Defective Software: Deciding Your Liability Terrain (Part 2) Implied Terms for Software

“The pessimist complains about the wind, the optimist expects it to change, the realist adjusts the sails” - William Arthur Ward

Introduction

From a litigator’s perspective, in every contractual dispute, while the client is synonymous to an army (where their attitude and resources will shape size and disposition of forces at your disposal), the contract signed between the opposing parties is synonymous to the terrain from which a litigation battle is to be fought.

Similarly, the drafting of a contract is synonymous to campaigning where each side will strive to manoeuvre to the best possible position, dictating how engagement will follow.

And where drafting fails as a result of circumstances, it falls to imply terms (synonymous to divine intervention) to decide the legal terrain of such dispute. Such implied terms can be drawn from statute or common law. Implied terms introduced by statute (eg merchantable quality and fitness for purpose) will be of special importance.

Statutory Application: Are Software Goods, Services or Something Else Entirely?

Illustrated in the case of St Albans City and District Council v International Computers [1996] 4 All ER 481, it was held by the Courts that

“By itself hardware can do nothing. The really important part of the system is the software”.

St Albans further noted that programmes are pre-determined instructions and command telling what hardware will do. An analogy was therefore drawn that a defective software is akin to an ‘ill-worded instruction manual’ and thus, no distinction can made whether the product was ‘tangible’.

Unfortunately, such ruling resulted in software being deemed as goods only when delivered on tangible media (such as on a DVD). This leaves services delivered via the Internet (eg by download) as sui generis and unprotected under the Sale of Goods Ordinance (SOGO). The ASX Operations and others v Pont Data Australia [1990] 27 FCR 460 is the case authority:

“it does not follow… that it should be read as if there was a further inclusion, by way of extension of the ordinary meaning of 'goods', so as to draw within the definition encoded electrical signals.”

Common Law Application: Implied Terms for Software

Illustrated in the classical authority of Trollope & Colls vs North West Metropolitan Regional Hospital Board (1973) 1 W.L.R. 601 at 609 (H.L.),

“An unexpressed term can be implied if and only if the court finds that the parties must have intended that term to form part of their contract”.

In this connection, it was held in St Albans that, subject to contrary words, there would be an implied term that programme ought to be reasonably fit.

As such, whilst software delivered by internet can have the implied term of fit for purpose, the standard of merchantability may not be applicable.

All in all, the application of statute and case authorities to determine liability leaves far too much room for uncertainty. Therefore, instead of relying on what is akin to divine intervention of the Courts, it is far better to have the terrain crystallise by way of contract.

The Importance of Mode of Delivery

Software programmers should keep in mind that the medium of which they decide to deliver a software will effect what sort of implied terms might be applicable and as such, must take a different approach as to how to crystallise the contractual terrain:

  1. Where by Disc, illustrated in ASX, physically delivered software will mean that statutes such as SOGO will apply. To achieve clarity of terms and avoid application of implied terms where possible, suppliers usually attempt to use shrink wrap licence (physical contracts shrunk to fine print so that they can be enclosed in the plastic packaging) to limit their liability.
  2. Where by Internet – placing in physical shrink wrap licence will be impossible. To achieve clarity of terms, suppliers usually attempt to use ‘clickwrap’ or ‘access wrap’ to impose a contract (acceptance of terms before access/download is allowed). This will, however, place the software under the auspices of the Electronic Transaction Ordinance.

Key Take-Away

Always remember, it is far better to be diligent at the beginning and have software terms well-drafted and agreed to by the parties than to resort to reliance on the Court’s intervention in which decisions can end up in any direction.

– Joshua Chu, Solicitor
Amanda Wu, Trainee Solicitor

ONC Lawyers

Jurisdictions: 

Solicitor, ONC Lawyers

Joshua Chu is a Litigation Solicitor qualified to practice in Hong Kong. Before becoming a lawyer, Joshua worked in the healthcare industry serving as the IT department head at a private hospital as well as overseeing their procurement operations.

Since embarking upon his legal career, his past legal experience includes representing the successful party in one of Hong Kong’s first cryptocurrency litigation cases as well as appearing before the Review Body on Bid Challenges under the World Trade Organization Government Procurement Agreement concerning a health care industry related tender.

Today, Joshua’s practice is mainly focused in the field of dispute resolution and technology law.

Aside from his legal practice, Joshua is currently also a Senior Consultant with a regulatory consulting firm which had been founded by ex-SFC Regulators as well as being a management consultant for the Korean Blockchain Centre.

Trainee Solicitor, ONC Lawyers