Frank Diedrich

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Reproduced with permission of 6 Vindobona Journal of International Commercial Law and Arbitration, Supplement (2002) 55-75

The CISG and Computer Software Revisited

Frank Diedrich [*]

Introduction

Is Computer Software a "Good" Pursuant to Art. 1 CISG

Is Every Transfer of Computer Software a Sale of Goods?

What to Do with Intellectual Property Issues

Court Decisions

Summary and Outlook

1. INTRODUCTION

Why is computer software so special in respect to the CISG to be in the center of an academic research? There are many answers.

The first answer is:

The CISG is not a brand new piece of legislation. Neither the numerous working groups nor the members of the diplomatic conference in Vienna 1980 did think of the unique and intangible nature of computer software. In those days software had just not entered the agenda of every day international commercial transactions. So software is terra incognita as well for the CISG as its travaux préparatoires. The 'international legislators' simply had not thought of the application of the CISG to software transactions.[1] [page 55]

The second answer is:

Software comes in different forms: system software (inbuild), standard software and custom made (be spoke) software. So there is the software embedded in a graphic chip that enables programming specific performance modes. There is also the standard software in the ubiquitous word processing program or computer game. And finally there is the software program specifically designed for the automatically online ordering of new products directly from the cash desk of supermarkets for those that were just sold to customers.

The third answer is:

The substantive sphere of application of the CISG is neither unlimited to all things nor open to all kinds of contracts: Art. 2 CISG excludes - inter alia - electricity, Art. 3 CISG service contracts and mixed contracts where the service element is predominant.

The fourth answer is:

A computer program contains the intellectual property of the author. In that respect computer software is like a book or a photo. So software is unlike other goods in which the buyer can directly and without any difficulties acquire the sole property. Therefore computer software can be compared to a book: the property to the physical copy of the book is being tranferred to the buyer because of the sales contract but not the right to copy and publish the entire content or part thereof. The exception are copies for the private use of the buyer. The protection of intellectual property, however, is the cornerstone of the development of an advanced economical society where the innovative work of authors is essential for the future development and has therefore to be protected. This has been recognised by almost all countries in the world ever since the 1886 Berne Convention for the Protection of Literary and Artistic Works has come into force on 5 December 1887.[2] [page 56]

The fifth answer is:

Computer software is by far the most frequently transferred 'intangible good' on the internet.[3] Everything in respect to software that is available in shops or via mail order houses is also available online via the internet.[4] So software has become a cornerstone in electronic commerce. And e-commerce does not know any physical borderlines. It is as such international or transnational. Here the question comes into play whether or not the CISG is applicable.

In the following the first part will be devoted to an analysis of the theoretical implications of the application of the CISG to software contracts, and the second part to practical responses from courts dealing with these issues. The end will be marked by a summary and an outlook.

2. IS COMPUTER SOFTWARE A 'GOOD' PURSUANT TO ART. 1 CISG?

First of all, there is neither an explicit definition of 'goods' nor of the term 'contracts of sale of goods' in the CISG. However, a definition of a contract of sale of goods pursuant to Art. 1 CISG can be inferred by reference to Arts. 30 and 53 CISG: A contract for the sale of goods is therefore a contract where one party (the seller) has the duty to deliver the goods and to transfer the property therein (including the handing-over of related documents), and the other party (the buyer) has the duty to take delivery of the goods and to pay the price.[5] Although the term 'contract' can again be indirectly defined as an agreement consisting of an offer pursuant to Art. 14 CISG and an acceptance pursuant to Art. 18 CISG, there is no indication on how to define the term 'goods' forming the essential element of such an agreement. [page 57]

Secondly, computer software is not expressly excluded by virtue of Art. 2 nor any other provision of the CISG: Electricity as another intangible was excluded because of specific political reasons unrelated to software. Moreover, there is no provision in the CISG limiting its substantive sphere of application solely to tangibles.

