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Grand Committee

Monday, 20 October 2014.

Consumer Rights Bill

Consumer Rights Bill3rd Report Delegated Powers Committee

Committee (3rd Day)

3.30 pm

Relevant document: 3rd Report from the Delegated Powers Committee

The Deputy Chairman of Committees (Lord Brougham and Vaux) (Con): Good afternoon, my Lords. This is the third day of the Consumer Rights Bill. If there is a Division in the Chamber, as soon as the Bell has rung, we will adjourn for 10 minutes to vote.

Clause 33: Contracts covered by this Chapter

Amendment 31A

Moved by Lord Stevenson of Balmacara

31A: Clause 33, page 21, line 35, at end insert—

“( ) Digital content as defined under section 2(9) shall have the same rights as goods under this Act.”

Lord Stevenson of Balmacara (Lab): My Lords, Amendment 31A is also in the names of my noble friends Lady Hayter and Lord Knight of Weymouth, whom we welcome back this afternoon. He is too often away from our business and of course has great expertise in this area.

In his report, Consumer Rights In Digital Products, prepared for BIS in September 2010, Professor Robert Bradgate starts by saying:

“One might be forgiven for thinking that the questions addressed in this report would have been answered before now. Digital technology is now well established and widely used; consumers are familiar with and regularly purchase digital products and, indeed, some of the core questions considered in this report were first considered by a common law court as long ago as 1983 and first came before the English Commercial Court in a reported case in 1988. Nevertheless, there is as yet no wholly authoritative and satisfactory statement of the legal rights consumers enjoy on purchase of digital products. The area is not covered by subject specific legislation, and it is not clear whether digital products fall within the existing consumer protection regime of legislation such as the Sale of Goods Act 1979 … or the Consumer Protection Act 1987. This must be regarded as unsatisfactory”.

That is a bit of an understatement, I think, and it is good that the Government are now bringing forward proposals to try to codify and update the law in this area.

Last week in Grand Committee we talked about tangible goods and services but, in reading further the report I have just referred to, I noticed that there were some comments about the general propositions of introducing consumer legislation that have not yet been taken into account. Professor Bradgate says:

“It is generally accepted that the commercial community favours certainty in the law; the original Sale of Goods Act 1893 was passed on the request of the commercial community, which wanted a clear and accessible statement of the law governing contracts for the sale of goods. Equally, lack of certainty in the

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law is contrary to the interests of consumer buyers and may be exploited by suppliers to deny consumers their rights. It will rarely be economical for a consumer to take professional advice on a claim relating to even a relatively expensive consumer purchase, let alone to initiate legal proceedings”—

that is the point we have been making. He goes on to say:

“A clear, authoritative statement of the law would therefore be in the interests both of businesses and consumers”.

Chapter 3 concerns contracts where a trader agrees to supply digital content to a consumer. Digital sales are different from goods or services and there has been substantial debate over whether or not they are similar to goods. In particular, as most digital content is bought online, the trader and consumer do not meet and that makes it even more important to have clear rules about what each can expect and what to do if things go wrong. This is increasingly the way in which we will obtain goods and services in the future so we ought to try to use this Bill to at least get the principles right.

Why does digital content matter? In the UK entertainment sector, digital music, video and games now account for 43% of total spend; digital video games were worth £1.17 billion in 2013; 99.6% of the 189 million singles sold in the UK in 2012 were digital downloads; and 27.7% of British consumers downloaded or streamed music legally, meaning that it affects some 17.5 million citizens, especially young consumers, as 95% of 16 to 24 year-olds buy digital content. There are various other figures, including a 40% increase in spending on digital videos through downloads and recent research that puts the UK as the leading European country for total digital content spend per capita.

It cannot be sensible for the Government to be sanctioning two different regimes for tangible and intangible goods and services, and even if that situation prevails at the end of this Bill, I very much doubt that the courts will actually stand for it. Simplification and clarification of the law in this area should make it easier for businesses to understand and comply with their responsibilities; to explain and communicate to consumers what their rights under the law are; and for consumers to understand and assert their rights when things go wrong and they receive poor service.

The recent and continuing proliferation of portable internet-connected devices, including tablets and smartphones, has provided consumers with many more opportunities and new ways in which to access, purchase and consume digital content. The pace of development in the digital content sector—with new device launches, a broadening array of new products and services, and a sharp growth in digital content sales of all types—make efforts to clarify digital content rights and remedies in order to protect consumers timely and welcome. Our amendment seeks to align the rights for digital content with those for goods as far as is possible.

The department has produced and recently circulated a useful note on the differences between digital and tangible goods, for which I am grateful. The main issue between us is the question of whether, if digital content is provided in an intangible form and does not meet quality standards, the consumer should be restricted to a right of repair or replacement only. We strongly

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believe that the consumer should in such cases have both a short and a long-term right to reject digital content.

I draw the Grand Committee’s attention to the BIS Select Committee’s scrutiny of the Bill, which makes the case rather well. In paragraph 120, it says:

“The remedies for faulty digital content differ from those for goods. Unlike faulty goods, which a consumer will be able to reject within 30 days and receive a full refund, consumers will not automatically have a short-term right to reject faulty intangible digital content. The Government’s argument is that this is because digital content is not provided on a tangible medium”—

which seems somewhat circular—

“where it is downloaded or streamed and therefore ‘cannot be returned in any meaningful sense’. However, consumers will have a short term right to reject digital content sold on a tangible medium (such as on a DVD or CD)”.

In paragraph 121, it says:

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

It is also worth also quoting the consumer organisation Which?, which said:

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

Now, I accept that the concept of “returning” intangible goods does not easily sit with digital content and that digital content is very easily copied and can be very difficult to delete from a device, certainly by those of us without technological skills. However, the situation we are in is that a consumer who has bought intangible digital content which turns out to be faulty has the right to a full refund only in one particular area: if the trader did not have the right to provide the digital content in the first place. If any of the other statutory rights that are available to everybody else for goods and services are not met, the consumer does not have access to a refund. The Bill does not provide a short-term right to reject or even a second-tier remedy of rescission of contract for intangible digital content, which means that a consumer would not be able to obtain a refund if any other statutory right were breached, on the basis that intangible content cannot be returned. That simply cannot be right.

Is there not a way through this? I note in the BIS Select Committee report that the Government were arguing at one stage that it may not be necessary to require a consumer to return or delete unsatisfactory digital content, on the basis that,

“existing legislation adequately protects IP rights”,

of the supplier. In other words, where a consumer has rejected the download, she or he ceases to hold rights in that material, and any subsequent copying or use would be a breach of IP rights. Can the Minister advise me if my reading of the situation is correct? If that is the case, it seems to create the ability to bring consumer rights on intangible goods to the same level as rights on tangible goods, so that we have parity.

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I agree with the BIS Select Committee that we ought to remedy the existing inconsistency in the Bill, and that there should be a short-term right to reject and a final right to reject in relation to intangible digital content. At the very least, the Bill should require that in these circumstances there is an obligation on the consumer to delete the relevant intangible digital content. In addition, the Government should set out in detail their legal advice on the question of IP rights if the right to reject is adopted.

Professor Bradgate, whose report I quoted at the start of my remarks, says:

“It is therefore recommended that the 1979 Act be amended by way of an extension of the definition of goods to apply provisions of the Act both to goods, and to digital products … and to include power in the amending legislation for Her Majesty’s Secretary of State to apply the Act by Statutory Instrument to new developments as they arise”.

Why did the Government not follow his advice? I beg to move.

Lord Knight of Weymouth (Lab): My Lords, I too applaud the Government for wanting to legislate on this area, because it is moving very fast and we will have to keep coming back to it. My noble friend has reminded us of the importance to the nation of the digital economy and we see, as an example, the huge numbers of people now being employed in it and the exponential rate at which vacancies are occurring. Indeed, we have a committee of the House looking at digital skills at the moment. It was a joy to see the noble Baroness, Lady Harding, being introduced into the House today to add some expertise for us in this area. Perhaps when she has had a chance to settle in she can visit this subject on Report. I also remind the House of my interests as managing director of online learning for TES Global and the somewhat overegged expertise, to which my noble friend referred, coming from my professional work in the last six months.

I would, obviously, agree that, given the importance of the digital economy and the extent to which it is now in the mainstream of how many of us live our lives, it is important to have, as far as possible, a single regime for consumers and producers on how this works, because that makes it more intelligible to us all. I am pleased that, in this clause, the Government are giving powers to the Secretary to State to look at exchanges other than by money. For instance, in subsection (3), some of these powers can be brought to bear if personal data are being exchanged rather than just money. When does the Minister think that these powers might be used? We know that many of the services most of us consumers use are notionally free, in respect of monetary exchange, but those of us who bother to read the terms and conditions know that we are getting these services for free in exchange for the platforms being able to use our data. So there is a very real exchange of something of huge value to us and this is of increasing public concern. I am of the view that the Secretary of State should be thinking actively about when these powers might be used. I would be interested in any guidance which the Minister could give.

It is also a delicate area because of the nature of iterative change of digital products. These days, it is likely that most producers of digital products will take advantage of the fact that they can alter them on an

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hour-by-hour basis, not just day by day or week by week. It is perfectly normal, and in the good interests of innovation, for products which are not functioning perfectly to be iteratively improved without them having to be returned, which might be the case if they were real products. We obviously need to legislate with iteration as well as agility in mind. Although I endorse the notion that, for the mainstreaming reason, we should, as far as possible, have the same regime, it is important to think about whether there are aspects where digital products might need slightly different consumer rights. If I were to purchase software on a CD and it did not work, I would expect to be able to return it and get something that did, or my money back.

However, if I am downloading an app from an app store, be it the Apple Store or Google Play, and I paid only 59 pence for it, these days I would probably just tolerate it not working well. If it did not work, I would go and buy another one for 59 pence. I am not that fussed about getting my 59 pence back. But it might suit me, as a consumer, to be able to say to the producer of the app via the platform, “It doesn’t work and you have 28 days to put it right”. I have then not wasted my 59 pence. That is a different approach to returning it and getting my money back, but there is merit in thinking about different sorts of rights, given the ability of producers to iteratively improve.

Finally, a point which would be worth ensuring is not far from the forefront of your Lordships’ minds is the fact that many of these digital products are co-produced, in some cases by minors. We all know the stories of 14 year-olds who suddenly become millionaires after having created a brilliant digital product. The notion of the producer being a powerful individual is not necessarily true, so we need to ensure that whatever digital consumer rights we create are viable in relation to the producers of the goods we are talking about. On that rather rambling basis, I am happy to support my noble friend and I look forward to the Minister’s reply.

3.45 pm

The Parliamentary Under-Secretary of State, Department for Business, Innovation and Skills (Baroness Neville-Rolfe) (Con): My Lords, the digital provisions are a vital aspect of the Bill, bringing consumer law into the 21st century. As the noble Lord, Lord Stevenson, has said, we need to get the rulebook right for the future, given the sheer scale, growth and innovation of the sector which he illustrated with some telling figures. I am also grateful to the noble Lord, Lord Knight, for his intervention and for reminding us of the importance of digital skills. He mentioned the hour-by-hour changes that are made to digital content and touched on the potential for co-production, which was interesting and important. Like him, I am delighted that my noble friend Lady Harding, who I also worked with when she was in retail, has joined the House and I agree that she will be able to bring some great insights to these important debates.

I can assure noble Lords that we have given extensive thought to and researched what these rights should be. What is clear is that a goods-like approach to the treatment of digital content is the right one to take. It

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builds on consumer expectations and familiar concepts for both businesses and consumers. The Bill will give consumers confidence, when they buy digital content, that it will be of satisfactory quality, fit for purpose and as described. If it is not, they will be entitled to have the digital content repaired or replaced, and failing that to get some or all of their money back. This approach creates a consistent regime for consumer protection other than where differences between goods and digital content justify different treatment, for example, because of the intangible nature of digital content.

Aligning the rights for goods and digital content completely would be a step too far. The main effect of providing that digital content should have the same rights as goods, as this amendment would do, would be to give consumers the short-term right to reject digital content that is supplied in intangible form, such as the music and films we download or games that are played online. We think that this would create real difficulties for our important digital content industry and would slow or prevent launches of new products in the UK. We believe that consumers will already be well protected by the new regime we have proposed without a short-term right to reject. As the noble Lord, Lord Stevenson, said, and as the noble Lord, Lord Knight, anticipated in his remarks, we have made clear in Clause 16 that goods which include digital content, such as digital content on a DVD or within a washing machine, will attract the full goods remedies, including the short-term right to reject. This also applies to software pre-installed on a computer or apps pre-installed on a phone. If the digital content is faulty, the consumer will be able to reject the goods in which it is included and return them to the trader. However, there are some significant differences between intangible digital content and goods which have led us to take a slightly different approach to digital content that is supplied in intangible form.

First, when consumers exercise their short-term right to reject faulty goods, they have no right to retain them. Under Clause 20, they have to make those goods available to the trader. However, unless digital content is embedded within a physical item, such as a DVD, it is difficult to return it to the trader in any meaningful sense. For example, it would be difficult for a consumer to return a faulty film they had downloaded to iTunes and, even if they did, the device would automatically retain a copy of the film. It has been suggested that the consumer could be required to delete the digital content as they cannot return it. However, this is easier said than done, as the noble Lord, Lord Stevenson, partly acknowledged. A requirement on consumers to delete the digital content would be difficult for even the best-intentioned consumer. For example, if a consumer was to e-mail back some digital content to the trader, a copy would be automatically retained in their sent box. In some cases, it would be impractical to delete the digital content. For example, a consumer might buy a so-called “mod” for a virtual world game such as Minecraft to be integrated into their world and built on further. Once this mod had been built on, if the mod proved to be faulty it would be impractical to delete it. A repair, or “patch”, to return the digital content to functionality would be a much more appropriate remedy.

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3.50 pm

Sitting suspended for a Division in the House.

