4.1 On 9 December 2015, the Commission published its first tranche
of legislative proposals aimed at delivering the Commission's
Digital Single Market Strategy[12],
including two Directives on the supply of digital content (for
example, streaming music) and the online sale of goods (for example,
buying books online). These were accompanied by a Commission Communication:
Digital contracts for Europe  Unleashing the potential
of e-commerce (the "Digital Contracts Communication").

4.2 This Report chapter focuses on the draft Directive
on the supply of online content and the Digital Contracts Communication
(considered together in one Explanatory Memorandum). The draft
Directive on the online sale of goods is the subject of a separate
Memorandum and chapter.

4.3 The draft Directive proposes 'maximum' harmonisation
in respect of certain contractual rights and remedies for the
(business to consumer) supply of online content. This means that
if the Directive is adopted, no Member State could give greater
or lesser protection than set out in the Directive (such that
certain aspects of consumer contract law would be fully harmonised
across the EU).

4.4 The provisions of the draft Directive on online
content are set out in detail below. However, key provisions and
potential areas of divergence from the recently implemented Consumer
Rights Act 2015 (CRA) in the UK include:

· Rights
and remedies in relation to digital content provided for non-monetary
consideration: non-monetary 'payment' (for example, personal data)
would attract quality standards and practices; and on termination
of the contract, providers would have to stop using the personal
data and give the consumer a means to retrieve content provided
or generated by the consumer;

· Suppliers'
liability for defects: defects would always be presumed to be
present on delivery, as digital content is not subject to wear
and tear. Therefore:

· if
digital content is 'defective', it would not be up to the consumer
to prove that the defect existed at the time of supply, but for
the supplier to prove there was no such defect at the time of
supply; and

· consumers'
rights to seek remedies for 'defective' digital content would
not not subject to a time limit.

· Consumers'
rights to terminate contracts: Consumers would have the right
to terminate long-term contracts and contracts to which suppliers
make major changes.

4.5 The Minister for Skills at the Department for
Business, Innovation and Skills (Nick Bowles) supports the Commission's
prioritisation of this proposal as the Government has been pushing
for such reforms and considers that it will deliver real benefits
for the UK. However, he notes that more work will be needed in
several areas to ensure that the final Directive is proportionate
and does not impose undue costs on businesses, including SMEs.

4.6 The Committee is
grateful to the Minister for his helpful Explanatory Memorandum
on this technically complex, but legally and politically important
draft Directive  one of the Commission's proposals aimed
at implementing 'pillar one' of the Digital Single Market Strategy
on 'better access to for consumers and businesses to online goods
and services across Europe'.

4.7 We note that the
Minister agrees with the Commission on the need to tackle certain
contract law related barriers to cross-border e-commerce at an
EU-wide level, particularly in light of growing fragmentation
of digital content consumer contract rights law across Member
States.

4.8 While we consider
the proposal timely in the wider context of increasing demand
for and consumption of digital content (both domestically and
cross-border), we wholeheartedly agree with the Minister on the
need for further work to be undertaken to:

· clarify
the scope of the Directive and its interaction with other EU rules
on consumer protection law, and

· ensure
that the measures are proportionate and do not impose unnecessary
burdens on businesses or have unintended consequences,

thereby increasing legal certainty while
providing the flexibility necessary for business practices to
adapt to innovations/rapid developments in the digital space,
and complying with the Commission's wider Better Regulation principles.

4.9 In
order for the Committee to be able to make a more informed assessment
of the likely impacts of the Directive and the progress of negotiations,
we ask the Minister:

· to
explain how adoption of the draft Directive in its current form
would deviate from the recently implemented Consumer Rights Act
(on an article by article basis) and what impacts this would have
on a) consumers and b) businesses;

· to
set out stakeholders' reactions to the draft Directive and their
key areas of concern or support;

· to
explain what work the Government considers necessary to assess
the practical implications for consumers and businesses, and whether
it intends to persuade the Commission to expand its own cost/benefits
assessment in this respect; and

· to
specify what changes he hopes to secure during the negotiations,
whether it has any red lines, and what the Government intends
to do to marshal the support of other Member States in its efforts.

