Is a software licence a sale?

Most people accept licence agreements with wary cynicism. That's about to change. A new law before Parliament, if passed, will empower the consumer and give new rights to software purchasers.

Most people accept licence agreements with wary cynicism. That's about to change. A new law before Parliament, if passed, will empower the consumer and give new rights to software purchasers.

The proposed law, the Consumer Protection (Definition of Goods and Services) Bill, is designed to promote certainty by bringing software licences within the ambit of our sale of goods and other consumer protection legislation.

The bill is necessary because these issues have not yet come before the New Zealand courts and suppliers have taken different approaches to consumer rights in their licence agreements. The bill creates certainty by amending the definition of “goods” in several statutes, including the Sale of Goods Act and Consumer Guarantees Act, so that it covers “computer software”.

While the intentions are laudable, execution is far from satisfactory. The Sale of Goods Act, under its current wording, excludes licences. Software is generally not sold. A licence to use is given. Because computer software is not defined in the bill, this raises the issue as to whether Parliament intends a software licence to be included in the words “computer software”. It is probably safe to assume that this is the case, but it should be made clearer in the bill.

A recent American case provides a different approach to the issue. The court had the opinion that the software licence at issue was not a licence but instead was a sale of “goods”.

The court’s reasoning is a little shaky, but its implications for New Zealand are clear. A transaction, although labelled as a licence, will not necessarily be regarded as one by the courts. This leaves the door open for computer software to be classed as a good, whether under the law as it currently stands, or under the bill.

This rather esoteric argument does have practical implications for organisations creating and/or selling computer software.

Sellers will have increased and mandatorily implied obligations to provide software including that the software be, if a good under the Consumer Guarantees Act, fit for the purpose intended by the buyer and of merchantable quality.

Sellers may be able to contract out of terms implied by the Sale of Goods Act and, in limited circumstances, those implied by the Consumer Guarantees Act. However, even that contracting out will have to be done very carefully in the licence agreement.

Furthermore, the seller will have new consequential duties not to mislead and that will involve care to ensure that exclusions are sufficiently brought to the attention of the purchaser in order to avoid the risk of an exclusion being deemed not part of the licence agreement.

Buyers can look forward to the protections of the Sale of Goods Act and also the Consumer Guarantees Act, if the software is a consumer product such as a game or sold for educational purposes.

Perhaps this is only levelling the playing field. These rules have always applied to hardware vendors. Software creators and vendors may be in reality joining the rest of the world and with the old mantras that the first rule of marketing is that “the customer is always right” and that the second rule is “if in doubt refer to Rule 1”.

Horrocks is a partner and Smith a law intern in Clendon Feeney’s technology law team. This article, together with further background comments and links to other websites, can be downloaded from www.clendons.co.nz. Questions and comments can be sent to craig.horrocks@clendons.co.nz.

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