Sunday 12 March 2017

Can Software Constitute Goods?

What constitutes goods under the sale of goods?
According to Section 2 of the Sale of Goods Act goods include all chattels personal other than things in action and money, and all emblements[1], industrial growing crops and things attached to  or forming part of the land which are agreed to be severed before sale or under the contract of sale.
The definition is extensive and virtually all embracing. It excludes non-physical items. What about software? Though a none-physical item but it can be embedded in some physical form and can be sent online without being embedded in some physical. Usually only the medium carrying the software is sold as the intellectual property rights reside with the software developer.
Is the supply of computer software a sale of goods?
Beta Computers (Europe) Ltd v. Adobe Systems (Europe) Ltd[2]
Adobe had ordered information management software from the plaintiff. The software was ordered via telephone. The package came and it had a shrink wrap license from the software house which is standard. On the package was a notice of terms and conditions of licensing and further the notice stated that the opening of the package indicates an acceptance of the terms and conditions. For one reason or the other Adobe refused to accept the goods and sent them back. The plaintiff refused to receive the goods back and sued for the price.
Beta Argued that it was a contract for the sale of goods.  Beta contended that there was an unconditional and unqualified order for identified software. This order was made on the telephone and Adobe purchased it 'blind' so far as any terms and conditions of contract were concerned. Beta met the order and claimed that Adobe should pay the contract price. Adobe argued that the accepting of the license agreement was an implied condition of the contract and it was suspensive if not accepted.
Lord Penrose held that both view were wrong and stated that it was a single contract sui generis and contained both elements of sale of goods and grant of a license. Was essential that the supplier provide the medium in which the software could be conveyed as well as access to use the  software. The learned judge held that there was no consensus ad idem until the conditions by the software author were accepted. Lord Penrose found that the license terms by the author of the software must form part of the contract that the purchaser made with the supplier.
The doctrine of privity in English law provides that contracts are binding only on those party to them. This means that where there is a software company, supplier and end-user, the software company must seek to create a contract with the ultimate customer. In circumstances similar to Beta v Adobe, it could be argued that the shrink-wrap license would be unenforceable by English law because there is no consideration from the purchaser to the software company. The license then becomes an unenforceable set of guidelines. However, any 'promise' by the purchaser might be interpreted to be a form of consideration. A contract could then exist between the software company and purchaser. If so, the outstanding question concerns the fact that the license terms only come to the attention of the purchaser after the apparent point of sale. The issues are the same as those considered above. To date, no English court has addressed the question of the validity of shrink-wrap licenses. If the issue should arise, Beta v. Adobe may hold some persuasive authority[3].
St Albans City and District Council v International Computers Ltd[4]
The council purchased software from the defendants to calculate council taxes. Mistakes in the software under calculated the amounts required to be recovered causing the council substantial losses. The company sought to rely upon a clause in the contract limiting the extent of their liability. The learned court found that a disk is within the definition of goods on the other hand a computer program is not goods. However when a defective program is encoded and sold or hired on a disk, the seller or hirer will be in breach of the terms as to quality and fitness. The supply of a disk is either a sale or supply of goods. Who is right? Lord Penrose, Sir Ian Glidewell(H.C) or Lord Scott Baker?
Christopher Reed wrote an article to the effect that when a software is encoded in a physical medium it should be regarded as property[5]. Lord Penrose criticized all his views and said that they are unattractive to him because they emphasize too much on the role of the physical medium. The rights of the parties should not depend upon the medium of supply. If a book is bought in a library and pages start falling off be termed as a contract sui generis and thus outwit the Sale of Goods Act? Certainly not. Liability must be established as between the publisher, supplier and end user.
A physical medium may harm its environment if it had a virus. Most software is sold off the shelf and online. Liability for defective software should not be based on the carrier medium but upon whether it is mass produced off the shelf software or customized software for a client. In the event of defective software the loss spreading approach would make the store liable as the biggest loss spreader and this would make it liable for breach under the Sale of Goods Act but under this approach there would be no need to include the software house in the matter.
In the Australian case of Toby Constructions Products Ltd. v. Computer Bar Sales Pty Ltd[6]
It was held that it would be too simplistic altogether to say that the supply of the system was a sale of goods merely because the bulk of the cost related to the hardware. Rather I think it is necessary to look at all the features of the object of the sale and the various ingredients such as price, the nature of the material which was to be supplied, the terms of installation, and the work which the system was designed to effect. The court suggested that mass production was a relevant criterion in determining whether there was a sale of goods. The court determined that the sale of a computer system, comprising both hardware and software, constituted a sale of goods.
Eurodynamics Systems Plc v General Automation[7]
ED designed and developed bespoke computer application software for small to medium mainframe computers. ED specialized in business/technical and accounting software and wanted to expand its business and to sell both its own software and the computers on which the software was designed to operate. In order to accomplish this purpose, ED became a franchisee of GA with a view to purchasing computers and associated programmes.
The express provisions of the franchise agreement imposed an obligation on GA to support COBOL software. After the agreement, GA started both to refuse to meet the extant technical complaints and to provide future support for COBOL-based software to ED. The court found that GA was in breach of express terms and awarded the sum of £94,500 based on the estimate that, during the relevant period, ED would have succeeded in making at least seven turnkey systems and seven application packages. Lord Steyn held that although the ideas and concepts involved in software remained [the defendant's] property, the reality of the transaction is that there has been a transfer of product. In the reality of the transaction approach classification does not matter if express duties are breached[8].



[1] In the common law, emblements are annual crops produced by cultivation for subsistence use.
[2] JILT 1998 (2) - Struan J A Robertson
[4] [1996] EWCA Civ 1296
[5] Computer Law, 2nd edn, 2004, Cambridge University Press, 44
[6] Supra 5
[7] Ibid

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