4.10 We
ask for this response by 8 April after the proposed stakeholder
conference the Department for Business, Innovation and Skills
plans to hold in February.

4.11 The Committee also
considers that complementary policies to the proposed maximum
harmonisation measures that increase businesses' and consumers'
understanding of their contract law rights and obligations and
means of cross-border redress are key to ensuring the success
of the proposed Directive. We ask the Minister to confirm whether
he shares this view and what action(s) he considers necessary
or outstanding. In this context, the Committee would be particularly
interested to hear the Minister's views on the Commission's recent
launch of an online dispute resolution platform (intended to address
consumer concerns over rights of redress) and the proposed Consumer
Protection Cooperation Regulation announced in the Digital Single
Market Strategy (intended to clarify and develop the powers of
enforcement authorities and improve the coordination of their
market monitoring activities).

4.12 Pending the further
information requested and progress updates from the Minister on
developments, we retain the draft Directive  document (a)
 under scrutiny and draw it to the attention of the Business,
Innovation and Skills Committee, Justice Committee and Culture,
Media and Sport Committee. We clear document (b) from scrutiny.

4.13 The Digital Single Market Strategy set out an
ambitious work programme of EU action in three 'pillars':

i) reducing barriers to e-commerce;

ii) setting the rules and frameworks in which
digital networks and services can thrive; and

iii) maximising the growth potential of the EU
digital economy.

4.14 Actions envisaged under the first pillar included
legislative proposals for simple and effective cross-border contract
rules for online and digital purchases, alongside reforms to EU
copyright law. A Regulation on the cross-border portability of
online content services in the internal market  the first
legislative proposal of the Commission's action plan to modernise
EU copyright rules - was published on the same day as the proposed
directive on contract rights and is the subject of a separate
Report chapter.[13]

4.15 Other actions, intended to secure the creation
of a genuine Digital Single Market, and considered complementary
to these initiatives include cross-border portability, measures
to improve price transparency and regulatory oversight on parcel
delivery.

CURRENT LACK OF HARMONISATION

Previous attempts at harmonisation

4.16 This is not the first time that the Commission
has attempted to harmonise contractual rights and obligations
across the EU. There have been a series of attempts to achieve
this in a more comprehensive way for more than ten years, the
most recent being a Common European Sales Law (CESL). CESL 
a draft Regulation  provided an 'optional instrument',
which would neither replace nor harmonise national laws, but could
be chosen as an alternative regime from those offered under national
laws, if supply wished. It was opposed by several Member States,
including the UK, and eventually abandoned for a number of reasons,
including objections to the proposed legal base and concerns that
an optional system would increase, not diminish, legal uncertainty.
The House of Commons issued a Reasoned Opinion on 23 November
2011, objecting to the draft Regulation on the grounds that it
did not met the requirements of a) being necessary, or b) producing
clear benefits by reason of its scale and effect.[14]

Why maximum harmonisation?

4.17 The proposed Directive's approach of maximum
harmonisation is similar to the approach taken under the Consumer
Rights Directive, which has fully harmonised certain rules for
the online sales of goods and supply of digital content (mainly
with regard to pre-contractual information and the right of withdrawal
or cancellation).

4.18 The Commission considers maximum harmonisation
necessary in order to increase consumer trust in entering into
transactions cross-border by providing uniform rules with clear
consumer rights, and to reduce business costs resulting from the
complexity and uncertainty arising from legal fragmentation in
cross-border e-commerce rules. Consumers would not be subject
to different levels of protection and businesses would not have
to face different consumer mandatory rules resulting from the
possibility of Member States being able to go beyond the minimum
requirements set out by EU legislation. The Commission also expects
maximum harmonisation to facilitate coordinated enforcement action
by consumer protection cooperation authorities.

UK consumer protection law

4.19 The UK has recently implemented legislation
to deal with consumers' rights if they are supplied with defective
goods or digital content as set out in the CRA. While the Netherlands
and Ireland have adopted rules for the supply of digital content,
the majority of Member States have not.

The Digital Contracts Communication of 9 December
2015

4.20 The Commission asserts that legal fragmentation
in certain areas of contract law (for example in the remedies
available to consumers who purchase defective tangible goods online
or digital content) results in high costs for businesses (especially
SMEs) selling in other EU Member States and low consumer trust.

