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Reproduced from the CISG-Australia website. Reproduced with permission of 14 Journal of Contract Law (1999) 54-71

Article 2B: International Perspectives

[A key subject of this commentary: Software transactions]

J. W. Carter [*]

Introduction
--     Background
--     Concerns
Characterisation and Specialisation
--     Introduction
--     Characterisation of software licences
Consumer Contracts
Sale of Goods or Supply of Services?
Conclusions

Introduction

Background

It is trite to say that, by virtue of modern methods of communication, the world becomes smaller each day. That is an obvious statement indeed in the context of anything to do with computer software. Many thousands of people communicate with each other (and do business) [1] through the internet and via email without any regard at all for the vast distances which may separate them physically, or for the differences in the domestic law by which they are bound, or for that matter without regard to what law actually governs their contracts. Access to computer software is available through the modem, access to massive databases is obtained at the click of a mouse. The facilities which computers provide challenge traditional values, and practices, including those of contract law.[2]

Dean Hunter and I drew attention to a legal aspect of this several years ago, when we discussed the possible existence of a 'world law' for commercial transactions.[3] We suggested:

"Lawyers who are involved with international transactions, academics who specialise in international law, bankers, and others increasingly discuss the growth of the global economy and the need for predictable legal standards that are not tied to the idiosyncrasies of particular domestic legal regimes."

We quoted Professor Harold J Herman's view that:[4]

"The exporters and importers of the world, the shipowners of the world, the bankers of the world, the marine insurance underwriters of the world, and others associated with them, including their lawyers, form a world community that, over the centuries, has made, and continues to make, the law by which their various types of transactions are governed. And many parts of that law may be applicable to domestic commercial transactions as well. Formally, the law applicable to a commercial transaction may be municipal law, but the municipal court will enforce the contract [page 54] the terms, and in certain types of transactions those terms are the customary terms used in world trade and, in that sense, constitute world law."

In recent times, there have been overt legal responses to the need for uniformity in legal rules which govern international transactions. Thus, we went on to note in our paper that the United Nations Convention on Contracts for the International Sale of Goods ( 1980) [5] and the UNIDROIT Principles for International Commercial Contracts (1994) [6] are important examples of the fact that commercial law is in fact moving closer to a world law. Those instruments can legitimately be described as 'international' in character. They have many objectives, including the unification of contract law. But, fundamentally, like the institution of contract itself, they are facilitative. Variations in domestic law are minimised, and the jealous regard we have for our own law is tempered by a desire to participate in the harmony of unification.

Neither CISG nor the UNIDROIT Principles deal specifically with software licences, although the former may apply to some such transactions, and the latter can certainly be used as a template for constructing an international software licence contract. Nevertheless, at the international level we cannot expect to find in this area of law the same uniformity as exists in, say, transactions for the sale of commodities. The world community is still coming to terms with the benefits (and burdens) provided by computer software. The contract principles are underdeveloped or untested at the domestic level. We therefore cannot expect to find a world law applicable to computer software licences. Only when domestic law has become more settled will common principles be developed. In this regard, the proposed art 2B [7] of the Uniform Commercial Code [8] is an extremely important document.[9]

Concerns

The proposed art 2B raises a great many theoretical, technical and practical issues. My concern is with its role at the international level, where there may also be political issues. However, I would emphasise that the word 'international' does not refer simply to international transactions as such. Just as several years ago one issue discussed at the Journal of Contract Law Conference at Northwestern Law School was the possible impact of CISG on [page 55] domestic issues, including the re-draft of art 2 of the UCC, so also the proposed art 2B may be considered from the perspective of its impact on the domestic law of other countries.[10] One purpose of this paper is to indicate, from the perspective of Australian law, where tensions may be felt. The kinds of problems which I identify below will no doubt arise in other countries as well.

Given the importance of the American computer industry for the world economy, it is patently obvious that the introduction of art 2B will impact on transactions the world over. The most obvious case, of course, is where the law governing the contract includes a jurisdiction which has adopted art 2B. This is perhaps some time off. However, when adoption has occurred, the drafting of contracts will reflect the Article. Even now, those drafting contracts may look to the proposed Article for guidance, and contracts may well be drafted in ways which reflect the approach of art 2B before it has the force of law. A second concern of this paper is therefore with the impact of contract drafting which treats art 2B, or the principles which it embodies, as a legal regime for an international transaction.

A slightly less obvious relevance of art 2B is to contracts which are governed by the law of other jurisdictions. In my experience, particularly when United States companies do business in Australia, local transactions reflect the drafting preferences of American lawyers. Again, therefore, in both the short and long term, art 2B may influence contract drafting: its provisions and structures may well be adopted elsewhere. Thus, a third concern of this paper is with the impact of art 2B on transactions governed by Australian law.

Characterisation and Specialisation

Introduction

As lawyers we rely heavily on pigeon holes: just as everyone needs to file information according to some logical basis, or by reference to some overriding theory, so also lawyers structure their legal analyses on logical bases, relying on the way in which concepts are grouped and legal institutions are structured. Familiar characterisation issues include:

The list could go on and on. It seems fair to say that the process is not just convenient, it is necessary. To see that the process of characterisation is relevant today one need look no further than the program for this Conference. Reliance is placed on a characterisation of some contracts as sale of goods transactions, and others as software licence contracts, and on a characterisation of some contracts or issues as domestic and others as international. How far such distinctions need to be made is necessarily a matter of debate. For example, the point with which I started this paper is that the distinction between domestic and international law is not as significant today as it once was.

