Introduction

Connected cars are a prime example for the digitalization of goods and the interconnectivity of goods with third party digital content and services. With the new European framework for consumer contract law, namely the Sales of Goods Directive (EU) 2019/771 ("SGD") and the Digital Content and Digital Services Directive (EU) 2019/770 ("DCSD") (the SGD and the DCSD together "Directives"), the legislator is aiming at adapting the legislative framework to this rapidly developing technological environment. The following article illustrates how the provision of connected cars services will be influenced by the new Directives.

What do the New Directives say in a Nutshell?

The SGD applies to sales contracts between a consumer and a seller for the supply of goods. Goods under the SGD also include those items "… that incorporate or are inter-connected with digital content or a digital service in such a way that the absence of that digital content or digital service would prevent the goods from performing their functions" (Article 2(5)(b) SGD, "Goods with Digital Elements"; digital content and digital services will be referred to together as "Digital Elements"). Incorporated digital content basically refers to software that is integrated into the good. Inter-connected services may include services that allow the creation, processing or storage of data in digital form, or access thereto, e.g., software-as-a-service offered in the cloud computing environment or the continuous supply of traffic data in a navigation system.

The DCSD applies to contracts where a trader supplies Digital Elements to a consumer and the consumer pays or undertakes to pay a price. It also applies if the consumer does not pay a price but provides or undertakes to provide personal data to the trader (unless the personal data provided are only processed for the purpose of supplying the Digital Elements or for the trader to comply with legal requirements, e.g., where a registration is required by applicable laws for security and identification purposes). Since the SGD and the DCSD complement each other, Goods with Digital Elements do not fall under the scope of the DCSD. Also, in the event of doubt as to whether Digital Elements form part of the sales contract, this shall be presumed, (i.e., the SGD shall apply). In principle, the SGD and the DCSD provide for a similar structure and in wide parts identical rules on non-conformity and remedies (there are, however, deviations in detail, e.g., only the DCSD provides for trader’s right to modify Digital Elements). Under both Directives the seller/trader must ensure that the goods/Digital Elements conform with the sales contract by (i) complying with what was contractually agreed between the seller/trader and the consumer (so called subjective conformity criteria, e.g., description, quantity or quality) and (ii) complying with objective conformity criteria (e.g., fit for the purpose for which similar goods/Digital Elements are normally used or qualities and features the consumer may reasonably expect).

In summary, the SGD covers sales contracts for the supply of goods, including Goods with Digital Elements. The DCSD basically covers the supply of Digital Elements that are not foreseen in the sales contracts for the supply of goods but are acquired separately by the consumer.

Which Directive applies to Connected Cars Services?

With regard to connected cars services, it will become relevant whether vehicles providing for such services would be considered Goods with Digital Elements (falling under the SGD) or whether the connected cars services would be considered separately acquired Digital Elements (falling under the DCSD).

Having a closer look at the classification of the Digital Elements under the SGD, Article 3(3) second sentence states that it shall apply to "…digital content or digital services which are incorporated in or inter-connected with goods in the meaning of point (5)(b) of Article 2, and are provided with the goods under the sales contract, irrespective of whether such digital content or digital service is supplied by the seller or by a third party." Where a vehicle is sold or advertised as providing for connected cars services such services may generally be considered relevant functions in the sense of Article 2(5)(b) SGD. The Digital Elements can either be supplied by the seller (e.g., the dealer) or by a third party (e.g., the vehicle manufacturer). Further, interpreting the wording and purpose of the SGD we would not expect the technical means of data flows, i.e. the fact that connected cars services are often provided or updated over-the-air, to change the above assessment, though.

The DCSD only applies to Digital Elements that do not fall under Article 3(3) second sentence of the SGD (see Articles 3(4) and 2(3) DCSD). One typical example falling under the DCSD would be third-party Digital Elements the consumer acquires separately from the sales contract. If the consumer does not pay a price it would need to be examined which data will be transferred and for what purpose (in order to determine whether this transfer of personal data could be considered equal to paying a price for the Digital Elements).

In summary, which of the Directives will apply to connected cars services will ultimately depend on the content of the sales contracts (e.g., regarding the contractually agreed functions and their integration into the vehicle). If the connected cars services are "closely linked" to the vehicle, the SGD may apply (e.g., if there is a close link between the provision of free connected cars services and the vehicle sales contract or if reference to the connected cars services is made in publicly available advertising material). If, analysing the sales relationship, one were to come to the conclusion that the connected cars services are not covered by the SGD, the DCSD might apply.

What are the Legal Consequences of the Applicability of the Directives?

Both Directives contain (amongst other legal consequences) an obligation to supply relevant updates, which may significantly impact vehicles providing for connected cars services.

As a general rule, the seller/trader has to ensure the supply of updates that have been agreed upon in the sales contract (subjective conformity) and are necessary to keep the goods in conformity (objective conformity). In the case of third-party involvement, this means that the seller (e.g., the dealer) must ensure the provision of relevant updates to the consumer by the third party (e.g., vehicle manufacturer). The Directives do not explicitly mention whether updates shall be provided free of charge. In light of the wording and purpose of the Directives there seem to be indications that no additional costs could be charged for the updates (if such additional costs have not been agreed upon between the parties in the sales contract). It remains to be seen how evolving case law will deal with this going forward. The obligation to provide for updates generally applies (i) for the duration the consumer may reasonable expect where the sales contract provides for a single act of supply of Digital Elements ("one-off contracts"), or, (ii) throughout the period of supply where the sales contract provides for a continuous supply of the Digital Elements.

Failure to supply updates as well as defective or incomplete updates will be considered a lack of conformity of the goods/Digital Elements. As a general rule for one-off contracts, the seller/trader will be liable for any lack of conformity which exists at the time when the goods/Digital Elements are delivered and which becomes apparent within two years from delivery. For Goods with Digital Elements this means for updates that the seller will generally be liable for two years starting from the time when the update was provided to the consumer. As a general rule for contracts with continuous supply of Digital Elements, seller’s/trader’s liability will extend to the supply period agreed with the consumer. Further, it is argued in legal literature that the liability period may be extended under certain circumstances, e.g., depending on the expected average lifespan of the affected goods such as smart vehicles. The details are currently discussed controversially (e.g., whether this discussion only becomes relevant for one-off contracts). Thus, it remains to be seen how evolving case law will deal with this going forward.

In summary, under both Directives there is an obligation to provide relevant updates to the consumers. If the SGD were to apply, it would be the seller (e.g., the dealer) who are generally obliged to ensure the provision of relevant updates to the consumers (in the case of third-party involvement, the seller may be obliged to ensure the provision of updates by the third-party, e.g., the OEM). If instead the DCSD were to apply, it would be the trader who is responsible towards the consumers for complying with the update obligation stipulated under the DCSD (e.g., the OEM if the OEM provides for the connected cars services). Interpreting the Directives, there are indications that such updates will likely need to be offered to the consumers free of (additional) charges (if there is no deviating contractual agreement respectively). The obligation to provide for updates may generally apply throughout the period of supply of the Digital Elements as provided for in the relevant contract terms.

How to prepare best?

Given that many details of the Directives are currently discussed controversially in legal literature and have not yet been settled by case law, an eye should be kept on evolving legal guidance going forward. Further, it may generally be advisable for OEMs and distribution partners to analyse existing contract documentation and align the approach towards the consumers within the distribution system (e.g., streamline update obligations and periods). Finally, commercial considerations will become even more important under the new Directives (e.g., to factor in potential update obligations already in advance where possible).

Authored by Patrick Ayad, Sebastian Schnell and Nadine Otz.