4 pm

Lord Knight of Weymouth: Before the Minister gets back into her stride, I hope that she will forgive me if I ask her a question. Before the Bell so rudely interrupted her, she was talking about what happens if a consumer is dissatisfied with an app and whether the consumer should have to delete it from a device. Have she and the Government given any consideration as to whether, in that circumstance, the consumer could require the producer of the app to delete any data it had collected about the consumer, as an aspect of the redress for their dissatisfaction?

Baroness Neville-Rolfe: Perhaps I can come back to that when I finish developing the argument. We had the first point and I am now going to move on to the second about the ease of copying digital content. Digital content is much easier to copy than physical goods because of its intangible nature, creating issues for digital rights managers. Under many existing contractual relations, the trader will make a payment to the original rights holder for each individual who downloads that content. However, if a trader has to refund the consumer for faulty digital content that they have rejected, that may lead to problems between traders and rights holders, given that the trader will be unable to prove to the rights holder whether the digital content was deleted.

A further point is that an error in the code of a digital content product will be replicated in each and every copy of that product, unlike most goods where faults may be restricted to only a few products. Therefore, where faulty digital content is released the trader would potentially have to provide a short-term right to reject to all consumers of that digital content. That would currently be addressed by the trader issuing an update at little inconvenience to consumers. Having to provide a refund to all consumers, in contrast, could have huge consequences for the digital content industry, which we want to support, particularly our growing number of start-ups and micro-businesses. The result would be much more conservative and costly offerings from businesses, which would spend more time in product development. The availability of basic games that the developer improves over time, or the cheap apps that are enjoyed by many consumers, could be significantly affected.

A short-term right to reject is only one aspect of the new law for digital content. As I have already explained, the consumer must have adequate protection in the digital field. Therefore, the Bill introduces consumer quality rights for digital content for the first time. Most faulty digital content will be repaired with an update, but where faulty digital content cannot be repaired or replaced—or where the repair or replacement cannot be done within a reasonable time or without significant inconvenience to the consumer—the consumer will be entitled to some money back. We have made clear in Clause 44(2) that this price reduction could be as much as 100%—so a full refund. Our evidence shows that where traders are not able to repair faulty content, some traders provide a full refund.

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Lord Knight of Weymouth: I am sorry to interrupt; I fear that I may become an irritating presence at this stage. Many designers of digital products have to make a decision about browser compliance, for example, if it is a web-based product, whether or not they will go back to old versions of Internet Explorer. Would the rights to which the Minister has just referred apply to digital producers in circumstances where they have had to make a judgment, when they launch their product, that it is not going to work on those old legacy browsers, as so few consumers are still using them?

Baroness Neville-Rolfe: That brings me on to the points raised by the noble Lords, Lord Stevenson and Lord Knight. Perhaps I can touch first on the issue of IP rights to address consumers’ difficulty in deleting faulty digital content. There is a role for IP law and there may be remedies available, but we again need to strike a balance. We do not want to disadvantage consumers who are unable to be sure whether they have fully deleted all copies of their digital content. That is why we have not taken this route and do not feel that it would be great for the consumer.

If I understood the point that the noble Lord, Lord Knight, was making, he asked, “Why isn’t free digital content included? When will we use the powers that are provided in the Bill to cover it?”. There is a power if future evidence of significant consumer detriment arises. That seems to me a sensible provision to make. However, we do not have enough evidence of consumer detriment at present, and requiring remedies could impact on the sometimes narrow profit margins for businesses, leading to fewer offerings to consumers altogether.

Lord Knight of Weymouth: Will the department be collecting those data?

Baroness Neville-Rolfe: The department always keeps the operation of new regulations under review, and I can certainly follow up with the precise detail on this provision, if that is helpful.

The noble Lord, Lord Knight, also asked whether the consumer could require a trader to delete any data that they may have collected. In a sense, the answer is similar: it would be a significant departure from the current regime, which traders are familiar with, and of course data protection rules need to be complied with at all times.

The noble Lord, Lord Stevenson, I think asserted that consumers have the right to a refund only if the trader did not have the right to supply it. However, as I have just said under my second general point, the consumer can get 100% of their money back under Clause 44(2) if a repair or replacement cannot be made within a reasonable time or without significant inconvenience.

In conclusion, I have heard the argument in favour of giving intangible digital content the same rights as goods, including applying the short-term right to reject. I realise that there are strong views on both sides of this debate and a keenness to get this area right. We are already improving the situation for digital content

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by providing new rights when consumers buy digital content. There may be some attractions to the idea of providing exactly the same rights for digital content as goods, but the issues are not clear cut and a balance has to be struck with the impact on industry. To exactly align the rights for digital content and goods could have severe consequences—to the detriment of industry, which would have to bear the costs, and consequently, I fear, to consumers, who might suffer from reduced product offerings, reduced innovation and, ultimately, higher prices. I therefore ask the noble Lord to withdraw his amendment.

Lord Stevenson of Balmacara: I thank the Minister for her response, although I am very disappointed in it. I also thank my noble friend Lord Knight for his contributions. It is obviously going to be a lively afternoon if this is the rate at which he intends to intervene. I encourage him to do so, a bit like “Angry Birds”—or is that the wrong analogy? Just while I have him in my sights, his support for me was, I think, generous but perhaps a little lukewarm on the central point, which we might have a talk about afterwards. However, I also felt two things about what he was saying—which I think is relevant to the debate; I am not trying to pick on him. I agree that very often the download level, at which you are paying a matter of pence for things, can look very trivial, and that perhaps makes the effort of trying to remove the charge uncertain; but there are people in this world who look after the pence and hope that the pounds will look after themselves. For all people we have to be sure that there is not a massive rip-off taking place on a big scale. Prices are important, but they are not the only determinant.

Secondly, the failure to find a way in which one can return intangible downloads is also a way of cluttering up one’s computer. I think that I would be quite pleased if I got rid of some of the stuff that I have wittingly or unwittingly received in my computer which is slowing it down. These are points that we perhaps might come back to.

My main argument is that there is a lack of consistency in approach here. It is therefore not really about the detail, it is about the principles of this. In light of the fact that the consumer can experience some types of digital content in both tangible and intangible form, it seems unarguably the case that we need to have a single remedy and a single process under which that is operating. I think that we are building in problems for ourselves as a society if we do not get this right at this stage, and I fear that the Government are getting it wrong.

There is also a danger that the market will become skewed if one regime is seen to be effective and efficient for tangible goods but there is another for intangible goods. The better consumer protection for tangible goods and materials will be of benefit, and higher prices may even be applied to that area. Again, that would distort the market, which I thought was what we were trying to avoid. The cost elements of the two platforms are an issue to which we would have to return.

The Minister said she was worried about consumers’ willingness to try new and innovative products, but we are not hearing—as we have in previous debates in this

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Committee—that it is an important tenet of consumers’ interest in new products and innovative solutions that they have security in their rights. If they do not have easy, effective and properly organised rights as regards intangible goods, they will be less likely to take innovative material. That would be bad for innovation and our economy.

The Minister said that what we were asking for was a step too far but, as we heard from my noble friend Lord Knight, there is a huge asymmetry in the relationship between the traders now operating on the internet and consumers. He gave an example about the benefits that come back to producers in the form of personal data and the unwillingness of the Government to take that on board as a serious issue. If a consumer takes a free download in return for providing personal data but has no redress in terms of what the data are used for if he chooses to reject the material he has downloaded, there is a new asymmetry that we need to think carefully about.

Lord Knight of Weymouth: I am most grateful to my noble friend and I apologise if I am getting tedious. Through him, I say in response to the Minister’s response to my intervention that this is something that the Government need to think carefully about. We recently had the case of Snapchat and the pictures saved through Snapsaved.com that were released, involving a gross invasion of people’s privacy. If people decide that they do not want to risk that and therefore want to delete apps and cookies from their systems, it is reasonable for consumers to demand that those data, such as their pictures, should then be deleted by that producer.

Lord Stevenson of Balmacara: I thank my noble friend for his intervention.

In conclusion, the argument that it is not possible for us to legislate in this area, because it is just too uncertain and difficult to require consumers to behave appropriately in relation to the products that they have downloaded or bought in an intangible form, does not stack up. It would be perfectly possible, as was recommended originally by the first report received by the Government on this matter, to place a legal duty on those who wish to return digital downloads to delete them, and if they do not do so, to rely on what was implied by the Minister—that there may be rights available to the producer to ensure that anyone who tried to reuse material that they wished to return would be subject to penalties under the law. We are placing a lot of responsibility on consumers to take up matters through the courts. Why should there not also be some responsibility in the hands of the producers?

We will return to this point but, in the mean time, I beg leave to withdraw the amendment.

Amendment 31A withdrawn.

Amendment 32

Moved by Lord Stevenson of Balmacara

32: Clause 33, page 21, line 38, at end insert—

“( ) For the purposes of this Act, intermediary services which enable access to digital content by being a platform for introducing a consumer to a trader shall also not be considered to have supplied digital content.”

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Lord Stevenson of Balmacara: My Lords, Clause 33 sets out which contracts to supply digital content are covered by this chapter. It clarifies that the chapter will apply to contracts between a trader and a consumer where a trader agrees to supply digital content that has been paid for with money; associated with any paid-for goods, digital content or services; or paid for with a facility, such as a token, virtual currency or gift voucher. As well as dealing with the substantive issue raised in the amendment, it would be helpful if the Minister can indicate whether “freemium” games and other free downloads are covered by this clause.

The substantive part of the amendment aims to make the distinction between intermediary trader services and a trader explicit. The reason why online platforms, from small bulletin boards to sites such as YouTube, eBay, Amazon, Facebook, Twitter and so on, are so beneficial is that they allow anyone anywhere to instantly connect with billions of people around the world. Before, if you wanted to speak to a large audience, you needed to own a broadcast tower. If you wanted to reach consumers around the world directly, you needed to set up store fronts. Now, all it takes is a website host, YouTube or eBay and you can connect with a global audience.

4.15 pm

Appropriate limitations on intermediary liability play a critical role in the internet’s development. It is essential that legal regimes do not put intermediaries in the untenable position of policing content or holding them strictly responsible for what users do. After all, telephone companies are not held legally responsible for callers who use their phone lines and are not forced to monitor calls to make sure that they are not doing something illegal. In the same way, requiring online services to monitor every piece of content or imposing harsh liability on them does not make sense. It would be bad for innovation, free speech and privacy.

When Android Market was originally launched in 2008, it included approximately 600 apps. Google Play, its successor, now includes more than 1 million apps, with thousands being added daily. It also includes a library of more than 18 million songs, 5 million e-books and thousands of movies. Google Play has had a total of more than 50 billion app downloads, and iTunes has 1 million apps in the App Store, with more than 60 billion app downloads. That has resulted in a total of $13 billion being paid to developers over the years—so it is a big part of the world’s economic activity.

The Bill refers to the consumer contract with “a trader”. It is therefore important for both consumers and UK developers that new legislation does not undermine the intermediary protections that allow platforms such as Google Play and Facebook to function. My amendment explicitly clarifies that there is a distinction between the trader—the developer of an app—and the intermediary, and that consumer rights over the trader are not extended to the intermediary.

Premium or free-to-play apps have been around since 2009, when the iPhone first allowed micro-transactions on the iTunes App Store. For those who are not up to speed on this matter—I am sure that my

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noble friend Lord Knight will keep us right, in case we go wrong—games can be downloaded that allow consumers to be charged for elements in the game. Such games have become much more widespread in the past year, with the success of games such as “Candy Crush” and “Clash of Clans”. It is estimated that 63% of the total revenue of phone apps comes from games. Although these games are free to download, the tactic of deprivation is used whereby users have only a finite number of moves or actions when playing the game for free, and they have to wait for a period of time—sometimes hours—in order to play again. Therefore, users are tempted to keep the fun going or satisfy their frustration with a particular level by paying for credits to continue playing. This tactic has led to a major revenue stream, and to plenty of addicts who are often surprised when their credit card bill comes in. At the beginning of 2013, 77% of apps in the iTunes App Store had an in-app purchase. By November, it had shot up to an amazing 92%.

Can the Minister explain to what extent this clause covers “freemium” content? For example, if a consumer has downloaded a free game that runs perfectly but there is a premium element to the software that must be paid for, do the rights extend only to the parts that are paid for, or will this extend to the unpaid-for elements of the software if they are subsequently affected? At which point under this clause does the cover kick in for “freemium” games—when they are downloaded or when the consumer purchases something within the game? Once the premium content is paid for, does the whole download become a paid-for service? I look forward to hearing from the Minister. I beg to move.

Baroness Neville-Rolfe: My Lords, I enjoyed the graphic picture described by the noble Lord, Lord Stevenson, of how things have changed and the smaller scale of everything as a result of the digital world. Despite his comments on the previous amendment, I think that we share a common goal: to legislate for the consumer of digital content in a 21st-century way.

One of the main aims of the Bill is to provide clarity on what rights consumers have when goods, digital content or services are substandard. I am sure that we are all agreed that one of the things that a consumer needs to know is to whom they should go when things go wrong. Intermediary businesses also need to be clear on when the rights do and do not apply to them, particularly when they are developing new and innovative business models. The digital content quality rights are contractual rights consumers have when they pay a trader to supply digital content to them under contract.

The noble Lord, Lord Stevenson, asked whether freemium products were covered by the clause for those who are not as digitally aware as some among the younger generation. A good example would be “Smurfs”, which is a free game but users can buy additional content within the game such as a house for Smurfers. The basic model is free but consumers then pay, sometimes at premium rates—hence the term freemium—for enhancements and additional features. Where a consumer pays for digital content and the trader provides it under a contract, the quality rights

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apply. This means that the initial free product will not attract the quality rights. However, the later paid-for features will, indeed, attract the quality rights. This includes being fit for the purpose for which they were bought—that is, to use in connection with the free product. Those of us who have studied the proceedings in another place will know that “Candy Crush” occupied a great deal of time among Members, to their great delight.

The noble Lord also asked what happens when the two matters come together and whether the quality rights that apply to the paid later additions then change the status of the free product. I will come back to him on that point.

