Consultation Response European Commission: Consultation on contract rules for online purchases of digital content and tangible goods. The Law Society of Scotland’s response September 2015 © The Law Society of Scotland 2015 Introduction The Law Society of Scotland aims to lead and support a successful and respected Scottish legal profession. Not only do we act in the interests of our solicitor members but we also have a clear responsibility to work in the public interest. That is why we actively engage and seek to assist in the legislative and public policy decision making processes. To help us do this, we use our various Society committees which are made up of solicitors and nonsolicitors to ensure we benefit from knowledge and expertise from both within and out with the solicitor profession. The Obligations Law Sub Committee of the Law Society of Scotland, welcomes the opportunity to consider the European Commission consultation on contract rules for online purchases of digital content and tangible goods. The committee has the following response to put forward: Comments Section 1 –Problems 1. In general, do you agree with the analysis of the situation made in the "Context"? On the whole, yes. The taxonomy is less significant in Scotland, England and Wales than in continental jurisdictions: the question is really whether supply of digital content fits into one of the pre-exiting specific regimes such as sale of goods. It is pretty clear that it is largely regulated by the general law of contract. As the report hints, the Consumer Rights Act will change this significantly when it comes into force by creating a specific regime for supply of digital content to consumers which is modelled on that for sale of goods. We are uncertain that this is likely to further increase the differences with other member states. It may actually bring the UK closer to Civilian approaches since such systems would have been more likely to apply consumer sale of goods rules by analogy than UK courts would have done. None of this is to say that the system would not benefit from clarification, however. © The Law Society of Scotland 2015 Page | 1 2. Do you think that users should be more protected when buying digital content products? Please explain why by giving concrete examples. The problem is perhaps one of lack of clarity rather than of lack of protection. In the UK, if the Consumer Rights Act is brought into force, the purchasers will have relatively robust protection in terms of quality, conformity to information provided and remedies. There are perhaps some questions about the applicability of some of the language used, repair or replacement, for instance – in the digital context. As compared with sale of goods, some might query the restriction on the consumer’s right to terminate for breach in s 42(8) but, at a European level, such a provision looks less anomalous. If consumers perceive problems, our impression is that they are more on the IP side than on the consumer contract side. This is what restricts the ability to move content from one device to another etc. 3. Do you perceive difficulties/costs due to the absence of EU contract law rules on the quality of digital content products? Please explain. There is certainly an inconsistency. There are relatively clear rules on quality in the law of sale of goods and these rules have operated fairly successfully. The market for digital content is more susceptible to transnational dealings than that for consumer goods so there is more reason to have harmonised rules on quality. 4. Do you think that upcoming diverging specific national legislations on digital content products may affect business activities? Please explain. We do not have detailed knowledge of proposals in other MS. It would be surprising if the UK measures had a significant chilling effect on traders who want to sell into the UK. The mandatory terms are not terribly onerous and represent a standard which traders should be upholding as matter of good practice anyway. © The Law Society of Scotland 2015 Page | 2 Section 2 – Need for an initiative on contract rules for digital content products at EU level 5. The European Commission has explained in the Digital Single Market Strategy that it sees a need to act at EU level. Do you agree? Please explain. For the reasons mentioned in answer 3, action at an EU level seems desirable in order to promote common standards across the single market in an area which is particularly well suited to cross border dealings. This is an area where national law is a bit thin at present so there is room for the EU to give leadership and perhaps less risk of running up against features of national systems which are dearly held but are not consistent. At the same time, not having well established domestic law means that those drafting law at an EU level have less collective experience to draw on in this area than in others so the process should proceed with great care and extensive consultation. 