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Legal Issues of Shrink Wrap Licences
Ian Lloyd

At the end of 1995, the Court of Session in Edinburgh delivered judgment in the first case concerning the validity and effectiveness of so called, 'shrinkwrap licences' to reach the stage of a full hearing before a UK court. Although it was stressed throughout the judgment that the decision was based on a particular factual situation, the overall approach may be of wider interest.

The Facts

During 1993 the defenders placed an order with the pursuers for the supply of software. The software in question was produced by a third party, Informix. Aspects of the transaction were shrouded in uncertainty but it was agreed that the software was not customised in any way and that the copy required was supplied to the pursuers via distributors Sphinx Level V Limited.

All negotiations between the parties were carried out over the telephone. When delivered, the package containing the software included a licence agreement. Opening the packaging, it was stated, 'indicates your acceptance of these terms and conditions'. The customer was advised of a right to reject the software if the conditions were considered unacceptable. The defenders subsequently sought to return the software to the pursuer. This was refused, apparently because the pursuers formed the belief that the return was prompted by a re-evaluation of the defenders software requirements rather than of any disagreement with the terms of the licence, and an action brought seeking payment of the agreed price.

Issues for Judgment

It was common ground between the parties that the court did not, in the context of the present proceedings, need to explore the defender's motives in seeking to reject the software. The question to be determined was to what extent the existence of the software licence impacted upon the contractual relationship between the parties. The argument put forward on behalf of the pursuer was essentially a simple one:

On the agreed facts, there was an unconditional and unqualified order for identified software. The defenders themselves had specified the product they wanted. They purchased it "blind" so far as any terms and conditions of contract were concerned. The pursuers obtained and supplied what was ordered, and the defenders must pay the contract price.

The pursuer's involvement, on this analysis, stopped at the moment the software contract was concluded, save of course in the event there was any complaint regarding the quality of discs or other materials supplied.

Counsel for the defenders adopted a different approach. This laid stress upon the necessity for the user to be able to use the software. There were, it was argued:

conceptual problems in analysing the forms of transaction currently in use in the market. One could not analyse the transaction as two contracts in tandem, one for the supply of the low value medium and one for the supply of the programs recorded on the medium. The software purchaser had no interest in the medium without the information it contained. ... It was unnecessary and inappropriate to attempt to force the transaction into predetermined classes such as sale of goods or agreement for a licence of the use of intellectual property.

On the basis of this analysis it was suggested that '(a)cceptance of the licence conditions was a condition suspensive of agreement.' The delivery of the software was not completed until the user's rights in respect of the intellectual property rights was clarified, something which would not occur until the outer packaging was opened and the user received sight of the licence terms.

The difficulty with this line of argument is that the conditions in question were brought to the user's attention only subsequent to the completion of the contract with the supplier. Even the fact that both parties would have been aware that conditions were invariably attached to software contracts would be of little assistance as the nature and extent of these varies from company to company and is subject to periodic change making it difficult to ascribe knowledge and consent by reason of a course of previous dealing.

The Court's Decision

Neither of the approaches advocated on behalf of the parties was considered persuasive by Lord Penrose. Analysing the transaction, he considered, required an initial identification what the defenders sought to obtain. This was access to the intellectual property of Informix in a medium and under conditions which would allow them to use it in the course of their commercial activities. The order, it was stated:

was not an order for the supply of discs as such. On the other hand, it was not an order for the supply of information as such. The subject of the contract was a complex product comprising the medium and the manifestation within it or on it of the intellectual property of the author.

In an English case concerned with the status of software contracts Eurodynamics Systems PLC v. General Automation Ltd. it was suggested that these transactions involved two distinct contracts, one for the supply of the storage devices containing the software and a second licensing the use to which these could be put. Such an approach was rejected as 'unattractive' as appearing:

to emphasise the role of the physical medium, and to relate the transaction in the medium to the sale or hire of goods. It would have the somewhat odd result that the dominant characteristic of the complex product, in terms of value or of the significant interests of parties, would be subordinated to the medium by which it was transmitted to the user in analysing the true nature and effect of the contract. If one obtained computer programs by telephone, they might be introduced into one's own hardware and used as effectively as if the medium were a disc or CD or magnetic tape. One could not describe the supply of information over the telephone system as a sale of goods.