The digital content chapter covers a consumer contract with the trader who supplies the digital content and not the intermediary who introduces the consumer to the trader, as they are not supplying that digital content. The intermediary will be covered only if they also supply digital content as part of their business. For example, if a consumer buys a computer game from an online trader such as Green Man Gaming, Green Man Gaming is the trader, in the same way as if they buy a board game from WH Smith, WH Smith is the trader.

If the consumer uses a search engine to find a trader from whom they can buy the game, the contract is not between the search engine and the consumer. The same is clearly true in the physical world. If the consumer uses Yellow Pages to find a shop, Yellow Pages is not the trader.

What consumers need to know is who the trader is. This information needs to be clear and transparent. I know that this is not always the case in the digital world. However, the consumer contract regulations, to which we referred in our discussions last week, came into force in June, particularly in respect of distance sales. They require that the identity of the trader and their contact details are provided to the consumer before the contract is made. This applies to digital content as well as to goods and services. Therefore, the proposed amendment is not necessary because this is how our reforms work. The rights apply against the trader the consumer has paid for the supply of digital content and not against the intermediary. The name and contact details of the trader have to be provided to the consumer under those regulations. I therefore ask the noble Lord to withdraw the amendment.

Lord Stevenson of Balmacara: I thank the Minister for her response. I take it from that that there is now agreement and clarity about the role of the intermediary, which I fully accept. I am glad to have on the record that the trader is the person with whom the consumer is contracting to provide a particular good or service delivered digitally and that the role of the intermediary is not involved unless they are also supplying either directly or indirectly material which could be called digital and it would be a paid-for service. I am also grateful for the confirmation that the consumer contract regulations will apply to that.

What I am not quite so happy about is the point raised by my noble friend Lord Knight about free downloads and what constitutes a free download—that

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is, not for monetary consideration—in the digital world. I wonder if the Minister would take that point away. It obviously comes up in relation to the freemium type of arrangement, but there are wider considerations here. I do not understand why the Government are taking a rather pure view of the fact that the trigger point appears to be the transfer of cash for a product that is already embedded into something that has been downloaded. The vanilla version—if I can use that term—of the game is clearly being used and operated in a traded way even though money is not being exchanged. There must be a reasonable expectation on both sides that a later development in that process would be for money to be exchanged so that the game could be enjoyed at a higher level. If the rights to it kick in only at the point at which consideration passes, then we are not covering the point at which the free version somehow interferes with and reduces the enjoyment of the player. It is perhaps too complicated to deal with here, but I would be grateful if we could exchange letters on this point. With that, I beg leave to withdraw the amendment.

Amendment 32 withdrawn.

Clause 33 agreed.

Clause 34: Digital content to be of satisfactory quality

Amendment 33

Moved by Lord Stevenson of Balmacara

33: Clause 34, page 22, line 21, at end insert—

“(aa) any claim made by the trader as to the outcome the digital content will achieve,”

Lord Stevenson of Balmacara: Your Lordships will be glad to know that this is my third of three amendments, and then I will have a rest and noble Lords will have a rest from me. Then again, you may not wish to know that the noble Lord, Lord Clement-Jones, will follow; with his detailed knowledge and expansive style, he may be in the same position.

Clause 34 requires that digital content sold to consumers must be “of satisfactory quality”, according to the expectations of a “reasonable person”. I am sure that it is obvious to all concerned that there are several different factors that will affect whether or not the quality expectations of a reasonable person are going to be met. These factors are: any description of the digital content, the price paid and its state and condition, as well as any other relevant circumstances. That is a very broad definition. The clause sets out that the content should be free “from minor defects”, and this is to be judged by the “reasonable person” standard, too. Therefore, a reasonable person could be said to expect a music file to work without playback problems, but if the software is complex it may be impossible to release a perfect version, and so the reasonable person would be expected to accept minor defects.

However, consumers are reporting problems with digital content. A recent EU study found consumers reporting one or more problems at, in the category of

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music, a level of 16% of downloads; for games it was 16%; for ringtones it was 19%; for antivirus software it was 23%; and for e-learning—presumably not TES—it was 22%. Our amendment would protect consumers where claims are made about the outcomes of a digital purchase. This follows on from the debate last week about tangible goods and what is “satisfactory”. There are obviously differences in relation to digital content. If, for example, a piece of antivirus software claims to remove all viruses or that it will protect your computer for two years and it turns out that it does not, a consumer should be able to rely on this outcome claim in being able to prove that this digital content is or is not of satisfactory quality.

In this area there are major differences between what the least and the most knowledgeable people understand about the products they can purchase, and therefore about what their expectations should be. The draft legislation assumes that digital goods should have a clear and specific purpose. That may seem a straightforward aim: it seems like an obvious truth that a product should do what it says on the tin. However, the short history of digital innovation shows that frequently the most successful innovations do not happen in ways that were expected when they first began. Amazon, Google and Facebook are obviously now used for much more than simply buying books, providing lists of links or student dating, although I gather from my children that Facebook still does have that function.

So, given that flexibility of purpose is both valued by consumers and critical to the evolution of digital goods, surely the legislation should take care that assumptions about the need for digital goods to have a specific purpose do not stand in the way of the innovation that consumers value and expect developers to deliver. Obviously, the ordinary consumer knows that they will need antivirus software before going on to the internet but they may not know how it works, what it will and will not stop and the nature of the latest threats. This places them in a far weaker position if they are negotiating with a trader.

If the consumer specifies that the digital content will be used for a particular purpose, the digital content must be fit for that particular purpose. For example, if a consumer tells a trader they want a piece of educational software for their preschool child and finds that it is in practice only suitable for an older child, we need to be able to say that it would not be fit for that particular purpose.

The clause also covers digital content supplied for a particular purpose, even where that is outside the usual purpose of goods of that type. This may be most applicable to specialist software, where a person may be seeking to use software in an innovative way. For example, PowerPoint can be used to design posters as well as doing slideshows, so a trader could conceivably sell this software for that purpose. However, posters designed using this software are not really of good enough quality to print and use and there are much better products available to do this. So, in some senses, it is not fit for purpose. This could be a problem for small businesses which may buy a piece of software off

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the shelf because they cannot afford a bespoke version and are then in trouble when it turns out not to be able to function as they intended.

Amendment 35 seeks to cover any public claims made by the trader about what the software may or may not be able to do that is not a usual function which would affect whether it is fit for purpose. This is a somewhat complex issue and will only apply in rather limited circumstance as interactions between buyer and seller will generally be private and not made publicly. So the amendment is quite narrow and would cover, say, a scenario where a trader was asked about a product in a public arena, such as a trade fair, and said, for example: “If you want to design posters without paying for specialist software, download PowerPoint for half the price and use that”. The consumer could then rely on this right by saying that the public statement did not achieve the quality outcomes that they needed. I beg to move.

4.30 pm

Baroness Jolly (LD): My Lords, for the first time, this Bill clarifies what rights consumers have when they buy digital content. Those rights include that the digital content be of satisfactory quality. If, before making a decision to buy, a consumer relies on a claim as to the outcome of digital content, it is, in many cases, absolutely right that this claim should be taken into account when assessing whether the digital content is of satisfactory quality. It may not, however, be appropriate when the claim relates to factors such as the subjective enjoyment of the content, such as an action game trader saying that the game will give the consumer “the greatest thrill of your life”. Thank you to the Bill team for that one.

That is why, as with goods, one of the factors taken into account in an assessment of satisfactory quality is “other relevant circumstances”. Again, I would like to stress that Clause 34(5) provides that this includes,

“any public statement about the specific characteristics of the digital content”.

This could include key outcomes. Where a consumer has relied on a claim made by a trader as to the outcome of the digital content, in many cases they will therefore already be able to take this into account when judging whether or not the digital content is of satisfactory quality.

When we discussed the question of outcomes relating to goods, the noble Baroness, Lady Hayter, distinguished claims about the physical characteristics of goods from claims about the outcome that the goods were supposed to achieve. Noble Lords may remember that there was much talk about the efficacy of washing machines and washing powders. However, statements about digital content may form part of the description—if the statement says that a calendar will include details of all public holidays, for example. Consumers have clear remedies if digital content, like goods, is not as described.

Where consumers are deliberately misled—again, as we have discussed in relation to goods—consumers are also protected under the Consumer Protection from Unfair Trading Regulations. The Government have given consumers a private right to redress if these

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regulations are breached, and we have clarified that they will apply to sales of digital content. These changes came into effect on 1 October. Under the Bill and the regulations, therefore, it is clear that there is strong consumer protection in place in relation to claims made by traders as to the outcome that digital content will achieve.

Earlier in Committee, the noble Baroness, Lady Hayter, expressed the view that if statements about outcome are already covered by the legislation, this should be included in the Bill to provide clarity to consumers. There may be a number of unintended consequences if that happened here. First, although it will in many cases be appropriate that public statements about the outcome of digital content should be taken into account when judging satisfactory quality, as with goods, a requirement that all statements be taken into account is not a practical option. Such a specific requirement would lose the necessary flexibility that we have under the current provisions. It would draw in statements made in advertising that are not intended to be taken literally. For example, an advertisement might state that a brain training app will turn you into the next Einstein, but a particular concern of the digital content industry, much of which is based on creative content, is that it would draw in statements as to the subjective enjoyment that the consumer would get from the digital content or the artistic merit of that content, which fall outside the meaning of “quality” that is understood in the Bill.

Secondly, there is a risk around narrowing the interpretation of “relevant circumstances”. The more circumstances that are specified as included, the greater the risk that the concept will be narrowly construed. As such, the Government consider that the Bill already provides the appropriate balance and flexibility in determining whether digital content is satisfactory. However, we can address the noble Lord’s point about providing clarity to consumers that statements about the outcome of digital content and goods are relevant factors in an assessment of “satisfactory quality”. This point will be set out in the guidance we will provide when implementing the Bill.

On Amendment 35, I do not dispute that it is important that consumers are protected if digital content is not fit for an advertised purpose. As we have discussed, the Bill provides this protection in Clause 34. The standard of satisfactory quality can include digital content being fit for its usual purpose and takes into account public statements made not only by the trader, but also by the producer or any representative of the trader or the producer. Clause 35 addresses a slightly different situation. Whereas Clause 34 refers to the purposes for which digital content of that kind is usually supplied, the purpose of Clause 35 is to ensure that consumers are protected when they rely on the trader’s judgment. If consumers make known to a trader that they intend to use the digital content for a particular purpose, and if it is sold to them on that basis, the clause clarifies that the digital content should indeed be fit for that particular purpose.

Let us take an example. A consumer may want to purchase an app that tells them whether or not their device is level, for the purpose of building a home extension. The consumer emails a trader to ask if the

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app can be used as a spirit level for building the extension and receives a reply stating that it would be suitable. So the trader has been made aware of the customer’s intentions for the app and has sold it on that basis. The consumer should be able to rely on the fact that the spirit level app will be accurate enough for their needs in constructing the house extension. Clause 35 protects the consumer even if the intended use is not the usual purpose for the digital content. Public claims about the digital content may not be relevant here. This clause is all about situations where the consumer is seeking the advice of the trader for less usual purposes, which may not be public. Indeed, this amendment may cut across the consumer protection that Clause 35 provides. Clause 34 already covers claims as to the quality or usual purpose of the digital content. I hope, therefore, that the noble Lord will be prepared to withdraw the amendment.

Lord Stevenson of Balmacara: I thank the noble Baroness for her comments, although I am slightly alarmed by the example of the spirit level app. However, that may have more to do with my technological ineffectiveness in terms of dealing with the tools of the trade; we can talk about that later. The key to some of these issues is better guidance because it is clear that we are in new territory here. What works for tangible goods may not be as effective in terms of intangible goods, and I think that that is common ground between us. Obviously we cannot see the guidance now, but I would ask the noble Baroness to advise me, not necessarily from the Dispatch Box, whether it will be available for consultation before it is issued and whether there will be the usual round of discussions with trade bodies, producers, consumer bodies and others. That would be helpful in terms of getting us to the right place. With that, I beg leave to withdraw the amendment.

Amendment 33 withdrawn.

Amendment 34

Moved by Lord Clement-Jones

34: Clause 34, page 22, line 22, after “relevant),” insert—

“( ) the fact (if it be the case) that the digital content is computer software of a type which commonly includes defects when supplied,”

Lord Clement-Jones: My Lords, I beg to move Amendment 34 and speak to Amendments 36, 37 and 38. Clause 34 specifies that digital content is,

“to be of satisfactory quality”,

and requires that digital content must be free from “minor defects”. I very much accept, unlike the noble Lord, Lord Stevenson, that there is a different regime for digital goods versus physical goods, but while this notion of satisfactory quality works well with traditional goods, it is unfortunately open to broad interpretation if applied to digital content, such as complex internet security software.

I suspect that Professor Bradgate will be much quoted today; I am no exception. In his report for BIS, which I quoted on Second Reading, he said:

“Even with extensive testing, it is quite common, and an experienced computer user will be aware of the fact, that the complexity of modern programs is such that bugs in the program are likely to manifest themselves throughout the program’s lifetime.

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Modern complex programs therefore need regular updating and patching to correct bugs and/or other potential weaknesses in the program as they arise”.

Professor Bradgate also states that,

“the courts have shown themselves aware of the fact that new software cannot be guaranteed free from ‘bugs’ and the presence of bugs, especially in new software, does not necessarily make it unsatisfactory”,

because bugs are considered standard in digital content on issue.

It follows that, in general, the presence of bugs in software is not in itself regarded as a breach of contract. It seems from the impact assessment that it is not the Government’s intention to change the law in this regard. The difficulty with the new implied terms as drafted is that they do not appear to cater explicitly for the presence of bugs. There is a real danger that an ordinary reader of these provisions may well be led to conclude that digital content containing bugs is not of satisfactory quality, is not fit for purpose and is not as described.

As I have mentioned, one of the signs of satisfactory quality in Clause 34(3) is “freedom from minor defects”. The test under subsection (2) is what,

“a reasonable person would consider satisfactory”.

