Chaos versus Uniformity: The Divergent Views of Software in the International Community

Trevor Cox

Gray Cary

3038029.11

[2000] B.L.I. Issue 4: © International Bar Association

9999998

–

91028

Chaos versus Uniformity:

The Divergent Views of S

oftware in the International Community

The world is wired with computers, cell phones, and handheld organizers; all of which are

connected to each other by the Internet. Businesses and consumers from ever

y country are using

the Internet to conduct international transactions and access information. The dissemination of

information on the Internet is leading the world into a “second industrial revolution,” in the form

of the information industry. Software

is one of the foundations for the information industry.

Software resides in an intangible realm that was not acknowledged by society prior to its

invention, depriving society of the words and concepts to understand the nature of software.

Since the limit

s of our language are the limits of our world,

there is an ongoing struggle to

understand how software fits into society ’s existing structures. The struggle to understand

software also exists in the legal community. The existing contract laws generall

y categorize the

world into either a contract for goods, or for services. While these two categories served the

legal community over the years, software challenges the established legal categories, since

software cannot easily be categorized as goods or s

ervices. Software can be delivered via the

Int

ernet (“electronic software”),

mass

–

produced and delivered on a disk, or custom designed for

a particular party. To recognize the unique nature of software, the legal community has modified

the existing contr

act principles and has created new contract pri

nciples. Through this process,

new type of contract has emerged. These contracts are license agreements. The concept of

licensing software has evolved from intellectual property rights and the means by wh

ich these

intellectual property rights are conveyed to another party. While the distinction received little

attention in the past, the legal community is beginning to acknowledge and consider the fact that

the underlying intellectual property rights in so

ftware are not sold with most software

transactions; instead, a software vendor grants a license to make certain uses of the software. For

example, the license agreement accompanied with Microsoft Windows 98 states “The

SOFTWARE PRODUCT is licensed, not s

old.” License agreements also contain other

provisions intended to address the unique nature of software, which will be discussed in this

article.

Ludwig Wittgenstein, Tactatus, Logico

-‐

Philiosophicus, section

5.6 (1922).

Software Divergence i

n the International Community

Gray Cary

3038029.11

[2000] B.L.I. Issue 4: © International Bar Association

9999998

–

91028

Even though the software industry has modified existing contract principles and has created new

contract pri

nciples, the existing uniform contract laws do not recognize or address these

developments. So, the legal community struggles to determine how to conceptualize software to

fit into the existing legal structures. This struggle is most apparent with electro

nic software.

Some of the issues being considered with electronic software include: (1)

should all software be

treated the same regardless of the means of delivery, (2)

can electronic software fit into the

definition of a good, or should electronic softw

are be considered a service, and (3)

should there

be a new body of contract law for software?

The international community is debating the answer to these questions. As one of the

fundamental goals of international law, the international community is striv

ing for uniformity in

the application of international contract law as it is expressed in the 1980 United Nations

Convention on Contracts for International Sale of Goods (“CISG ”).

Unfortunately, countries

are not treating electronic software consistentl

y. Depending on the jurisdiction, the same

software is treated as the sale of goods, or the providing of services. To complicate matters even

more, the United States is beginning to adopt a new body of contract law where software would

no longer be treat

ed as goods, or services. With these diverging approaches to software, there is

an emerging state of chaos with contract law for software and the entire information industry.

This article examines the treatment of software contracts in international law,

in the European

Communities and the European Union (“E.U.”), and in the United States of America (“U.S.”).

This article illustrates how these emerging legal structures are leading to legal uncertainty in the

information industry. Section

I examines the t

reatment of software under international law.

Section

II examines how the E.U. is treating software. While the E.U. is drafting directives to

address electronic commerce and related issues, an examination of the laws of E.U. Member

States (“Member States

”)is essential because the extent to which the E.U. will address contract

law is uncertain. Section

III examines the treatment of software in the U.S. This section will

United Nations Convention on Contracts for International Sale of Goods (“CISG”), U.N.

Doc.A/Conf.97

/18, Annex I (1980).

Trevor Cox

Gray Cary

3038029.11

[2000] B.L.I. Issue 4: © International Bar Association

9999998

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91028

focus on a new body of law entitled the Uniform Commercial Information Transaction A

(“UCITA ”)to show how UCITA is specifically designed to address software and the Internet.

International Law

The CISG is the main body of international contract law. The CISG stands alone as the only

body of international contract law that has been fo

rmally adopted by the international

community. The goal of the CISG is to promote uniformity in international contract law so that

there is certainty in the rules that govern transactions between parties.

The CISG applies to the

sale of goods between pa

rties whose places of business are in different states.

By its own terms,

the CISG does not apply to service contracts.

When a contract is for services, the contracting

parties must look to the applicable domestic law of the contracting parties where c

ontracts can be

subject to varying and sometimes inconsistent rules. The CISG is also silent on the issue and

extent to which it applies to software contracts, because at the time of the drafting of the CISG,

the countries could not have anticipated the i

mpact of the software industry or the Internet.