4.21 It therefore considers that intervention at
an EU level to:

"fully harmonise in a targeted way the key
mandatory rights and obligations of parties to a contract for
the supply of digital content and the online sale of goods
will contribute to the faster growth of the Digital Single Market
by":

· reducing
costs resulting from differences in contract law;

· creating
legal certainty for business and thereby encouraging them to engage
in cross-border sales;

· helping
consumers to gain from online cross-border shopping in the EU;

4.22 The Commission stresses that it has consulted
a wide range of stakeholders on the draft Directives and "taken
into account the lessons learnt from previous attempts to approximate
contract laws", by proposing a Directive (which allows Member
States "the freedom to adapt the implementation to their
national law") on "targeted full harmonisation of mandatory
consumer rights which remedy cross-border trade and address the
urgency of acting on the online sphere".

4.23 The Commission also sets out its plans within
the context of broader changes to EU consumer legislation resulting
from its 'Regulatory Fitness and Performance Programme' (REFIT),
including the Consumer Sales and Guarantee Directive and also
stresses the need for ensuring consistency between 'online' and
'offline' rules.

The draft Directive

4.24 The draft Directive proposes a set of harmonised
rights (to a maximum level) to consumers across the EU when they
purchase digital content for a) money or b) in exchange for agreed
access to their personal data or other information, in the event
of a provider's failure to supply digital content a) altogether
or b) in conformity with the contract. This means that if the
Directive is adopted, no Member State can give greater or lesser
protection than set out.

OBJECTIVES

4.25 The aim of the proposal is to reduce barriers
to growth of cross-border e-commerce in the EU and facilitate
the creation of a well-functioning Digital Single Market. In particular,
it intends to fill a regulatory gap in EU consumer protection
measures for the supply of digital content (given the lack of
protection or coverage in various Member States), create a level
playing field and increase legal certainty for businesses irrespective
of where they sell in the EU, and increase consumers' confidence
that any problems that they may encounter with their digital content
purchases will be resolved irrespective of where the content is
bought in the EU.

Scope (Article 3)

· Business
to consumer (B2C): Covers business to consumer transactions only;

· Digital
content: The proposal covers all types of digital content (such
as video, music, games, apps, and streamed content) provided for
a) money or b) in exchange for agreed access to their personal
data or other information (except where the data has been collected
for the sole purpose of meeting legal requirements);

· Mode
of supply: It applies to content delivered on a physical format
such as a DVD or CD and content delivered electronically, for
example as a download. It is not intended to cover digital content
which is integral to the operation and functioning of physical
goods, for example washing machine programmes; these remain subject
to existing measures that apply to goods;

· Consistency
with other EU rules: The draft Directive specified that in the
event of conflict between the Directive and other EU act, the
other EU act takes precedence. In particular, it clarifies that
the Directive is without prejudice to the data protection rules;
and

· Exclusions:
Services performed with a significant element of human intervention
or contracts governing sectoral services such as healthcare, gambling
or financial services are excluded.

KEY PROVISIONS

4.26 Article 6  conformity of the digital
content with the contract: conformity with the contract will be
assessed against what is promised in the contract, for example,
as regards its quality, quantity, duration, compatibility and
interoperability. In the absence of explicit (contractually set)
benchmarks, the content must be 'fit for the purpose' for which
digital content of that type and description would normally be
used. It also clarifies that when the digital content is supplied
over a period of time, the digital content must be in conformity
with the contract throughout the duration of the contract and
the version of digital content supplied to the consumer must also
be the most recent version available at the time of conclusion
of the contract.

4.27 Article 9  burden of proof/supplier's
liability for non-conformity: the burden of proof for a lack of
conformity with the contract lies with the supplier, unless the
consumers' digital environment is not compatible with the digital
content. This reversal of the burden of proof is not limited in
time as the Commission's explanatory memorandum specifies that
digital content is not subject to wear and tear.

