The problem with “mixed” digital contracts

One of the biggest challenges for regulation is to keep up with the complexities of the digital ecosystem. A good example of this is dealing with a “mixed” digital contract under the Consumer Rights Directive.

Consumer Rights Directive

A key aspect of the Directive is the distinction between (a) contracts for the supply of goods (“sales contracts”), (b) contracts for the supply of services (“service contracts”) and (c) contracts for the supply of online digital content (“digital content contracts”).

The distinction is important because, under the Directive, different rules apply regarding consumers’ withdrawal rights when they enter into any of these contracts “at a distance” (e.g. buying something online or via an app etc). Broadly speaking, for sales contracts, consumers have 14 days from receipt of the goods, to change their mind and withdraw and can receive a refund for the goods. For service contracts, consumers can withdraw within 14 days from conclusion of the contract, but the trader is now entitled to pro-rate the consumer’s refund to take account of any services performed during the 14 day withdrawal period. For digital content contracts, the trader is able to exclude the consumer’s cancellation right completely from the point when supply (e.g. download or streaming) of the digital content starts (provided certain information requirements and formalities are met).

The question therefore arises as to what happens if the contract involves the provision of a combination of goods, services and/or digital content?

In the case of goods and services, this situation is legislated for expressly. Article 2(5) of the Directive states that where a contract has as its object both goods and services, the contract should be considered a “sales contract” (i.e. a sale of goods contract) – this means that for the purpose of calculating when the 14 day withdrawal period starts running, you use the “goods” procedure (and not the “service” procedure) so that it starts running from when the goods are received (and not from when the contract is concluded as is the case with services). However, in addition to this, Recital 50 of the Directive states the following:

“for contracts having as their object both goods and services, the rules provided for in this Directive on the return of goods should apply to the goods aspects and the compensation regime for services should apply to the services aspects.”

The example given by the European Commission in its guidance on the Directive is the situation where a distance contract involves the delivery and installation of a household appliance. If the appliance was delivered and also installed when delivered, the consumer will have the right to cancel within 14 days from receipt of the appliance and receive a refund for it, but the trader will be entitled to retain the installation service fee.

However, the situation for mixed contracts involving digital content is less clear. The problem is that, as mentioned above, a “mixed purpose contract” as described in the Directive and the Commission’s guidance, together with the limited European case law cited by the Commission in its guidance (e.g. case C-20/03 Marcel Burmanjer), is described only as including a mixture of goods and services. It doesn’t involve the new statutory concept of “digital content”. In particular, Recital 19 of the Directive expressly states that digital content contracts “should be classified, for the purpose of this Directive, neither as sales contracts nor as service contracts.” So it appears to be the case that digital content contracts are envisaged to be a mutually exclusive class of distance contract.

It’s therefore very unclear how the withdrawal rights should operate in a contract which involves the provision of digital content together with either goods and/or services. Imagine for example a subscription involving periodic delivery of a hard copy comic (goods) together with access to exclusive streamed video clips (digital content). In particular when does the 14 day period start running and can the withdrawal right be excluded in relation to the digital content?

The most obvious conclusion would be to assume that the same principle under Article 2(5) and Recital 50 of the Directive applies by analogy and the contract would be classed as a “sales contract” but the trader would still be able to exclude the withdrawal right in respect of the digital content element. However, this is very much an assumption and the outcome would still not be very clear regarding how this would work in practice – i.e. if the trader can exclude the cancellation/refund rights for the digital content – what would then be refunded to the consumer if he/she cancelled pursuant to the goods rules?

In contrast to the Directive, the new UK Consumer Rights Act 2015 (the CRA) which will come into force in October this year and which, broadly speaking, relates to defective or substandard goods, services and digital content, deals with mixed digital contracts in a more granular way.

Consumer Rights Act

Sections 1(4)-(6) of the CRA set out the position regarding mixed contracts including any combination of goods, services and/or digital content. Under the CRA, the service element expressly attracts specific service rights and remedies, the goods element attracts the specific goods rights and remedies and the digital content element attracts the specific digital content rights and remedies. The CRA also addresses how termination in whole or part might work for mixed contracts and in particular whether such a contract is “severable” (sections 20(20)-(21)).

However, the lack of clarity in the Consumer Rights Directive on this point seems to defeat one of the key purposes of the Directive which was intended to bring simplicity and clarity to the regulation of distance contracts. As stated in Recital 2, the new regime was introduced “with a view to simplifying and updating the applicable rules, removing inconsistencies and closing unwanted gaps in the rules.”