Since there is no international contract law specifically intended for software contrac

ts,

the issue

is the extent to which the CISG applies to software contracts. This section discusses (1)

whether

the CIS

G applies to a software contract where the software is delivered on a disk, and

(2)

whether the CISG would apply to electronic software.

Software on a Disk

Software delivered on a disk looks similar to any other good subject to the CISG. A compact

disk, a

car, and a television all share the same basic characteristics as software on a disk.

Nevertheless, software has caused a debate in the international community on whether software

is a good.

Courts and commentators have looked at software from many dif

ferent perspectives

to determine whether the CISG should apply. Ultimately, the general consensus is that the CISG

Uniform Commercial Information Act (“UCITA ”)adopted by the National Conference of

Commissioners on Uniform State Laws on July 29, 1999. See also http://www.2BGuide.com/for

more information on UCITA.

CISG, supra Note

2, Article

CISG, supra Note

2, Article

CISG, supra Note

2, Article 3(2).

Frank Diedrich, “Maintaining Uniformity in International Uniform Law Via Autonomous Interpretations:

Software Contracts and the CISG ”, 8 Pace International L.Rev.(1996)303

–

338, 336.

Software Divergence i

n the International Community

Gray Cary

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[2000] B.L.I. Issue 4: © International Bar Association

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should apply to software on a disk.

This section begins with a discussion of the means by which

courts and commentators have determined th

e applicability of the CISG to software on a disk.

The second part discusses the limitations on generally applying the CISG to software on a disk.

Applicability of the CISG

The obvious place to begin is with the definition of a good. Since CISG does not

define a good,

commentators have focused on, but have found little guidance in, looking at different translations

of the term “good ” into various languages to find its essential meaning and scope.

Based on

this analysis, commentators have concluded that

goods under the CISG are essentially movable

and identifiable separate objects.

Software meets

this criterion

, because a particular software

program can be placed on a disk and transferred to a different location.

Even though software is movable and ide

ntifiable, the question has been raised whether the

CISG should apply to intangible property that can be separated from the tangible good in order to

be used. With software, the underlying intangible property is usually separated from the good

after deliv

ery. When the buyer receives the software, the buyer usually does not use the software

contained from the disk. Instead, the buyer usually loads the software onto a computer. So, the

good and the copy of the software contained on the good are mere condu

its for the ultimate use

by the buyer.

There is some support for the idea that certain types of intangible property are not covered by the

CISG.

A German court noted that a market study does not constitute a good under the CISG,

because a market study is

intangible property.

Commentary has also noted that other intangible

property rights, such as know

–

how, are not goods under the CISG.

Based on this analysis, if

software were considered a separable intangible property that exists independently of the

disk,

See generally, ibid.

Franco Ferrari, “Specific Topics in the Light of Judicial Application and Scholarly Writing ”, 15 Journal

of Law and Commerce, 1

–

126 (1995).

See Diedrich, supra Note 7, citing L.

Scott Primak, 331.

Ferrari, supra Note 9, 437.

ibid.

Trevor Cox

Gray Cary

3038029.11

9999998

–

91028

then the CISG would not apply to software.

Even though there is some support for the idea

that intangible property should be excluded from the CISG, the majority of courts and

commentators have generally dismissed this idea.

The general view is t

hat software is a good

because the software is incorporated into a tangible good.

Software should not be treated

differently from any other goods that have intangible properties incorporated in them. Since

items such as compact disks, video tapes, and b

ooks are considered goods, software on a disk

should also be considered a good.

This approach is also consistent with the need to promote uniformity in international trade. If

software was not treated as a good under the CISG, then a large segment of inte

rnational trade

would be without a uniform body of contract law. Thus, the general view is that software on a

disk is a good and that the CISG applies to this software.

Limitations on the Applicability of the CISG

When looking at the need for uniformity

in international law, the international community should

consider the potential limitations of the CISG with software. There are two noteworthy

limitations on the extent to which the CISG applies to software contracts. First, courts and

commentators have

acknowledged that custom software does not fall under the CISG.

For

software that is custom designed according to specifications, the contract is generally considered

to be a service contract.

Without a uniform body of international contract law for s

ervices,

there is still a limitation on the goal of uniformity in international law. So, the parties must look

to the applicable domestic law as it applies to custom software.

Secondly, consumer contracts are excluded from the CISG.

With software delive

red on a disk,

this limitation is less relevant because software vendors usually distribute software through

resellers and distributors located in the country where the consumer is located. However, this

ibid.

ibid.; Maximilian Endler and Jan Daub, Internationale Softwareueberlassungsvertraege und UN

–

Kaufrecht, Computer und Recht, 603 (1993). See also Diedrich, supra Note

ibid.

Id., Supra Note

Endler and Daub, supra N

ote

15, 606.

CISG, supra Note

2, Article 2(a).