4.28 Articles 12 and 13  remedies and termination
for lack of conformity: In the case of failure to deliver, the
consumer has the right to terminate the contract and obtain a
refund (if no money has been paid by the consumer the supplier
must refrain from any further use of the personal or other data
the consumer has provided under the terms of the contract). In
the event that the digital content does not conform to the contract
the consumer is entitled to have the content repaired or replaced
within a reasonable time, free of charge and without any significant
inconvenience to the consumer. Where this is not possible or it
would be of disproportionate cost to the supplier the consumer
can terminate the contract and receive a refund or a proportionate
reduction in price. Further use of consumer data is prohibited
and the consumer is entitled to the return of any data they have
provided or produced in the course of using the digital content.

4.30 The Minister broadly welcomes the proposed Directive,
considering it will deliver real benefits for the UK, as it is
expected to confer and harmonise certain contractual rights and
obligations on consumers and businesses buying and selling digital
content across the EU  thereby 'levelling the playing field'
and encouraging cross-border e-commerce:

"The UK Government has asked the EU to take
bold steps to create a Digital Single Market that delivers for
consumers and entrepreneurs trying to break into new markets.
We therefore welcome the ambitious proposals on consumer protection
that will deliver real benefits, and contribute to a Digital Single
Market.

"This proposal on digital content means
that for the first time consumers will have a clear set of rights
when they buy digital content across the EU, and that business
will have a single set of rules and obligations wherever in the
EU they market and sell digital content. The UK has led the way
in this area, introducing the first bespoke consumer rights in
Europe covering the purchase of digital content. The Commission
has identified that a lack of clearly harmonised rules in this
area has already led to fragmentation across the Member States.
By legislating now, the EU will deal with these disparities and
prevent further differences of approach."

4.31 He stresses that for the reasons outlined above,
the Government is "more strongly in favour of achieving good
progress on this directive than on the proposal on online and
other distance sales of tangible goods".

4.32 While the Minister raises concerns in relation
to the scope and proportionality of the proposed measures and
notes possible overlaps with existing EU rules in related areas,
he that such concerns can be resolved during negotiations. Given
the detail of his commentary, the text is reproduced for ease
of reference below:

"The proposal reflects in good part the
approach to digital content already in place in the UK and we
are therefore supportive of the overall approach and much of the
detail. However, it differs in some important respects, giving
rise to concerns about its proportionality, practicality, and
relationship with existing EU rules in related areas. We are confident
that our concerns can be resolved satisfactorily in the course
of refining and clarifying the text during negotiations.

"The main policy concerns for the UK are
as follows:

"Scope

"The proposal seeks to include "free"
digital content, that is, content which is provided in return,
not for money but for the agreement to provide access to the consumer's
personal and other data. While we have no fundamental objection
to this (in the Consumer Rights Act 2015 we provided for the option
to extend the UK regime to "free" content in the event
that there is sufficient evidence of consumer detriment). However,
we do need to ensure that the conditions under which consumer
agreement is provided are clear and that the obligations and remedies
proposed are proportionate and do not unduly inhibit this often
low margin but very innovative business model.

"The Commission seeks to extend the definition
of digital content into certain types of digital service, some
of which are clear, for example cloud storage and movie streaming;
but the full extent in respect of communications services is not.
There are already EU rules on electronic communication services
and these rules and others, for example the E-commerce directive,
are being reviewed or are in discussion. Their subject matter
may abut or overlap with that of the proposal although "electronic
communication services as defined in Directive 2002/21/EC"
(the Framework Directive) is exempted. There is for example, uncertainty
about the extent to which pay TV is included in the scope of the
proposal. We want to avoid any overlap and to achieve more clarity
as to the services covered.

"Data protection

"The remedies in the proposal include rules
on what happens to data provided by consumers and collected by
the trader. Although the proposal says it is without prejudice
to the protection of individuals with regard to the processing
of personal data we want to avoid any confusion with or unjustified
extension of the already comprehensive EU rules in this area,
including the recently agreed General Data Protection Regulation
(GDPR).

