Hardware and Software Contracts :
Legal Status & Defect Liability
by Ottavia Molinari
Hardware and Software Contracts :
Legal Status & Defect Liability
2. INFORMATION SYSTEM
3. THE LEGAL STATUS OF COMPUTER
THE LEGAL STATUS : Hardware
THE LEGAL STATUS : Software
4. SHRINK-WRAP LICENSE
4.1 CONTROVERSY OVER THE SHRINK-WRAP LICENCE
4.3 SHRINK-WRAP LICENCES UNDER US LAW
4.4 SHRINK-WRAP LICENCES UNDER UK LAW
4.5 SHRINK-WRAP LICENCES UNDER EU LAW
5. CONTRACTUAL LIABILITY & INTERNATIONAL LAW
6. LEGAL LIABILITIES & COMPUTER
7. SOFTWARE’S QUALITY & FAIR USE
8. DAMAGES & LEGAL LIABILITY
8.2 NON - CONTRACTUAL LIABILITY………………………...….pag.35
The Internet can be defined as one of the most revolutionary invention of the technological development in the history where millions of bit of information travel around the world connecting people daily and providing them with data and access to numerous services through the World Wide Web.
In this dynamic environment the information technology is continuing to transform global communications and the world economy with innovative products and services. In fact, over the last two decades in particular, the marriage between computers and telecommunications into digital communication technologies such as the Internet has achieved growing impact on day-to-day practices as well as on our society. The users can navigate through the Web and this has become the dominant, most popular and inexpensive way of communication shaping and changing relationships of every aspect of life and social institutions. The information system forms an integral part of the modern organization and businesses by supporting normal functions and activities to such an extent that information technology is no longer considered a business resource but it has became integral part of our business environment with our lives totally depending on it. A computerized information system is a combination of hardware, software, database(s), telecommunications, people and procedures all organized in such a way as to input, process and output data and information.
There is a common consideration that technology does currently exist to secure a platform access to the system information, high-valued transactions and communications over the Internet. Recording and transmitting data under electronic form has many advantages compared with traditional methods and today it is extensively utilized in the commercial and administrative activities. Documents can be made available almost instantly, even in large quantity and the recipient is able to work on them directly. The electronic transmission is considerably cheaper and faster with respect to other transmissions and documents can be sent around the globe in a matter of seconds, without delay. Important sources for securing trustworthy data transmission and communication over open networks are provided by authentication and integrity services. The speed of technological progress implies that many of the potential application fields for authentication and integrity services are difficult to ascertain at this stage while new application areas such as protection of intellectual property rights, stored data, network security or electronic cash are developing continuously. In particular for electronic communications the digital signatures are considered to play a significant role.
If from one side, the worldwide success of the electronic commerce for transacting goods or services is due to the low costs factor and open and easy accessibility by anybody, on the other, the fact that the transactions including payments are conducted via the Internet has created new concerns on the security of the electronic transmissions of data as it has been observed that computer hackers may detect, intercept and manipulate original messages. The same types of fraud scenarios, which have victimized consumers and investors for many years before the creation of the Internet, are now appearing online. With the explosive growth of the Internet and E-commerce in particular, online criminals try to present fraudulent schemes in ways that look, as much as possible, like the goods and services that the vast majority of legitimate E-commerce merchants offer and this is creating difficulties in detecting preliminarily such fraud cases. Cyber criminals not only cause harm to consumers and investors, but also undermine consumer confidence in legitimate E-commerce and the Internet. The new forms of fraud and forgery have intensified the effort to create a secure and trustworthy way to conduct business through computer and analysts and experts worldwide are creating solutions to preserve security, integrity and confidentiality, otherwise all advantages offered by the electronic commerce could be easily nullified. As a result, many organizations, including law enforcement agencies, are concentrated to develop procedures to maintain tight security and to protect privacy. The base for providing a secure and trustworthy E-commerce should be supported by a favorable policy government in facilitating the growth of commercial infrastructure by supporting the emerging security technologies.
Businesses around the globe have developed better and safer services, greater efficiency and effectiveness by reducing expenses, improving decisions. The results obtained made substantial improvements or added efficiency in all field of organizations by playing an important role in today’s business and society. However, while it is true that technology has been responsible for the loss of many jobs especially in the manufacturing and services industries, it is also visible that a wealth of new type of employment opportunities have arisen in their places.
