Does the law of sales applicable to contract for supply of software?
Assume a government authority has bought a software from a software company. A defect in the software led to massive loss of money. Can the manufacturer be held liable for the injury caused by the defective computer software?
One of the prominent attributes of the digital age is that every aspect of modern life is becoming dependent on information technology. And undoubtedly every information technology device is controlled, operated and instructed by software. As business automation and digitalization increases in our country, both governmental and private organizations engage in multi-million birr software procurements. But it is obvious that as the use of software and software controlled products grows, the public vulnerability to defective or poor quality products mounts. In purely economic terms, losses are potentially massive. This in turn increases the issue of liability whether it be contractual, non-contractual or product liability. For now I want to focus on contractual liability with the following questions in mind.
What is special with software and software defects?
As described above, our modern life is becoming dependent on information and communication technologies – be it computers or smart phones. But hardware by itself can do nothing. The most important part of the system is the software. Software are the instructions or commands that tell the hardware what to do.
One prominent feature of software is the exact sameness of copies. Unlike most tangible products, all copies of given software are to the greatest extent identical. It is difficult, for example, to differentiate a given copy of Microsoft window from another copy of the same. It is also difficult, if not impossible, to argue that a given copy of Microsoft window is lower or greater in quality than another copy of the same. Thus, unlike other forms of products, the defect of software cannot be proved through the comparison against another same copy. And if one customer wins a case that software is defective that may precipitate claims from the users -perhaps hundreds of thousands in number-of all other copies, giving rise to an extraordinary degree of risk to the supplier.
Another feature of software is that it is difficult to exhaustively examine its accuracy at the design or production stage. It is impossible to test even the simplest program in an exhaustive fashion and thus difficult to comply with standard of quality on software. This leads to the third feature of software i.e. Failure is inevitable. As software systems are products of the human mind, they are vulnerable to programming mistakes. According to the research from the Royal Academy of Engineering and the British Computer Society, only 16% of IT projects are considered truly successful. Complexity and invisibility are, among other things, the main factors that make the success rates of software too low.
The question is therefore; if failure in software products is inevitable, how shall sellers guarantee to buyers that the software sold is not affected by defects? To address this question, it is important to ascertain whether software is good or a service.
Is software a good or a service?
There is some debate about whether software is a good or a service. The materiality of the distinction lies in the applicability of certain remedies available to persons affected by the defects of software. Sales of goods are subject to the damages for any defect and warranty principles of contact law. In other words if software is identified as a good, its supply under a contract of sale will impose strict obligations upon the seller to ensure that the software is of satisfactory quality and fulfils its purpose. Therefore, if the computer software is considered to be a good, the computer software manufacturer can be held liable for injury caused by the defective computer software under a warranty theory.
But in the event that software would be characterized as service, it might be argued that the seller needs to show no more than the use of reasonable care and skill.
Can these elements work on contract for supply of software?
Unlike goods, software is typically supplied under a license transaction and governed by intellectual property laws in the form of copyright. That means, when customers buy software, they buy a copy and the right to use it in certain ways. This make the sale transaction for software not to fit into the traditional sale and purchase contractual relationship since the actual sale usually relates to a sale of the software license or right to use the software. The element of contract of sale as defined under article 2266 of the civil code that requires transfer of ownership is not fulfilled. Defect is also inherently inevitable with software. Therefore, a software supplier, for example Microsoft, cannot guarantee buyers that the software are not affected by defects. What a supplier of software can do is to carry out with reasonable care and skill. Therefore, the sale and purchase of software cannot fall in to the definition of contract of sale under the Ethiopian civil code. In other words, it can be argued that software fall under the category of service.
Despite this unique feature of software, however, there is a clear legal regime in Ethiopia that classifies software as goods. According to article 2 (1) of the Ethiopian Federal Government Procurement and Property Administration Proclamation No. 649/2009, the definition given for “goods” includes raw materials, products, equipment, and marketable software. This law regarded contracts for the supply of software as a species of goods, not as a form of services.
There are also arguments that suggest that the medium of supply should be taken in to consideration in classifying software as “good” or “service”. While some software are supplied encoded in a medium such as a disk, other software can be downloaded from the website. Based on such variety in the medium of supply, there are some arguments that classify software supplied encoded in a medium as goods and those downloaded from websites as services. But it is strange to argue that supply of the same software will be governed by different laws when downloaded from a website as opposed to acquiring it from a shop in the form of a disk.
There are also other augments that suggest the classification of given software as good or service should be based on the type of software. According to this line of argument there are two types of software called off-the-shelf software and bespoke software.
As Rowland D. and Macdonald E. (2000) put it, the consumer who wants software will either simply walk into a shop and purchase it ‘off the shelf’, select and purchase it through a mail order catalogue or purchase and download it from the web. However, if a business wants software which is tailored to its particular needs, it will contract for ‘bespoke’ software, to be written for it. Therefore, off-the-shelf is a kind of software designed for a wide range of businesses or is ready-made and available for sale to the general public such as Microsoft Office. On the other hand bespoke software is written to meet specific client requirements.
According to this kind of classification, the purchase of bespoke software is considered as a contract of sale of goods, whereas that of off-the-shelf software is a contract for supply of service.
I think this line of argument holds water. If a software is “off-the-shelf” available for sale to the general public, ownership will not be transferred to any customer. The manufacturer of the software reserves her ownership and buyers will be licensed to use the software in some way. In such kind of software, the manufacturer cannot guarantee buyers that the software are not affected by defects but only carry out with reasonable care and skill. Furthermore, identification of any defect in one copy renders all billions of copies in the world defective. And this makes a claim to recover damages difficult if not impossible. For example I cannot buy Microsoft Office program and own exclusively. This software is “off-the-shelf” kind of program for billions of users and every copy is identical. Therefore, it is better to classify the supply of this kind of software as service.
On the other hand, if a given software is “bespoke software” specifically designed to fulfill specific requirements of a customer, the manufacturer of the software has to transfer ownership and hence their relationship is a contract to sale of goods. In such kind of contract the buyer can recover any damage caused by any defect in the software.
As indicated above the Ethiopian Federal Government Procurement and Property Administration Proclamation No. 649/2009 refer to marketable software (emphasis added). Does this proclamation referring to bespoke or off-the-shelf software? This is far from clarity but the wording of the provision “marketable software” (ለገበያየተዘጋጀሶፍትዌር) seems to deal with off-the-shelf kind of software. But indicated above the classification of software as pure” good” is open to challenge.
From this very special nature of software, its classification as pure service or pure good is open to challenge. Its special nature makes it not to fit neatly into the classification of a good or service. For a given software to be classified as good so as to be governed by sales contract or as service, the type of software (whether bespoke or off-the-shelf) should be considered.
Therefore, the applicability of law of sales to supply of software should be determined in accordance with its type. Many have suggested that rather than to create a new definitive legislation, the classification of a software should be determined depending on its function, purpose and construction of the contract terms or relationship and define liability accordingly.