"Standards and Remedies

"Currently the proposal departs from the
usual provisions which set the standards which can be expected
of products (fit for purpose, as described, and, of a quality
which could reasonably be expected in the circumstances). While
fit for purpose would be a standard under the proposal we would
prefer to see quality as a measure of conformity with the contract
as well, particularly if "free" content remains within
scope. The necessary remedies for which business is liable should
be commensurate with perceived consumer loss or failure to meet
expectations, which would likely be lower in the case of free
content. In this respect this proposal is not in line with the
proposal on online and other distance sale of goods, although
the Commission's Communication specifically states that the two
should be as closely aligned as possible.

"The proposed rules on the return of consumer
data to the consumer in the event the contract is terminated appear
to be very broad and potentially onerous for business. While ensuring
that the consumer has access to data and content they have produced
or stored in the course of using digital content is not unreasonable,
the extent of this obligation as described in the proposal appears
to cover data which would be difficult for the trader to retrieve
and which would appear to be of little practical use to the consumer.
We want practical and proportionate remedies."

FINANCIAL IMPLICATIONS

4.33 The Minister does not consider that there will
be any significant financial implications for Government spending
on implementing the Directive as the "contractual rights
proposed in the Directive are already in place to a large extent
in the UK".

4.34 However, he acknowledges that further work will
need to be done "as consultation progresses to understand
and reflect potential costs and benefits to Government, business
and consumers".

ENGAGEMENT WITH STAKEHOLDERS

4.35 The Minister lists the stakeholders his Department
has met with, but does not provide any detail on whether they
support or oppose the proposed Directive (and their reasons):

"BIS officials have met and corresponded
with key stakeholders including Which?, the CBI, the Federation
of Small Business, the British Retail Consortium, tech-UK (a body
representing digital content suppliers and developers), the Law
Society and the Competition and Markets Authority and will continue
to do so throughout the negotiation process.

"As part of our ongoing engagement, BIS
plans to hold a stakeholder conference in February to provide
the Commission with a chance to explain its approach and to provide
stakeholders with the opportunity to discuss this and the proposal
on contracts for the online and other distance sale of tangible
goods."

IMPACT ASSESSMENT

4.36 The Minister refers to, but does not provide
any detailed commentary on, the Commission's Impact Assessment.
The Government's Impact Assessment Checklist, which covers both
this proposed Directive and the one of the online sale of goods
is available online[15].

LEGAL AND PROCEDURAL ISSUES

Subsidiarity

4.37 The Minister agrees with the Commission's assessment
that only action at an EU level on cross-border contractual rights
in relation to the purchase and supply of digital content can
effectively overcome fragmentation in the internal market, and
in this content the proposed Directive is therefore justified
in accordance with the principle of subsidiarity set out in Article
5 of the Treaty of the Functioning of the European Union:

"The Commission's objective in introducing
this proposal is to create a single set of consumer rights across
the EU to fully harmonise contractual rights and obligations which
are relevant to cross-border trade. This will contribute to the
completion of the Internal Market by removing fragmentation resulting
from different interpretations of existing EU legislation to digital
content and caused by the development of Member States' domestic
law in this area. The Commission states that this fragmentation
creates important barriers to cross-border trade. This fragmentation
cannot be addressed through uncoordinated actions by Member States.
Furthermore, the Commission contends that coordinated legislation
is needed to address new market developments and regulatory gaps
in order to prevent further legal fragmentation.

"The Government accepts that the establishment
of a clear and harmonised framework for consumer rights in respect
of the supply of digital content in the EU will require action
at EU level and cannot be achieved by Member States on their own."

Impact on UK law

4.38 The Minister notes that the proposed Directive
proposes maximum harmonisation in certain aspects of consumer
protection law for digital content, which will impact on UK law.
In particular, the recently adopted and implemented Consumer Rights
Act 2015 will need to be amended to implement the Directive. However,
he does not consider that major changes to UK law will be required,
as the proposed Directive largely mirrors that of existing UK
law:

"Chapter 3 of the Consumer Rights Act 2015
regulates consumer rights in respect of the supply of digital
content in the UK. Implementing the proposed directive will result
in changes to this legislation. In some respects it is likely
that the effect of the Act will change, for example to account
for the application of the proposal to a wider range of digital
products and services. Nevertheless, the proposal is to a large
extent based on UK experience in this area, and as we do not anticipate
major changes in the substance of the rights on offer during the
negotiation, many aspects could remain unchanged.