So the term 'goods' in Art. 1 CISG has to be interpreted by using an autonomous interpretation pursuant to Art. 7(1) CISG and the Preamble. An autonomous interpretation method means to look for a solution to be derived from the CISG itself. This is a unique, supranational interpretation method that involves separate steps:

First, one has to start with the wording of the six equally authentic languages to find any indication about the 'true' meaning of the terms of the CISG. However, one has to take into consideration that the wording was autonomously chosen for newly- created supranational rules. Therefore one cannot use the meaning and connotation that a word or term might have under the domestic law most closely connected with the authentic language. A term under the domestic French sales law does not per se have the same meaning as in the CISG. This result can correctly only be achieved after having taken all the other steps in the autonomous interpretation method.

Also the wording of the CISG's predecessor, the 1964 Hague Sales Conventions, cannot be used as a reference. It was superseded by the CISG that was drafted by different draftsmen from many more countries than the Hague Sales Conventions. Only if it is clear from the travaux préparatoires that there was a joint agreement in the drafting process to adopt the precise meaning of a term previously used in another convention, this term can be used with exactly the same meaning as previously given by commentators or courts.

However, one can compare the different authentic wordings of the text to extract the 'texte juste'. One can presume that the authentic texts of the prevailing languages in the drafting process do express the intention of the 'international legislator' best. Additionally, Art. 33 of the 1969 Vienna Convention on the Law of Treaties stresses [page 58] that the real or normative intention of the final diplomatic conference shall be decisive if there are disparities between equally authentic texts of a treaty. As the working language at the final 1980 Diplomatic Conference was mainly English and occasionally French,[6] one can therefore compare the English wording 'goods' with the French one, 'marchandises'. The term 'marchandises' supports the commercial character of the CISG as it refers to goods sold commercially, i.e. by merchants. Nevertheless, the wording in two equally authentic languages is just one, and by no means conclusive, hint as to the autonomous, supranational interpretation of the term 'goods'.

Secondly, the systematic structure of the CISG or other sections might provide indirect hints as to the meaning of the word or term in question.

This is difficult with the term 'goods' as it is the very subject of the CISG but lacks any official definition at the same time. If one looks into the obligations of the seller it will become a little bit clearer what elements a thing or item must possess to fall into the category of 'goods':

a) According to Art. 30 CISG the seller has to deliver the goods, hand over any documents relating to them and transfer the property in the goods. So the goods have to be moveable for being the object of a delivery. Moreover, it has to be possible to transfer the property in the goods to the buyer. This does not necessarily mean that 'goods' under the CISG can only be things which are the seller's property. Article 30 CISG makes the obligation of the seller to transfer the property subject to the contract. The parties are therefore free to deviate from this obligation of the seller. This is being stressed by Art. 41 CISG that highlights the buyer's freedom to take the goods subject to a right or claim of a third party. The same holds true pursuant to Art. 42(2)(a) CISG if the buyer at the time of the conclusion of the contract knew or could not have been unaware of a right or claim of a third party based on industrial property or other [page 59] intellectual property. Thus the seller can transfer computer software, books or photos to the buyer under a contract for the sale of goods according to Art. 1(1) CISG although a third party has a copyright pertaining to the goods. The transfer of property can, for example, be substituted by a license or lease agreement giving the buyer the right to use the goods for an unlimited period of time. In return the buyer retains all his other rights against the seller in respect to the conformity of the goods (Art. 35(1), (2) CISG). Only the seller has to inform the buyer about his legal incapacity to transfer the sole property in the goods and the buyer has to agree. Otherwise the seller might become liable for breach of contract. In the case of a non-digitilised book or photo the seller can certainly transfer the sole property in the paper-copy to the buyer. But the buyer does not acquire automatically the right from the seller to produce copies of the photo or the text of the book as the aforementioned intellectual property right belongs to the copyright owner.

b) Moreover, the goods need not to be ready-made. Article 3(1) CISG makes it clear that goods to be manufactured or produced are also generally regarded a goods under the CISG. Thus goods made to order/custom-made goods can be the subject of a CISG sales contract, too.

c) Finally, the goods must not belong to the items expressly excluded from the sphere of application in Art. 2(d), (e) and (f) CISG, i.e. stocks, shares, investment securities, negotiable instruments, money (d), ships, vessels, hovercraft, aircraft (e), and electricity (f).