6. The European Commission has announced in the Digital Single Market Strategy that it will make a proposal covering harmonised EU rules for online purchases of digital content. Other approaches include, for example, the development of a voluntary model contract that consumers and businesses could use for their cross-border e-commerce transactions or minimum harmonisation. What is your view on the approach suggested in the Digital Single Market Strategy? The other two strategies mentioned suffer from a common defect: lack of familiarity with mandatory consumer rules in other member states can deter smaller business from selling into other MS. The proposal (whether displacing national law altogether or as a “blue button” model) would allow them to choose to contract on the basis of a single set of consumer rules rather than on the basis of different rules for each MS. A voluntary contract model or minimum harmonisation model would not displace mandatory protections in MS legal systems. This is not to say that there would not be a case for voluntary contract models which provided greater detail for specific areas of digital content: eg music or apps. The minimum harmonisation model suffers from a defect in principle as well. It is based on the assumption that greater consumer protection is somehow “more European” or “more supportive of the European project” and that, as such European harmonisation is not affected by protections which overreach. This misunderstands the nature of the single © The Law Society of Scotland 2015 Page | 3 market. First, there is a significant danger that consumer protection measures can be used to create non-tariff barriers. Secondly, it is not obvious why the single market should be conceived as only existing for the benefit of consumers: the opportunity it provides to businesses to make a lawful profit also matters. Therefore, we should be looking to strike a proper balance in these areas. Section 3 – Scope of an initiative 7. Do you think that the initiative should cover business-to-consumers transactions only or also business-to-business transactions? Please explain. The problem of mandatory rules is most acute in the context of consumer transactions. Therefore, a proposal which involved business to business transactions would be a tougher sell. For this reason, it would be advisable that the B2C rules be severable, in case it was not possible to secure sufficient support for the broader rules. That said, the desirability of consistency might be thought to make a matching business to business regime attractive. This is particularly the case if the consumer law is based on a blue button model: so it would simple create an option for the use of businesses. The case for such an option is strengthened when we bear in mind the arguments made in the course of the DCFR process, that a bright line between businesses (who are presumed to have the power to negotiate in a pursuit of their own interests) and consumers (who are presumed to have little or no such power) is a bit unrealistic. A small business or one which is making a purchase (such as accounting or business management software) where it is not a repeat player may suffer some of the same problems as a consumer. 8. What specific aspects in business-to-business transactions, if any, should be tackled? Please explain. The primary concern is for businesses purchasing assets in who do not have expertise relating to the product being purchased. Therefore the key provisions should probably be similar to that proposed in relation to consumer transactions: clarifying responsibility for the quality or capacity of the product and remedies. The major difference, we believe, should be that the obligations should not be mandatory in the B2B context. The balance between the value of flexibility and of protection changes in a business context but the rules would © The Law Society of Scotland 2015 Page | 4 provide a baseline for negotiation. Remedies in this area would benefit from clarification, particularly if there is a desire for a focus on repair. However, there are grounds for being cautious about favouring repair and replacement in the context of digital content. In some cases, digital content has the capacity to do significant damage to existing software and systems. It is asking a lot of a customer who has already suffered damage in this way to expect them to expose themselves to further interventions from the party responsible for the damage. 9. Digital content products may cover inter alia the products listed below. Which of these digital content products/services should be covered by the initiative (tick as many as apply)? There is a case for dividing downloaded content on the one hand from streaming/ongoing services on the other. The basis for such a division is that the former is closer to a classical contract of sale while the latter is closer to a contract for services. However, in both cases, there is a case for context specific rules because of the lack of clarity about the present law and a sector which is particularly suited to a transnational market. Furthermore, many providers will be dealing in both service types. For these reasons, we would favour the broadest approach: i.e. any software or service accessible online. 10. Digital content products can be supplied against different types of counter- performance. Which of the following counter-performances should be covered by the initiative (tick as many as apply)? Money should certainly be covered for obvious reasons. It may be difficult to distinguish the second and third in some circumstances since data would require to be collected in order to establish that the relevant activity has been done. At least some personal data is clearly of value to the provider which is of equivalent value to money. Certain remedies such as reduction/return of the purchase price are difficult to apply in the context of personal information since it is very difficult to ensure that the provider has surrendered the benefit of the information and it is questionable whether such surrender is of equivalent benefit to a consumer as return of the price. © The Law Society of Scotland 2015 Page | 5 There is a case for covering the second and third cases: the content provider clearly considers what is provided to be of value (otherwise the product would not be given in return for it) and a regime provides a clear framework for recovery where the content distributed does damage. Even if non-monetary consideration is thought less valuable, it should surely be uncontroversial that a