Our appraisals of the work of legislative bodies and the courts, and the utility of our legal institutions rely heavily on individual views about characterisation processes. But these views need not conform to those which formed the basis for the legislation, legal institution, legal concept or court decision. Many of the distinctions upon which the process of characterisation relies are more or less arbitrary, but the aspiration is to arrive at something which is coherent, fair and workable in practice. The taxonomy which we adopt as the basis for analysis also provides the basis for characterisation, a process which is part and parcel of traditional legal analysis.

This is the style of thinking which informs the UCC, although, because it is rooted in positivism, it is an approach to law which is by no means universally applauded today. Indeed, one of the most significant features of modern legal scholarship is its diversity. Thus, scholarship based on critical legal theory, or having a law and economics perspective, will often call into question traditional characterisation processes, or the goals or utility of legislation, legal institutions, legal concepts and court decisions.

Another process familiar to lawyers is specialisation. In all major law firms, and in all law schools and government departments around the world, specialists exist in all branches of the law, including 'information technology'. Indeed, there are no doubt some law firms whose practice largely consists in the provision of advice in that area of expertise. Part and parcel of this process of specialisation is a process of differentiation, that is, legal problems -- theoretical and practical -- are broken down into their constituent parts. Thus, if a client retains a law firm to provide advice in relation to a complex task, the component parts of the task may be allocated to different sections of the firm, with the result that the final advice is actually a composite of each component part, worked on by specialists.

The various articles of the UCC reflect these processes of specialisation and differentiation. Software licence transactions differ from sale transactions, and also differ from lease transactions. Different articles are therefore necessary to deal efficiently, thoroughly and coherently with these transactions. Within each article, the specific components of the transaction -- performance, warranties and so on -- are dealt with in specific sections. That is not to say that each is mutually exclusive, or that the sections of one article differ substantially from those of other articles. Just as different lawyers may provide advice on various aspects of a single transaction, so also under the UCC, different articles may be relevant to different aspects of a single transaction, and the component parts of different transactions may attract similar rules under different articles.[page 57]

Characterisation of Software Licences

We need to be able to work in manageable units. As commerce becomes more complex, so the processes of specialisation and characterisation become more and more refined. Whatever else we might say about a software licence contract, it does not fit neatly into the familiar contrast between a contract for the provision of services and one for the supply of goods, by way of sale or ease. While, from the contract perspective, a software licence could be treated as no more than a contract for the supply of goods or services, this may give insufficient prominence to the special nature of the subject matter, that is, the intellectual property or information to which the licence provides access. It also tends to ignore the diversity of such transactions.

At present, the law regulating software licenses would draw on the three main components which such contracts may possess:

(1) There may be a sale component, where a program is supplied in a physical medium. Ultimately, however, from the software provider's perspective, the subject matter is the licence to use the software. In other words, whatever the medium, the user of the software relies on the grant of a licence which, because it does not exhaust the rights of the owner of the software, is not properly characterised as a sale transaction.

(2) There may be a service component, This is obviously the case where a licence is granted in relation to a software program written to solve a particular need. Thus, a person who is commissioned to write a program provides a service when the licence to use the program is supplied. Similarly, a grant of access to a database does not involve any sale transaction. The owner of the database simply provides a service.

(3) There is always an information or intellectual property component, that is, access to information gathered by another or the intellectual property of another. Traditionally, of course, this has been regarded as a quite different branch of the law from that applicable to the sale and service components. There may, indeed, be an element of 'sale'. for example, if there is an assignment of ownership in intellectual property. But we have not in the past treated the assignment of a chose in action as governed by sale of goods law.[11] In any event, such an assignment is not a licence.

While the uniqueness of software licences cannot be denied, a similar diversity in components exists in other contexts. Books contain information, video and audio cassettes and discs contain copies of works which are subject to copyright and so on. Thus, in relation to books, records, cassette tapes and compact discs there is the same feature, namely, that the physical medium is less important than its content.[12] It is obvious that, for example, copyright continues to subsist in a musical work even though a copy is supplied in a [page 58] physical medium. For hundreds of years we have had little difficulty in coping with the absence of any special rules, distinguishing sales of books from sales of motor cars. What is it which makes computer software so different? One obvious answer to this is that the use of computer software necessitates copying the software. Indeed, that occurs whenever the software is loaded by a computer.[13] But there is more to it than this.

To discuss the issues identified above I want to call on two characterisation issues, principally from the perspective of doing business internationally. One is between consumer and non-consumer contracts. The other is between sale of goods contracts, contracts for the acquisition of services and software licence contracts. My concern is mainly practical rather than theoretical, and in particular to highlight some of the absurdities of legislation which regulates Australian contract law.

Consumer Contracts

The characterisation of a transaction as a consumer transaction is necessarily a matter on which domestic law will be significant, and what the drafters of art 2B regard as a consumer transaction may differ from characterisation under local law. One surprising feature of software transactions is the legal complexity which may arise in the most simple transaction. Take the case of the acquisition of proprietary software such as a standard word processing program. The contractual structure may be quite complex, involving various contracts, some of which are consumer and others commercial transactions. For example, a United States company may supply quantities of the program to an Australian importer, and expressly or impliedly license the importer to supply to a local retailer, or make copies of the program in Australia for distribution to a retailer. The retailer's supply will be to a person whose concern is acquisition for use rather than further supply. It is this ultimate user -- who may acquire as a consumer or for a commercial purpose -- that needs a licence to use the software. Of course, that party is, contractually speaking, at least once removed from the owner of the software, that is, the licensor. This is true whether the transaction has a domestic or an international character.