Thirdly, one has to look into the legislative history, i.e. the drafting process with the officially published travaux préparatoires, to find out about the intentions of the 'international legislator'. The intention of the original international legislator, however, cannot be final. The CISG - as any other piece of legislation - has a life of its own. So it has to be adapted to changed circumstances to prevent any petrification that would make it useless for practical purposes. This is in particular [page 60] the case with conventions having a large number of member states that render revision via diplomatic conferences extremely cumbersome and lengthy.

In respect to the meaning of 'goods/marchandises' pursuant to Art. 1 CISG there is almost nothing to be found in the travaux préparatoires: This term was not subject to any form of criticism at the UNCITRAL Working Group,[7] that was engaged in drafting a reformed convention based on the Hague Sales Conventions.[8] Also, no intention can be derived from the officially published materials regarding the negotiations of the entire UNICTRAL [9] or at the final 1980 Diplomatic Conference in Vienna. Furthermore, at the 1980 Conference there were no talks regarding intangible moveables or computer software as objects of the convention outside of the official negotiations.[10]

There is just a unilateral statement from a French point of view, that the state representatives at the 1980 Diplomatic Conference did not intend to change the meaning by using the new term 'marchandises' instead of 'objects corporels mobiliers' as previously used in the French version of the Hague Sales Convention.[11]

Fourthly, the intentions and goals of the CISG itself as expressed by the Preamble and underlying concepts, e.g. reasonableness, B2B-contracts (Art. 2(a) CISG, commercial customs and usages (Art. 9 CISG), have to be taken into account. Because of these underlying principles one has to interpret the CISG in a broad [page 61] sense to encompass as many international commercial contracts as possible to create legal certainty through uniform rules.

Fifthly, one has to look for judgments of courts in member states as persuasive authority to achieve the uniformity in application pursuant to Art. 7(1) CISG.

If the previous four steps have not provided for any clue, courts can carefully refer to exemplarily chosen judgments of courts in member states regarding domestic law as persuasive authority. This is the most difficult and controversial task as courts cannot look into the judgments of courts in all member states in respect to the same legal issue according to their domestic law. So one should choose two or three countries as examples for one legal family (e.g. civil law, common law) or for being specifically advanced in the particular area of law (e.g. computers, electronic commerce). It has to be stressed that the latter comparison of domestic laws of member states to the CISG can methodically only be justified if one pursues the goals of any interpretation as set by Art. 7(1) CISG and the general goal of the CISG as a whole as being laid down by the Preamble.

If one takes for example court decision from the USA, as being a highly developed country in computerised items from the common law countries, regarding the application of Art. 2 UCC to computer software transactions, one will relatively quickly find the leading case Advent Systems Ltd. V. Unisys Corporation.[12] This case was decided by the U.S. Court of Appeals for the Third Circuit already in 1991 and involved the transfer of hardware, the manufacturing of a custom-designed computer program, and the rendering of elaborate instructions on an hourly basis. The Court of Appeals held that the term 'goods' in Article 2-105(1) UCC must be liberally interpreted to apply the unified rules of Article 2 UCC to a variety of commercial transactions.[13] So the court concluded that the term 'goods' [page 62] encompasses all personal property that is transferable and identifiable except those things that are excluded by Article 2 UCC.[14] Neither the intangible nature of software nor the fact that the seller might not be entitled to pass on all intellectual property rights to the buyer were an obstacle for the court to classify computer software generally as 'goods' pursuant to Article 2 UCC.[15] This wide interpretation of Article 2-105 UCC has found a positive echo amongst scholars in the U.S.[16]

Taking court decisions from Germany relating to sales contracts and computer software as another example, one finds a less conclusive judicature.

The Federal Court of Justice (Bundesgerichtshof/BGH) has so far categorised contracts for the transfer of custom-designed (bespoke) software as contracts of manufacture ('Werkvertraege', � 631 BGB) or contracts for the supply of goods and services ('Werklieferungsvertraege', � 651 BGB).[17] So the supply of skilled labour in producing the software has been regarded as the true subject matter of the contract. This categorisation cannot serve as a guideline for the CISG as contracts for goods to be manufactured do in general are within the sphere of application of the CISG by virtue of Art. 3(1) CISG.

