a contract.

  Secondly, the Committee has expressed concern that the intended scope and effects of the country of origin principle in Article 3 of the Directive remain unclear. Your letter of 22 November states that the Government is still in the process of establishing its policy in this area. Your later letter of 30 November provides helpful clarification of the relationship between rules of private international law and the law of the "home" State in which the service provider is established. It would seem, however, that not all Member States subscribe to the view that home State rules which are favourable for the service provider should (except in the case of consumer transactions) prevail over provisions of the applicable law designated in accordance with the rules of private international law. As you acknowledge, the implications of the country of origin principle have generated much confusion. The Committee believes that the intended application of the principle must be evident from the text of the Directive and wishes, for this reason, to have the opportunity to consider the latest text.

  You also refer in your letter of 30 November to concerns that provisions in the Directive limiting the liability in civil and criminal law of intermediary service providers might represent an extension of the Community's competence into the criminal law field. I understand that the criminal law aspects of the draft Directive are to be considered at the Justice and Home Affairs Council on 2-3 December. You suggest that the provisions fall short of harmonisation, as they do not prescribe specific rules on offences, sanctions or procedures, and that the effect of the provisions on criminal law is the minimum necessary to ensure the functioning of the Single Market.

  The Committee notes that the relevant provisions, Article 12-14 of the Directive, would prevent Member States from imposing criminal liability in respect of certain conduct by intermediary service providers. It would welcome your opinion on the possible distinction between a "negative" power of prohibition and a "positive" power to create criminal liability. In particular, does the Government accept that if the Community has the power under Article 47(2), 55 and 95 (the proposed legal base) to prohibit making certain conduct criminal, it must also have a power to require that certain conduct be made criminal? The Committee would be grateful for details of precedents for including criminal law provisions in Single Market measures.

  In the light of the Committee's observations above and the importance of the issues still to be resolved, notably the application of the country of origin principle and the criminal law aspects of the Directive, the Committee intends to hold the Presidency draft Directive under scrutiny. The Committee would note, in this regard, that the Presidency draft has not cleared scrutiny, as is suggested in paragraph 2 of your letter of 30 November.

  The Committee looks forward to receiving your response to the points raised above and expects to have early sight of the latest revised draft of the Directive. It would also welcome a prompt account of the outcome of discussions on the criminal law aspects of the draft Directive at this week's Justice and Home Affairs Council.

2 December 1999

Letter from Patricia Hewitt MP, Minister for Small Business and E-Commerce, Department of Trade and Industry, to Lord Tordoff, Chairman of the Committee

  Thank you for your letter of 2 December regarding the above document, in which you posed a number of questions. Firstly, you emphasised the Committee's need to have sufficient time to examine proposals thoroughly. Secondly, you expressed concern that the intended scope of the country of origin principle in Article 3 remains unclear. Thirdly, you raised a number of questions on criminal liability and asked my opinion on the possible distinction between a "negative" power of prohibition and a "positive" power to create criminal liability.


  I regret that it was not possible to give the Committee earlier notice of these texts. As you know, the final meeting of COREPER took place on 1 December, and the text for the Internal Market Council was not made available until 3 December. In these circumstances, I understood that it would be most helpful for the Committee to have a commentary taking account of decisions up to the end of 1 December.


  The question of the application of the country of origin principle has been discussed in the working group negotiations in the run up to the Internal Market Council. It may be helpful in this context to consider first the scope of the Directive. Its general scope, and hence the scope within which the country of origin principle applies, is defined in terms of the Directive's "co-ordinated field". This refers to "requirements laid down in Member States' legal systems applicable to Information Society service providers or Information Society services, regardless of whether they are of a general nature or specifically designed for them.

  "The co-ordinated field concerns requirements with which the service provider has to comply in respect of:

    —  the taking up of the activity of an Information Society service, such as requirements concerning qualifications, authorisation or notification schemes;

    —  the pursuit of the activity of an Information Society service, such as requirements concerning the behaviour of the service provider, requirements regarding the quality or content of the service including those applicable to advertising and contracts, or requirements concerning the liability of the service provider.

  The co-ordinated field does not cover requirements such as:

    —  requirements applicable to goods as such;

    —  requirements applicable to the delivery of goods;

    —  requirements applicable to services not provided by electronic means."