All relevant circumstances are to be considered. However, there is no evidence that a reasonable person would be aware that bugs are normal or consider this a relevant circumstance. The position would be clearer if the fact that the presence of bugs is normal was expressly mentioned as a relevant circumstance in subsection (5), but unfortunately it is not.

Some forms of digital content—music and e-books perhaps being the classic examples—are not expected to contain bugs. That is absolutely clear. That could be catered for by specific reference to those forms of content. In fact, the overwhelming majority of digital products are provided through and on top of an intricate underlying mesh of physical infrastructure, such as the broadband network; virtual infrastructure, such as a cloud server; hardware, such as a computer or smartphone; software, such as an operating system; and other products, such as the application needed to play a media file.

As a result, defects in complex software can rarely be identified in isolation from the context in which they are being provided. Therefore, the attribution of a defect or malfunction to one particular product will, in most cases, be at best ambiguous and sometimes outright impossible. The same product might perform flawlessly in one context and work poorly in another. For this reason, to require that complex software performs without minor defects in all circumstances would be unrealistic—the consequences of strict compliance are likely to be increased cost to consumers and slower product evolution from the increased time and resource required for testing. It would be preferable for consumers and businesses to require that minor defects or malfunctions that may surface as a product or service is used should be fixed as promptly as possible. I welcome the revised Explanatory Notes clarifying that it is common to encounter some bugs in

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complex software, but this should be expressly included in the Bill as it would provide greater certainty to both consumer and industry.

4.45 pm

Moving on to Amendment 36, Clause 35 is likewise qualified by a requirement of reasonableness. However, in this instance, the position is even less clear than in Clause 34. There is no reference to a reasonable person test but simply to reasonableness. Again, there is no mention of the fact that bugs are normal.

Moving on to Amendments 37 and 38, Clause 36 requires digital content to be as described. The same considerations apply to Clause 36. It requires that digital content essentially remain as it was initially described for the entire duration of the contract. This is highly problematic for many types of digital content, especially complex internet security software, due to its dynamic nature. The quality of digital content may actually improve over time during the course of routine upgrades.

Software updates typically follow the evolution of the technology landscape and, as a result, functionalities may be introduced or phased out, become obsolete or vulnerable, or otherwise adapt to changing consumer needs, demands and expectations in the course of the service being provided or the software being used. As a result, the software product may not always or entirely meet the description given initially upon conclusion of the contract. The Bill would impose liability for nonconformity in such a case even though the change is very much in the interests of the consumer.

The Explanatory Notes rightly observe:

“As long as the digital content continued to match the original product description”—

and the quality is not reduced—

“additional features would not necessarily breach this right”.

However, this does not adequately take into consideration that certain characteristics, features, functionalities or other attributes may have to be removed or disabled from security software; for instance, to fix newly arisen vulnerabilities or to address issues caused by obsolescence, whether that of the seller’s digital content or of third party content, products or services.

According to Clause 36(4), changes to the digital content are permitted only when,

“expressly agreed between the consumer and the trader”.

This would prove extremely problematic in most cases, especially for security software products, which require frequent and regular modification, in particular to stay abreast of the fast-evolving threats that they are faced with. In practice, this clause would mean that software providers would need to seek the consumer’s agreement on a case-by-case basis to each and every modification of the product. The proposal for clarification in guidance is not a satisfactory solution. There is a risk that both the business and the consumer will spend time and money on an unnecessary dispute. There is also a reputational risk to a business if it declines to provide the remedy that the consumer believes is available; and, of course, consumer confidence would be undermined. I beg to move.

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Baroness King of Bow (Lab): My Lords, this is an interesting group of amendments. “Oh no, it’s not”, I hear you say. Oh yes, it is. It is interesting because it relates to the fact that digital content is different from most other retail goods in so far as consumers cannot hold it in their hands. However, these amendments add more exemptions to areas where digital goods must be of satisfactory quality.

I will not speak at length on this amendment or the other amendments in the name of the noble Lord, Lord Clement-Jones, but it seems worth reiterating the peculiar nature of digital content, which is why these amendments arise. It is hard to imagine any other area of retail where a manufacturer would sell you a good when they know it is almost certainly going to have problems—it is almost certainly going to be defective in some way. Digital software is a strange anomaly because, as we heard, computer coding means that there are virtually always bugs to fix. We do not think it is abnormal any more, for instance, when Apple releases a new operating system such as iOS8 and, for whatever reason, our computing equipment is—to use the technical term—stuffed. My iPad is no longer working ever since I downloaded iOS8. There was actually an even more appropriate technical term to use but I did not think it was parliamentary.

The point here is that the Bill must tread a careful balance. On the one hand, we must not create a legal framework which is permissive towards digital content providers selling products that are simply not fit for purpose. On the other, we do not want to stop innovation and modification in the fast and frenetic world of technological advance and software downloads. In light of this, will the Minister ensure that any amendments of this nature do not tip the balance away from the consumer and towards the digital content provider? Most consumers struggling with technology feel that it is already unevenly balanced. My noble friend Lord Stevenson used the term “asymmetry”, which is very apt. Notwithstanding this, however, we recognise that with complex software it is impossible to give 100% guarantees. Therefore, it seems reasonable to say that where minor defects in software do not affect the overall functionality of the product, that digital content should not be deemed unsatisfactory. We look forward to the Minister providing further clarity on this issue because, as she pointed out, this is about getting the rulebook right for the 21st century. At present, we are not entirely clear what the rules are.

Lord Knight of Weymouth: My Lords, last Tuesday I facilitated part of an event at BAFTA organised by Innotech. One of the speakers was a young man, Jamie Woodruff, who has autism but probably earns a good income from being what I think is described as a white-hat hacker. He is a benign hacker who hacks into computer systems but has an ethical agreement whereby he gives people 28 days’ notice to resolve the security problems. If they do not resolve them, he can publish the problems. He did a live hack during the event to show how easy it is to hack into websites and expose the weaknesses that many sites have. That raises a question in my mind about quality.

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I raise this issue to give the Minister an opportunity to say a little more about Clause 34(3) in respect of how quality is defined in this context. The word “safety” is used in Clause 34(3)(c). A company may have a business-to-consumer relationship in the course of which it collects a whole bunch of data. The service may be of very high quality in terms of what is described and what the consumer pays for. Indeed, the whole experience may be fine but subsequently it transpires that that business has not bothered to make the consumer’s personal data secure, it is hacked into and they lose their personal data. Does the word “safety” cover that scenario so that the consumer is protected and can have proper redress against that company?

Baroness Jolly: My Lords, this has been an interesting debate. Amendment 34 raises an important issue for digital content—when does a defect in digital content render it faulty and at what point is digital content not of satisfactory quality? I can confirm that BIS has listened to Professor Bradgate. As such, I recognise that some forms of digital content, such as software or games, commonly contain minor defects, or bugs, because it is currently difficult to produce code that is entirely error-free, whereas other types of digital content, such as music files, do not. I know that industry players such as techUK and the Federation Against Software Theft have expressed the concern that complex forms of digital content, such as software, should not be treated in the same way as simpler forms of digital content, such as music files. I believe that the Bill is flexible enough to cope with these differences.

Reasonable consumers understand that some types of digital content sometimes contain minor bugs, and that bugs will usually be fixed along the way through an update, although I went into a reverie at one stage listening to the noble Lord, Lord Knight, and remembered that my very early updates of MS-DOS were actually posted to me on a five and a quarter inch floppy disk, so things have moved on. While I know that the software industry is concerned about the phrase “freedom from minor defects”, the key point is that freedom from minor defects is an aspect of satisfactory quality only “in appropriate cases”.

We have acknowledged in the Explanatory Notes that it is the norm to encounter some bugs in a complex game or piece of software on release. A reasonable person might not expect that type of digital content to be completely free from minor defects. We will also highlight this point in business and consumer guidance when implementing the Bill. That guidance is being written in consultation with industry and consumer stakeholders. The Bill team confirmed this when we went through it again just before this session.

Assessments of satisfactory quality also take into account “all relevant circumstances” and I would expect the type and nature of the digital content to be such a relevant circumstance. However, it is entirely reasonable to expect other forms of digital content, such as MP3 or music files, to be free from minor defects. Such types of digital content would probably not be judged to be of satisfactory quality if they contained bugs, even minor ones. So it is important to retain “free from minor defects” as an aspect of satisfactory quality in “appropriate cases”, as the Bill provides.

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Although I understand the driver behind the amendment, I believe that the Bill is already flexible enough to take these concerns into account. To pick up a point made by my noble friend Lord Clement-Jones, about evidence that reasonable consumers expect bugs in software, the presence of bugs is widely understood in the marketplace. In its evidence to the BIS Select Committee during pre-legislative scrutiny, Which? stated:

“Consumers are very accepting of updates and patches within the software development world and when purchasing apps”.

That will, necessarily, form part of the assessment of satisfactory quality. However, consumers do expect software to work as they are told and as described when sold and that in any given situation, you would be able to tell the difference between a faulty piece of software and one that is just evolving.

The Bill is based on, and takes into account, the expectations of a reasonable person. Amendments that address specific types of software would reduce this flexibility, and may limit the relevance of the provisions in future as the industry evolves. I am also concerned that a blanket requirement to take account of the common presence of defects could have negative implications for consumers. It would make it harder for a consumer ever to show that software was not of satisfactory quality when it contained a defect, even one that was not minor.

Amendment 36 seeks to bring the issue of defects into the concept of “fit for a particular purpose”. As such, it conflates two different concepts: satisfactory quality and fit for a particular purpose. Digital content is fit for a particular purpose or it is not. That is separate from questions about whether it is of satisfactory quality. Clause 35 relates to instances when a consumer might let a trader know that they intend to use the digital content for a specific purpose that is not the normal use of that digital content. So if a consumer tells a sales assistant that she wants to use a computer game described as helping children learn to read in order to teach her child some basic letter sounds, and the trader sells her the game for that purpose, the game must be fit for that particular purpose—it must be able to teach basic letter sounds. The consumer is relying on the skill and judgment of the trader that the game has this feature.

If the digital content is not fit for that particular purpose, Clause 35 is breached, unless the trader can show that the consumer did not rely, or it was unreasonable for them to have relied, on the skill or judgment of the trader. A defect might render some digital content unfit for a particular purpose if a necessary feature did not work well enough or, indeed, it did not work at all. In such cases, I would be concerned that a requirement to take account of the common presence of defects could create a lack of clarity for consumers and lower consumer protection. The amendment could water down the concept of “reasonably fit” in subsection (3) for products that could be argued to be of a type that commonly includes defects. This could have the effect of reducing the impact of Clause 35 and therefore consumer protection.

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5 pm

Finally, Amendments 37 and 38 seek to provide that, for complex types of digital content, the mere presence of defects should not mean that the digital content is not as described, unless the description specifically states that the digital content is defect-free. However, as with “fit for a particular purpose”, the digital content either meets the description or it does not. As with Amendment 36, Amendments 37 and 38 have the effect of undermining the requirement that the digital content should be as described.

The description of the digital content is largely in the gift of the trader, but it includes information on the main characteristics of the digital content and its functionality and interoperability, as required under the Consumer Contracts Regulations. Again, digital content is either as described or it is not. If digital content does not perform a function it is described as having, then it is not as described.

What about defects that prevent functions from working? If a consumer buys a word processor that is described as having a spell checker and the spell checker has a defect that prevents it from working properly, the digital content is clearly not as described. I am concerned that the amendment could be interpreted such that, in this scenario, the word processor still meets the description because software normally contains defects, so that is to be expected. This is not an acceptable outcome for consumers. If a defect affects the functioning of the digital content so that it no longer meets the description, the consumer should be entitled to a remedy for breach of Clause 36. That is the position in the Bill and I believe it is the right one.

As well as being concerned by a reduction in consumer protection, I am concerned about the effect of the amendment on the longer-term competitiveness of the UK digital content industry. If we effectively state in legislation that some types of software contain bugs and are therefore not usually faulty, what is the driver for improvement in the industry?

My noble friend Lord Clement-Jones raised a point that certain features might have to be removed to deal with new security threats. I am not really ducking the issue, but I say to him that we are going to discuss that under Amendment 40A.

The noble Lord, Lord Knight, asked about Clause 34(3) and how quality is defined, especially in paragraph (c), “safety”. If a company has a B2C relationship and collects data from consumers but the personal data are not kept secure by the business, is the consumer protected by the term “safety”? To be of satisfactory quality, digital content must meet

“the standard that a reasonable person would consider satisfactory”,

taking into account all relevant circumstances. Our view is that the security of digital content is a relevant circumstance that could form part of the judgment of whether or not digital content is of satisfactory quality.

All that being said, I therefore ask the noble Lord to withdraw his amendment.

Lord Clement-Jones: My Lords, I thank my noble friend. She certainly came out fighting for Clauses 34, 35 and 36. I thank the noble Baroness, Lady King, for her very thoughtful contribution.

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What we are trying to get at—and I do not think we are that far apart, actually, in substance—are the realities of supply of digital software. This is not an attempt to drive a coach and horses through the Bill or, to use another metaphor, to steal a march in this respect. As the noble Baroness, Lady King, said, we have to try to maintain a careful balance in these circumstances. Those who are propounding amendments to the Bill are a very responsible group of software companies, such as those represented by FAST and techUK. This is not some mirage that has been put up. They are seriously concerned about the nature of consumer expectations.

In reference particularly to Clause 35, my noble friend said, “No, no, we cannot have that amendment because it will not provide us with clarity”. We are all on the same page as far as that is concerned. What we want is clarity. Obviously, I will read what my noble friend had to say but actually an awful lot of what is in these amendments is a response to what Professor Bradgate had to say. But the Government are proposing to deal with this via consumer guidance rather than in the Bill. The big question is whether that is adequate to give sufficient clarity in the case of dispute. That is what it is all about.

We have spent many, many happy days in this House arguing whether having something in the Bill is better than having it in regulation or in guidance. In this case, with a very important industry such as the software industry, which is highly competitive—and if it cannot innovate, that will actually reduce its competitiveness—it is completely the other way round from the argument that the Minister used. Software companies need to be able to innovate and we must allow them to innovate. What concerns me is that if there is not clarity in the contract between the consumer and the software provider, that will have damaging consequences for a highly competitive industry.