The development of information technology and the information society for consumers has brought several consequences. The new technological environment has been greeted with enthusiasm by many, citing the improvement in consumers choice, convenience and general accessibility of information but there have also been calls to focus on the needs of consumers protection legislation around the world in response to the technical advantages . Increasingly, the world is becoming a global community market where hardware and software are developed, manufactured, bought and sold internationally. Ensuring compatibility, safety and compliance with each country’s or state’s regulations has become a formidable task. Issues such as product liability, intellectual property, electronic e-commerce and right of accessing information increasingly analyzed and discussedby worldwide experts.
2. INFORMATION SYSTEM
To better enter into specific topics, object of this thesis, I think it is important to provide some general preliminary information with the aim to explain concepts that, although utilized frequently, are often misunderstood or are not properly clarified.
The so called “computer” is a computerized information system which consists of a number of interrelated components that work with the aim to convert inputs into data and its most relevant components are the hardware and the software.
The typical structure of the computer foresees the presence of a processor, a memory and peripherical units. The processor is the hearth of the elaborator and is forming the electrical component able to execute the received instruction (as by the way of sample, it can be compared with the motor of a car). The memory contains information that shall be processed by the processor and the data to work with by the processors.
The “hardware” describes the physical, electronic and mechanical, components (or its invariable part) of computers, telecommunications and other information technology devices. As a collective word it includes not only the computer but also cables, connectors, power supply units and peripheral devices such as the keyboard, mouse, audio speakers and printers. The term arose as a way to distinguish the "box" and the electronic circuitry and components of a computer from the "program" you put in it to make it do things. However, the modular configurations of most computers in their hardware part can be changed by adding new adapters or card that extend the computer's capabilities. The hardware alone is not able to solve any problem and we can identify it as "a unit that resolves potential problems of different nature".
The hardware itself is not able to provide any practical utility as for its use it needs to put in it programs. Between the instructions provided to the hardware, we have to distinguish the general basilar functions which relate to functions for any kind of application and placed in the permanent memory, from those operative intended for specifics needs of the user. Different programs allow the same hardware for different scope of works depending upon the programs inserted, for instance from keeping an accounting system for a company to controlling the air-traffic for an airport.
The term “software” describes the abstract, variable part of computers, such as the various kinds of programs, which are used to operate these and their related devices. Therefore, the program is generally known as the “software” and, differently from the hardware, it can easily be varied. The type of task that a computer can perform depends from the specific software installed. The software can be divided into two main categories: software of base, which is made of all programs able to make operative the computer and therefore, to solve problems for their users; and the applicative software constituted by programs that solve specific problems for their users.
Based on the above consideration it results clear that without a software, the hardware would be of no effectiveness.
3. THE LEGAL STATUS OF COMPUTER
The problem related to the computer liability is quite recent and connected to the incredible expansion and application of new informatics technologies in all sectors of social organization. The growth of the software industry and its autonomy with respect to the hardware industry, the large amount of investments in research & development sectors and the interests of all constituencies involved are all elements that justify the need of a legal identification and consequently, an adequate legal protection. The international doctrine and jurisprudence have started to studying the computer’s legal protection with the aim to classify it as juridical entity in order to provide a proper efficient and specific protection outside the general laws and regulations offered.
Historically, the purpose of “licensing” computer program copy use was to employ contract terms to augment trade secret protection in order to protect against unauthorized copying at any time when first, the existence of a copyright in computer programs was doubtful, and later when the extent to which copyright provided protection was uncertain. In Europe the EU Directive (91/250/EEC) has organized in the whole European Union a common regulation based upon copyright law for the protection of computer programs or software. The main reason for protecting computer programs by copyrights was initially the fact that computer programs (as such) were excluded from patentability in Europe by the European Patent Convention (EPC).
As already clarified in the previous paragraph, while the hardware represents the physical aspect of a computer and the other information technology devices, which implies permanence and invariability, the software, instead, represents the variables and is not a corporal part of the computer as it is composed of all such information provided by the programmer to obtain a function or a practical results. However, while it seems generally recognized that the “hardware” is identified as a tangible product and therefore, legally classified as a “good”, the legal status of “software” still remains open to various interpretations which vary from the theory of defining it as an intangible product (“immaterial”). It is therefore identified as a “service”, to the opposite conception of recognizing it as a tangible (“material”) product and therefore classified as a “good”. A response to the question, still not answered definitely under the European law, on whether the software is a good or a service, is of extreme relevance for a determination of satisfactory forms of protection.
It is commonly known that the use of a piece of hardware or software usually comes with a licence agreement that states that the creator is not liable for any damages that may result from the use of his product. However, do the programmer, publisher, designers of software and hardware have the right to say that they are not at all responsible? If a product is found to be poor in quality and endangering for the user normal life would be held responsible in a court law its manufacturing company? The same would apply to computer products from which we depend upon more and more every day?