Although art 2B will exert a powerful influence on the domestic law of other countries, its uniqueness will necessarily lead to tension in the international context, at least in the short term. This is particularly true in the consumer context. In the absence of a legal regime peculiar to software licences, the legal system must draw on the components of the licence, and characterise the particular issue so as to fit one of those components. Thus, in relation to the purely contractual issues, in Australia one question which lawyers may ask is whether the Trade Practices Act 1974 (Cth) [14] applies to the transaction.[15] Under that legislation, not only may certain terms -- 'warranties' in the UCC sense -- be implied into the contracts, but the parties' [page 59] freedom to contract out of those terms, or liability for their breach, may be circumscribed.[16] Whether the legislation applies depends, principally, on three factors.

First, whether the contract involves a 'supply' of goods or services. While we might question the wisdom of seeing a software licence as a transaction which necessarily involves the supply of goods or services, there seems no doubt that most such transactions would be so regarded. Because characterisation is crucial to the application of the Act, and because the Act provides important protection for consumers, the transaction will be forced into the category of 'supply'. In other words, if your world comprises supply by way of sale or the provision of services, a software licence must be one or the other.[17]

Second, the supplier must be a corporation. We can pass by this as a pure accident of the Federal system: the legislation relies for its validity on the Commonwealth constitution and the principal relevant head of power is the corporations power. Of course, it is otherwise entirely arbitrary. There is no a priori reason why the contracts of partnerships and individuals should not be governed by the same legislation as corporations' contracts. A pragmatic rationalisation is that the bulk of goods and services are supplied by corporations. Nevertheless, it is entirely irrational as a basis for transaction characterisation.

Third, the other party to the contract must be a 'consumer'. The definition is quite complex, but for our purposes it is sufficient to say that unless the contract involves the supply of goods to a person who is acquiring goods for re-supply, a party will generally be a consumer if there is a supply of goods or services at a price which does not exceed $40,000. Because there is no exclusion of corporations from the definition of consumer, unless goods are being acquired for the purpose of re-supply a corporation may be a consumer. Moreover, the $40,000 limit does not apply if the goods or services are of a kind 'ordinarily acquired for personal, domestic or household use or consumption' .

Of course, all of this means that many contracts which any rational person would characterise as being of a commercial nature are treated as consumer transactions by the TPA. On the other hand, under the proposed art 2B, a consumer is defined [18] as 'an individual who is a licensee of information or informational rights that are intended by the individual at the time of contracting to be used primarily for personal, family, or household purposes'. It is also provided [19] that 'consumer' does not include an 'individual who is a licensee primarily for profit-making, professional, or commercial purposes, including agriculture, business management, and investment management [page 60] other than management of the individual's personal or family investments'. This is a markedly different approach from that of the TPA.

Much has, indeed, been written on the question of who ought to be regarded as a consumer for the purposes of protective legislation. I do not intend to enter into that debate. My purpose is simply to highlight the difficulties which will face those who draft their contracts by reference to the proposed art 2B, or attempt to do business in Australia on that basis. Consider the proposed s 2B- 703. This states:[20]

"(a) An agreement may provide for remedies in addition to or in substitution for those provided in this article and may limit or alter the measure of damages or a party's other remedies, such as by: (1) precluding a party's right to cancel for breach of contract; (2) limiting remedies to return or delivery of copies and refund of the contract fee; or (3) limiting the remedies to repair or replacement.

"(b) Resort to a contractual remedy is optional unless the remedy is expressly agreed to be exclusive, in which case it is the sole remedy. If the performance of the exclusive remedy by the party in breach causes the remedy to fail of its essential purpose, the exclusive remedy fails. If the exclusive remedy fails, subject to subsection (c), the aggrieved party is entitled to other remedies under this article.

"(c) Failure or unconscionability of an agreed remedy does not affect the enforceability of terms disclaiming or limiting consequential or incidental damages if the contract expressly makes those terms independent of the agreed remedy.

"(d) Consequential damages and incidental damages may be disclaimed or limited by agreement unless the disclaimer or limitation is unconscionable. Limitation or disclaimer of consequential damages for injury to the person in the case of a consumer transaction for a computer program contained in consumer goods is prima facie unconscionable, but limitation or disclaimer of damages where the loss is commercial is not."

This provision, with its heavy emphasis on freedom of contract, is quite different from the regime of the TPA. Section 68 of the TPA is the principal provision. It states:

"(1) Any term of a contract (including a term that is not set out in the contract but is incorporated in the contract by another term of the contract) that purports to exclude, restrict or modify or has the effect of excluding, restricting or modifying -- (a) the application in relation to that contract of all or any of the provisions of this Division; (b) the exercise of a right conferred by such a provision; (c) any liability of the corporation for breach of a condition or warranty implied by such a provision; or [page 61] (d) the application of s 75A,[21] is void.

"(2) A term of a contract shall not be taken to exclude, restrict or modify the application of a provision of this Division or the application of s 75A unless the term does so expressly or is inconsistent with that provision or section."

The essence of s 68 is absolutely clear: an exclusion, disclaimer or limitation in relation to the implied terms (or the rights or remedies available for breach of any such term) is void. There is no requirement that the clause be unreasonable, no reference to unconscionability and no judicial discretion to allow enforcement. It follows that if a contract for the supply of software contains such a term, the term will be of no effect.