I do not think that we are very far apart in our intentions but we differ over what we believe the remedy to be for the particular issues that the software industry has. I will consider Hansard. I hope that my noble friend will likewise consider what I have said with some care, particularly the issue about the changing nature of some of the software over a period of time, particularly security software. She was adamant about Clause 36 and the need for the content to be as described but we are dealing with—I do not know which Greek mythological creature changed over a period of time but it is rather akin to that. You think it is one thing but it has to respond to changing threats in security over a period of time and you may end up with a slightly different product. So it is not simply that you are going to get what is described right at the outset of the contract. That is too black and white a view. Nevertheless, the whole purpose of Grand Committee is to have a debate about these things and unpack some of the issues, and I very much hope that we can continue that discussion with the industry. In the mean time, I beg leave to withdraw.

Amendment 34 withdrawn.

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Amendment 34A

Moved by Lord Clement-Jones

34A: Clause 34, page 22, line 40, at end insert—

“( ) which is beyond the trader’s control (including third party software provided without warranty to the trader).”

Lord Clement-Jones: My Lords, I am very pleased to have the support of the noble Lord, Lord Sugar, for Amendment 34A. I do not know whether he is going to make a personal appearance today, which would excite us all, but let us see. I see that his name is on other amendments so you never know.

Traders often use third-party software in their digital content products. This software is usually provided to the trader on a no-warranty basis, meaning that the third party will not guarantee that the software works or is free from bugs. However, Clause 34 inserts a term into the contract between the trader and the consumer that the digital content is of satisfactory quality. This means that in effect the trader has to guarantee the first party’s content even when it does not have the same guarantee from the third party whose content it is. This creates a liability for the trader which is beyond its control. The clause risks stifling innovation as it would prejudice SMEs which have less negotiating power with third parties and may have to stop using third-party software that is provided without warranty.

Let me provide an example. An app provider creates a consumer-facing app using software that it has licensed in from a third party. The software licensor provides its software on standard terms which state that no warranty is given. The app provider must then make its app available to consumers subject to the provision in the Bill that the app is of satisfactory quality, even though it does not have that warranty upstream and even though it has no control over the software licensor’s portion of the app. If the app does not work because of the software licensor’s software which the app provider has no control over, and for which it has no recourse against the software licensor, the app provider will still be liable to the consumer. That is an illustration of the impact and I hope very much that my noble friend will take it into account when considering the merits of this amendment. I beg to move.

Baroness King of Bow: My Lords, this amendment would provide further exemptions to the providers of digital content, freeing them from the need to guarantee the third-party software they use. I understand the argument put forward by the noble Lord, Lord Clement-Jones; namely, that the trader may not have a warranty from the third party, and I am sorry that my contribution will be a disappointment to him. It appears to me none the less that it would reduce consumer protection, but after all, this legislation is called the Consumer Rights Bill. Again, this is a question of balance. The key point is that if the trader benefits financially from the use of the third-party software, surely it is inappropriate to load the risk on to the consumer. It is the trader’s decision to buy and use third-party software, so if that trader is unsure of its quality, it must be a risk that it

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undertakes and consequently should be liable for, not the consumer. The consumer cannot control the trader’s relationship with its suppliers; third-party software is very much the responsibility of the trader, and therefore we cannot support the amendment.

As I have already mentioned, if a business is selling digital content for profit, it is up to that business to ensure that all elements of the final product are of a reasonable quality. I hope to hear that the Minister shares this view.

Baroness Jolly: My Lords, the Bill aims to create confident consumers who are more likely to try new products and new providers, and as such, help to drive growth and innovation. With this aim in mind, our position is that there should be no gaps in consumer protection for digital content. It is only right that when a consumer buys digital content they can expect it to be of satisfactory quality, fit for purpose and as described. If not, they can expect the fault to be put right. The concerns of traders who may find their ability to claim back costs from third-party providers limited by their business-to-business arrangements need to be balanced against the needs of consumers who should be able to shop with confidence. I understand that B2B relationships may be particularly complex in the area of digital content, but complex arrangements are not a defence against faulty digital content, and consumers should not be left without adequate protection.

I shall pick up on a point made by my noble friend Lord Clement-Jones, that it was not fair on SMEs since intermediaries may limit their liability in a B2B contract. I understand the problem that some smaller traders may lack bargaining power with larger companies, and that is why we have other protections in law such as the Unfair Contract Terms Act 1997. However, beyond that basic protection and other protections, such as the Sale of Goods Act, where appropriate, we believe it is important to allow businesses the freedom to make contracts with each other without state interference. My concern is the potential for this amendment to significantly undermine consumer protection, because it would seem to have such very broad implications.

5.15 pm

For example, I want to avoid a situation where traders are provided with a get-out clause for the quality of digital content. We have explicitly stated that businesses cannot limit their liability for the quality rights in Clause 47. In cases where the trader is not the original digital content manufacturer—for example, when a consumer uses a retailer such as GAME, Amazon, Steam or the App Store—all digital content could fall within the concept of “third-party software”. As with the statements about the existence of bugs in software, I am also concerned about the long-term effect of this provision. What would be the incentive for traders to supply quality products when this provision would effectively allow them to limit their liability for faults where the B2B contract has a disclaimer regarding the quality of third-party software?

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However, I will provide some reassurance to noble Lords about the position of traders, particularly SMEs, which may be caught in the middle between consumers and third-party traders. First, there are other protections in law, such as the Unfair Contract Terms Act 1977, which I referred to earlier, that may protect traders in B2B contracts. However, beyond that basic protection and other protections such as in the Sale of Goods Act, we believe it is important to allow businesses the freedom to make contracts with each other. Secondly, it is important to consider the remedy that would be available to consumers when digital content is not of satisfactory quality.

We have already debated whether or not there should be a short-term right to reject digital content. Our view is that there should not be. The remedy available to a consumer who finds their digital content not of satisfactory quality would be repair or replacement. For digital content, this is usually a repair delivered in the form of an update. As the vast majority of traders operate in good faith, it is normal industry practice to provide an update to fix any faults that arise. The Bill requires traders to do only what they would normally do anyway to rectify the situation.

I do not believe, therefore, that the impact on traders of providing consumers with clear rights, even in the situations described, would be disproportionate, and I ask the noble Lord to withdraw the amendment.

Lord Clement-Jones: My Lords, this may be slightly unusual for me, but I thank my noble friend for an extremely well reasoned response, if I may say so. Pointing out that there is no right to reject is crucial in these circumstances.

However, my noble friend has opened a door. She talked about the Unfair Contract Terms Act. Of course, there is a big flaw in that Act: if there is no warranty about copyright between a small business and another business and it turns out that the copyright is not held by the licensing business, it is not covered by the Unfair Contract Terms Act, which leads to another amendment that I have later on in the Bill. I am sure that my noble friend will be extremely sympathetic to that when the time comes for precisely the reason that she has raised. Of course we want SMEs to be properly protected in these circumstances, and I entirely accept that in an ideal world the Unfair Contract Terms Act would be fully applicable. I look forward to the debate on my Amendment 57A. In the mean time, I beg leave to withdraw the amendment.

Amendment 34A withdrawn.

Clause 34 agreed.

Clause 35: Digital content to be fit for particular purpose

Amendment 34B

Moved by Lord Clement-Jones

34B: Clause 35, page 23, line 18, leave out “or by implication”

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Lord Clement-Jones: My Lords, in moving Amendment 34B I will speak also to Amendment 34C.

Under the current wording of Clause 35(1), a consumer can include in a contract for digital content a term that the content is fit for the purpose for which the consumer wants to use it without providing the trader with a realistic opportunity to evaluate, reply to, agree to or reject the consumer’s request. This means that the consumer can unilaterally include terms in a contract which go against the terms and conditions or the normal use of the content or even against the use of the content stipulated by the trader. Consumers should surely not be able to include a term in the contract on their own. A term should only be included if agreed by both parties. Clarity in a shared agreement as to contract terms is essential so that both parties understand and truly agree the contract. As currently drafted, the consumer may include a term in the agreement by implication. Contract terms should be expressly agreed, not by implication.

Surely if a consumer e-mails an online content store, saying that they intend to watch “Match of the Day” for a romantic night in, then that content would be deemed fit for that purpose under the current drafting. If it did not perform the stated purpose, the consumer would have a course of action against the store. As a second example, a consumer may e-mail an online content store saying they are buying a film to watch on a plane when they will not, in fact, be able to watch it because they need to stream the film over an internet connection and cannot download it. As currently drafted, unless the trader replies before the transaction takes place, the contract will, by implication, include a term that the consumer can use the content on a plane and the trader will be in breach of contract. I am sure there are many other possible scenarios that one might dream up, but it seems very strange that the consumer can, essentially, determine the nature of the contract in these circumstances as a result of Clause 35(1). I beg to move.

Baroness Neville-Rolfe: My Lords, I am grateful for the comments of my noble friend Lord Clement-Jones and for his constructive and telling contributions throughout this session. I note his comment about the consumer essentially creating the contract. I will answer, and try to cast light on the circumstances that we foresee for this provision, by looking at another scenario. Where a consumer e-mails a trader about their desired use for the digital content and then downloads it immediately—as is the case in the example proposed—it is highly unlikely that the consumer would be able to claim a remedy under Clause 35 from the trader if the digital content was unsuitable for that particular purpose.

This scenario would already apply to goods bought online. A consumer could e-mail a trader saying that they wanted to use the goods for a particular purpose that was not their usual purpose, and then order the goods without waiting for a response. However, there is no evidence that consumers are playing the system in this way, nor that it is causing problems for traders. The first key point is that the consumer must make known to the trader the purpose for which they intend to use the digital content. Secondly, the clause does

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not bite if the consumer does not rely on, or it was unreasonable for them to have relied upon, the skill and judgment of the trader.

In my scenario, we think it would be open to traders to raise a number of arguments. First, the consumer may not have made known their purpose to the trader, particularly if the time interval was such that the trader could not have been aware of the purpose at the time the contract was made. Secondly, the trader has not responded in any way and so has not exercised any skill or judgment. Finally, the consumer did not rely on the trader’s skill and judgment in these circumstances since their decision was made before the trader responded, and possibly even before the trader could have done so. So the clause is unlikely to apply in the scenario I outlined.

Amendment 34B says that we should remove the phrase “or by implication”. It is important to reflect that the requirement that a trader makes known the particular purposes for which digital content is intended implies that the trader must be aware of the consumer’s intentions. The phrase “or by implication” is to be seen in that context and may be more relevant in face-to-face sales than online ones. For example, a consumer may tell a salesperson that they are teaching their child to read when they are buying a particular piece of software but may not expressly say that they want to buy the software for the purpose of teaching their child to read. I do not want to deny consumers a remedy in such a case.

Amendment 34C requires that traders should expressly agree the purpose. Again, there are scenarios where the consumer may rely on the skill and judgment of the trader without their express agreement. For example, a consumer may e-mail a trader several times, providing the trader with an opportunity to respond to their request. The consumer may assume that the fact that the trader has not denied that the digital content is suitable for their purpose implies their agreement. Again, I do not want to deny consumers a remedy in such a scenario. Nor would I want to introduce additional steps into the purchasing process that were not necessary.

The clause replicates the related clause for goods, Clause 10, and also, crucially, that in the Sale of Goods Act. Keeping the wording consistent wherever we can retains the link with existing case law on fitness for a particular purpose, and ensures a close alignment between goods, digital content sold on a tangible medium and intangible digital content. While on the face of it, this amendment seems like a sensible clarification of the provisions for digital content, it could, as I have explained, have a perverse effect. I therefore ask the noble Lord to withdraw his amendment.

Lord Clement-Jones: My Lords, I thank my noble friend the Minister for her response. It is interesting and rather tricky. This is one of the trickiest areas that we have come across to date. I can understand my noble friend’s attachment to existing case law; that is what many lawyers would say in the circumstances. However, I want to innovate. The existing case law for goods in these circumstances could be extremely dangerous.

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I accept some of the Minister’s points about the consumer having seriously tried to get the trader to respond and they have not, and about circumstances in which is entirely reasonable for consumers to rely on their skill and judgment. However, the digital world is different from the product world. The ability to communicate in one direction over e-mail without having a response adds a new dimension. It will not always be the case that it being unreasonable for the consumer to rely on the skill or judgment of the trader or credit broker will get the trader out of this particular situation, where there has been a unilateral statement that the product is required for such and such and, for some reason, the e-mail has not been received or the trader has not acknowledged receipt, or whatever.

Of all the clauses we have talked about to date, I do not think that this one is really the finished article yet. There is still some room for improvement precisely because the digital world is different from the product world. If you are buying a car on the dealer’s forecourt, you are in a very different position from that of winging e-mails and pressing buttons on purchasers’ websites. This clause does not yet reflect that adequately. I shall read what the Minister has said carefully and have further discussions. In the mean time, however, I beg leave to withdraw the amendment.

Amendment 34B withdrawn.

Amendments 34C to 36 not moved.

Clause 35 agreed.

Clause 36: Digital content to be as described

Amendments 37 and 38 not moved.

5.30 pm

Amendment 39

Moved by Lord Stevenson of Balmacara

39: Clause 36, page 24, line 9, at end insert—

“(4A) The trader is required to provide full details of the total cost of digital content prior to sale, including details of any additional service fees or charges that could be incurred by the buyer in purchasing the digital content.

(4B) The information set out in subsection (4A) should be portrayed prior to sale and the explicit consent to purchase digital content at this price sought prior to sale.”

Lord Stevenson of Balmacara: My Lords, Amendment 39 aims to ensure that a consumer is aware of their statutory rights and what that means in practice ahead of any purchase. The purpose is twofold: to ensure that consumers have those rights at the forefront of their thinking when they place the order, and the corollary of putting the rights as they are offered back in the mind of the trader. That is obviously important for digital content because traders and consumers do not interact in real time. We still have a situation where the nature of the transactions for any digital goods is

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new for many people and where the technical information around content lies outside many people’s normal experience.