The ramifications of possible software and hardware applications are enormous, let think of their use in the medical field, for instance, where human lives are at stake or in financial markets where large sum of money are concerned and in educational institutions, where performance is measured. Consequently, we can easily imagine how many could be the practical examples of defective software applications, which may cause physical injury, loss of records, business, productivity and damages to all computer systems, etc. For example, in the medical field it has been suggested that anesthesia provided by a sophisticate software to patients undergoing operations may result less expensive and more effective in monitoring all conditions of the patients than the traditional one. However, in the event of failure it could even cause the death of the patient and if so happen it is still not clear who should be considered liable: whether the anesthesiologist, the hospital or the software developers.
3.1 THE LEGAL STATUS OF COMPUTER: The HARDWARE
Under the legal point of view, the “hardware” is generally considered by the doctrine and jurisprudence an (industrial) product and therefore, classified as a “good” to which we can apply the general laws and regulations foreseen for goods. Moreover, if the technical innovations satisfy the requisites of patent, the hardware can be protected more efficiently by filing application for patent invention or as an industrial model.
Generally, the contracts which govern the hardware fall under two main categories:
a) Contract of sale; a contract between two parties, called respectively, the seller (or “vendor”) and the buyer (or “purchaser”) by which the former, in consideration of the payment or promise of payment of a certain price in money, transfers to the latter the title and the possession of the property; in this case the buyer become owner of the hardware part of the computer.
b) Contract for leasing: a contract by which one owning such property grants to other the right to possess, use and enjoy it for a specific period of time in exchange for periodic payment of a stipulated price.
It is interesting to note that under the European Laws the contract having as object the purchase of an hardware implies the obligation for the supplier to consign the computer to the client, which, under the general condition of contract, could be fully complied with the simple consignment at the level of the external road. In consequence of this, the obligation to provide also the assembling would be considered a different and separate contract as obligation of services. Moreover, the maintenance and assistance would be also considered under separate contracts. Under these circumstances, in case the buyer/client decides to claim back the paid amount for the mal functioning of the computer, a link between such different agreements should be found and proved. It is also worth to note that in the event of dispute, the coexistence of different and separate agreements would complicate any action brought by the buyer because directed against different subjects .
3.2 THE LEGAL STATUS OF COMPUTER: The SOFTWARE
In trying to give a current definition of “software” it could be said that the software, or program for elaborator, is the sum of all information or instructions that the programmer gives the elaborator in order to obtain a function or practical result.
Software can be produced and supplied either by the same manufacturing company of hardware or by different companies - called software-houses - that produce and supply exclusively software programs, and finally, by professional programmers.
The legal status of software is not yet univocally classified at International law level and the matter is far from being settled. Therefore, the codified laws that are usually searched to provide adequate protection to the software would be found mainly in the contractual codes under some specific clauses that regulate or limit their utilization by users, intellectual property rights area (invention, right of author) as well as unfair competition.
Software can be classified in three main categories:
A) The “STANDARD SOFTWARE”, also called “OFF-THE-SHELF” package, (which represents the majority of software purchased by private consumers) where fixed intangible information and adoption of programs are recorded into physical disks called CD-ROOM and made immediately available to customers; and this type of software is identified as a good . In this category, identical copies will be supplied to users often via a substantial distribution chain and at a cost ranging from tens to thousands of pounds. There will seldom be any written agreement negotiated in advance between the parties with the producer attempting to introduce a set of terms and conditions through the device of a licence. We have to recall that the same version of software programs can be also downloaded through Internet without the physical support of a floppy disk and in the same way it seems that it would be equally identified as a good.
B) The software “MADE TO MEASURE” or “BESPOKE” is a specific program, ideated and designed for clients in order to meet their detailed necessities; this type of software is identified as a service in consideration that the contract previews the work in the area of design; the cost of these may run into many millions of pounds, with the essential feature being that the supplier agrees to design and develop software to suit the needs of a particular customer or a comparatively small number of identified customers. The software will be supplied under the terms of a written agreement negotiated between the parties.
