Q&A: The contract law barriers to online sales in the EU
The European Commission ('EC') published on 12 June a consultation, to run until 3 September 2015, which aims to find solutions to contract law obstacles that limit the cross-border online sale of digital content and tangible goods. The consultation marks a step towards a proposal, to be published by the EC by the end of 2015, for an alternative to the proposed Common European Sales Law ('CESL'), which following substantial criticism has been shelved by the EC. Simon Fuller spoke to Louis B. Buchman, Partner at Fieldfisher in Paris, about the EU's plans for a CESL-alternative and the issues relating to contract law that the EC explores in its consultation.
Is it a surprise that the CESL plans now appear to have been abandoned?
Not after the joint letter sent to the EU Commission by six Member States on 28 November 2014, excoriating the CESL on various ground, some serious, some less so. This achieved its goal of convincing the Commission to shelve the CESL.
How much of a sense do we have of what the new amended proposal for 'harmonised EU rules for online purchases of digital content' will contain, and how this proposal will differ from the CESL regime ?
The proposal will differ in many respects, but the most important is that the aim seems to be to come up with a EU Regulation, or a Directive if a Regulation proves to be politically out of reach. It will also give greater attention to online sales, as the e-economy is growing fast.
What are the primary issues relating to contract law discussed in the consultation, and how might we see these being addressed?
The primary issues are the following :
As far as digital content products are concerned: Digital content products markets are growing rapidly. For instance, the app sector in the EU has grown significantly in less than five years, and is expected to contribute to €63 billion to the EU economy by 2018. Consumer spending in the video game sector is estimated at €16 billion in 2013. In the music industry, digital revenues now represent 31% of total revenue in the EU. This economic potential should be further unleashed by increasing consumer trust and legal certainty for businesses.
However, when problems with digital content products arise (for example, the digital content products cannot be downloaded, are incompatible with other hardware/software, do not work properly, or even cause damage to the computer), specific remedies are lacking at the EU level (namely a right of the user against the trader when the digital content is defective). In addition, the user cannot influence the content of the contracts on the basis of which digital content products, which are 'off-the-shelf' products, are offered because these are 'take it or leave it' contracts. For instance, contracts may limit the user's rights in the case that digital content products do not work properly. They may also exclude the user's right to receive compensation if the digital content products caused damage (for example by damaging the computer), or limit compensation solely to so-called 'service credits' (extra credits for future service).
In addition, contracts for the supply of digital contents products may be characterised differently in each Member State, for example they may be service, lease or sale contracts. Such different treatment may result in different sets of remedies, some of them in the form of mandatory rules, others not. This may cause legal uncertainty for businesses about their obligations – and for users about their rights – when selling digital content products both domestically and cross-border.
A number of Member States have enacted or started work to adopt specific legislation on digital content products (namely the UK, the Netherlands, and Ireland). This could further increase the differences between national rules that businesses would have to consider when providing digital content products throughout the EU.
Certain aspects of contract law for the online supply digital content products are already covered by EU law. For example, the Consumer Rights Directive provides uniform rules on the information that should be provided to consumer before they enter into a contract and on the right to withdraw from the contract if they have second thoughts; the Unfair Contract Terms Directive provides rules against unfair standard contract terms in consumer contracts. However, there are no EU rules on other aspects of contracts for digital content products (such as what remedies are available if the digital content product is defective).
As far as online sales of tangible goods are concerned: In 2004, 50% of EU consumers shopped online, rising from 30% in 2007. With an average annual growth rate of 22%, online retail sales of tangible goods surpassed €200 billion in 2014, reaching a share of 7% of total retail in the EU-28. The Commission's Digital Single Market Strategy has highlighted that this economic potential should be further unleashed by removing barriers.
If traders decide not to sell outside of their domestic market, this may limit consumer choice and prevent lower prices through a lack of competition. Today, traders may be deterred from doing this by differences in contract law, which may create costs for traders who adapt their contracts or increase the legal risk for those who do not. For example, depending on the Member State, consumers may have two years, five years, or the entire lifespan of the purchased product to claim their rights. In business-to-business transactions, where no specific EU rules exist, negotiation on the applicable law may also create costs.
As for digital content products, certain aspects of contract law have already been fully harmonised for online purchasing of tangible goods by consumers. In particular, the Consumer Rights Directive has fully harmonised the information that should be provided to consumers before they enter into a contract and the right to withdraw from the contract if they have second thoughts. The Unfair Contract Terms Directive provides rules against unfair contract standard terms for consumer contracts. In addition, contrary to digital content products, remedies in case of defective tangible goods are also regulated at EU level in business-to-consumers transactions (under the Consumer Sales and Guarantee Directive). Nevertheless, this harmonisation only sets minimum standards: Member States have used this possibility – on different points and to a different extent.
There are also secondary issues relating to product-related rules on labelling. They are mentioned in the Digital Single Market Strategy in relation to aspects of cross-border e-commerce, but these will not be included in the Commission's future proposal relating to the Digital Single Market Strategy on contract rules for online purchases of digital content and tangible goods.
In a Digital Single Market, both consumers and traders should be confident in trading cross-border without barriers that may be created by differences between national rules. The EU's Digital Single Market Strategy identified several obstacles stopping businesses and consumers from fully enjoying the benefits of the Digital Single Market and highlighted the objective of "ensuring that traders in the internal market are not deterred from cross-border trading by (…) differences arising from products specific rules such as labelling".
Different technical specifications or rules on labelling and selling arrangements may apply in specific areas and, depending on where in the EU the consumer is located, national product-related rules may require the trader to adapt their products and packaging accordingly. Although the mutual recognition principle applies, Member States may justify such rules by public interest objective taking precedence over the free movement of goods, such as on health and safety grounds. National measures that hinder the free movement have to be justified and have to be necessary to effectively protect the public interest invoked. However, even for product categories for which harmonised rules apply, Member States can – under certain conditions and in accordance with a legally established procedure – introduce certain additional mandatory labelling requirements at national level.
This situation means that online suppliers of goods and services who wish to serve a pan-European market may potentially need to know about, and comply with, 28 differing sets of national regulations. Finding out which regulation applies in which case may be difficult. 37% of firms in the EU that have experience with selling online to other Member States stated that lack of knowledge of the rules that have to be followed is a barrier to selling online cross-border. Moreover, 63% of firms that have no experience with selling online cross-border stated that they believe lack of awareness of which rules have to be followed may constitute a barrier. This shows that the perceived barriers are significantly higher than the real barriers and that there is space for better communication and transparency. This situation creates information and compliance costs for online traders, especially for small and medium-sized enterprises, and in particular when the value of the transactions remains low.