In that context, consumer rights need to be spelled out as clearly as possible—possibly more so than for traditional goods—so that they are not an additional complicating factor. The consumer should be required to acknowledge that she or he has received that information. Another part is to ensure that all the details of costs—including potential or optional costs—are available to the consumer before they download. As previously indicated, that is especially important for online sales: consumers are not on the forecourt of a car salesroom and they cannot ask the questions that arise out of a discussion about the physical object that they are about to buy. As I am bound to say, if the Government insist on maintaining their view that digital rights are curtailed relative to equivalent tangible goods, then surely greater prophylactic measures need to be in place.

The amendment would be a good thing in its own right, but it would give statutory force to the OFT’s recommended principles for the online game industry. These include being upfront about all costs, including the download cost, unavoidable costs once downloaded and optional extra costs. All material information about the game should be provided upfront before download or play begins. That will include what the game does, how it works, compatibility with hardware, whether the game contains advertising or marketing material, and how personal data may be collected, stored and shared. Information about the business providing the game or app should make clear who the consumer is contracting with and how they can be contacted in case of queries or complaints, or if they wish to seek redress. The OFT’s principles also make it clear that in-game payments are not authorised and should not be taken unless the payment account holder—often a parent in the case of many of these purchases—has given his or her express, informed consent.

It is also interesting that the Advertising Standards Authority works to similar guidelines on price advertising in its code, which is set out by its Committee of Advertising Practice. Those guidelines include that price statements must not mislead by omission, undue emphasis or distortion; they must relate to the product featured in the marketing communication. Quoted prices must include non-optional taxes, duties, fees and charges that apply to all or most buyers. If a tax, duty, fee or charge cannot be calculated in advance, perhaps because it depends on the consumer’s circumstances, the marketing communication or advertisement must make it clear that it is excluded from the advertised price and state how it is calculated. Marketing communications that state prices must also state the applicable delivery, freight or postal charges. If the price of one product depends on another, marketing communications must make clear the extent of the commitment the consumer must make to obtain the advertised price. Lastly, price claims such as “up to” and “from” must not exaggerate the availability or amount of benefits or discounts likely to be obtained by the consumer.

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I mention those because they are relevant to the amendment: there is a lot more than simply putting a blanket price on a product. I am sure that all of us have been caught to some extent by not seeing prices. This will sometimes apply to tangible goods as well as intangible goods, but it is much worse for intangible goods because, as we have said, there is a lack of direct contact. For all these reasons and the ones already indicated, it would be interesting to hear the Government’s response to this. We should strengthen this clause for the benefit of consumers and traders. I beg to move.

Lord Knight of Weymouth: My Lords, I was hoping to catch my noble friend before he sat down, but I am sure he will save up his response. I am extremely sympathetic to the amendment, given that I have signed it with him. I have a question on in-app purchases. In the course of the Committee we have discussed the iterative nature of improvement and change. It is difficult for some suppliers to anticipate all the potential in-app services that may evolve over the life of an app, for example. Is it my noble friend’s intention that the supplier of the services should set out, as far as it can foresee, what the potential cost would be of further digital content that is not completely upfront, but that it would not be completely bound by the clause if it then chooses to offer something additional?

Lord Stevenson of Balmacara: My Lords, that is an interesting point. I think that the intention behind the amendment was to restrict the applicability to purchases and the information available at the time that purchase was made. However, it is a fair point to suggest that where a purchaser clearly has intentions to upgrade or change the product in some way, there is a case for that being signalled at the time that the purchase is originally made—that other options or, indeed, if it were mandatory, extra charges could be coming down the line. Perhaps the Minister could respond to that point.

Baroness Jolly: My Lords, this amendment relates to communication of the costs that the consumer will face. This can be particularly important for digital content provided under the “freemium” model, discussed earlier in Committee, where the original digital content may be provided for free, but consumers have the opportunity to purchase extensions and improvements to this content through “in-app purchasing”. That is why the Government are committed to providing clarity and transparency to consumers when it comes to costs.

I am sure that noble Lords will be happy to know that the Consumer Contracts Regulations, which came into force in June of this year, ensure that the trader provides information to the consumer about the total price, including taxes, before the sale is made. Under the regulations, this will have to be clear and comprehensible to the consumer before they buy. The Bill makes it clear that this information becomes part of the contract and cannot be changed without the consumer’s express consent. Furthermore, the regulations make it clear that the consumer’s express consent must be given before any payments are made in addition to the main price.

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We have also made it clear that pre-ticked boxes, where the trader has already ticked the “agree” box for the consumer, are not enough to signify express consent for those additional payments. This should go a considerable way towards ensuring that a consumer knows exactly what they are buying before they commit to it. Under the “Unfair Terms” part of the Bill, which is still to come, additional charges will not be able to be hidden in the small print.

Legislation to provide clarity on pricing and a clear obligation to pay is already in place. However, we are all aware of cases where young children in particular have racked up high bills relating to in-app purchases in games. This is an issue for enforcement. That is why the then Office of Fair Trading conducted an investigation into children’s online games at the end of last year, which resulted in the publication of a set of principles for games manufacturers in January, based on the Consumer Contracts Regulations and the Consumer Protection from Unfair Trading Regulations.

The noble Lord, Lord Stevenson, asked me to clarify whether the Office of Fair Trading principles applied to the online games industry. The amendment would provide a statutory basis. So the OFT principles are based on statute. They are based on the Consumer Contracts Regulations and the Consumer Protection from Unfair Trading Regulations. I am therefore confident that the OFT—now, of course, rebadged as the CMA—already has the legal toolkit that it needs. To reiterate this, the CMA, as it is now known, is currently looking into industry’s compliance with these principles and will consider enforcement action in necessary cases.

Lord Stevenson of Balmacara: I thank the noble Baroness for giving way. I am interested in what she said about the principles being set out in an OFT report but I am not clear where we ended up. Perhaps she would reflect on that a little more so that I have a better understanding of it. The principles bite quite hard on this problem, so if they were to be given statutory backing, that would go a long way towards answering the other points that are made in my amendment. Can she confirm whether that is the case? Is she saying that the impact of the Bill as it currently stands is such that it would incorporate the set of principles identified by the OFT or is she not? It is a simple question.

Baroness Jolly: That is my understanding, but I sought to check the point with my team before it goes into Hansard. They already have statutory backing in the regulations. We are already there.

Lord Stevenson of Balmacara: Just to be troublesome, the Advertising Standards Authority is not a statutory body, although it does still exist where the OFT does not. As we have heard, it is now part of the CMA. Is it also the case that the ASA’s principles, which again bite hard on this problem, would be considered to be part of the statutory provision or not? I am happy to wait for a reply because I appreciate that it might take more time.

Baroness Jolly: Rather than mislead the noble Lord, I shall send him a letter and copy it to all noble Lords who are concerned with this debate.

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I shall proceed with my response. We are pleased that the games trade associations have responded positively to these principles since the industry does have a duty to behave responsibility. Of course, parents too have a responsibility, for example, to turn off in-app purchases. I confess that I did not know they exist, but my kids are a bit big for them now. I hope that, as a result of this action, we will continue to see progress on compliance with the regulations in this area, and I would therefore ask the noble Lord to withdraw his amendment.

Lord Stevenson of Balmacara: My Lords, I am grateful to the Minister for responding to these points and I look forward to receiving a letter. On reflection, if the letter could cover both the OFT, now CMA, principles and the ASA principles, that would be a lot better.

We share a concern on the generality of these issues. These games are incredibly popular and are played by loads of people, but the particularity of the problem which we have identified is that the danger arises because it is mostly children who are engaged with them. Yes, it is possible to switch off the in-app acquisitions elements that are part of the process of playing games these days, but I still think that there are many concerns which will surface in other areas alongside those, such as exposure to advertising and so on. They form part of the value chain of the very products we are talking about. Although we are dealing with a first level of concern here, I worry that we will need to come back to this, perhaps in some other forum, and question how it is that the almost addictive quality of the game-playing capacity that now engages among young people in this and many other countries is being accompanied by a new mode of trading which is not just purchase based but, as we have heard, is about acquiring personal details on purchasing habits that help to inform trading activities, particularly as they affect children. However, these issues are broader that what we have before us and no doubt we will come back to them at some point. In the mean time, I beg leave to withdraw the amendment.

Amendment 39 withdrawn.

Clause 36 agreed.

Clauses 37 to 39 agreed.

Clause 40: Quality, fitness and description of content supplied subject to modifications

Amendment 40

Moved by Lord Stevenson of Balmacara

40: Clause 40, page 25, line 31, at end insert—

“( ) If the trader becomes aware of digital content that is faulty, it is the responsibility of the trader to take all reasonable steps to inform the consumer affected so that he may exercise their statutory rights.”

Lord Stevenson of Balmacara: My Lords, we are circulating around the issues that come with the new trading activity of intangible goods. This amendment deals with the unique qualities of digital content which

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are, as we have heard, often updated and upgraded, in some cases almost hourly and certainly on a regular basis, once someone has bought into the arrangement. Indeed, it may well be that some of these updates are a requirement to keep the program going. As we heard earlier, antivirus software has to be updated and changed simply to cope with the developments of hackers.

Our Amendment 40 would require a trader to take reasonable steps to inform a consumer if the trader becomes aware of faulty digital content. Many digital products containing complex software are released on the understanding that the item will not be 100% perfect, and certainly not when it is released. The details of coding and the size of the programs mean that it is not always possible to spot problems. Furthermore, the product often has to run on different operating systems and, as I have said, antivirus software has to be constantly updated. This clause would simply require providers to inform those who have downloaded a defective product about the problem as soon as they become aware of it so as to allow consumers to make an informed choice about their rights to repair or refund or, indeed, as we would argue, to return.

I think that the Government accept that the software industry needs the flexibility to be able to publish and sell programs that contain minor problems. This is a good thing, as anything other than that would be unworkable, as we have heard. This flexibility is, as we have heard, not properly written into the Bill. The software industry has concerns, which the BIS Select Committee has reinforced, about requiring digital content to be free from minor defects. Our amendments would go some way towards resolving that. I beg to move.

5.45 pm

Baroness Jolly: My Lords, when the issue of the trader’s responsibility when they are aware that they have a digital content product that is faulty was discussed in the other place, much reference was made to inaccurate mapping software that continued to be offered to consumers even after it was known to be faulty. Examples like this are embarrassing to the businesses in question. No reputable manufacturer wants to release an inadequate product, especially in these days of Twitter, Facebook and other social media, where news of such faults spreads really quickly. When problems such as this do occur, it is in their best interests to act quickly to resolve them. Consumers vote with their feet. In the case of the inaccurate mapping software, consumers simply switched back to a competitor’s product.

It is therefore in the interests of traders and manufacturers who find themselves with a faulty product to act quickly to produce an update to rectify the fault, and to ensure that consumers receive that update. Of course, in the case of updates to apps, downloaded products or products that are uploaded and then registered online, manufacturers already proactively inform consumers when updates are available.

However, the amendment has implications that would be burdensome on business and, at the least, an unwelcome irritation to consumers. The effect of the amendment would be to require traders to make consumers aware that there is a bug before they provide an update. This would seem to introduce an unnecessary step in the

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process, particularly for those consumers who have not already noticed the bug. It could also be burdensome for businesses, especially small businesses, if the result is an increase in complaints that have to be handled, diverting resources away from the important issue of producing the update.

Of course, I am not discouraging consumers from complaining to traders where their rights have been breached—quite the opposite. The Bill aims to empower consumers to assert their rights. However, encouraging consumers to claim a remedy where they might otherwise not have noticed that there was a fault, and a repair was already being produced by the trader, seems unnecessary. I therefore ask the noble Lord to withdraw the amendment.

Lord Stevenson of Balmacara: I thank the Minister for her response. I will read carefully what she has said and consider it. I did not agree with her view that this might in some senses be unwelcome to consumers. I think we are underestimating the worries that many people have when they buy material that is then subject to problems, and they need to be updated about that. Nevertheless, for the moment, I beg leave to withdraw the amendment.

Amendment 40 withdrawn.

Amendment 40A

Moved by Lord Haskel

40A: Clause 40, page 25, line 31, at end insert—

“( ) Subsection (1)(c) does not apply where modifications are made to digital content if such modifications—

(a) benefit consumers;

(b) remedy issues or risks; or

(c) improve functionality of the digital content;

provided that the fact that necessary changes may be made is disclosed in the terms and conditions.”

Lord Haskel (Lab): My Lords, as my noble friend said, Clause 36 deals with digital content and the consumer’s right for it to be as described. This is important because people may not be able to properly check digital content before buying a complete program. Neither can you check whether it matches a trial version. It has to do what it says on the label.

As my noble friend said, digital content does not remain static. It evolves over time and during use. To give consumers the benefit of these improvements and the advantages of new developments as they come along, digital content providers supply updates, as the Minister explained. However, in addition to updates, upgrades are needed to make sure that the digital content works on the latest operating system and hardware.

The Explanatory Notes say that the Bill goes partly towards recognising this, in that it allows for updates that enhance features or add new features. However, the Bill is not clear. It insists that the digital content continues to match the original product. It has to remain as initially described for the duration of any contract. People in the industry, including my noble friend Lord Sugar, who has many years of experience in the software industry, consider that this could hold

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back progress in upgrades because the obligation of having to match the original product description could make some new features difficult or impossible to install.

This amendment therefore suggests a more practical approach while still maintaining the rights of the consumer. The amendment allows digital content to be modified if it is of general benefit to the consumer or if it improves the functionality of the software, regardless of whether the digital content continues to meet the original description. To make this absolutely clear, the original terms and conditions must disclose the fact that necessary changes may be made.

The Minister said that she was determined to provide clarity. This is what the amendment does, and achieves it by adding an exemption to Clause 40 so that subsection (1)(c) does not apply where modifications are made to digital content if such modifications are of benefit to the consumers, if they remedy issues, eliminate risk or generally improve the functionality of the digital content—provided that the fact that necessary changes may be made is disclosed clearly in the terms and conditions of the original contract. For example, the amendment will make it perfectly clear that if a consumer purchases Microsoft Office 365 they are not buying a static product and need not purchase a new version each time Microsoft issues an update or improvement. The programme will be refreshed and its features updated automatically as the consumer continues to use the software and had been informed of this at the time of the purchase.