In respect to standard software there are a number of cases of the BGH in which the transfers were categorized as contracts for the sale of goods pursuant to � 433 BGB.[18] However, all these cases involved the transfer of program copies on a tangible carrier. It is by now still open whether the highest German court in civil and commercial matters would apply sales law to the online transfer of standard software, e.g. a word-processing program. [page 63]

At this stage of an autonomous interpretation, one should consult in addition commentators and scholarly writings as persuasive authority. The most comprehensive commentary on the CISG maintains that the CISG only applies to computer software contained in a tangible medium.[19] However, this view is neither supported by any other authority nor shared by any majority of scholars.[20]

To put the whole matter into a nutshell one can conclude from the autonomous interpretation that any item that can be commercially sold and in which property can be passed on and which is not explicitly excluded from the CISG's sphere of application by virtue of Art. 2 CISG can be the subject matter of a contract of sale, i.e. goods, pursuant to Art. 1(1) CISG. No reason can be derived from the CISG to limit its sphere of application to tangible things. In respect to computer software it would be the same to exclude beer from the sphere of application if it is being sold in a bottle and from the tap. The container or medium is irrelevant in which the goods are being transferred to the buyer. A computer program is a distinctive set of orders in a language that is understood by a computer to perform a certain activity. The software can be transferred in various forms pursuant to the needs of the parties and requirements of the contract: It can be done via floppy disc or from hard-drive to hard-drive, wireless via infrared or other cellular ports, or online via the internet.

3. IS EVERY TRANSFER OF COMPUTER SOFTWARE A SALE OF GOODS?

The CISG's sphere of application is limited to goods as the subject matter of the transaction and to sales contracts as the structure of the transactions. [page 64]

If one follows the argument above that computer software does qualify in general for being the subject matter, i.e. goods, the first hurdle is taken. Therefore the CISG is certainly applicable to system software and standard software. System software anyhow forms a unit with the hardware and is practically worthless if sold separately. Standard software is being bought and sold like a book off the shelf. And it does not necessarily have to be fixed to a tangible medium, e.g. a floppy disk. Also, books can meanwhile be bought online with the buyer having the right to print it out. To be sure, if one includes intangible, 'virtual' goods in the term 'goods' in Art. 1(1) CISG, custom-made (bespoke) software cannot be per se excluded. The limitations come with the second leg, limiting the scope of the CISG to certain transactions, i.e. sales contracts.

Goods to be manufactured generally fall under the CISG's sphere of application according to Art. 3(1) CISG. However, Art. 3(1) CISG already excludes transactions where the party who orders the goods undertakes to supply a substantial part of the materials necessary for the manufacture. A substantial part needs not to amount to a preponderant part. It has to be seen in the individual case whether or not the buyer supplies an essential part without which the seller would be unable to manufacture the goods.[21] In software transactions such a substantial/essential part of the materials could consist in supplying data in respect to the buyer's business and customers to enable the seller to produce a tailor-made software-program or supplying a specific source-code that is the essential starting point for producing or adapting a new computer-program or even hardware, e.g. graphicboards. The 'materials' do not have to be necessarily of a physical nature. Article 3(1) CISG has to be interpreted in the same wide manner as Art. 1(1) CISG because the factual circumstances have changed since 1980. However, placing the order with the information which computer system is being used by the seller, does not amount to a substantial part. The latter situation is similar to a buyer wishing to buy a spare part for a classic car that needs to be manufactured. To be sure, the buyer has to give the seller the specific information on the year, model etc., and maybe even hand over the old spare part to ensure the manufacture of the correct spare part. And even custom-made software, specifically designed and programmed for the needs of the buyer, can be the subject matter of a transaction covered by the CISG as [page 65] 'goods to be manufactured'. In the latter case the buyer usually has to rely exclusively on the expertise of the seller and is only interested in the transfer of the end-product, the computer program as provided by the contract.