Section 68 is qualified to some extent by s 68A. This provides:

"(1) Subject to this section, a term of a contract for the supply by a corporatIon of goods or services other than goods or services of a kind ordinarily acquired for personal, domestic or household use or consumption is not void under s 68 by reason only that the term limits the liability of the corporation for a breach of a condition or warranty (other than a condition or warranty implied by s 69) [22] to --

(a) in the case of goods, anyone or more of the following: (i) the replacement of the goods or the supply of equivalent goods; (ii) the repair of the goods; (iii) the payment of the cost of replacing the goods or of acquiring equivalent goods; (iv) the payment of the cost of having the goods repaired; or

(b) in the case of services: (i) the supplying of the services again; or (ii) the payment of the cost of having the services supplied again.

"(2) Subsection (1) does not apply in relation to a term of a contract if the person to whom the goods or services were supplied establishes that it is not fair or reasonable for the corporation to rely on that term of the contract.

"(3) In determining for the purposes of subs (2) whether or not reliance on a term of a contract is fair or reasonable, a court shall have regard to all the circumstances of the case and in particular to the following matters:

(a) the strength of the bargaining positions of the corporation and the person to whom the goods or services were supplied (in this subsection referred to as 'the buyer') relative to each other, taking into account, among other things, the availability of equivalent goods or services and suitable alternative sources of supply; [page 62]

(b) whether the buyer received an inducement to agree to the term or, in agreeing to the term, had an opportunity of acquiring the goods or services or equivalent goods or services from any source of supply under a contract that did not include that term;

(c) whether the buyer knew or ought reasonably to have known of the existence and extent of the term (having regard, among other things, to any custom of the trade and any previous course of dealing between the parties); and

(d) in the case of the supply of goods, whether the goods were manufactured, processed or adapted to the special order of the buyer."

This is a long and complex provision the details of which need not detain us. It can be seen, however, that it requires goods or services to be characterised. Only if they are not 'of a kind ordinarily acquired for personal, domestic or household use or consumption' does s 68A apply. Section 68A then permits the supplier to include contractual provisions which do exclude, disclaim or limit the rights or remedies available for breach of an implied term, at least to a limited extent.

There is a certain logic in being concerned with whether the goods or services are or are not of a kind ordinarily acquired for personal, domestic or household use or consumption. To some extent this conforms to art 2B. Similar words are included in the definition of consumer in s 2B-102(10), when it refers to 'personal, family, or household purposes'. Provision is made in art 2B for a court to refuse to enforce an unconscionable contract or term.[23] Thus, proposed s 2B- 703(d) states that:

"Limitation or disclaimer of consequential damages for injury to the person in the case of a consumer transaction for a computer program contained in consumer goods is prima facie unconscionable, but limitation or disclaimer of damages where the loss is commercial is not."

However, whereas the TPA criterion is essentially objective in nature, the art 2B provision is couched in subjective terms ('intended by the individual'). It will also be noticed that there is a major contrast in the philosophy. Under the TPA the fact that the goods or services are not of a kind ordinarily acquired for personal, domestic or household use or consumption justifies a limited contractual exclusion, unless this is unreasonable, but where the goods or services are of such a kind all exclusions are simply prohibited. Under art 2B, there is simply a limitation on freedom of contract -- and a very narrow one at that -- where there is a 'computer program contained in consumer goods'. Why a commercial purchaser should get the benefit of s 68A of the TPA simply because the goods or services are of a kind ordinarily acquired for personal, domestic or household use or consumption is difficult to understand. Taken overall, the obvious criticism (in terms of characterisation) of the TPA is the lack of consistency, not only with what most people would see as a consumer contract, but also internally.

At the least we can say that what would be regarded as a consumer contract for the purposes of the TPA will not necessarily be so characterised for the [page 63] purposes of art 2B. Given the obvious complexity of the TPA provisions, one might expect one of two reactions from a lawyer employed to draft a software licence contract to conform to the TPA. First, a drafter might try to accommodate all the characterisations, and draft a complex but reliable exclusion. Second, a drafter might be content to have a general exclusion, but also include a severance clause, such as is contemplated by proposed s 2B-703(c) of the UCC.

In making the choice (or finding some middle ground) there is another dimension -- another characterisation -- which must be taken into account. Civil and criminal sanctions may be imposed on persons who contravene s 53(g) of the TPA. The section states:

"A corporation shall not, in trade or commerce, in connexion with the supply or possible supply of goods or services or in connexion with the promotion by any means of the supply or use of goods or services -- . . . (g) make a false or misleading representation concerning the existence, exclusion or effect of any condition, warranty, guarantee, right or remedy."

It necessarily follows that a general exclusion, disclaimer or limitation of liability in relation to a contract to which s 68 of the TPA applies will infringe s 53(g), with consequent civil and criminal liability.

In summary then, if a United States corporation supplies software under a software licence contract which contains an exclusion, disclaimer or limitation which is invalid under the TPA, the following consequences may flow:

(1) the TPA will have implied mandatory terms into the contract and any general exclusion or disclaimer will be invalid;

(2) any limitation of liability will be valid only if the subject matter of the contract does not come within the description goods or services 'of a kind ordinarily acquired for personal, domestic or household use or consumption', and provided it is fair and reasonable for the supplier to rely on the term;

(3) for a breach of a mandatory term the consumer may be entitled to terminate the contract, perhaps even if the breach appears to be relatively minor;

(4) for any such breach, the consumer's damages claim will be limited only by the general rules on causation and remoteness; and

(5) the supplier may be criminally liable.[24]

This would be an extreme set of consequences even under a regime which relied on a narrow definition of consumer. Given the breadth of the definition of consumer in the TPA it is draconian indeed.