C) Finally, the “CUSTOMIZED SOFTWARE” represents a category in between the other two above mentioned since its programs are characterized by a composition of standard applications directly selected by the customer and additional programs specially ideated by programmers in order to meet their necessities. This involves the supplier modifying existing software, developed either by themselves or a third party, to suit better the requirements of a particular customer. The degree of customization may vary from making very minor adjustments to a single package, to developing a unique system based on a combination of a number of existing packages. This type of software is considered as a service in consideration of the great amount of work provided by the creation of new special programs. The classification conducted above is of relevance in case of software failure. The engineering design and manufacturing company can be found negligent if they have failed to use reasonable care either in manufacture or design of a software product placed into the market corrupted, especially if the company may lack in a proper quality system. In the normal course of applications customers purchasing the faulty software would realize such failure only when trying to install the program in the computer. The main argument in case of dispute shall be based on applied and available general software ordinary standard and work-processing program manufactured by other producers.
The above considerations are influencing the regime of the liability of the manufacture and/or supplier of a computer. In fact, in the event the software would fall under the classification of being considered a good, the obligation of the manufacturer/ supplier would be an obligation of results. Differently, if the type of software would be classified as a service the obligation of the manufacturer/ supplier will be considered as an obligation of services and therefore, a technical service suitable to realize some results based on the actual knowledge in the sector, where the realization of results will be juridical regarded as a matter of diligence and expertise.
A claim for damages incurred for defective software is not specifically dealt with by software laws and therefore, it would be essential to clarify whether the software would be considered by law as a good or a service by keeping in mind that the product liability law is applied only to goods (and often found under the consumer protection measures). In this regard, in the UK, the Consumer Protection Act 1987 states that a product will be considered defective if it does not provide the level of safety we are entitled to expect from an expert system. However, an adequate supporting documentation may cover all situations by explaining also that there is no always guarantee for correct information or functioning.
Another important element would be to ascertain if the claim will be considered and built under the laws and jurisdiction of a country of common law or civil law.
Common law jurisdictions, under the law of contract, apply the doctrine of privity of contract and it means that rights and remedies may normally be pursued only between the contracting parties. If a piece of software is purchased from a retailer, the contract would be with that party and any action will be pursued in that direction. The product will have been made by the manufacturing company but in the absence of a contract the buyer cannot bring actions directly against the producer. What may occur is a chain of contractual actions. If the claim filed by the buyer shall end successfully against the retailer on the ground that the software is not of satisfactory quality than the retailer may claim against its supplier seeking reimbursement of the sums it has had to pay out to the buyer in compensation. That supplier will have to pay up but will then seek reimbursement from its supplier.
In the Civil Law jurisdiction, if in possess of a regular contract, the consumer who has bought a defective software from the retailer may, on presentation of a valid receipt, usually within a week time, ask for the refund of the money paid. However, if the damages occurred are higher than the price of the software he may file a claim directly against the producer.
When a contract does not exist, the final user must seek protection, in the common law countries, under the general tortuous liability law (which is more time consuming and expensive) under the principles of negligence, breach of warranty and fault of the manufacturer or, in case of negligence certification, against independent software testing companies when inspecting, testing and approving defective software products.
However, in consideration that defective software may be used in a single computer as well as in a net of integrated computers, the failure of its program could cause damages ranging from a small amount to millions of pounds and these damages would be difficult to quantify and insure prior to the purchase and utilization of the software. As a result of this, the manufacturers and developers now tend to minimize their legal responsibility applying limited liability clauses in their licensing contracts with the end users or to exclude it entirelyas for instance in the contract of “shrink-wrap licence”.
4. SHRINK-WRAP LICENSE
When a software program fails and causes losses, the end user may sue the manufacturer for breach of contract, breach of warranty, or both on the grounds that the manufacturer delivered a program that did not perform as warranted or as expected by the user. Most software license agreements, however, provide warranties that are so limited as to be almost meaningless and typically limit liability to the amount paid for the program, excluding "consequential" damages, such as lost profits.
The most common legal agreement found in the information technology industry is a “standard form of agreement” which is called “shrink-wrap licence”. This type of licence is entirely drafted by the vendor without consultation or negotiation with the purchaser and grants the right to use the software program. This licence represents an attempt to limit or exclude the software developer liabilities if the software program should prove to be defective.
Today many license agreements for commercial software read as follows: This software is provided on an "As Is" basis without a warranty of any kind, including without limitation the warranties of merchantability, fitness for a particular purpose and non-infringement. The entire risk as to the quality and performance of the software is borne by you. Should the software proven to be defective, you and not the companies assume the entire cost of service and repair. Under no legal theory tort, or contract or otherwise will the company be liable to you or any other person for any indirect, special, incidental or consequential damages of any character including damages for loss of good will, work stoppage, computer failure or malfunction or any and all commercial damage loss. In no way will the company be liable for damages in excess of the list price for a license to the software even if the company will have been informed of such danger or for any claim by other parties.