commercial provider who puts a product out should be accountable for any serious damage which it does to those to whom it is supplied. In short, there is a case for including all three categories but the range of remedies workable in the second and third cases would be more restricted. The practical limit in the last mentioned case would be liability for damage done by the product. Section 4 –Content of an initiative 11. Among the areas of contract law below, which ones do you think are problematic and should be covered by an initiative (tick as many as apply)? If the aim is to provide a coherent framework in this area, then the question of whether the relevant area of law of problematic is not decisive as to whether a matter should be covered. The model of sale of goods suggests that quality of digital content and remedies should been included. Modification by the trader and termination of long term contracts should be included if the scope of the project includes longer term transactions such as the supply of online services. It is difficult to see a strong reason for including rules on exercise of remedies. That is more likely to be part of the law of civil procedure. Consideration should be given to varying obligations depending on the nature of the consideration provided: someone who looks at an advert is entitled to a product which will not do any damage to his or her electronic devices and other software but not necessarily to protection of an expectation interest. This nuance might be made in terms of the remedies available but a strong case can be made for doing it at the level of rights and duties rather than of remedies. Essentially, this is because the difference in consideration affects what the supplier is properly expected to do rather than the way in which those duties can be enforced. © The Law Society of Scotland 2015 Page | 6 12. Should the quality of digital content products be ensured by: o Subjective criteria (criteria only set by the contract) o Objective criteria (criteria set by law) o A mixture of both If the law is to provide consumer protection by mandatory rules, then at least some of the criteria should be set by the law but the best model for this is a context sensitive rule which refers to what is expected of software of the relevant type. It would be strange to draft provisions which did not make clear that the content must meet the agreed criteria but the role of law there is much less important because basic contract law gives the answer. In short, a mixture is necessary but the objective criteria are much more important in terms of law doing its job. 13. When users complain about defective products, should: Users have to provide evidence that the digital content products are defective Traders have to provide evidence that the digital content products are not defective if they consider the complaint to be unfounded This question is a little strange. The issue is not what is required for a complaint (it being up to the parties how they react to that) but what should be required by a court to make out a remedy or a defence. In that context, it is difficult to see much justification for departing from the normal rules about burden of proof arising from the law of civil procedure. Remedies for defective digital content products 14. What are the key remedies that users should benefit from in case of defective digital content products (tick as many as apply)? Resolving the problem with the digital content product so that it meets the quality promised in the contract Price reduction © The Law Society of Scotland 2015 Page | 7 Termination of the contract (including reimbursement) Damages For monetary consideration, provision should be made for all of the remedies listed above. Clearly, restrictions will need to be placed on the availability of the “specific performance” remedy. There may also be a case for restricting termination, as is the case in relation to goods. However, some care needs to be taken with such a restriction in this context because of the importance of trust when digital content is being supplied: most consumers have a scant understanding of the way many of their digital devices work and are therefore not in a position to assess or control damage or breach of privacy resulting from defective digital content. 15. Should users have the same remedies for digital content products provided for counter-performance other than money (for example, the provision of personal data)? Please explain. The appropriate range of remedies will vary depending on the range of transactions covered and, if non-monetary consideration is covered, then bespoke regimes of remedies to take account of that should be considered: price reduction and reimbursement make little sense in such contexts. As noted above, there may be a case for restricting certain remedies where no monetary consideration is provided on the basis of what you deserve to get for something other than money but the more principled way of dealing with this is to look at the supplier’s duties in such a context. 