Additionally, Art. 3(2) CISG excludes transactions where the preponderant part of the obligations of the party who furnishes the goods consists in the supply of labour or other services. This presupposes first of all that there is a single or joint contract and not two separate one, one for the supply of goods, the other for the supply of services. This depends ultimately on the parties's will that has to be determined autonomously pursuant to Art. 8 CISG.[22]

Secondly one has to determine what is the preponderant part of the obligations on the 'seller's' side. The preponderant part has to have a share of more than 50% of all contractual obligations of the seller. Nevertheless, the isolated value of the labour or services supplied under the contract in contrast to the value of the goods is not necessarily decisive. The parties' will and intentions have also to be taken into account.[23] If the buyer, for example, orders standard software program that is so complicated that the seller has to furnish extensive, time consuming explanations, training or even seminars. This could certainly be the case with certain book-keeping and controlling software or CAD-programs. The same can be true where the contract explicitly provides for regular servicing of the software or training of the buyer's personnel by the seller. However, the installation of a software program at the buyer's premises or within the buyer's existing network of computers alone does not amount to a preponderant part of the obligations.

So one can conclude that any international transfer of computer software for a price can be categorised as a contract for the sale of goods pursuant to the CISG. The limitations expressed in Art. 3(1) CISG in respect to goods to be manufactured and in Art. 3(2) [page 66] CISG regarding the supply of labour or services have to be viewed in the light of the individual case, in particular by referring to the parties' intentions.

4. WHAT TO DO WITH THE INTELLECTUAL PROPERTY ISSUES?

The transfer of property is not covered by the provisions of the CISG according to Art. 4(b) CISG which leaves an explicit and intentional gap in the convention. As a matter of fact, most of the computer software is rather licensed than sold.[24] But as indicated above, the wording of the contract has to be precise, the headline 'License Agreement' is not necessarily conclusive if the interpretation of the contract according to Arts. 8, 9 CISG reveals that the intended transaction is a sale of goods.

UNCITRAL itself adopted in 1996 the Model Law on Electronic Commerce and in 2001 the Model Law on Electronic Signatures.[25] Also in 2001 the UNCITRAL Working Group on Electronic Commerce turned its attention to the CISG. The question was raised whether the CISG would need an 'up-date', in particular, whether its scope should be extended to all kinds of 'virtual goods'.[26] The Report of the Working Group was cautious in recommending any expansion of the CISG to transactions in nontangible 'virtual goods' or rights in data but focused its attention more on contracts concluded by electronic means.[27] However, the Report recommended the development of harmonised rules to govern international transactions other than sales of movable tangible things in the traditional sense. But the Report left open whether this preparation of new rules will include software, computerised information and licensing.[28] So it remains uncertain whether UNCITRAL will follow the example set by the Uniform Computer Information Transaction Act (UCITA) in the U.S. that [page 67] introduced a separate legal regime for the transfer of computerized information in contrast to the sale of goods governed by Art. 2 UCC. The UCITA was drafted by the National Conference of Commissioners on Uniform State Laws (NCCUSL) in 1999 and has been subject to various modifications due to different political and economic interests.[29] The substantive sphere of application of the UCITA are pursuant to its s. 103(a) 'computer information transactions'. These transactions are defined by s. 102(11) UCITA as 'an agreement or the performance of it to create, modify, transfer, or license computer information or informational rights in computer information. [...]'. Computer information means, according to s. 101(10) UCITA, information in electronic form which is obtained from or through the use of a computer or which is in a form capable of being processed by a computer, including a copy of the information. Therefore UCITA is in general applicable to agreements involving multi-media products, photos, books and software in electronic, computer-readable form. Films (motion pictures) and music were expressly excluded by virtue of s. 103(d) UCITA. Moreover, s. 104 UCITA provides for an 'opt-in' by the parties.