The amendment will provide the clarity that the Government seek, less room for dispute, and continuing benefits for the consumer. I beg to move.

Lord Knight of Weymouth: My Lords, I have considerable sympathy with my noble friends’ amendment. However, I should like to return to the issue of the iPad of my noble friend Lady King, which she described as “stuffed”, following the iOS upgrade. I am sure that Apple would argue that the modifications embedded in the upgrade are of benefit to consumers, remedy issues or security risks, and improve the functionality of the iPad. Whatever the reason—it may be an old iPad that cannot handle the iOS, or it may be user or Apple error; I do not know the circumstance of her iPad being “stuffed”—the point that I am trying to make, certainly when others upgrade their iPads with the new iOS, is that if they have an old version of the device they would be struggling. We know that plenty of software upgrades depend, to some extent, on whether your hardware can cope with all the extra features that Apple in particular include. I wonder whether my noble friend’s amendment can deal with such a scenario in which benefit may apply to most but not necessarily all consumers. The amendment may be better than what is in the Bill, and it may be that I am just pointing out the complexities of this area, but I should be interested in his and any other responses to that point.

Lord Stevenson of Balmacara: My Lords, I am grateful to my noble friend Lord Sugar for putting down this amendment and my noble friend Lord Haskel for adding his name to it and standing in and

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presenting it for my noble friend Lord Sugar who is unavoidably detained today. As has been said, this is an alternative approach to things which is, perhaps, more reflective of a more dynamic and engaged relationship between consumer and trader in which you have to trust the trader to develop the tools you use and you go forward. It certainly beats the old advice—which I am sure my noble friend Lady King has already tried—that when in trouble switch it off, hope for the best and it will magically work itself out. It is an attractive idea that somebody up there is thinking about how it works and how best to improve it. With the dangers that my noble friend has mentioned, we need to hear from the Minister about how this has been received.

Baroness Neville-Rolfe: My Lords, I am also grateful to the noble Lord, Lord Haskel, for his amendment and for standing in for the noble Lord, Lord Sugar. I look forward to his appearance on the Lord Sugar show.

I recognise that some types of digital content, such as software and games, do, in the words of the noble Lord, Lord Haskel, evolve over time. That is precisely why we introduced Clause 40, allowing updates that were in the terms of the contract. So let me reassure noble Lords that there is nothing in the Bill that prevents digital content traders from providing updates or upgrades, under the terms of their contract, to improve the functionality of the digital content. We have heard several times from the noble Lord, Lord Knight, about the iterative nature of some digital content and I am grateful for his digitally aware intervention.

Clause 40 ensures that, as long as modifications are allowed under the terms of the contract, there is nothing to prevent the trader from updating or upgrading digital content as long as it remains of satisfactory quality, fit for any particular purpose and as described. Such contract terms would be assessable for fairness under Part 2, “Unfair Terms”. The “as described” aspect does not fix the digital content to a static description. The digital content has to match the description but this does not mean it has to be exactly the same as the original description. It simply means that if the digital content is described as containing a certain feature then it should have that feature. However, as long as it has the described features, any additional features would not prevent it from matching, rather as a blouse may match a jacket, although the jacket may have more colours.

To a large degree, the description is in the gift of the trader, as long as it includes the main characteristics of the digital content, its functionality and interoperability. I have heard the industry’s concerns that it needs to be able to provide updates that are made for the consumer’s benefit. Perhaps a feature is taking up too much processing power and slowing everything else down, or perhaps a feature has become vulnerable to a security threat and needs to be removed while it is fixed, to protect the consumer from the threat. Of course it is important that industry is able to act in these cases but I am not convinced by arguments that Clause 40 will prevent it from doing so or slow it down in cases of urgent updates.

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Let us assume that a trader has needed to remove a feature of some digital content, either intending to improve functionality or protect from a security threat. What would the trader do next? They would have two options. They could repair the feature to make it work more efficiently or improve security, and then reinstate it. Or they could take a decision that it was a minor feature that not enough consumers used, so they would not reinstate it. If, in that scenario, the removal of the feature meant that the digital content no longer matched the description, as required by Clause 40, the first remedy available to the consumer would be the repair or replacement of the digital content.

In the first option I have just outlined, that is normal industry practice already and is appropriate. A consumer has bought some digital content expecting it to contain the features or perform the functions it was described as doing. If the digital content no longer does that they will be justifiably unhappy and will expect the problem to be fixed. In the second option, where the trader is not repairing or replacing the feature, the consumer would be entitled to some money back. Let us remember that the amount due is unlikely to be the full price paid. It would be an appropriate amount and we would expect this to take into account the use the consumer had already had of the digital content and the continued functionality of the rest of the digital content. So the amount might be small.

6 pm

The industry has told us that it would remove only little-used features, so it may not have to compensate all consumers if consumers are not even aware that a feature has been removed and are therefore not inconvenienced. The compensation of consumers does not prevent the trader from making the update; it just becomes part of its commercial decision as to whether or not the right thing to do is to repair the feature. Again, this is appropriate. If a consumer is deprived of a feature they expected the digital content to contain and that feature is not reinstated in some way, it is appropriate that they should be compensated. Of course, it is also open to the trader, under Clause 36(4), to agree to a change to the information provided about the digital content with the consumer, which may be appropriate in some cases.

Again I have concerns that the implication of the amendment would be to limit consumer protection. For example, paragraph (b) of the amendment, “remedy issues or risks”, may include almost any type of modification, including those which are not in the consumer’s interest. Even if a trader asserts that a modification is to the benefit of consumers, how would that be assessed? Last year, a very well known software manufacturer updated its suite of office products to refresh the layout and add new features. At the same time, the update removed some other features that may not have been used by the majority, but which were much loved by a minority of “super users”. The update may or may not have breached Clause 40. That would depend on whether the quality rights were met. However, let us imagine the scenario where the features removed were included in the description of the product. Under the noble Lord’s amendment, the software manufacturer could argue that the update was to the

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benefit of consumers, but it clearly was not to the benefit of the users who lost functionality and the features on which they relied. The manufacturer could otherwise simply argue that the update remedied issues.

I am concerned that the perverse effect of the amendment would be to allow traders the opportunity to change digital content post sale through an update and not provide consumers with a remedy if the result of the update is that the consumer no longer has the digital content that was described when they bought it—I think back to the iPad of the noble Baroness, Lady King. I therefore hope that the noble Lord understands these concerns and feels prepared to withdraw the amendment.

Lord Haskel: I am sorry I was not here to hear about my noble friend’s problems with her iPad. I was in a Select Committee meeting. As far as my noble friend’s comments are concerned, this is an industry that is moving all the time. If too many constraints are put on it, it will stop moving at the speed that it is meant to go. We have to ensure that consumers’ rights are not limited, but that the industry can make progress. I feel that the amendment that my noble friend Lord Sugar and I have put down meets that balance.

In her response the Minister spoke about the two options. Those options are always there, but we also have to ensure that, although the consumer has these options for their rights, the industry can make progress, otherwise we will all end up with obsolete software—rather like my noble friend.

I thank the Minister for her response, and my noble friend Lord Knight. This is a very complicated technical matter. We will have to look at the Minister’s response. The amendment is based on my noble friend Lord Sugar’s many years of experience in the industry—I am too old to be in the show. We will certainly consider the Minister’s response and the other contributions and perhaps return to the matter on Report. In the mean time, I beg leave to withdraw the amendment.

Amendment 40A withdrawn.

Clause 40 agreed.

Clause 41 agreed.

Clause 42: Consumer's rights to enforce terms about digital content

Amendment 41

Moved by Baroness Neville-Rolfe

41: Clause 42, page 26, line 31, at end insert—

“(7A) It is not open to the consumer to treat the contract as at an end for breach of a term to which any of subsections (2), (4) or (5) applies.”

Amendment 41 agreed.

Clause 42, as amended, agreed.

Clauses 43 to 45 agreed.

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Clause 46: Remedy for damage to device or to other digital content

Amendment 42

Moved by Lord Clement-Jones

42: Clause 46, page 28, line 28, at end insert—

“( ) the damage has not been caused or contributed to by an unreasonable use of the digital content by the consumer,

( ) the damage is of a kind which the trader ought reasonably to have foreseen at the date when the contract was concluded,”

Lord Clement-Jones: My Lords, the rationale for this amendment is that Clause 46, which deals with consumer compensation for damage to a device or other digital content, fails to appreciate totally the complexities of security software products. Failures and malfunctions in software can occur for a variety of reasons, often without any connection to the design or development of the product itself. Improper use of the product is one common cause, while defects in the consumer's own equipment are another. The incompatibility of different pieces of digital content used simultaneously by the consumer is a third. In all these instances, the liability of the software provider can extend only to what is effectively in the sole control of that provider; that is, to cases where the cause of the damage sustained by the consumer is unambiguously and exclusively the product of that provider.

In the area of internet security products, urgent critical fixes for serious threats may sometimes get released before companies have tested the process extensively as there is generally a greater benefit for a greater number of consumers compared with a small number who may experience minor compatibility issues or false positives. These updates are developed with reasonable skill and care and they are tested against numerous possible known configurations. However, by their very nature the updates are a process that needs to be automated, and that is done under extreme time pressure. As a general rule, the faster an update is released to consumers, the greater the number of people who are protected from a new threat.

However, the current clause might encourage suppliers to slow down, delay or discourage the release of new security solutions or urgent critical fixes, to the ultimate detriment of consumers. Against that backdrop one must add the fact that the Bill does not allow the trader to restrict his liability under any circumstances. It then becomes apparent that the security industry will be confronted with a very real disincentive. Moreover, in the digital environment it is sometimes necessary to sustain minor damages that are unavoidable to protect the consumer from greater or further harm. A few examples may be helpful to illustrate this point because it is so specific to the digital environment.

It is better to delete a malware-infected e-mail from the consumer’s webmail account and to lose the content of that one e-mail than to have the consumer’s entire computer corrupted. It is also preferable as a precaution to temporarily block the consumer’s access to a website that is suspected of distributing malware rather than

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giving access and exposing the consumer to the risk of an infection. Similarly, it might be advisable in certain cases to take a service offline in order to address a security threat before making it available again to the consumer. In all these cases, the consumer or the consumer’s property may sustain damage, such as the loss of the content of an important e-mail that was deleted because of the malware that had infected it, the failure to receive a live video transmission while access to the service platform was blocked, or the inability to perform a particular online action at a precise moment because of a service outage. But in certain circumstances it has to be understood that this minor damage is a reasonable price to pay for the avoidance of much bigger harm, and Clause 46 should acknowledge that. I beg to move.

Baroness Neville-Rolfe: My Lords, I listened with great interest to my noble friend’s concerns. However, it is worth going back to the driver for this clause, which is to make it clear that all consumers of contractually provided digital content, free or paid for, may have a right to damages if the circumstances warrant it. Perhaps I can expand on that a little. The consumer already has the ability to bring a negligence claim in this area. If a consumer downloads some digital content that contains a virus, the consumer could seek to make a negligence claim against the trader if the virus caused loss or damage to the device or other digital content. However, excluding free digital content from the quality rights may leave consumers unsure that they have the ability to make a claim when free digital content causes damage, so Clause 46 clarifies the position. It is designed to reflect negligence principles and not to introduce any new burdens on industry.

On the question of consumer responsibility, I agree that traders should not be liable for damage that results from something the consumer has done with the digital content that it was not reasonable for them to do. Clearly, in this case, it is the consumer’s behaviour that has caused the damage and not the digital content. However, I do not agree that it is necessary to lay this out in the Bill. It is already implicit in the way the clause works. In order to prove a breach of the clause, the consumer has to show first that the digital content itself caused the damage to their other digital content or device. Secondly, they would have to show that the trader failed to use reasonable care and skill to prevent the damage. If the damage occurred because of something the consumer had done, then the consumer would not be able to prove a breach.

The concept of reasonableness in the application of this provision was referred to. I recognise that digital content operates in a very complex environment, as has been said often, and furthermore that no digital content trader can be expected to know every possible configuration of digital content on a consumer’s device. That is why we used the concept of reasonable care and skill in this clause. Reasonable care is part of the test of whether there was a breach in the first place. Even if the digital content can be shown to have caused the damage, there is no breach if the trader acted with reasonable care and skill to prevent the damage. This effectively protects the trader from

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expectations that they must have acted in every way possible to prevent the damage if it was not reasonable for them to have done so. It means that the trader would not be expected to test exhaustively for every possible scenario and that the trader’s activity would be judged against the normal standards in the industry.

The concept of reasonably foreseeable is slightly different. It addresses whether it was reasonably foreseeable that breaching this clause would cause the loss that the consumer suffered. However, expressly limiting the application of the provision to damage of a kind which the trader ought reasonably to have foreseen makes the provision more complex and creates an additional hurdle for consumers, making it harder for a consumer to secure a remedy.

My noble friend raised the issue of urgent updates and the need for them to be automated under the inevitable pressure of time. It is unreasonable—

6.13 pm

Sitting suspended for a Division in the House.

6.23 pm

The Deputy Speaker (Lord Geddes) (Con): My Lords, it is now 6.23 pm. At least, it is according to the Annunciator, not the Clock; we should not rely on the Clock. I cut the noble Baroness, Lady Neville-Rolfe, off in her prime. Perhaps she would like to continue.

Baroness Neville-Rolfe: My Lords, I had finished explaining the background to what we were seeking to achieve, which is important for the Committee to understand and for the record because of the original nature of the discussions on online. However, my noble friend Lord Clement-Jones was particularly concerned about emergency security updates. He rightly emphasised that they need to be carried out with great speed and that some consumers could suffer minor damage.

