EU Commission proposes modern digital contract rules under the DSM strategy

We've previously commented in some depth on the EU's Digital Single Market proposals, most of which are currently out to consultation. The European Commission today set out new plans for two proposals We've previously commented in some depth on the EU's Digital Single Market proposals, most of which are currently out to consultation. The European Commission today set out new plans for two proposals under this DSM strategy to better protect consumers who shop online across the EU and help businesses expand their online sales.

Some context

In a single market, companies should be able to manage their sales under a common set of rules. But any business that has considered online presence across more than one EU Member State will quickly tell you Europe’s digital regulatory and ecommerce landscape is far from harmonised. What’s more, even in areas where there have been past attempts at harmonisation, gaps or national differences remain. In fact, conducting online business in Europe from a single platform is intrinsically difficult.

In our DSM briefing we explained that, within the EU today the EU Commission recognises, some aspects of contract and online regulation have already been harmonised. Today, EU rules touch upon:

1. Vendor identity disclosures and transparency around the online contract process;


2. The information that should be provided to consumers before they enter into a contract; and


3. The rules that govern a consumer’s right to withdraw from the deal if they have second thoughts.


 

 

But, we also highlighted that there is imperfect or no harmonisation around issues such as:

1. The basics of consumer contract law;


2. The remedies available to consumers if tangible goods are not in conformity with the contract of sale (there have been attempts to harmonise but certain Member States have gone further); and


3. The remedies applicable for defective digital content purchased online (such as e-books, online games or in-app purchases for virtual goods).


 

 

Amongst other things, today's "Digital Contracts for Europe" proposals look to address these last two issues.

New Directives proposed

The Commission today adopted two proposals: one on the supply of digital content (e.g. streaming music, online games or e-books (see text here)) and one on the online sale of goods (e.g. buying clothes or electronics online  (see text here)). The Commission states that "[T]he two proposals will tackle the main obstacles to cross-border e-commerce in the EU: legal fragmentation in the area of consumer contract law and resulting high costs for businesses – especially SMEs- and low consumer trust when buying online from another country."

It's quite a surprise to see the European Commission delivering on some of its heavily promoted Digital Single Market initiatives. We feared much of the momentum had stalled and we were likely to get lost in a world of consultation and statements of intent. However, this appears to be tangible output in 2015 (and as promised!). Together with the online content portability proposal also published today (yes the EU plans to ban geo-blocking and other restrictions too), these two proposals on digital contracting are the first deliverables under DSM. The Commission is quick to stress that they "aim to bring down the remaining contract law barriers and to unleash the untapped potential of cross-border e-commerce in the EU." But what will they do?

What changes will the proposed Directives introduce?

As explained above, some aspects of contract and online regulation have already been harmonised. But, there is imperfect or no harmonisation around other basic rights. With EU consumers entitled to their "home" law and the enshrined consumer rights of their local jurisdiction, today the eVendor must develop a different skew of its services, contracts and sales processes for each EU country which it sells into. If the eVendor is not able to do this it faces a choice of either not complying or not selling within the territory. This may restrict consumer choice and lead to imperfect competition.

For Digital Content:

There is a real legal patch-work today. Countries like the UK and Ireland have created specific rights for "digital content" in recent legislation (think this October's Consumer Rights Act in the UK). Yet in other Member States there are no rules or confusing approaches treating digital content contracts as sales, services and even rentals. Hard to navigate and the new country specific laws are only creating more fragmentation.

The Commission proposed specific rights and protections neatly summarised in their own Q&A as follows:

1. "Supplier's liability for defects: If the digital content is defective, the consumer can ask for a remedy. There will be no time limit to the supplier's liability for such defects, because -unlike goods- digital content is not subject to wear and tear.


2. Reversal of burden of proof: If the digital content is defective, it will not be up to the consumer to prove that the defect existed at the time of supply, but rather for the supplier to prove that this is not the case. This is important considering the technical nature of digital content where it can be especially difficult for consumers to prove the cause of a problem.