16. Should users be entitled to ask for remedies for an indefinite period of time or should there be a specific time limit after they have acquired the digital content products or discovered that the digital content products were defective? Please explain. An indefinite right would be a remarkable innovation for which it is difficult to see any justification. At least in Scotland and in England and Wales, contractual rights are subject to negative prescription and limitation. Aside, perhaps, from setting a minimum period to prevent certain Member States from using very, very short periods, it is difficult to see any justification for exempting these contracts from this regime. © The Law Society of Scotland 2015 Page | 8 The converse issue arises from the example of concepts of acceptance in English and Scots law and from duties of inspection and prompt notification in certain Civil law systems in the context of sale of goods. These regimes protect suppliers by imposing a shorter time limit than would apply under the general limitation/prescription regime. The justification which is typically given for the shorter period in the context of sale of goods would also apply here: the supplier’s interest in a degree of commercial certainty regarding outstanding liability. It is worth noting that there is significant variation between Member States in the sale of goods in this area because acceptance of goods precludes termination but does not preclude a claim for damages. As far as we are aware, this has not given rise to serious problems in the context of sale of goods but it is the kind of rule which might be expected to catch out the unwary. If a “blue button” option is being pursued, then it should contain a rule on this issue for that reason. 17. Should there be one single time limit or should there be two different time limits, one for the period during which the defect should appear and one during which users have to exercise the remedies? Please explain. There is a case for a longstop period, providing the supplier with a degree of finality and another period which effectively enforces prompt action by a user on discovery of a fault. 18. Which time limit(s) do you think is (are) appropriate? Please explain. The high turnover and relatively ephemeral nature of much digital content suggests that the longstop period should be reasonably short. Conversely, a reasonable degree of consumer protection should mean that they be given a bit of leeway in working out who needs to be informed of a problem and when. Any number will be a bit arbitrary but the longstop period might be set at 3 years and the notification period at 6 months. 19. If there is a right to damages, under which conditions should this remedy be granted? For example, should liability be based on the trader’s fault or be strict (irrespective of the existence of a fault)? Liability should be strict, at least in consumer cases. Putting the user to proof of fault is likely to deter or prevent effective recovery in many cases, particularly where the value of © The Law Society of Scotland 2015 Page | 9 the dispute is relatively low. The supplier is likely to have a much better understanding of the relevant technology than the user. An alternative, which might be more acceptable to Civil law systems would be to include a fault requirement but to use a presumption to reverse the burden of proof. 20. Should it be possible for damages to mainly consist of 'service credits' (extra credits for future service)? Please explain. No. In many cases the consumer may have good reasons for not wanting to deal with the supplier in the future, paying damages in service credits effectively ties them into that relationship. Additional rights 21. Should users be able to terminate long term contracts (subscription contracts) for digital content products? Yes 22. If you reply yes to question 21, please specify under which conditions and following which modalities should users be able to terminate the contract (tick as many as may apply): We are uncertain at the difference intended by the first two options. It is reasonable that the user should have to give notice to the supplier. The trader should not be able to make further use of the user’s data. Providing the means to retrieve data does not add much to this since the user exercising this power would rarely be in a position to verify that the data had been deleted and data is not single use in the relevant way. 23. In case of termination of the contract, should users be able to recover the content that they generated and that is stored with the trader in order to transfer it to another trader? Yes. We believe this reflects the reasonable expectations of users in most circumstances. The marketing and general environment of services such as cloud computing stress its © The Law Society of Scotland 2015 Page | 10 equivalence with traditional storage media. In that context, the content is the property of user and is freely transferable. 24. If you reply yes to question 23, please indicate under which conditions (tick as many as may apply): Transferability is not meaningful unless the format is commonly used. It is not clear what without significant inconvenience or in a reasonable time would add to the general duty in these circumstances (when taken together with general principles about giving effect to legal rights). Free transferability is important for the promotion on competition between service providers. 25. Upon termination, what actions should the trader be entitled to take in order to prevent the further use of the digital content? This is not necessarily a question which can be answered in general terms. Different solutions might well be suitable for different types of transaction. 26. Should the trader be able to modify digital content products features which have an impact on the quality or conditions of use of the digital content products? Yes. Updates are key to the function of modern software. Without it systems are vulnerable to virus and problems with computability. Without this access, traders would struggle to provide the relevant service. 