This wide scope of the UCITA is on the one hand very beneficial for fostering uniformity in computer information transactions, on the other hand it has called for a lot of compromises that lead to a complicated text. Additionally, UCITA has expressly left federal law untouched (Art. 105 UCITA). So the U.S. Copyright Act does preempt the provisions of the UCITA, i.e. the strict copyright law still prevails over general contract law.[30] [page 68]

Because of the long and extremely detailed provisions it is very unlikely that the UCITA will serve as a blueprint for an internationally acceptable uniform model law dealing with all software or information contracts (licenses).[31] However, the provisions of the UCITA might serve together with those of the CISG and the UNCITRAL Model Law on Electronic Commerce as a model for a new international uniform law for all ecommerce transactions, taking into account the needs of consumers and entrepreneurs alike.[32]

Copyright and any other issues relating to intellectual property have become of prime importance for authors because of the recent technical advances by which digitilised/computerized texts, graphics, films and photos can be identically copied in split-seconds and globally transferred by the internet at almost no costs. But these are problems of intellectual property law that can be separated from the question of the application of the CISG to software transactions. The fact that a computer program is the intellectual property of its author does not preclude to categorise the software as goods and the transaction as a sale according to Art. 1(1) CISG.

Article 41 CISG puts the obligation on the seller to deliver goods that are free from any right or claim of a third party unless the buyer agreed to take the goods subject to that right or claim.

In addition, Art. 42(1) CISG provides that the seller has to deliver the goods free from any right or claim of a third party based on industrial property or other intellectual property. This obligation of the seller does not extend to cases where the buyer at the time of the conclusion of the contract knew or could not have been unaware of such of right or claim. [page 69]

Therefore one can license, i.e. restrict, the use of the software within the framework of an international sales contract. The CISG will in general remain applicable to the transaction, provided the buyer knew or could not have been unaware of the copyright of the author of the software.[33] The aforementioned knowledge would be already documented by the buyer agreeing to a licence by which he, inter alia, does not receive the unrestricted right to copy the software. This would, however, allow the buyer to sue the seller for damages if the computer program or the transferred copy of it does not conform with the sales contract (Art. 35 CISG).

In conclusion, intellectual property rights in the goods - for example, the software - do not exclude the application of the CISG. This can be derived from the provisions in Art. 41 and Art. 42 CISG: As long as the buyer is informed pursuant to Art. 41 and 42(2)(a) CISG that he or she is not going to receive the goods free from intellectual property rights of a third party, there is also no obligation on the seller to deliver the goods free from any such right. Only if the seller is also the author and sole owner of all intellectual property rights in the goods, he or she will be under the obligation to transfer the property in the goods according to the general rule in Art. 30 CISG. But the obligation in Art. 30 CISG is itself subject to the parties' intentions as expressed in the contract. Thus the parties can deviate from the seller's obligation to transfer all property in the goods to the buyer by either modifying the sales agreement through a licence clause or entering into a licence agreement. This would also serve the buyer's interest best because he or she will rarely need all intellectual property rights relating to a software program which would then become prohibitively expensive. So a licence agreement, not governed by the CISG, might be the cheaper and more appropriate solution in the individual case. But the 'buyer' or better licensee will then not have the advantage of the default rules of the CISG (Art. 35 et seq. CISG) protecting him or her from software that does not conform to the contract. Nevertheless, the parties' intention to exclude the application of the CISG or derogate from its provisions pursuant to Art. 6 CISG has to be done expressly. Otherwise the autonomous interpretation of the contract [page 70] according to Art. 8 and 9 CISG might still lead to the application of the CISG to the software transaction, despite having formally used the wording 'licence agreement'.

5. COURT DECISIONS

Now it comes to the practical side, the test of what the courts have so far done in practice. Surprisingly enough, there are not many decisions on computer software and the CISG at all. Therefore the few court decisions in which the issue of the applicability of the CISG to software was actually decided will be analysed in chronological order:

(1) Regional Court Munich/Landgericht München, Germany, (8 HKO 24667/93) of 8 February 1995 ("Graphiplus")

The buyer and seller had their respective places of business in two different member states of the CISG. Unfortunately, the judgment does not mention the countries by name. Only the buyer certainly had its place of business in Germany. In February 1993 the buyer ordered from the seller a professional software developer or software house, the computer program 'Graphiplus 5.1' for a network of five workplaces for the price of DM 31,500.00 (EUR 16,000.00). The buyer, however, refused to pay the price although the program was installed - alleging that there was firstly no binding contract and secondly defects in the program itself.