Sale of Goods or Supply of Services?

Articles 2, 2A and (proposed) 2B of the UCC rely on distinctions between contracts for the sale of goods, contracts for the lease of goods and software licence contracts. These are, clearly enough, quite sensible bases for characterising transactions. The essence of a sale of goods contract is the transfer of general properly in the goods, whereas the essence of a lease is a [page 64] right to use a chattel,[25] and the essence of a software or information licence contract is the grant of a right in respect of an intangible, namely, a right of use or access to a software program or information.[26]

The grant of a right of access to information or intellectual property cannot be a sale of goods. In the Australian sale of goods legislation there is a general exclusion of sales of 'things in action',[27] such as the assignment of an intellectual property interest, and a mere licence to use is an a fortiori case. This approach is part of a general tendency to restrict the concept of goods to 'personal chattels'. Thus, the domestic sale of goods law in New South Wales defines 'goods' as 'chattels personal other than things in action and money'.[28] For example, although a contract for the sale of hardware and software was characterised in Toby Constructions Products Ply Ltd v Computa Bar (Sales) Pry Ltd [29] as a contract for the sale of goods, the judge expressed doubts on whether a contract relating solely to software would be so classified. So far as I am aware, the matter has not been resolved.[30] The issue of characterisation of computer software contracts has also arisen in relation to the application of art 2 of the UCC. The balance of authority appears to support the application of art 2 to some (at least) of these contracts,[31] although this may owe more to the desire to ensure that art 2 applies than a considered view that a software licence is a 'sale'.

Under CISG, contracts for the 'supply of goods to be manufactured or produced are to be considered sales unless the party who orders the goods undertakes to supply a substantial part of the materials necessary for such manufacture or production'.[32] On the other hand, the general approach is simply to exclude certain transactions from the scope of the Convention. Thus, CISG specifically excludes a sale of electricity.[33] However, there is no express reference to computer software.

The TPA also relies on a distinction between supply of goods and supply of [page 65] services. That the Act includes electricity within the definition of 'goods' [34] shows that there is always room for debate even in relation to a basic matter such as what 'goods' comprises. There is certainly no reason why, today, we should restrict the concept of 'goods' to personal chattels. The reason for including electricity (and gas) is that electricity is capable of being consumed in the same way as, for example, food. However, this does not mean that we should treat all intangibles as goods, or that treating electricity as goods requires all contracts involving electronic signals to be so treated [35] In any event, the features which distinguish a licence from a sale are that ownership is not transferred [36] and that the subject matter is used, not consumed.

No doubt there is also room for overlap. For example, a goods lease may confer an option to purchase, a licence in relation to intellectual property may be granted as part of a goods lease or a single contract may involve a sale of hardware and a supply of software. No doubt these (and other) possibilities are all dealt with in specific terms of the UCC.[37] It is, indeed, relatively easy to cope with overlap of the objects of a composite document such as the UCC. However, in the wider sphere of international transactions problems may arise, if for no other reason than that the conceptualisation (characterisation) of the UCC is to some extent unique to that document.

The fact that some contracts involve both the provision of services and the supply of goods may require a process of characterisation, where having one characteristic has legal consequences. Thus, the distinction between sale of goods and work and materials contracts gave rise to a great deal of controversy under the domestic sale of goods law of New South Wales, due to the imposition of a Statute of Frauds requirement in relation to sale of goods contracts. The repeal of that requirement [38] has reduced considerably the relevance of the distinction. Under CISG, characterisation is required for the application of the Convention. The issue is whether 'the preponderant part of the obligations of the party who furnishes the goods consists in the supply of labour or other services'.[39] If that is the case, then CISG does not apply. Thus, it is difficult to see how CISG could apply to a licence in relation to unique software developed for the licensee.

If it is necessary to characterise a computer software licence as either a sale of goods or a supply of services, the licence ought in my view to be treated as a supply of services.[40] This is clear enough in the context of the grant of a [page 66] licence where access to information data base is gained through a modem. But is a licence of computer software ever a sale of goods? In a transaction involving proprietary software such as a standard word processing program, the licence will be obtained by the acquisition of the program in a physical medium. We have all purchased disc or CD ROM versions of software. I am inclined to think that, in so far as people do consider such esoteric matters, many (perhaps most) people will see this as a sale of goods contract.[41] This is because there is no reason to expect the lay person to understand that the essence of the contract is the right to use the software. In one sense, all that a retailer is actually selling is the physical medium (and manuals). The right to use the computer program a copy of which the medium contains is actually derived from the owner of the program, and the retailer may or may not be granting a right to use as the agent of the owner. However, the 'purchaser' will have a different view, and regard the retailer as selling a product, such as the word processing program, or whatever it is that the disc contains, including the right to use.