  Such is the most recent text of Article 2(g), which merely serves to clarify the understanding previously held by Member States.

  Within this general field, the country of origin principle covers all aspects of the provision of services not referred to in Annex I. As you correctly observe, contractual obligations concerning consumer contracts fall within Annex I, and hence outside the country of origin principle. Article 3(2) has the effect that if, in respect of any contractual or non-contractual obligation not falling within Annex I, the rules of Private International Law point to a law other than that of the service provider's home state and a rule of that law is more disadvantageous to the service provider than his home state law, his home state law will prevail over that rule of the other law. Not all Member States agree that this should be the effect of the Directive; but all are agreed that this is the effect. I do not think therefore that there is a lack of clarity in the current text as regards the effect of the country of origin principle.


  You also posed a number of questions relating to the criminal liability provisions in Article 12-14 of the Directive. In particular, you invited my opinion on the distinction between a "negative" power of prohibition and a "positive" power to create criminal liability, and asked whether the Government accepts that if the Community has the power under Article 47(2), 55 and 95 to prohibit making certain conduct criminal, it must also have a power to require that certain conduct be made criminal. You also requested details of precedents for including criminal law provisions in Single Market measures.

  The purpose of Articles 12 to 15 is to ensure that diverging national provisions and case-law on the extent of liability do not prevent economic operators from enjoying the freedoms guaranteed by Community law and do not produce distortions of competition in the internal market. In view of the fact that the legal systems of Member states do not distinguish in the same way between actions which may carry civil liability and those which may carry criminal liability, the proposals contain rules regarding the limitation of liability in both civil and criminal proceedings.

  This explanation, which is drawn from the Opinion of the Council Legal Service on the Directive, makes a distinction between the negative competence to affect criminal law in order to protect the freedom to provide services in compliance with Community law and any positive competence to determine what is a criminal offence. The ECJ has stated that "although in principle criminal legislation is a matter for which the Member States are responsible, the Court has consistently held that Community law sets certain limits to their power, and such legislation may not restrict the fundamental freedoms guaranteed by Community law" (Calfa, 1 January 1999).

  The Government thus concedes that, in respect of the provisions in Articles 12-14, the granting of some immunity is within Community competence to the extent that a rule of criminal law presents a barrier to the functioning of the internal market. There is a substantial difference between an obligation to remove barriers, which may include the removal of criminal offences, and an obligation to provide effective sanctions for the enforcement of harmonised provisions, where it is for each Member State to decide upon how the sanctions are to be imposed (choice of criminal, civil and administrative) and the only Community obligation (sometimes, but not always set out in the Community instrument) is that the sanctions be effective, proportionate and dissuasive. The Government therefore does not accept that the Community has the power under Articles 47(2), 55 and 95, to require that certain conduct be made criminal.

  One example of a precedent for a single market measure including criminal law provisions is to be found in Article 9 of Directive 91/308/EEC (prevention of the use of the financial system for the purpose of money laundering). This provides for an exemption from liability ("liability of any kind") for employees or directors of financial institutions and for specific actions. This is not an exact parallel of the E-Commerce Directive, however, since its primary effect on criminal law concerns the imposition of a positive obligation with sanctions for non-compliance, rather than a limitation liability. A further example is to be found in Directive 92/59/EEC on general product safety, transposed into UK law through the General Product Safety Regulations 1994, which inter alia disapplied the provisions of section 10 of the Consumer Protection Act 1987 to the extent that it imposed general safety requirements. Most single market measures, however, contain provisions requiring the removal of restrictions, and this applies as much to restrictions enforced by criminal law as to others.

  You also requested an account of the outcome of discussions on the criminal law aspects of the Directive at this week's Justice and Home Affairs Council. Some Member States asked questions about the legal base and effect of the criminal law provisions. The Commission explained that the Directive is not intended to harmonise criminal law, but to fix a clear framework of responsibility: the conditions under which Information Society service providers benefit from the limits on liability were well defined and restricted. It was agreed that Member States should co-ordinate their positions on the Directive.