It is curious to know that the shrink-wrap licence gets its name from the fact that retail software packages are usually covered in a plastic or cellophane “shrink-wrap” and as soon as the customers tear the wrapping from the package a written licence reported in the CD-ROOM disk is declared effective. In this circumstance, we have to consider that the average purchaser eager to try his or her program, invariably tears off the cellophane to get inside the box containing the disk or CD-ROOM, without a second thought for the piece of paper between the box and the cellophane. This piece of paper is the shrink-wrap licence and carries a collection of small print on the side, headed by a statement similar to the following example “By opening this envelope you agree to the terms and conditions below. If you do not agree to this terms, return the disk in the unopened envelope to your supplier for a full refund”. The parties to a computer contract concern with the acceptance because it triggers the beginning of the warranty period and/or a payment to the vendor.
4.1 CONTROVERSY OVER THE SHRINK-WRAP LICENCE
The problem over shrink-wrap licence originates from the fact that a licence is a form of contract, which ordinarily would require having two parties reaching mutually agreeable terms. However, when purchaser pays and gets the CD-ROOM containing the software program he usually has no time to read this contract, neither to agree on mutual terms and to put its signature in the document. The absence of a written or verbal agreement is considered substituted by the action of wrapping the CD ROOM package.
A number of courts have been addressed with the enquiry over validity of the shrink-wrap licences, as its legal status is unclear. The enforceability of use of restrictions and transfer prohibition set forth in a standard form, non-negotiated, computer program copy ”licence” has been the subject of substantial academic and other controversy. In the United States, for instance, a consistent number of courts have found them to be invalid, characterizing them as contracts of adhesion, unconscionable and/or unacceptable pursuant to the Uniform Commercial Code because there was no agreement formed between the parties. This position has been contrasted by few others US courts, starting by the federal district court in Wisconsin, that have ruled that the shrink-wrap licence is valid and enforceable and provided a clear guidance on circumstances under which a shrink-wrap agreement will be instead held invalid and unenforceable.
These judgments represent some of the most recent decisions in favor of shrink-wrap licence. However, it would be advisable that in order to address properly this much disputed question and having explored the legal significance of the missing second thought over the shrink-wrap licence we have primarily to identify all the relevant elements related to the information system.
As already clarified, shrink-wrap licences are essentially documents, which appear with commercial software and state that by opening the package or using the software buyer agrees to abide by their terms without any negotiation and without bearing the signature on the contract. There are different types of shrink-wrap licences: a “box-top” licence, which is visible beneath the wrapping on the box, an “envelope licence” instead is printed on the outside of a sealed envelope containing the licence and a “referral licence” has a sticker over the disk or CD-ROOM box. The vast majority of shrink-wrap licences are not available for inspection prior to purchase.
The software developer attempts to form a contract between software developer and end purchaser, with the purpose of excusing themselves from any liability should the software prove defectiveincluding restricting the use of the software to a selected number of licence’s users, restrictions on timesharing or selling time on the software to third parties, declaring governing jurisdiction, disclaiming legal warranties and limiting availability of monetary damages.
Generally there will be two main clauses : the first will relate to the Intellectual Property Rights protection and the second more controversial, as an attempt to limit the developer’s liability, will exclude entirely the manufacturer of software from liability for any loss or damage caused by defects in the software. The terms have been expanded to include the presentation of licensing agreements to software buyers and information users before the program will permit use of the product or information and if accepted, the customer cannot refuse the other limitation or exclusion clauses which can be extensive and difficult to quantify and thus to insure against.
A software manufacturer operates a traditional manufacture and sale of physical-medium delivery software to retail outlets type operation. However, the nature of the software industry must be more widely considered as now companies are commonly selling directly through the web. The "click-wrap" (or “web wrap licence”) is referred to software for on-line transaction in retail that requires users must affirmatively click on a mouse indicating their acceptance of the licensing agreement before they can install the software or view the information on-line. This type of licence is considered more readily enforceable at law rather than shrink-wrap licence since the website from which the software is being downloaded can log the time and date that the user accessed the site and read the terms and conditions. If a condition or essential term of a contract is breached then there may be a claim for damages losses incurred as well as the common law right to terminate the contract. However, the parties must agree that there was a binding contract in place for this to be an issue. Recoverable damages may include a claim for money to put the customer in the same situation as if the contract had been performed including loss of bargain (expectation loss) and damage suffered and expenditure incurred in reliance of the contract (reliance loss). If the term is a warranty only then a claim only arises for damages or for rectification of the problem.