One way that the consumer may get an inkling of the concept of a software licence is if the consumer reads the documentation inside the box which contains the disc and product information, or notices what is said on the box itself. We have all seen the shrink wrap contract device, where the consumer is told that by breaking the wrapping the consumer is deemed to have agreed to be bound by certain terms. Whether these (or other devices [42] currently employed) work is another matter. The issue has been debated, somewhat inconclusively, in most jurisdictions.[43] While I am not aware that the matter has ever been tested in Australia, my personal view is that it would be very unlikely for the terms to be binding on the purchaser. This is due to the difficulty of establishing consideration, notice of the terms and privity of contract.[44] This complexity is, of course, one reason for having a specific legal regime to deal with the issues.[45]

In so far as the law requires the licensor to provide consideration in order to get the benefit of the terms of the licence, it is difficult to see how the requirement is satisfied. The sale transaction with the retailer is a past consideration. The licensor is unlikely to be offering anything which would not be implied into the transaction with the retailer. Similarly, the law requires the licensor to provide notice of the terms prior to the purchaser's entry into the contract. But if the terms can only be seen after purchase of the product [page 67] this is unlikely to be satisfied. Privity is a more fundamental objection. The contract is with the retailer, not the owner of the software, and the 'purchaser' does not need a second contract to be able to enjoy its rights under the first. Clearly, a software licence of some sort must exist; use of the software cannot be regarded as an infringement of the intellectual property rights of the owner.[46] However, the prospect of the terms which are set out by the owner actually being incorporated as contractual terms of a contract with the user seems rather remote.

One of the objections to software licences in the consumer context is that the licensor's principal objective appears to be to place limitations on the consumer's rights. There is, in any event, a real issue concerning the validity of any exclusion, disclaimer or limitation of liability drafted in accordance with the proposed 2B- 703. Moreover, a simple exclusion, for example, of an implied warranty of fitness for purpose, would amount to a representation infringing s 53(g) of the TPA 1974. It is, indeed, possible that a criminal offence is being committed even if the exclusion, disclaimer or limitation is not part of a contract between the licensor and user. This is because s 53(g) applies to representations in connection with the supply or promotion of the supply of goods or services.

Returning to CISG, there may be good reasons for having to decide whether the Convention applies to a computer software licence. Characterisation of the transaction may have very significant implications. At the technical level the rights and remedies provided by CISG may differ quite significantly from those available under the UCC or Australian law. Indeed, sale of goods law has been typified by strict warranties to achieve results, whereas the obligations of a party under a contract for the provision of services often require the exercise of care. Lawyers will, of course, seek to maximise their clients' rights by manipulation of the process. The most likely area of overlap between CISG and art 2B is where there is a bulk (commercial) purchase of proprietary software by an Australian purchaser from an American supplier. Because Australia and the USA are Contracting States, CISG will apply unless specifically excluded from the contract.[47] Assuming that, for example, New York law is the relevant choice of law, it would seem that CISG would apply to the sale aspect, although art 2B might apply to the licence aspect.[48] I am not sure that this is a satisfactory result. Thus, if an Australian corporation orders a consignment of computer software from an American company, that contract will be treated by the parties as a sale of goods. It will be set up in the same way as a normal sale of goods. CISG will apply unless excluded by the parties. Accordingly, a failure to deliver will be a breach which is within the rules set out in CISG, and the remedies of the parties will be determined on that basis. If the seller breaches the contract in some other way, it will depend on the circumstances whether the breach relates to the sale or the licence aspect of the transaction. However, it is likely that any such [page 68] breach would be regarded as falling within the terms of CISG, such as the fitness for purpose obligation.[49] If the Australian corporation is sued by the purchaser for an alleged breach of the contract because of an infringement of the intellectual property rights of a third party, this may be characterised as a defect in the goods. Thus, under art 42 a seller may be liable if it does not deliver goods 'which are free from any right or claim of a third party based on industrial property or other intellectual property'.[50]

Another dimension to the problem is art 4 of CISG, which provides:

"This Convention governs only the formation of the contract of sale and the rights and obligations of the seller and the buyer arising from such a contract. In particular, except as otherwise expressly provided in this Convention, it is not concerned with: (a) the validity of the contract or of any of its provisions or of any usage; (b) the effect which the contract may have on the property in the goods sold."

The applicable domestic law will be important in relation to such matters. If New South Wales law is chosen, it is arguable that the exclusion of 'validity' issues embraces s 52 of the TPA, which provides:

"(1) A corporation shall not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive.
"(2) Nothing in the succeeding provisions of this Division shall be taken as limiting by implication the generality of sub-section (1)."

Thus, if, for example, during the negotiation of the transaction the seller (or licensor) made representations to the buyer (licensee) concerning the suitability of the software, this may constitute misleading or deceptive conduct.[51] This will have very important implications for the liability of the seller (or licensor). The following is a very brief summary of some of the points established in relation to s 52.

First, liability for breach of s 52 is strict: there need be no intention to mislead.

Second, for any breach of s 52 causing loss or damage there is a statutory right to damages.[52]

Third, a court has power [53] to make a wide range of other orders. These include an order declaring the whole contract void.

Fourth, as a general rule, an exclusion, disclaimer or limitation of liability expressed in a term of the contract will not apply to a breach of s 52.[54]

Two other points are worth mentioning. One is that certain provisions of the TPA purport to give s 52 extra-territorial operation. Thus, conduct in the United States may be the subject of relief in the Australian courts. The other point is that there are decisions which suggest that the breach of an express [page 69] warranty is per se misleading or deceptive conduct.[55] If this is correct (and the Australian cases proceed on the basis that it is) an express exclusion, disclaimer or limitation of liability stated in a term of the contract will not apply to the buyer's (or licensee's) claim for damages for breach of the express warranty.[56] It is important to note that this aspect of the TPA is not limited to consumer transactions. Thus, these points apply to all commercial transactions, in relation to any conduct within the scope of s 52.