The court held that the CISG is applicable to this contract, as a contract for the sale of goods pursuant to the CISG does exist as long as standard-software is being permanently transferred in exchange for a single payment. Moreover, the court did not regard it as necessary for the parties to agree upon each and every detail of the sales contract, provided that there was an agreement on the basic elements of the purchase, i.e. goods for a price.

So the judgment of the German court can be used as persuasive authority containing the ratio decidendi that the CISG is applicable to international agreements for the [page 71] permanent transfer of standard-computer software for a single price, regardless of the wording of the contract chosen by the parties.

(2) Court of Appeal Hertogenbosch/Gerechtshof te 's-Hertogenbosch, The Netherlands, (770/95/HE) of 19 November 1996 (Princen Automatisering Oss B.V. v. Internationale Container Transport GmbH)

The buyer, a company with its place of business in Germany, entered into an 'all-inclusive' contract on a data-processing software package called 'Transit' with the seller, a company with its place of business in The Netherlands. The contract was concluded on 24 May 1993 and provided for a price of 100,000 Dutch Guilders (EUR 50,000.00). After having already paid 50,000 Dutch Guilders, the buyer stopped any further payment because of defects in the software program and an improper installation of it at the buyer's premises. Although the facts of the case should have made it necessary to look into the general sphere of application of the CISG, the legal issues circled mainly around the conclusion of the contract as such: The Dutch seller sent, after the conclusion of the contract, a facsimile referring to its general terms and conditions as being part of the contract. Upon the German buyer's request, the Dutch seller forwarded its general conditions whereupon there was no reaction from the buyer's side: A typical battle of the forms in international commercial contracts.

The Dutch court of appeals applied Arts. 18 and 19 CISG on the conclusion of an international contract for the sale of goods without any reference to the fact that a computer program is an intangible good which poses a problem for the application of the CISG as such.

As the legal problem of applying the CISG to contracts for the transfer of computer software was not explicitly dealt with, the judgment cannot be used as persuasive authority. However, it is an indication that courts do not regard computer software necessarily as something different from a physically existing thing as long as the software is being transferred in exchange for a price. [page 72]

(3) Federal Court of Justice/Bundesgerichtshof, Germany, (8 ZR 306/95) of 4 December 1996 ("dynamic page printer")

The buyer, with its place of business in Vienna, ordered in November 1992 from the seller, with its place of business in Germany (vicinity of Nuremberg-Fuerth) the printing system 'dynamic page printer', consisting of a software/hardware package for the price of DM 65,100 (EUR 33,000.00). The seller installed the printing system at the buyer's premises in January 1993. Nevertheless, the buyer refused to pay the price at all because of the allegedly missing documentation of the printer.

The Federal Court of Justice held that the CISG is applicable because of Art. 3(1) CISG as contracts for the supply of goods to be manufactured or produced ('Werklieferungsvertraege') are equivalent to ordinary contracts for the sale of goods ('Kaufvertraege'). It continued with going into detail about the alleged defects and the buyer's duty to give notice of the lack of conformity of the goods to seller according to Art. 39(1) CISG. However, the court did not distinguish between soft- and hardware nor addressed the problem of intangibles being within the sphere of application of the CISG.

So this judgment of the German Federal Court of Justice can only be used as an indication that an international contract for the transfer of a computer system consisting of soft- and hardware for a single price will be treated as a contract of sale of goods pursuant to Art. 1 and/or Art. 3(1) CISG.

Given the number of the cases, they can hardly be conclusive. In addition, the reasons are uncertain for such a small number of reported cases concerning the CISG and computer software. One can presume that there is still a lack of information on such judgments in the member states, despite CLOUT and other databases. Moreover, courts are often overlooking or ignoring the problem or do not regard it as necessary to elaborate on something obvious, i.e. treating computer software the same as any other tangible good that is not explicitly excluded from the CISG. Further, in the past there were mostly package deals including soft- and hardware plus the installation of the [page 73] computer system that made a distinction unnecessary for deciding the case. It is therefore difficult to predict whether courts will also not have any problems to apply the CISG to pure software transactions where, for example, the contract allows the buyer to download the computer program or any other electronically stored information from the seller's website.