Software companies use either the “shrink-wrap licence” or the “click-wrap” licence for two important reasons - to protect their copyrights and to limit their exposure to lawsuits by limiting the software company’s legal liability. The increasing number of standard form of agreements to govern the use of digital products is creating a growing number of conflicts between the prohibitions embedded in contracts and uses permitted by copyright law. In the event a software licence is provided on-line, some consideration should be made as the manufactures theoretically receive orders from anywhere, and often take measures to limit this, whether to avoid prosecution in respect of content which is legal in one jurisdiction but not in another, or to avoid competing against the company’s own branches in other countries. If a “click-wrap’ agreement does not specify which laws govern the agreement and in which jurisdiction the agreement is made, the supplier could be subject to the laws in its customer’s location that are very different to the laws in the supplier’s state or country. The concerned courts may use different factors-test to determinate whether they have jurisdiction over a dispute.
4.3 SHRINK-WRAP LICENCES UNDER U.S.
The legal status of software licences has been debated in few cases mostly of these based in the USA and Canada.
In the USA, the need for protection arises by the general laws governing contracts and the sale of goods, which in all states (except Louisiana) is the Uniform Commercial Code. The U.C.C. governs a variety of commercial and business transactions. In several decisions involved the sale of hardware and software under a single agreement, in majority of these decisions article 2 of the Uniform Commercial Code that deals with contract formation, performance, breach, repudiation and remedies, was applied to the transaction. Although the U.C.C. applies only to the sale of goods and consequently programming services are outside the U.C.C. rules, the courts tend to apply the U.C.C. to programming services when the services are connected with the sale of computer hardware.
The U.C.C. allows a programmer or developer to limit their liability for defective software through the elimination of liability for consequential or incidental damages, limitation of the other remedies that would otherwise be available to the license, as well as through a disclaimer of warranties. A limitation of remedies provision in a contract means that a licensee’s recourse is limited to a specific remedy such as repair or replacement of the software. The U.C.C. provide for express warranties of merchantability (unless the seller specifically excludes those), as stated by the manufacturer either in writing or orally, and implied warranties which arise by the nature of product for example an accounting program is expected to create a financial report.
The present status of shrink wrap licenses is unclear since U.S. Courts have both enforced and refused to enforce various provisions of such licenses.
In the case Triangle Underwriters it was addressed the threshold question of whether software was a good under article 2. The court, sitting in diversity concluded that a New York court would treat both the computer hardware and software as goods under article 2. The same question was also confronted in the Dreier where the court stated: “It is clear that the sale of a computer system consists not only of physical goods, but of substantial services essential in producing the final product. Nevertheless, most authorities agree that the sale of a computer system involving both hardware and software is a "sale of goods" notwithstanding the incidental service aspects of the sale; therefore Article 2 of the Uniform Commercial Code . . . applies.”
Under the USA law if software is considered as a “good” two set of principles must be considered, strictly liability in tort (product liability) and contract-related provisions of Art. 2 of the Uniform Commercial Code. Therefore, if an expert system is considered a good product the principles of product liability would apply, however, product liability applies where there has been not injury to person or property as a purely economic damages generally cannot be recovered under the product liability action. Moreover, U.C.C. section 2-607(3)(a) states that where the tender of goods has been accepted the buyer is barred from any remedy for breach if the buyer fails to notify the seller of the breach within a reasonable time after buyer discovers or should have discovered the breach. Section 2-206(1)(b) of the Uniform Commercial Code states that” a buyer accepts goods when, after an opportunity to inspect, he fails to make an effective rejection”.
Recent changes to US Software licensing law strengths the rights of software owners regarding the licenses, which the purchaser of their products must abide by. The U.C.C. on its side seems to disclaim for the U.S. software industry all responsibility for the quality of products allowing a programmer or developer to potentially limit in the contract their liability for consequential or incidental damages. Unlike the manufacturing companies of cars, cookers, medical devices or anything else, software companies in America are in effect exempted from product-liability unfavorable laws. They evade responsibility for the quality and safety of their goods by stating in their licence agreements that they grant to use them, not to own them, with a long list of disclaimers if customers open the packet. The Uniform Computer Information Transaction Act (UCITA) , which provides that the shrink-wrap licence is enforceable by software owners as soon as it has been unwrapped or in case of on-line transaction the – “I accept” - button has been clicked irrespective that the user has read the terms. The UCITA is a long complex law projected, ideated for the scope of creating an uniform law governing a wide range of transactions and controlled by lobbyists for software publishers, that will govern all contracts for the development, sale, licensing, maintenance and support of computer software, plus most contracts for information in digital form. Vendors of other products that contain software such as computers, can also bring their products within the scope of UCITA rather thanArt. 2 of the U.C.C..