These implications of the contract being governed by Australian law clearly provide a strong incentive to the insertion of an exclusion of CISG, and an agreement that the law of a United States jurisdiction is to govern the contract.[57] In the consumer context this may not be permitted, at least where the consumer protection provisions of the TPA apply.[58] Moreover, even in the commercial context this will still lead to important and difficult conflict of laws issues in relation to s 52.[59]

Conclusions

The proposed art 2B is a response to the complexities of business and consumer transactions. It is also a recognition of the need for a rule structure which specifically addresses transactions which are an integral part of the American economy. They are also an integral part of today's world economy. However, as I have emphasised, there are tensions which must be resolved in the international arena, in the interaction between art 2B and CISG, and the interaction between art 2B and domestic law in other countries. Thus, aIthough I began the paper with a reminder of the need for international conformity and harmony, there is likely to be much disharmony in the application of art 2B to contracts involving Australian licensees. That is not to say that the problems are limited to art 2B. In so far as they are simply the result of different approaches to characterisation, for example, of consumer transactions, they may also arise in connection with art 2.

From the international perspective, the proposed art 2B provides a starting point for a process of which we will hear a great deal more in the coming years. While goods may be easily exported, and software licences may be agreed between residents of different countries, legal systems cannot be exported and the freedom which art 2B provides in relation to the negotiation of contract terms may simply not be available when doing business in a foreign country. Equally, it is neither feasible nor desirable to endeavour to accommodate the transaction characterisations of other jurisdictions when drafting domestic law.

The point for lawyers, of course, is that when dealing with transactions [page 70] which easily cross national boundaries attention must be given to the destination of the product. In this regard, software licences are no different from other contracts.[page 71]


FOOTNOTES

* Professor of Commercial Law, University of Sydney; Consultant, Freehill Hollingdale & Page. I would like to thank Don Robertson and Tony Coburn (Partners, Freehill Hollingdale & Page), as well as Andrew Phang and Gregory Tolhurst, for their helpful suggestions on the topic. I am also grateful to Stanley Lai for making available an extract from a draft of his Cambridge PhD dissertation.

1. The extent of such business is a matter of debate. See Electronic Commerce Expert Group's Report to the Attorney General, Electronic Commerce: Building the Legal Framework, Canberra, 1998, 1.4, 1.5.

2. Many are discussed in the Electronic Commerce Expert Group's Report to the Attorney General, Electronic Commerce: Building the Legal Framework, above, n 1.

3. See H O Hunter and J W Carter, 'Is Commercial Law Becoming a World Law?' (1996) 2 NZBLQ 161.

4. Harold J Berman, 'World Law' (1995) 18 Fordham Int'l LJ 1617 at 1620.

5. Hereafter CISG.

6. Hereafter the UNIDROIT Principles.

7. The draft relied upon is dated 1 August 1998.

8. Hereafter the UCC.

9. Legislation was also proposed by the Electronic Commerce Expert Group's Report to the Attorney General, Electronic Commerce: Building the Legal Framework, above, n 1. However, the principal focus is the UNCITRAL Model Law on Electronic Commerce (1996). In relation to the ability of contract law to deal with the issues, some of the assumptions or assertions made (eg 4.2.5-4.2.7, 4.2.11) in the Report are difficult to understand, questionable or simply wrong. There are also areas (eg 4.5.87) in which the present law is explained in a fashion which suggests common law uncertainty where none exists. The overall theme of the report is that legislation will provide greater certainty than the current common law. But compare suggestions (eg 4.5.34, 4.5.79) as to the use of provisions based on Trade Practices Act 1974 (Cth), s 68A(3). For the legislation proposed in response to the Report, see Department of the Attorney-General, Issues Paper: An Australian Legal Framework for Electronic Commerce, Canberra, November 1998.

10. Cf Amelia H Boss, 'Electronic Commerce and the Symbiotic Relationship Between International and Domestic Law Reform' (1998) 72 Tul LR 1931 (referring to the impact of UNCITRAL Model Law on Electronic Commerce (1996) on domestic law in the US).

11. It is, indeed, specifically excluded by the Australian sale of goods law. See below, text at n 27. Of course, the common law distinction between choses in action and choses in possession may not be present in other legal systems.

12. See Marcus G Larson, 'Applying Uniform Sales Law to International Software Transactions: the Use of CISG, its Shortcomings, and a Comparative Look at how the Proposed UCC Article 2B would Remedy them' (1997) 5 Tul J Int'l & Comp L 445 at 453ff.

13. See Clive Gringras, 'The Validity of Shrink-Wrap Licences' (1996) 4 International Journal of Law and Information Technology 77 at 78, 80-1.

14. Hereafter the TPA.

15. The concern is with Pt V, Div. 2. Manufacturers and importers may be liable under Pt V, Div 2A.

16. A 1998 Joint Statement on Electronic Commerce, by Australia and the United States, includes a consumer protection objective. There is, however, no indication of how this will be achieved. For a generous evaluation of the consumer protection objectives of art 2B see Mary Jo Howard Dively and Donald A Cohn, 'Treatment of Consumers under Proposed UCC Article 2B Licenses' (1997) 15 Journal of Computer & Information Law 315.

17. But cf Colin Tapper, 'Some Aspects of Software Licences' in Essays in the Law of Contract in Honour of Guenter Treitel, F D Rose (ed), Sweet & Maxwell, London 1996, p 286.