  As you know, e-commerce holds a particularly important place in the UK's economic policy. The Government made a commitment in its 1998 Competitiveness White Paper to make the UK "the best environment in the world for e-commerce", and the development of a common legal framework is a vital part of that approach. The framework must be effective, and it must be in place rapidly if the UK and Europe are not to cede further ground to the USA in this swiftly developing field. It is unfortunate that scrutiny procedures could not be completed, but I wish to inform the Committee that the UK will vote in favour of political agreement on the Directive, assuming it remains largely unchanged, for special reasons, notably that we wish the provisions of the Directive to come into force as quickly as possible, and that we are unlikely to achieve a package of measures as favourable to UK interests if agreement is delayed.

8 December 1999

Letter from the Rt Hon Helen Liddell MP, Minister of State for Energy and Competitiveness in Europe, Department of Trade and Industry, to Lord Tordoff, Chairman of the Committee

  On 7 December, I represented the Government at the Internal Market Council, which reached political agreement on this directive. I am therefore writing to you at the earliest possible opportunity, before the meeting of your Committee this afternoon, to inform you of the outcome of the Council, and to follow up your correspondence with Patricia Hewitt on the Parliamentary scrutiny of this measure. She wrote to you on 22 November, responding to points raised by Sub-Committee E; on 30 November explaining that the Internal Market Council of 7 December was likely to reach a political agreement on the directive; and on 8 December replying to your letter of 2 December containing some further questions.

  In your letter of 2 December, you acknowledged that there was a balance to be struck between, on the one hand, the intense pressures to secure a common position on an important Single Market initiative and, on the other hand, the thorough examination of proposals in order to discharge the important requirement of effective scrutiny. I hope that Patricia's letter of 8 December has gone some way to assure you that the Government takes the Committee's scrutiny role very seriously and is committed to the objective of completing scrutiny well in advance of political agreement, a common position or final agreement on a proposal.

  Exceptionally, this uncleared proposal reached the decision stage after an unforeseen rapid burst of progress. In the event, no formal voting took place on the agreement of the draft directive. It was the subject of unreserved approval by 14 delegations, with Belgium indicating that it wished to record its abstention.

  I should like to outline the special reasons why I gave the UK's approval to political agreement and report the main issues discussed at the Council. Patricia Hewitt has already mentioned the economic advantages to the UK, and to Europe generally in a global setting, of putting in place an effective legal framework for e-commerce as rapidly as possible. The main effect of any delay would have been a sense that Europe was losing its commitment to this goal, and the loss of confidence among business and consumers. The negotiations to date had produced a text that met our objectives and we judged that it should be crystallised before the end of a particularly determined and helpful Finnish Presidency. We are confident that any further round of negotiations would not have improved the text significantly from the UK's point of view, and could well have given the opportunity for other Member States' narrower interests to be pressed further, to the disadvantage of the overall balance of the proposal.

  There were no changes agreed at Council which alter the substance of the directive. I have set out in the attached note the main points of discussion which led to changed wording of any significance in the text. I regret that, at the moment, there is no final text of the directive showing exactly what was agreed.

  The Presidency concluded the discussion by indicating that the directive would come forward for the formal adoption of a common position at a future Council meeting as an "A" point. I shall write to the Committee again if, for some reason, the proposal has been amended substantively in the meantime. The directive will then undergo a further reading in the European Parliament.

  I would, of course, be happy to give any further written or oral statement to the House if the Committee so requests.

  Finally, I should apologise for the error in Patricia's letter of 30 November, which suggested that your Committee had given clearance to an unofficial Presidency draft of the directive, which was placed on the DTI website for consultation purposes and made the subject of an unnumbered Explanatory Memorandum dated 18 October 1999.

8 December 1999


  The Council agreed, as an additional basis for case-by-case exemptions in Article 3(5)(a)(i), the insertion of ". . . and violations of human dignity concerning individual persons."


  The Presidency circulated proposals during the discussion for two new recitals, one relating to Articles 12 and 13 clarifying the activities involved in the transmission and temporary storage of information and the other to Article 15 clarifying the conditions under which intermediary service providers can be expected to co-operate with national authorities in the detection and prevention of crime. All reflected the Commission's reassurance that the Directive would not hinder the fight against cyber-crime. In addition, the package contained the addition of "crime prevention" in Article 23 as a matter to be kept under review. The words "Member States shall provide in their legislation" was replaced with "ensure" in Articles 12.1, 13.1 and 14.1, to reflect conventional drafting and changes already made elsewhere in the draft. Also agreed was the reinstatement of a clause in the Recital to Article 14.3 to make clear that Member States may establish specific requirements to be fulfilled prior to the removal of illegal material.