27. If you reply yes to question 26, under which conditions should the trader modify digital content products features which have an impact on the quality or conditions of use of the digital content products: It is widely expected so it should not require to be specifically agreed. However, the modification does change the terms of engagement so the consumer should be allowed to leave, at least where the change has a significant effect on functionality. Minor changes should probably not trigger that as it would provide a disincentive to the provision of upgrades. © The Law Society of Scotland 2015 Page | 11 28. Which information should the notification of modification include? Please explain. The notice of modification should inform the user of the effect of the changes made on practical use and provide access to a more technical account of what has been changed to which reference can be made in case of difficulty. PART 2 – ONLINE SALE OF TANGIBLE GOODS Section 1 – Problems 29. In general, do you agree with the analysis of the situation made in the "Context"? Please explain. Yes. We endorse the arguments made on behalf of this endeavour during the Common European Sales Law process. 30. Do you think that users should have uniform rights across the EU when buying tangible goods online? Please explain why by giving concrete examples. For the reasons set out, the problem of gold-plating, together with a reasonably significant variation in availability of remedies and rules on prescription and limitation have the potential to chill smaller trader’s involvement in trade throughout the single market. 31. Do online traders adapt their contract to the law of each Member State in which they want to sell? If yes, do they face difficulties/costs to do so? Please explain. We have no specific data on which to base an answer to this question. 32. Do you think that any such difficulties and costs dissuade traders from engaging at all or to a greater extent in cross-border e-commerce? Please explain. We have no specific date on which to base an answer to this question but the effect described is to be expected given the variation described above. Section 2 - Need for an initiative on contract rules for online sales of tangible goods at EU level © The Law Society of Scotland 2015 Page | 12 33. The European Commission has explained in the Digital Single Market Strategy that it sees a need to act at EU level. Do you agree? Please explain. For the reasons set out in the previous answers, there is a strong case for maximum harmonisation in this area in order to further the single market in this context. 34. The European Commission announced in the Digital Single Market Strategy that it will make a proposal allowing traders to rely on their national laws based on a focused set of key mandatory EU contractual rights for domestic and cross-border online sales of tangible goods which would be harmonised in the EU. Other approaches include, for example, the development of a voluntary stakeholders' model contract that consumers and businesses could use for their cross-border ecommerce transactions. What is your view on the approach suggested in the Digital Single Market Strategy? A European level regime into which traders and consumers can opt in, as was the case with the Common European Sales law would be preferable to a model contract because there is always the risk of the model contract being varied in a manner which is detrimental to the consumer. Furthermore, such an approach would not be able to deal with existing mandatory consumer protection rules which are, in some sense part of the problem here because of their variation. Given that the EU regime is not complete, it does require to be embedded in a national legal system and it is plausible that this should be that of the trader. However, care will need to be taken to ensure that the rules are expressed in a way which does not unnecessarily undermine consumer confidence. Section 3 – Content of the initiative 35. Do you see a need to act for business-to-consumers transactions only or should the EU also act for business-to-business transactions? Please explain. The problem of mandatory rules is most acute in the context of consumer transactions. Therefore, a proposal which involved business to business transactions would be a tougher sell. For this reason, it would be advisable that the B2C rules be severable, in case it was not possible to secure sufficient support for the broader rules. © The Law Society of Scotland 2015 Page | 13 That said, the desirability of consistency might be thought to make a matching business to business regime attractive. This is particularly the case if the consumer law is based on a blue button model: so it would simple create an option for the use of businesses. The case for such an option is strengthened when we bear in mind the arguments made in the course of the DCFR process, that a bright line between businesses (who are presumed to have the power to negotiate in a pursuit of their own interests) and consumers (who are presumed to have little or no such power) is a bit unrealistic. A small business or one which is making a purchase (such as accounting or business management software) where it is not a repeat player may suffer some of the same problems as a consumer. 36. What specific aspects in business-to-business transactions, if any, should be tackled? Please explain. Given that the desire is to promote simplicity and consistency the divergence between B2C and B2B should probably be in whether rules are mandatory or not rather than in the aspects tackled. 37. Among the areas of contract law below, which ones do you think create problems related to national divergences which should be covered by an initiative (tick as many as apply)? See answer given to question above in relation to digital content. Quality 38. Which should be the criteria for establishing the quality of the tangible goods? Should there be any additional/different criteria in addition to those already provided by Article 2 of the Consumer Sales and Guarantees Directive? Please explain. The rules on quality of goods have been well-established for a reasonable period of time without major or well documented problems. There would be costs in terms of learning the operation of a new system, associated with moving away from this model. For that reason, it should probably be retained. 