18. See proposed 2B-102(10) ('Consumer').

19. See proposed 2B-102(10) ('Consumer').

20. Compare UCC, 2-719.

21. Section 75A is concerned with the consumer's right of termination (called rescission) for breach of an implied term.

22. Section 69 is concerned with a supplier's obligations in relation to title to goods.

23. See proposed 2B-110.

24. I do not pause to consider whether the drafter of the contract would also be liable.

25. Sometimes described as the transfer of 'special' property.

26. Under proposed 2B-102(28), ' "License" means a contract that authorizes access to or use of information or of informational rights and expressly limits the contractual rights or permissions granted, expressly prohibits, limits, or controls uses, or expressly grants less than all informational rights in the information. A contract may be a license whether the information or informational rights exist at the time of contract or are to be developed, created, or compiled thereafter and whether or not the contract transfers title to a copy'. ' "License" includes an access contract and, for purposes of [the Uniform Commercial Code], a consignment of a copy, but does not include a reservation or creation of a financier's interest.'

27. See eg Sale of Goods Act 1923 (NSW), s5(1).

28. See Sale of Goods Act 1923 (NSW), s5(1).

29. [1983] 2 NSWLR 48.

30. The position was left open in ASX Operations Pty Ltd v Pont Data Australia Pty Ltd (1990) 97 ALR 513. Cf Re Caslec Industries Pty Ltd and Windhover Data Systems Pty Ltd, (1992) unreported (FCA, Gummow J) 13 Aug NG627 Of 1990 Fed No 580 (agreement for supply of software and maintenance not a sale of goods). It appears that under English law a contract for supply of software will not ordinarily involve a sale of goods; see Benjamin's Sale of Goods, 5th ed., Sweet & Maxwell, London, 1997, 1-087.

31. See Frank Diedrich, 'Maintaining Uniformity in International Uniform Law via Autonomous Interpretation: Software Contracts and the CISG' (1996) 8 Pace International Law Review 303.

32. See art 3(1).

33. See art 2(f). See Frank Diedrich, above, n 31 at 319.

34. See TPA, s 4. Also included is 'gas.'

35. See ASX Operations Pty Ltd v Pont Data Australia Pty Ltd (1990) 97 ALR 521 at 520. See also Re Caslec Industries Pty Ltd and Windhover Data Systems Pty Ltd. (1992) unreported (FCA, Gummow J) 13 Aug NG627 Of 1990 Fed No 580.

36. See, eg Bernardine Trompenaars, Formation and Validity of On-Line Contracts, Institute for Information Law, Amsterdam, 1998, 1.4.

37. For example, proposed 2B-103(b) allows for the application of art 2B to part of a transaction. See also Michael L. Rustad, 'Commercial Law Infrastructure for the Age of Information' (1997) 15 Journal of Computer & Information Law 255 at 275.

38. And other factors including the application of the TPA to contracts for the provision of services.

39. See art 3(2).

40. Contrast L Scott Primak, 'Computer Software: Should the UN Convention on Contracts for the International Sale of Goods Apply? A Contextual Approach to the Question' (1991) 11 Computer/Law Journal 197.

41. Cf B W Napier, 'The Future of Information Technology Law' [1992] CLJ 46 at 55-6.

42. There are, of course, many variations on this, including the 'first use' agreement in access to data bases.

43. For a review of the decisions see Bernardine Trompenaars, Formation and Validity of On-Line Contracts, above, n 36, 2-2. See also Graham P. Smith, 'Shrink-Wrap Licensing in the Scottish Courts' (1996) 4 International Journal of Law and Information Technology 131; Clive Gringras, above, n 13; Joseph C Wang, 'ProCD Inc v Zeidernerg and Article 2B: Finally, the Validation of Shrink-Wrap Licenses' (1997) 15 Journal of Computer & Information Law 439; Stephen Fraser, 'Canada-United States Trade Issues: Back from Purgatory? Why Computer Software "Shrink-Warp" Licenses Should be Laid to Rest' (1998) 6 Tul J Int'l & Comp L 183.

44. For a discussion of the relevant principles, see J W Carter and D J Harland, Contract Law in Australia, 3rd ed, Butterworth, Sydney 1996, Chs 3, 6 and 9.

45. See eg the proposed 2B-208, 2B-617.

46. See Colin Tapper, above, n 17. If the 'purchaser' does need the second contract in order to use the software then the retailer was in breach of contract in supplying software which could not be used without a further transaction.

47. See art 1.

48. See Marcus G Larson, above, n 12.

49. See art 35.

50. See art 42(1). Compare, in the domestic sale of goods context, Niblett Ltd v. Confectioners' Materials Co Ltd [1921] 3 KB 387 (sale of goods with label which was an infringement of a trademark amounted to breach of condition that sellers had right to sell).

51. That is not to say that CISG cannot deal with matters of contract formation, although how far the relevant provisions can operate independently of local rules is a matter of some uncertainty. See Filanto SpA v Chilewich International Corp 789 F Supp 1229 (SDNY, 1992).

52. Under s 82.

53. Under s 87.

54. See eg Byers v. Dorotea Pty Ltd (1986) 69 ALR 715.

55. See Accounting Systems 2000 (Developments) Pty Ltd v CCH Australia Ltd (1993) 42 FCR 470; 114 ALR 355.

56. See Diane Skapinker and J W Carter, 'Breach of Contract and Misleading or Deceptive Conduct in Australia' (1997) 113 LQR 294.

57. However, it should be noted that TPA, s 66A gives CISG supremacy to the extent of any inconsistency with that Act.

58. See TPA, s 67.

59. See, eg Laminex (Australia) Pty Ltd v Coe Manufacturing Co (1997), unreported (SC (NSW), James J) 19 Dec No 21051/95.


Pace Law School Institute of International Commercial Law - Last updated July 12, 2001
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