A panel of experts at the National Academy of Sciences in Washington, DC, is proposing the introduction of a new legislation to end the software industry's special exemption from product-liability suits. In the area of product liability reform, IEEE-USA supports the following general principles:
- A determination of liability should require proof that the product was both defective and that the defect was the proximate cause of harm.
- Manufacturers should not be held liable for harm caused by a product that cannot be made entirely safe where the risk of using the product is known or should be known to product users.
- Product manufacturers should be allowed to defend themselves by showing that any product in question was made in conformance with the state of the scientific and technical standards at the time, and that the manufacturer in question gave reasonable notice of safety considerations known at the time or manufacture or subsequently discovered.
- Manufacturers liability should be limited if a product user alters or misuses a product resulting in a personal injury. "Alter" means changing a product in a manner inconsistent with the specifications. "Misuse" is the use of a product in an application or a manner other than the one for which the product was intended.
- Product sellers (retailers and distributors) should not be held liable for harm caused by defects in the product unless they have control over the product's manufacture, its design, or the safety warnings that accompany it; or unless they otherwise fail to exercise reasonable care, make an express warranty, or engage in intentional wrong-doing.
- A two-year statute of limitations should be adopted on product liability tort actions, beginning when the claimant discovers (or should reasonably have discovered) the defect and its cause.
American lawmakers seem bent on giving the software industry even more protection. The Uniform Computer Information Transactions Act, already enacted by Maryland and Virginia, allows software producers to escape liability for damages caused by defects that they knew existed when the software was shipped and to prevent customers from openly criticizing the product. Many believe this is going to have a chilling effect on innovation and competition within the software industry.
IEEE-USA recognizes the need to impose some terms and conditions on the sale or other transfers of computer software and other digital works. However, it is important that consumers understand such provisions and that there be nationwide uniformity in the law governing such non-negotiable terms and conditions. Vendors of computer software or other digital works subject to non-negotiable terms and conditions should not be permitted to disclaim all warranties except when the works are distributed at no cost to the recipient. In all other cases, vendors must at least warrant that the digital information may be read on any device appropriate for the media except to the extent clearly stated to the contrary. Unless the computer software or other digital works are being provided for no more than the media duplication and shipping and handling costs, vendors must also warrant that a product substantially conforms to its documentation and any other representations made by its developers and distributors. Remedies for these warranties must include, but may be not limited to, the return of the product for a complete refund within a reasonable period of time. Incidental and consequential damages may be disclaimed only to the extent permitted by state law. To achieve those goals, IEEE-USA recommends that:
· Congress exercise its authority to regulate national commerce to bring about uniformity for non-negotiable terms and conditions that accompany the sale or transfer of computer software and other digital works, much as it has established national rules for consumer warranties and for the protection of intellectual property by patents and copyrights.
· The terms and conditions for a particular transaction should be available before the transaction occurs and must be available at any time after the transaction.
· Before their actual use of computer programs or digital works, if purchasers or users are dissatisfied with the terms and conditions, they may return the computer software or digital works at the vendor's expense.
· Only standardized terms and conditions should be permitted, to help consumers understand the limitations being imposed on them.
Congress should establish a mechanism for the review of suggested provisions to assure that they are not against public policy and are fully explained to the public, perhaps through administrative review with public comment by an agency such as the Federal Trade Commission. The burden should not be on an individual consumer to show that a provision is unconscionable, but on those proposing a provision to show that it is fair and reasonable.
IEEE-USA further believes that some non-negotiable terms and conditions should never be permitted, including provisions that:
· Prevent the study and understanding of a computer program by legitimate means, including reverse engineering.
· Prohibit commenting on a product, including the publication of benchmarks comparing the product to its competition.
· Convert what would otherwise be a sale into a license and thereby affect established user rights in copyright.
· Forbid the transfer of the computer software or digital work to somebody willing to abide with the original restrictions on the work.
· Permit "self help" that purports to authorize the accessing of a user's computer to enforce the terms of a license, particularly when it is accompanied with a disclaimer of liability for any damage caused.
· Require that a consumer bring any legal action in a forum inconvenient to that consumer.