"The supply of digital content is also regulated
by the Consumer Contracts (information, Cancellation and Additional
Charges) Regulations 2013 (SI 2013/3134) which implements the
Consumer Rights Directive (2011/83/EU). The regulations provide
for rights to pre-contractual information and withdrawal rights
in respect of distance sales and sales away from business premises.
As the proposed directive is without prejudice to existing EU
law, which takes precedence, we do not envisage any significant
change to these regulations.

"The proposal is intended as a full harmonisation
measure. The UK would not be able to maintain more or less stringent
requirements in relation to matters falling within the scope of
the proposed Directive than those set out in the proposal. It
will be necessary to review legislation in the UK which covers
matters falling within the scope, such as the abovementioned Act,
to determine the extent to which they impose more or less stringent
requirements.

"We envisage being able to implement this
Directive by means of secondary legislation under the section
2(2) powers of the European Communities Act 1972."

Fundamental rights analysis

4.39 The Minister notes that certain fundamental
rights under the European Charter of Fundamental Rights will be
engaged, in particular Articles 7 and 8 (the right to respect
for private and family life and the protection of personal data),
Article 16 (the freedom to conduct a business) and Article 38
(consumer protection), but that that the interference is justified
as it does not go beyond what is necessary to fulfil a legitimate
objective to ensure free cross-border movement of digital content
and services:

"A thriving cross-border e-commerce sector
can bring benefits to businesses and consumers, supporting the
rights in Article 16 (freedom to conduct a business) and 38 (consumer
protection). The Government agrees with the Commission that a
set of fully harmonised rules for digital services, including
digital content, will contribute to the freedom to conduct a business
by facilitating the sale of digital content cross-border. The
Government also agrees that fully harmonised law on digital content
would support consumer protection if it is set at a sufficiently
high level.

"The proposals also engage the right to
the protection of personal data (Article 8). It is proposed that
in the event that the contract is terminated the supplier should
delete all personal data or render it anonymous. [The Government
is satisfied this is consistent with the protection of individuals
with regard to the processing of personal data as set out in Directive
95/46/EC and Directive 2002/58/EC].

"Lastly the proposal that a consumer may
be required to cooperate with the supplier by allowing virtual
access to the consumer's digital environment engages right to
a private life, confidentiality of communications and the protection
of the consumer's personal data. The Commission recognise that
this should only be permitted in exceptional and duly justified
circumstances where there is no alternative means which would
be less intrusive. The Government is of the view that this is
a proportionate mechanism to determine conformity with the contract
in circumstances where the burden of proof is on the supplier."

4.40 The Minister does not refer to Article 47 (right
to an effective remedy) in his Explanatory Memorandum, as referenced
in the Commission's own explanatory memorandum of the proposal.

EXPECTED TIMETABLE

4.41 The Minister states that the Dutch Presidency
is scheduling Working Group discussions at the end of January
and that

"the proposal will be presented to an informal
Justice and Home Affairs Council on 25-26 January 2016 for initial
views of Ministers, and for likely discussion in the May Competitiveness
Council."

4.42 While the Minister considers that negotiations
will progress faster than the Directive on online sales of goods
(as there is largely a 'blank canvas' to work from as the majority
of Member States do not have a contractual framework in place
in relation to digital content, as opposed to the online or distance
sales of tangible goods), he considers agreement before mid-2017
unlikely:

"Although this proposal was published at
the same time as the proposal for directive on the online and
other distance sales of tangible goods (15252/15), they are not
intrinsically linked and seem unlikely to run to the same timetable.
Given the lack of existing coverage of digital content in many
Member States we would anticipate that negotiations on this proposal
could progress more rapidly than on the proposal for the online
and other distance sales of tangible goods (15252/15). In any
case we would not expect trade-offs between the two. Nevertheless,
we expect the negotiations to carry over to the Slovakian Presidency
and they could still be on the table during the UK Presidency
in 2017."

4.43 The Minister is not able to provide any information
on the European Parliament's expected timetable for consideration
of the proposal, but expects it "is likely to become clear
in early 2016".