There is no doubt that the definitions within the Sale of Goods Act would produce such an effect. 'Goods' it is provided 'includes all personal chattels other than things in action, and in Scotland all corporeal moveables except money'. There is no doubt that some item of tangible property requires to be transferred from seller to buyer in order for the statute to apply. Similar, indeed frequently identical definitions apply in a variety of other statutes such as the Consumer Credit Act, the Supply of Goods and Services Act, the Unfair Contract Terms Act, the Consumer Protection Act (defining product as 'any goods or electricity). Given the increasing utilisation of systems of electronic delivery of information based products, e.g. BT's trials of video on demand services over the telephone network, electronic delivery of software, downloading of digitised audio works, it may be that there is need for a reappraisal of the statutory definitions. Although contracts for the supply of software may be regarded as 'complex', there does not appear to be significant dispute that the sale of a pre-recorded video or a CD would be classed as coming under the Sale of Goods Act. There can be little justification in subjecting functionally identical transactions to different legal regimes with significant variation in areas as fundamental as the nature and extent of liabilities.

The solution adopted in the present case was to suggest that software contracts should be regarded as sui generis . The contracts possessed points of similarity with those of sale of goods but 'would be inadequately understood if expressed wholly in terms of any of the nominate contracts.' The essential feature of a software contract, it was suggested, was that the supplier undertook to deliver a functional copy of the software which could be used by the end user. To hold that the supplier's obligations ceased at the point of delivery of the software might have the unacceptable consequence of depriving the customer of any rights in the event the producer's terms and conditions were unacceptable. In the case of R&J Dempster v. Motherwell Bridge and Engineering Co, the Lord President (Clyde) held that in order for a commercial contract to be considered as concluded 'all the essentials have to be settled. What are the essentials may vary according to the particular contract under consideration.' In that case, the essential ingredient was the price to be paid. For software contracts, the essential element related to identification of and agreement upon the terms and conditions under which the software could be used.

Where the conditions of such use are not within the control of the supplier either as owner, or under some prior contractual arrangement, but require to be derived from the owner, and in particular when there are well-established routines for determining what those requirements are, it appears to me consonant with a proper view of parties' commercial relationship that there should not be consensus in idem until there are produced and accepted by parties to the contract, those conditions stipulated by the owner of the software for its use. That point could not come earlier in this case than the stage at which the supplier, deriving the material from the owner, tendered to the purchaser an expression of those conditions which the purchaser might accept or reject before becoming bound to the contract.

Comment

It is difficult to determine what the effect of this judgment will be. In some respects it seeks to evade the issue of the status of software licences by subsuming them in consideration of the wider relationship between the supplier and the user. Certainly, there would be problems in applying the approach under English law with the twin concepts of consideration and privity of contract posing obstacles to the involvement of third party interests. For Scotland, the case is authority for the proposition that shrink wrap licences can be enforced although in the particular case, the effect of enforcing its terms was to benefit the customer rather than the supplier.

It was stressed throughout that the judgment was one dictated by the particular facts of the present case. There are a number of aspects of the transaction in question which support the view adopted. In particular, the fact that the order for the software was placed and accepted by telephone reduced significantly the possibility that terms and conditions could be brought to the customer's notice prior to the delivery of the goods. In such a situation, it is reasonable to conclude that the delivery of goods is a stage short of the final completion of the contract. The transaction has much in common with the concept of the supply of goods on approval.

In the situation where supplier and customer deal on a face to face basis, the approach adopted appears less appropriate. Many products may be sold which are protected by patents. This fact may become apparent to the purchaser only upon opening the packaging and may serve to limit the use to which the product can be put. Other products may contain features which have the effect of rendering them unsuitable for particular purposes contemplated by the buyer. Although the buyer may possess a remedy for breach of contract in such situations (the goods failing to comply with the requirements of the Sale and Supply of Goods Act) it has never been considered that no contract has come into existence. Such a prospect would do little for commercial certainty.

The major problem which requires to be addressed is that every use of a computer program requires its reproduction. In terms of the end product there is little distinction between use of a computer program and use of a book. Although there are obvious attractions and good reason for applying the copyright system to computer programs, these are the only form of protected work whose normal use requires reproduction of the contents. It is perhaps fair to suggest that were the copyright regime being devised today, that a different approach would be adopted towards defining the exclusive rights of the copyright owner.

To an extent this has happened with the implementation of the European Directive on the legal protection of computer programs and data. The Copyright (Computer Programs) Regulations 1992 add a new section 50C to the 1988 Act providing that:

It is not an infringement of copyright for a lawful user of a copy of a computer program to copy or adapt it, providing that the copying or adapting -

This provision entered into force on 1 January 1993. Given that the supply of the software at issue in Beta v. Adobe took place 'on or about 27 August 1993', it is surprising that no reference was made to this provision which challenges the judges assumptions that the licence of the producer was essential for the customer to be able to make use of the software. If this view is correct, there is little justification for regarding software contracts as a unique species.


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