39. How long should the period be during which the trader is required to prove that the tangible goods were not defective at the moment of delivery? Please explain. © The Law Society of Scotland 2015 Page | 14 We are not aware of any reason for departing from the current 6 month rule. Remedies 40. Which contractual rights should the buyer have in case of a defective good (tick as many as apply)? What is suggested above covers the existing suite with the removal of price reduction. If liability for damages is strict, then the case for allowing price reduction alongside damages become much less strong since the effect can largely be achieved by allowing damages to be set off against the price. Damages provide a more appropriate measure of the loss suffered: focussing on a direct comparison between the position in which the buyer should be and that in which they actually are. 41. Should the buyer have a free choice of remedies or should there be a hierarchy of remedies (namely the trader is first given the option to repair the good)? Please explain. There is a case for according consumers strong termination rights in the case of breach by the supplier. Repair (and to a lesser extent) replacement will be difficult to organise in the context of the long distance transactions which are the core concern of the proposed instrument. Binding the consumer to accept attempts to repair or replace in this context may not work well. Time limits to exercise remedies 42. Should the buyer be entitled to ask for remedies for an indefinite period of time or should there be a specific time limit after the buyer has bought the good or discovered that the good was defective? Please explain. See the answer given in relation to digital content. 43. Should there be one single time limit or should there be two different time limits, one for the period during which the defect should appear and one during which the buyer has to exercise the remedies? Please explain. See the answer given in relation to digital content. © The Law Society of Scotland 2015 Page | 15 44. Which time limit(s) you think is (are) appropriate? Please explain. For the sake of simplicity, a strong argument can be made for having a single time period which covers both goods and digital content. That could be communicated to consumers easily and clearly. If that policy is not adopted, the period for emergence of the fault should probably be a bit longer for goods but there is no reason to extend the period for exercise of the remedy which is primarily about how quickly the consumer can be expected to get his or her act together. 45. Should the time limit(s) be shorter in case of second-hand tangible goods? No, the difference for second hand goods should relate to the quality standards applicable not to time limits. Damages 46. If there is a right to damages, under which conditions should this remedy be granted? Should liability be based on the trader’s fault or be strict (namely, irrespective of the existence of a fault)? See the comments above in relation to digital content. Notification 47. Should the buyer be obliged to notify the defect within a certain period of time after discovery? If so, should the period start from the moment the buyer is aware of the defect or, rather, from when he could be expected to have discovered the defect? How long should the period be? Please explain. Some kind of inspection duty arises in both Common law and Civil law contexts, therefore there is a case for including it here. Proving actual knowledge will be very difficult for the trader in the case of a dispute so a “should have known” standard is likely to be more practical. The edges of this could be softened by a relatively generous notification period. Commercial guarantees © The Law Society of Scotland 2015 Page | 16 48. Commercial guarantees are voluntary commitments by the trader to repair, replace or service tangible goods beyond their obligations under the law. Do you think uniform rules on the content and form of commercial guarantees are needed? Please explain. These are added value by trader. Rules and remedies about quality provide the buyer with what they are entitled to. Therefore, it is difficult to justify mandatory rules on content. However, a case can be made for having some rules on form to ensure minimum levels of clarity. 49. Could these requirements on the content and form of commercial guarantees be modified contractually or should they be mandatory rules? Please explain. If they are to protect consumers, they will need to be mandatory. Unfair terms 50. Should there be a list with contract terms which are always to be regarded as unfair? If yes, which terms should always be regarded as unfair? Please explain. No comments. 51. Should there be a list of standard contract terms which are presumed to be unfair? If so which terms should be on such a list? In particular, how to treat advance payment which is very frequent in the online world? Please explain. The present rules in this area seem, generally to be ok. We would be inclined to treat rules about advance payment in the body of the mandatory rules rather than through unfair terms regulation. © The Law Society of Scotland 2015 Page | 17 For further information and alternative formats, please contact: Brian Simpson Law Reform DD: 0131 476 8184 E: [email protected] The Law Society of Scotland Atria One, 144 Morrison Street Edinburgh EH3 8EX www.lawscot.org.uk © The Law Society of Scotland 2015 Page | 18
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