  The draft directive includes in Articles 6 to 8 some provisions harmonising commercial communications. A Joint Commission and Council declaration was agreed, under which the Commission is to bring forward within a year further initiatives to build on Internal Market policy on commercial communications.


  It was agreed to leave in the directive wording allowing national laws to block unsolicited e-mail, but to include the issue in the review clause (Article 23).


  It was agreed that the directive should be implemented 18 months after formal adoption.

  At the Internal Market Council on 7 December 1999, a number of outstanding issues were resolved. The main changes are set out below:


  The Commission proposed that only certain specific financial services should benefit from an exemption from the Internal Market Principles established in Article 3 of the text. The Council added to the "case by case" exemptions envisaged in Article 3(5)(i), 4th indent of the text "the protection of consumers including investors".


  The objective of Article 3(1) and (2) of the draft Directive is to ensure that Information Society services provided by a service provider established in a Member State are subject to the legal requirements of that Member State, regardless of whether his services are limited to the territory of that Member State or are also received in other Member States. This means that the Member State of origin has to apply its national rules and a Member State of destination cannot restrict the free movement of Information Society services. A number of delegations had expressed concern about the relationship of these principles with existing rules of international private law concerning conflicts of law and jurisdiction.

  The compromise agreed by the Council included a new paragraph to make clear that the directive does not establish additional rules on private international law, nor deal with the jurisdiction of Courts; a recital to reflect this and make clear that provisions of applicable law designated by private international law shall not restrict the freedom to provide Information Society services as established in the Directive; and a Council Declaration on developing consumer confidence in Information Society services based on a resolution adopted by the Consumer Council on 19 January 1999.


  A number of delegations expressed concerns about the impact of this draft Directive (and in particular Articles 12-15 on the liability of intermediaries) on some areas of criminal law. It was decided to widen the justifications for Member State measures taken under Article 3(5) and to make it clear in the text that the procedural conditions for such measures do not apply to acts carried out in a criminal investigation. A new recital explains that the Directive does not seek to harmonise the field of criminal law as such. Also agreed was a statement (based on that which accompanies the Money Laundering Directive) according to which the Member States undertake, without prejudice to Community law, to ensure that their criminal legislation does not obstruct the internal market principles of the Directive.

Letter from Lord Tordoff, Chairman of the Committee, to Patricia Hewitt MP, Minister for Small Business and E-Commerce, Department of Trade and Industry

  Thank you for your letter of 8 December clarifying the intended application of the country of origin principle in the draft E-commerce Directive and the competence of the Community in relation to criminal law. The Committee has noted the distinction you draw between the Community's power to act to remove obstacles to the functioning of the internal market and its power to require effective sanctions for the enforcement of harmonised rules. While the Community may, it seems, require Member States to disapply rules of criminal law, it may not also require that certain conduct be made criminal. The choice of an effective sanction, whether administrative, civil or criminal, remains with the Member States. You mention the Community's Money Laundering Directive as an example of an internal market measure including criminal law provisions. As amended version of the Directive is currently under scrutiny and the Committee will pay particular attention to the criminal law aspects of the proposal.

  The Committee took note of your intention to achieve a political agreement on the draft Directive at the Internal Market Council on 7 December. Your colleague, Mrs Liddell, has since written to inform the Committee of the outcome of that Council and the broad terms of the agreement reached by Ministers. I very much welcome Mrs Liddell's assurance that the Government takes the Committee's scrutiny role seriously and is committed to the objective of completing scrutiny well in advance of political agreement. The Committee is grateful for your endeavours to keep it informed of progress on the Directive and recognises the importance of establishing a common legal framework for electronic commerce in the European Union. The Committee nevertheless regrets that you have been unable to provide a draft text of the Directive containing the main elements on which political agreement would be sought. A commentary by your officials, while helpful as an indication of the Government's approach to the negotiation, is not a satisfactory substitute for a text. However, in view of the fact that political agreement has now been reached, the Committee has decided to clear the unofficial Presidency text from scrutiny.

16 December 1999

9   Printed in Correspondence with Ministers, 17th Report, Session 1998-99, HL Paper 94, p 74. Back

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