The position as the Government see it is as follows. The consumer has to demonstrate that the trader failed to use reasonable care and skill to prevent the damage. We would expect that all reputable traders in this area would use reasonable care and skill as a matter of course, even for security updates that obviously have to be released rapidly. However, what constitutes reasonable care and skill for urgent security updates would be judged against the normal industry standards in that context, not against the standards for regular updates.

I sympathise with my noble friend’s concerns about traders facing claims concerning minor damage caused to a few consumers during the process of an emergency update. However, if the trader has used reasonable care and skill, given the context, I would not expect that Clause 46 would be engaged. I therefore ask my noble friend to withdraw the amendment.

Lord Clement-Jones: My Lords, I thank my noble friend once again for a very clear exposition. If there is ambiguity when it comes to a court looking at some of the provisions of the Bill when it is enacted, some of

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the explanations may be quite useful in a Pepper v Hart kind of way. That useful exposition would give some assurance to anybody looking at the clause. I will read

Hansard

with great interest. I thank my noble friend and I beg leave to withdraw the amendment.

Amendment 42 withdrawn.

Debate on whether Clause 46 should stand part of the Bill.

Lord Stevenson of Balmacara: My Lords, we question whether Clause 46 is as effective as it might be in this area. Although the debate on the last amendment was very helpful, it served to amplify some of our concerns about how this matter should be dealt with. As the Minister explained, the issue seems to be that there is the possibility of a price reduction if a trader fails to provide, or can neither repair nor replace, digital content if the consumer requires it but the trader is in breach of the requirement to do so within a reasonable time and without significant inconvenience. There is an implication that this is about paid-for content and that it arises from the contract. An obvious question is how it will deal with free downloads. I think I caught the Minister saying that it did apply to free material. I listened carefully to what she said but I am still not quite sure about the implications of this in terms of getting redress. There is also a wider question about how these things are going to be calculated.

My first question is: what is the mechanism under which price reductions and replacement costs are going to be calculated? Is this a matter for the courts or will some guidance be issued? If so, how will it be developed and will it be subject to the usual consultation? If it is not being dealt with by the courts or in documentation issued by the Government, who is going to decide this? Is it an ombudsman’s issue? Will there be a sliding scale of time for usage, given that some digital content such as streaming a film might be for one-off use while others might be for longer, such as an anti-virus software package—which usually covers a computer for a year or longer—or games which might be used for even longer than that? What is the basis on which this will be approached? Is it that you have had it for 12 months and therefore it is a longer or shorter period depending on the original cost? Are there difficulties about digital content that relate to such matters as a consumer having had 11 months’ use out of a piece of anti-virus software that is supposed to last for 12 months but a fault in the program causes significant loss through damaged work files or a personal data breach? Do they get only one-twelfth of the price paid because that is the period of time remaining under the original contract? Presumably there is a way of calculating a scale of loss in relation to the damage caused. If so, will the Minister explain it?

Ending with our favourite fermium apps, how do they work? I gather from the body language and the nods that they will be included, but when do they get picked up? Do you get the full force of the law, as outlined in this clause, as soon as you have downloaded, or only once you have gone on to the premium aspects? How is the balance between the two arrived at? There

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seem to be so many questions that the clause is not working effectively. I would like to hear further from the Minister before deciding on this matter.

Lord Knight of Weymouth: My Lords, my question returns to something that I have come back to every now and then today. In the context of this clause, has the Minister thought about remedy, not only for damage to a device or other digital content but for damage to reputation? Many digital products now involve co-production whereby users of the product are creating the product. Even something as simple as Twitter is of value purely by virtue of the nature of the contributions of the users. I have given the example of Snapchat, which is possibly the most recent example of this issue, but problems of people suffering damage to their reputation arise regularly. Obviously, they have a potential recourse to law but if we are starting to legislate to protect these consumers, as we should, will this extend to protecting prosumers—an ugly word—that is, consumers who are also producers? For example, a supplier of digital services may have a problem with the privacy setting and, although the consumer has legitimately set up privacy controls to protect his privacy, those have failed and there is then an impact on the consumer’s reputation. Can consumers seek recourse under this legislation or do they have to go through other legal means?

6.30 pm

Baroness Neville-Rolfe: My Lords, this clause aims to address a specific concern of consumer groups who have told us that, as a minimum, we should give some protection in legislation against free digital content that causes damage, as we discussed earlier. The clause aims to clarify that consumers have a right to a remedy for damage to their device or other digital content, even in relation to free digital content, if it has been supplied under a contract. It addresses a concern that there may not be a clear course of action because free digital content is not covered by the quality rights.

We are all aware that digital content sometimes contains malware, such as computer viruses, that can damage the consumer’s device. Often this is as a result of the actions of rogue traders, but malware can also be introduced accidentally from legitimate sources. For example, in January, an American personal computer manufacturer notified its dealers that it had accidentally shipped at least 500 computers that contained the Michelangelo virus, which erases the computer’s hard disk, on 6 March, Michelangelo’s birthday. The virus had infected the computers from a third-party supplier whose software was bundled in the computers. The intention of this clause is to engage negligence principles. It gives consumers rights to a remedy for all contractually provided digital content which causes damage. The remedy would be a repair or an appropriate payment.

The noble Lord, Lord Stevenson, asked about freemium apps. I have already promised to write to him, so I will ensure that this aspect is also covered in that letter. He also asked how one would calculate an appropriate payment for free digital content that causes damage. The payment is not a reduction in price of the original content. The financial remedy is to provide

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compensation of an appropriate amount. We would expect this amount to be proportionate to the damage caused. If the damage simply stopped the spellchecker within the word processor from working, the financial compensation would be very minor.

A noble Lord: Scandalous!

Baroness Neville-Rolfe: I agree—I take the rebuke. Obviously, perfect spelling is very important to the future of civilisation.

As I was saying, the digital content might have introduced a code that has damaged all the digital content on the consumer’s device, including the underlying operating system—for example, as can happen on one’s iPad. In this case, the compensation could be considerably more.

We have already debated the issues surrounding business liabilities under this clause and we have talked a little about the consumer angle. I have listened very carefully to both of the perspectives discussed in relation to this clause and I will read Hansard. I am keen to ensure that we have the balance right here. I think that we have. For that reason, I hope that your Lordships will agree that this clause should stand part of the Bill.

Lord Stevenson of Balmacara: My Lords, I thank the Minister for her comments. By her use of examples she has explained some of the difficulties. She put herself into exactly the position I was trying to bring her to, which is that I do not really understand how this works yet. I now understand the mechanism and that it will apply to free delivery, and anticipating her line of argument, presumably where free apps turn into freemium apps there will be an assessment of both the free part and the premium part because there will be two different elements in the calculation that go towards it. I can see that the issue is about the damage caused rather than the original pricing because there was no price on the free element. However, I still do not quite understand who is doing that. Is this now a matter for the courts or will some new form of arbitration system be set up for problems around free downloads? I am not looking for a response at this point, but perhaps the Minister could write to me.

Baroness Neville-Rolfe: Perhaps I may clarify that obviously it is ultimately for the courts since we are talking about provision for damages and so on. I shall set that out clearly in writing.

Lord Stevenson of Balmacara: I am now slightly more confused because the text of the Bill states that the consumer has a right and can exercise that right against a trader. Is that going to be in the courts in all circumstances? If we are talking about some of the apps referred to earlier by my noble friend Lord Knight, we are considering trivial things which may create a lot of confusion. I cannot believe that the courts will wish to engage themselves with “Angry Birds” and “Candy Crush” users who are annoyed about an issue.

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Baroness Neville-Rolfe: Perhaps I have confused the noble Lord by saying that ultimately this is a matter for the courts. However, he will be pleased to know that we are planning to issue guidance in this area which will be subject to the usual consultation. The minor points being articulated by the noble Lord will be the subject of guidance and therefore, it is hoped, will not reach the courts too often.

Lord Stevenson of Balmacara: “A hae ma doots” about that—but perhaps I should not use that term in Hansard. I have some doubts about where this is going, so again perhaps I may request a letter that sketches this out in more detail; I am sure that we will reach an accommodation. In the mean time, I am happy not to press my opposition to the clause.

Clause 46 agreed.

Clause 47: Liability that cannot be excluded or restricted

Amendment 43

Moved by Lord Clement-Jones

43: Clause 47, page 29, line 20, after “would” insert “unreasonably”

Lord Clement-Jones: My Lords, in moving Amendment 43, I shall speak also to Amendment 44. Very significantly, the effect of Clause 47 is that liability under most of the provisions of Chapter 3 cannot be excluded or restricted. Broadly, the clause in its present form prohibits any exclusion or restriction of liability whatever, however reasonable it may be to exclude or restrict such liability. The intention of these amendments is to allow such exclusion or restriction of liability if it is reasonable. This is particularly important because, as we discussed earlier, software often contains defects and is known to do so. Increasingly, software is installed and runs alongside or on other applications or platforms. These are often refined and altered as new versions are released and indeed may have incidental defects as well. The performance of one software program may therefore often depend on other applications, interfaces and programs, and it is the resulting interplay that can expose unexpected defects, but these may not be evident or even exist when running the same program in another manner or configuration.

The appearance of a defect might lead to the conclusion that a software program is defective as an absolute and verifiable characteristic of that software, but many such defects may exist only in certain circumstances or in specific configurations. This is very different from a single consumer good which, operating alone, either functions in accordance with the marketed description or is defective. It may well be reasonable to allow the supplier to exclude liability for defects. It is important to stress that the amendment would permit the supplier to exclude or restrict liability only if a court thought it reasonable to do so.

The fact of the matter is that virtually all software contains defects. There are limited exceptions but they are highly specialised and tend to be found in application areas where the consequences of failure are so grave as

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to demand ultra-resilient and dependable software—for example, aircraft and automotive control systems, software for nuclear installations, software in surgical scenarios, or software to guide or launch weapons. To the extent that defect-free software exists, it will tend to be infinitely expensive.

Cheap consumer software is wholly different. It cannot be polished for ever and, if so, would be very expensive to buy a licence for. Apps are being developed all the time for the consumer at the cost of, for example, around 69p or free. Without the ability to limit such liability, this law could chill software development by micro-business and SMEs. Costs will be pushed up for such small developers as they will need to seek to mitigate or insure against such legal risks. It could end up by stifling innovation. It could make the developer think, “Why supply software under such a law to consumers at all? It’s too risky”.

In any event, this law is unnecessary as in practical terms the software industry will always find a workaround or fix to a problem. Such solutions happen each day and often very quickly. The rule will be divorced from reality. The remedy is not proportionate and, in the view of many in the software industry, is somewhat draconian. It is out of step with the way in which the industry works and looks after its customers, who are its lifeblood. A solution could be that such a rule under Clause 47 applies only if a workaround or fix is not implemented. Thus, unlimited exposure kicks in only if a fix fails.

The clause is too much of a blunt weapon to cure, at best, only a technical legal problem. Have the consequences been properly considered on developers? The effect of such potential unlimited or excludable liability can be foreseen as the near certainty of choking back innovation and the further distribution and take-up by consumers of advanced technologies in application areas where it is not reasonable for them to expect a perfect product—especially where the product is at zero or very low cost. In any event, it is reasonable to take into account any fix offered, together with a number of factors, in order to determine reasonableness.

In conclusion, as the Federation Against Software Theft suggests, a more equitable approach would be to permit the exclusion or restriction of liability to the extent that it is reasonable to do so, taking into account factors analogous to those under the Unfair Terms in Consumer Contracts Regulations 1999—SI 1999, No. 2083. That would enable the courts to develop a fair and equitable system on a case-by-case basis. I beg to move.

Baroness Jolly: My Lords, we have heard that this amendment seeks to introduce into the digital content chapter a right for businesses to be able to exclude or limit their liability for meeting the quality rights if doing so is “reasonable”.

We have chosen not to allow “reasonable” limitations on liability for the quality rights in any of the goods, services or digital content chapters of the Bill. This reflects the current law in relation to business-to-consumer contracts for goods. Clause 47 prevents a trader contracting out of the consumer’s statutory rights and remedies specified in that clause. This is because, in practice, the liability will for the most part be limited

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to the contract price of the digital content, as for goods. So there is a natural cap.

Clauses in consumer contracts that exclude liability entirely, or limit liability to significantly less than the contract price, are unlikely to be judged as reasonable anyway. I have heard industry concerns about the complex environment in which digital content works, and I know that contractual relationships between traders may be complex, as may the technical issues. Against this backdrop, it is difficult for a trader to have full control over the quality of the digital content that they supply, so traders have concerns about being liable for problems that are not entirely in their control. However, as I said earlier, is it right, from the consumer’s perspective, that traders can limit their liability? Surely if a trader offers to sell digital content for a consumer, they should take responsibility for the consumer getting what they expect.

6.45 pm

Complex arrangements are not a defence against poor product offerings, as we have made clear in Clause 39, which deals with products supplied across a network. Allowing “reasonable” limitations makes the situation unnecessarily complex. It also risks that traders will use—and consumers will think they are bound by—terms which would not bind the consumer. Here is an example from some real terms and conditions for digital content. It says that the company:

“provides the product software ‘as-is’ and disclaims all warranties and conditions, whether express, implied, or statutory, including the warranties of merchantability, fitness for a particular purpose, title, quiet enjoyment, accuracy, and non-infringement of third-party rights”.

It further says that the company:

“makes no warranty that the product software will be uninterrupted, free of viruses or other harmful code, timely, secure, or error-free”.

We want to put it beyond doubt that such terms are not binding. Introducing the word “unreasonable” into the Bill would not give consumers that clarity. As such, the amendment would see consumers of digital content with lesser protections than consumers of goods. I therefore ask my noble friend to withdraw his amendment.

Lord Clement-Jones: My Lords, I thank my noble friend for her response. In contrast to some of her earlier responses, I am not quite convinced by her analysis of the clause. This is a very serious potential issue for software suppliers in these circumstances. I noticed that she used the phrase “unnecessarily complex” again. That seems to me to be a splendid phrase to pop into a response when it is just too much bother to put in a clarifying phrase. Either it “does not provide enough clarity” or it is “unnecessarily complex”.