3. Right to end a contract: Consumers will have the right to terminate long-term contracts, and contracts to which the supplier makes major changes.


4. Contract established in exchange for data: If the consumer has obtained a digital content or service, in exchange for personal data, the new rules clarify that the supplier should stop using them in case the contract is ended."


 

 

For the fourth bullet, let's not ignore the impact of this.  I assess the complications of this provision in another piece in our sister Privacy Blog.  What's more, Article 14 states that the eVendor "shall be liable to the consumer for any economic damage to the digital environment of the consumer caused by a lack of conformity with the contract".  So, if your content breaks my iMac, "you're paying".  Let's see what the lobbyists make of that!

For Goods:

Again, today's rules comprise a patchwork of legal rights when it comes to consumer remedies for defective physical products. There are minimum rights in place, but national laws enhance these again leaving an eVendor facing alternative returns and replacement policies throughout the EU.

The Commission proposed specific rights and protections neatly summarised in their own Q&A as follows:

1. "Reversal of the burden of proof for two years: In the EU, it is already the case that for a certain period of time a consumer asking for a remedy for a defective product does not have to prove that the defect existed at the time of delivery; it is up to the seller to prove the opposite. Currently, the time period during which the seller has this burden of proof varies by Member State; now it will be extended to two years throughout the EU.


2. No notification duty: Consumers will not lose their rights if they do not inform the seller of a defect within a certain period of time, as is currently the case in some Member States.


3. Minor defects: If the seller is unable or fails to repair or replace a defective product, consumers will have the right to terminate the contract and be reimbursed also in cases of minor defects.


4. Second-hand goods: For second-hand goods purchased online, consumers will now have the possibility to exercise their rights within a two-year period, as is the case with new goods, instead of the one-year period that currently applies in some Member States."


 

 

For the avoidance of doubt, there is no new directive (currently) proposed in relation to "services".

Fieldfisher's view

These proposals are likely to be good news for the digital businesses and eVendors addressing the EU's online markets. No-one likes regulatory hurdles and even fewer like jumping the same regulatory hurdle in a different way Member State by Member State. More uniformity around rights and the ecommerce rules should be helpful. There is more certainty, but eVendors will find that, in some instances at least, they will be required to offer enhanced rights.

Therefore we believe this will broadly prove to be a welcome addition to uniform consumer rights across the EU. However, despite the proclamations that "[b]usinesses will be able to supply digital content and sell goods online to consumers throughout the EU, based on the same set of contract law rules" and that"[t]his will increase legal certainty and create a business friendly environment" may yet prove elusive. Why? Well these proposals don't of course address and harmonise all of the EU's consumer contract laws.

In fact, Member States will continue to have divergent consumer contract laws. To be effective, Terms are Conditions, and the ultimate construction of rights and remedies within them, will still be subject to the local law of the consumer. Notwithstanding the unfair contracts principles, Germany's codified laws are applied quite differently to the UK's common law rules. There will still be a need to localise online terms and honour the consumer's local law and jurisdiction even though the basic principles align. It seems the proposals for Common Europe Sales Law (CESL) rules may have been sacrificed for harmonisation of "key" principles, or perhaps it's just a case that these CESL rule proposals (which offered, a perhaps optional, single EU consumer contract law for all Member States) will continue to simmer on the legislative back-burner

Of course draft Directives, take time to be approved as a part of the EU legislative process. Once approved, they require at least two further years to be assimilated into local Member State law.  Time will tell whether these proposals will have their desired effect and whether consumers "will have access to offers from more traders across the EU and will therefore benefit from a wider choice of products, at more competitive prices." Until then, eVendors will have to muddle on and compromise as best they can.

Mark Webber, Partner EU Digital Regulation – Silicon Valley – mark.webber@fieldfisher.com