6. SUMMARY AND OUTLOOK

The software industry usually prefers licence agreements to avoid the warranties of the buyer under the CISG or national sales law. Additionally, the CISG favours in general the buyer which leads often to an express exclusion pursuant to Art. 6 CISG. For classifying an international software transaction as such one has to apply Art. 8 CISG and Art. 9 CISG.

However, computer software is generally a 'good' according to Art. 1 CISG, despite its non-physical existence and different appearances. In the CISG itself no limitation can be found to physical items forming the subject matter of the transaction. Moreover, Art. 7 CISG and the Preamble call for a wide and autonomous interpretation of the provisions of the CISG to give a wide circle of international transactions the benefit of uniform rules. The CISG has also had a life of its own, due to commentators and court decisions. So the meaning of the terms is necessarily changing to adapt the CISG to changing factual circumstances.

In summary, the CISG is prima facie applicable to international transactions involving the transfer of computer software for a price. The limitations can be found in the structure of the transaction and the parties' will.

Article 3 CISG excludes transactions that are no longer sales contracts, i.e. where the buyer supplies the substantial part of the materials necessary to manufacture the goods [page 74] and where the seller's preponderant part of the obligations consists of the supply of labour or other services. Additionally, licence agreements giving the licensor control over the use of the product by the licensee are not sales contracts. The central concept of a sales contract is that the buyer is free from any restrictions as to the use of the bought goods. However, there still might be restrictions as to the use of the goods because of intellectual property rights of third parties. Article 42 CISG acknowledges this and gives the seller the option to inform the buyer at the time of the conclusion of the contract. Thus an international software transaction termed by the parties as 'licence' could be interpreted pursuant to Arts. 8, 9 CISG as a sales contract by which the buyer accepted limitations to the use of the software because of intellectual property rights of third parties that were disclosed to him by virtue of Art. 42(2)(a) CISG. If the 'seller', on the other hand, owns all intellectual property rights and offers just to license the goods or products to the 'buyer', there is clearly no intention on both sides to transfer the property in the goods or products. The obligation of the seller to transfer the property in the goods (Art. 30 CISG) is, however, a central element for a sales contract pursuant to the CISG.

Nevertheless, courts might not yet be ready and willing to follow such a wide interpretation of Art. 1 CISG. If parties to an international software transaction therefore wish to avoid any legal uncertainty whether or not the CISG is applicable, they should either expressly 'opt out' or 'opt in' according to Art. 6 CISG.[34] [page 75]

FOOTNOTES

* Dr. Frank Diedrich, MLE, Institute of International Law, University of Rostock, Germany.

1. See Diedrich, F, 'Maintaining Uniformity in International Uniform Law Via Autonomous Interpretation: Software Contracts and the CISG', Pace Int.L.Rev. 8 (1996) 303, at p. 321.

2. Meanwhile 138 countries have become member states of the Revised (Paris, 1971) Berne Convention.

3. See Schmitt, H., 'Intangible Goods' in Online-Kaufvertraegen und der Anwendungsbereich des CISG, CR 3/2001, at p. 145.

4. Schmitt, H., please see fn. 3, at p. 145 with further references.

5. See Schlechtriem-Ferrari, Kommentar zum Einheitlichen UN-Kaufrecht -CISG-, 3rd ed. (2000), Art. 1 no. 13 with further references.

6. Schlechtriem-Ferrari, please see fn. 5, Art. 7 no. 26*; Magnus, 51 RabelsZ (1987) 123, at p. 128.

7. UNCITRAL-Yb I 177 (1968-1970); Honnold, J., Documentary History of the Uniform Law for International Sales (1989), at p. 15.

8. UNCITRAL-Yb XIII 27 (1977); Honnold, please see fn. 7, at p. 320.

9. See Negotiations of the First Committee, Official Records, UNICTRAL-Yb 238 (1968-1970) and Protocol of the Plenary Meeting, Official Records I UNCITRAL-Yb 200, 201 (1968-1970).

10. See the remarks in favour of applying the CISG to computer software of Professor Schlechtriem who personally participated in the 1980 Diplomatic Conference, 'Uniform Sales Law - The Experience with Uniform Sales Law in the Federal Republic of Germany', 3 Juridisk Tidskrift (1991-1992) 1, at p. 18.