Can Computer Software be Classed as Goods?

The issue of whether computer software may be regarded as goods for the purposes of the Sale of Goods Act 1979 has been the subject of a raged debate across the various common law jurisdictions for decades.[1] The issue of tangibility is at the core of the debate and the idea that ‘all personal things are either in possession or in action’,[2] tends to distinguish the category of goods which fall under the definition in the Act.

…despite the fact that software is one of the most universal products of our commercial age, it has no distinct legal identity. Whether it falls within the definition of goods depends upon its classification as a personal chattel…

Section 61(1) of the Sale of Goods Act 1979 provides that the term ‘goods’, ‘includes all personal chattels other than things in action and money…’,[3] meaning ‘those tangible, movable items that we call things in possession’.[4] Although the definition is extensive, the statute excludes things in action, such as shares in a company, bills of exchange and other negotiable instruments. Patents, copyright and trade marks are also excluded, though goods may exist which embody these intellectual property rights.[5] However, it is unclear what method of legal treatment should apply in disputes involving software. This uncertainty manifests itself in the question of whether software should be treated as goods for the purposes of the Sale of Goods Act 1979 (SOGA).[6]

Software is a term used to describe programs, algorithms, procedures and documentation concerned with the operation of a data processing system. Without it, computers would not be able to operate and perform any dynamic functions. From a legal point of view, software is significant for two main reasons. It differs from other conventional chattels with which the law is familiar, as it has many distinctive characteristics. Furthermore, despite the fact that software is one of the most universal products of our commercial age, it has no distinct legal identity. Whether it falls within the definition of goods depends upon its classification as a personal chattel, distinguishing it from a thing in action. Such an interpretative question may be regarded as one for the common law, but judges have been reluctant to provide a consistent method of classification in regards to software, and the failure to do so leads to ambiguity and uncertainty.

The usual supply of software is through a licence; its scope and the contract on which it is based may vary. A licence may be regarded as ‘formal authority to do something that would otherwise be unlawful’.[7] The terms of the software licence prescribe the permissions of use that the owner of the rights subsisting in the software is willing to grant the user of the software.[8] The rights of use will usually be granted when consideration is provided, such as a licence fee. The traditional view is that software is supplied under a licence and therefore the focus is on the copyright in the software, with the terms of licence granting permission to use the copyright-protected work.[9] In relation to software transferred by downloading directly from the Internet, or from a disk temporarily supplied by the software supplier, the contract is not one of sale of goods. Since the software is not tangible, it would not constitute goods, as discussed by both Scott Baker J at first instance and Sir Iain Glidewell in the Court of Appeal in the case of St Albans City and DC v International Computers Ltd [1996] 4 All ER 481.[10]

However, software may be supplied in a medium, such as a disk, where the sale of the medium would be a sale governed by SOGA. Nevertheless, it has been argued that, ‘the software itself will be governed under the terms of a licence, which will define the scope of permitted use but which will not confer outright ownership’.[11] Confirmed in the following case, the medium in which the software is delivered is essential in determining whether there is a sale of goods for the purposes of SOGA. The sale of computer hardware, with or without software, is a sale of ‘goods’ within the Act, according to Rubicon Computer Systems Ltd v United Paints Ltd [2002] 2 T.C.L.R. 453.[12] Moreover, in London Borough of Southwark v IBM UK Limited [2011] EWHC 549,[13] it was held that software is within the definition of goods for the purposes of SOGA when supplied on a CD but not where the software is licensed.

The traditional view is that software is supplied under a licence and therefore the focus is on the copyright in the software, with the terms of licence granting permission to use the copyright-protected work.

On the other hand, in Beta Computers (Europe) Ltd v Adobe Systems (Europe) Ltd [1996] S.L.T. 604,[14] Lord Penrose criticised the view that the medium in which the software was delivered was of any relevance as to whether it might be regarded as goods for the purposes of S.61 SOGA. The law applicable to a particular transaction would depend on whether software has been delivered on a disc or downloaded online, even though the purpose of such transactions will often be the same.[15] This result would be unfair to the parties of these transactions, and in particular consumers who would not expect that their chosen medium of delivery would have such significant consequences to their rights.

The purchaser of the software does so in order to acquire it for the use of its value, which vests in the corporeal product itself, and the corresponding restricted intellectual property rights over it do not affect that. This interest in the use value relates to the tangible and operational state of the product and, consequently, requires that the purchaser’s expectations in terms of quality, fitness for purpose and functionality of the product be protected. In this context, where a consumer buys software in order to benefit from its use value, the transaction is indistinguishable from those in which conventional goods are bought for a similar purpose.[16] Therefore, it is unreasonable to distinguish between the types of legal protection afforded in each context.

The lack of a clear legal approach and inconsistent common law in regards to issues involving software is problematic and commercially inconvenient. It denies predictability in relation to legal response to any issue that may arise and to parties of transactions who primarily deal with the transfer of software. This stands in great contrast to the predictability granted to those contracting for conventional products.

The lack of a clear legal approach and inconsistent common law in regards to issues involving software is problematic and commercially inconvenient.

The continuous growth and development of technology and electronic devices being sold by companies like Fierce PC, and the social significance of software lend urgency and importance to the challenges which software poses for the law. Contemporary examples which further reveal the nature of software and the range of possible methods for supply of software offer additional opportunities to test the law.[17] The limited response of the law and the interpretation in cases is often unclear and contradictory; nonetheless, it is clear that the distinctive characteristics of software raises particular concerns and queries for the law to address.

As software is a unique phenomenon and a truly unconventional chattel, any attempts to understand its nature through analogy with existing concepts do not guarantee a satisfying result. Moreover, it leads to uncertainty and inconsistent judgments. A clear response from the law is essential in light of the increasing technological development in modern-day society. In order for software to receive appropriate legal treatment, therefore, either the legal classification, or the criteria used in relation to it, needs to be revised.[18]

Valentina Georgieva is in her penultimate year reading law at London Metropolitan University.

[1] Bridge M. (2012) Benjamin’s Sale of Goods 8th Ed. Sweet&Maxwell, London, Part1, Ch. 1, Section 4(a) 5
[2] Colonial Bank v Whinney (1885) L.R. 30 Ch. D. 261 at p.285, per Fry L.J.
[3] Section 61 (1) Sale of Goods Act 1979
[4] Bridge M. G. (2009) The Sale of Goods 2nd Ed., Oxford University Press, Oxford, 36
[5] Adams J., MacQueen H. (2010) Atiyah’s Sale of Goods 12th Ed. Pearson, Dorchester, 74
[6] Green S., Saidov D. Software as Goods, Journal of Business Law (March 2007) 161-181Sweet & Maxwell
[7] Oxford Dictionary of Law (2003, 5th ed.)
[8] Atkins R. (2007) Software asks the questions: what’s the law’s response? University of Wales, Aberystwyth, 2
[9] Ibid.
[10] St Albans City and DC International Computers Ltd [1996] 4 All ER 481
[11] Supra n8
[12] Rubicon Computer Systems Ltd v United Paints Ltd [2002] 2 T.C.L.R. 453
[13] London Borough of Southwark v IBM UK Limited [2011] EWHC 549 (TCC)
[14] Beta Computers (Europe) Ltd v Adobe Systems (Europe) Ltd [1996] S.L.T. 604
[15] Supra n6 at pg.5
[16] Supra n6 at pg.12
[17] Supra n8 at pg.7
[18] Supra n6 at pg.1