US businesses are often surprised by how different the regulatory framework is in the UK (and across the EU) for selling directly to consumers. Even large, sophisticated US consumer brands find that the terms on which they sell directly to consumers in the US require significant overhaul in order to comply with the far more consumer-friendly regime in the UK and across the EU.
This significance of the regulatory differences in selling to consumers is set to increase markedly over the next few years. In 2018, the European Commission announced a 'New Deal for Consumers' which seeks to strengthen the enforcement of consumer law infringements, including the introduction of turnover fines for certain infringements and the introduction of bodies designed to bring class actions for cross-border infringements of consumer law.[i]
This article seeks to highlight some of key issues that UK and European consumer law raises for US businesses looking to sell directly to consumers on the other side of the Atlantic.
What constitutes a consumer?
In 2011, the European Union adopted the Consumer Rights Directive (2011/83/EU) which all EU member states implemented by way of local implementing legislation. In the UK, the Consumer Rights Directive 2011 was implemented by way of two separate pieces of legislation: the Consumer Contracts (Information, Cancellation and Additional Charges) Regulations 2013 (the "2013 Regulations") and the Consumer Rights Act 2015 (the "2015 Act").[ii]
Under both the 2013 Regulations and the 2015 Act, a consumer is defined as 'an individual acting for purposes that are wholly or mainly outside that individual’s trade, business, craft or profession'. Whilst it is clear that, for the UK, a consumer must be an individual (meaning small businesses do not qualify for protection under consumer law), whether an individual is acting as a consumer or a business turns on the purpose and intention of the individual at the time they contract with a business.
Whenever a business seeks to sell to individuals in the UK, and those individuals are acting wholly or mainly outside of their trade, business, craft or profession, then that business must design its order processes, terms of sale and post-order processes in a way that addresses the requirements of UK consumer law.
Below are some of the main obligations consumer law imposes on businesses which US companies will need to take into account.
Right to cancel
The 2013 Regulations provide that, subject to limited exceptions, businesses that contract by means of distance communications (such as online) with consumers must offer consumers a 14-day cancellation period. This means that a consumer has the right to change their mind during the cancellation period, unwind the transaction and receive a full refund (including for any standard delivery costs). This applies even if the product/service/digital content which is the subject of the transaction is fit for purpose and complies with the terms of the contract.
There are certain exceptions where the 'right to cancel' does not need to be offered, such as B2C contracts for:
- bespoke products i.e. goods that are made to the consumer’s specifications or are clearly personalised;
- goods which are liable to deteriorate or expire rapidly; and
- digital content subscription services (e.g. Netflix) – in this case, whilst the 'right to cancel' must be offered, a consumer can lose this right if they elect to access the digital content during the 14-day cancellation period. This exception, however, will only be effective if the appropriate prescribed information and waivers are obtained by the business from the consumer at the point they seek to access the digital content. If a business fails to obtain the appropriate consent then a consumer can consume the content during the cancellation period and, provided it exercises its right to withdraw before the cancellation period expires, cancel its account and receive a full refund.
Fairness and transparency tests
The 2015 Act imposes two tests that apply to all terms of a B2C contract.
First, all terms of B2C contracts (other than the price and 'main subject matter' of the contract) are subject to a fairness test which, if failed, renders the relevant term unenforceable against the consumer. The fairness test is set out in section 62(4) of the 2015 Act as follows: 'a term is unfair if, contrary to the requirement of good faith, it causes a significant imbalance in the parties’ rights and obligations under the contract to the detriment of the consumer'. A court will assess a term for fairness not in the circumstances in which a business seeks to apply it, but at the time at which the contract has formed – this means that a widely drafted clause may be unenforceable even if the circumstances in which a business seeks to rely on it are entirely justified.
When advising a business on a B2C contract with a UK consumer, each clause must be assessed for fairness. Clauses that are often considered to be likely to fail the fairness test include:
- unilateral rights for a business to change the terms of a B2C contract;
- entire agreement clauses;
- waivers of a consumer's right to set off a debt owed by a business;
- requiring a consumer to pay a disproportionately high sum if they do not fulfil their contractual obligations; and
- permitting a business to determine the characteristics of the subject matter of the contract after the consumer has become bound by the contract.
Secondly, all terms of a B2C contract must be transparent. This means that each term must be expressed in plain and intelligible language, failing which the most favourable interpretation of that term for the consumer will be taken by the courts. Examples of common B2B provisions that are likely not to be transparent in a B2C contract with UK consumers are:
- phrases such as "subject to", "without prejudice" and "notwithstanding"; and
- use of indemnities to transfer risk.
Implied warranties and statutory remedies
The 2015 Act imposes warranties into all B2C contracts. The implied warranties depend on the nature of the underlying B2C contract – whether that contract is for goods, services or digital content. In each case, however, the intention is to hold a business to a minimum standard of quality when it contracts with a consumer irrespective of the terms of that B2C contract.
By way of example, the 2015 Act implies into all B2C supply of goods contracts that the goods are of satisfactory quality and are fit for purpose. Whilst these warranties do not need to be expressly included in the B2C contract, any terms which directly or indirectly cut across the implied warranties will be unenforceable. Common clauses in B2B contracts, such as products being supplied 'as is', will therefore not be enforceable against UK consumers.
The 2015 Act also prescribes certain remedies for consumers when businesses breach the implied warranties. Again, the remedies available vary depending on the nature of the underlying contract. Breaching the implied warranties for goods, for example, would allow a consumer:
- within 30 days of the goods being delivered, to reject the goods and receive a refund; or
- at any time during the natural product life of the relevant good (up to the statutory limitation period of six years), seek a repair or replacement, failing which they can reject the goods and receive a partial refund.
UK (and EU) consumer law is prescriptive in terms of the order process that leads to consumers transacting with businesses, and also how businesses interact with consumers after the order has been placed. Examples of the obligations imposed on businesses that transact online include:
- extensive information obligations – businesses are required to provide detailed information in their order processes and in their B2C terms;
- the "order" button – the final button that a consumer presses before committing to the transaction must be labelled clearly, such as "order with an obligation to pay"; and
- businesses must send order acknowledgements, attaching a copy of the relevant B2C terms in a format that can be stored by consumers, without delay.
It is clear that in comparison with the US, the regulatory framework in the UK (and across the EU) is consumer-friendly and this trend is set to continue as the legislative proposals arising from the 'New Deal for Consumers' are finalised and take effect. Before seeking to sell directly to consumers across the Atlantic, US businesses will need to understand this regulatory regime both to comply with the obligations imposed by law and to design contractual provisions that address the key risks for those businesses in an enforceable way.
[i] The 'New Deal for Consumers' included two main legislative proposals: (1) "A Directive on better enforcement and modernisation of EU consumer protection rules" (COM(2018) 185) which has been signed by the European Parliament & Council of the European Union and EU members must pass implementing legislation by 2021; and (2) "A Directive on representative actions for the protection of the collective interests of consumers" which is currently at first reading stage of the European Parliament.
[ii] Both the 2013 Regulations and the 2015 Act will continue to apply once the transitional rules for Brexit have expired and the United Kingdom has fully separated from the EU, meaning that (for the time being at least) there will continue to be a high degree of harmonisation between the UK and EU's consumer protection rules.