4.4 SHRINK-WRAP LICENCES UNDER UK LAW
A software is not a physical or corporeal thing but the arrangements of magnetic particles on a diskette like the essence of a book is the typeface on the pages. On the other hand, software is more than information alone: it directly instructs the hardware and is the only means by which a computer can be made to operate. The precise legal nature of software has been the subject of much academic and judicial discussion.
In the UK legislation if for example, software is identified as a "good", its supply under a contract of sale will attract certain implied terms under the Sale of Goods Act 1979. This could impose strict obligations upon the seller to ensure that the software is of satisfactory quality and fulfils its purpose. In the event that the software would be no so characterized, it might be argued that the seller needs to show no more than the use of reasonable care and skill.
In an earlier position held by the UK Court in the Saphena v. Allied Collection Agency case it was stated that a software product even if recognized as a product would not be considered simply as a commodity and therefore, eventual defects found in it should be naturally expected to be corrected through a lengthy and laborious process and any immediate legal action in this regard would be considered as premature. Therefore, it must be observed that the suitability of the software product for its intended use was considered as not fundamental.
In the St Albans City and District Council v. International Computers Limited [Queen's Bench Division 1995] case, the decision of the Court of First Instance of English Court, where the software was considered as an informational good on the grounds that if a software enter into a medium, the medium itself is altered (in line with the United State jurisprudence orientation), was overturned in Appeal [1996 All ER 481] by English judge Sir Iain Glidewell. He awarded substantial damages in respect of a supply of defective software, which proved unsuitable for the customer's intended use(perhaps the most important attribute in this case is the assertion that software is a product and is to be assessed qualitatively on that basis). In the St Albans case an error in the customized software designed to calculate a community charge caused the rate to be too low because the number of the persons for tax base was overstated. The Appeal’s decision focused the question on the legal status of a computer program and differentiated the computer programs and electronic information from the media where it is stored. Pragmatically the judge considered in a similar way a car maintenance manual with a defective software program inserted in a disk arguing that while computer disk would fall within the definition of “good” as per s. 61 of the Sale of Goods act 1979 as well as s. 18 of the Supply of Goods and Services Act 1982, a computer program would not. Therefore, the computer program being not a “good”, it would not breach the terms “ quality and fitness of goods ” as per art. 14 of Sale of Goods Act 1979, which provides implied terms of satisfactory quality. However, in consideration of the absence in the contract of any express term of quality and fitness or any term in the contrary, the Common law that would apply to solve the case and therefore, it was considered that that terms would be considered as implied since the program should have been considered fit i.e. reasonably capable of achieving the intended use.
In the U.K., another singular case that deserves to be mentioned is the BETA v. ADOBE held in Scotland at the end of 1995. Prior to such case, the shrink-wrap licences were thought to be unenforceable and although the judgment of that decision was based on a particular factual situation, the overall approach may be considered of wider interest. The Scottish Court of Session ruled otherwisein respect to the English law position since it was held that the contract for supply was concluded only when the shrink-wrap terms had been seen and accepted by the purchaser. Therefore, if the purchaser buys software without using it and without unwrapping the envelope he may still return the software for a refund. The basilar points considered in the case were the facts whether it is legally justifiable to hold the purchaser to licence terms which only come to his attention after the apparent point of sale and second whether the software company can rely on its licence in a contract between two other parties. The judge, Sir Lord Penrose found that there was no consensus in idem between Beta and Adobe and recognized the validity of shrink-wrap licences per se on the basis of jus quaesitum tertio. This concept is not considered under the English law which rules, under the doctrine of privity, that contracts are binding only on those parties.
However, while the issue is not settled in all jurisdictions, the recent trend in the law has been to consider such shrink-wrap licences agreements enforceable and binding, provided that the user has the opportunity to return the product for a full refund in the event that he does not desire to be bound by the terms of the agreement. The contract of sale drawn up in respect of a software package will define the legitimate rights and expectations of contracting parties in respect of a breach. Any such contract will, of course, be subject to various legal provisions at international, European and national level. However, it would be essential identify the applicable laws, starting by distinguishing whether the software was purchased for business or personal use; as well its delivery mode, such as physical or online and finally if the software is classifiable as good or service.
4.5 SHRINK-WRAP LICENCES UNDER E.U. LAW
As a result of these increasingly sophisticated market driven demands, it is very important for software developers to ensure that customers are kept satisfied, while at the same time ensuring the maximum value of software products. Extreme care is also usually taken in drafting the software licence so as to exclude, to the permissible extent, implied statutory warranties and, in the case of warranties, which cannot be excluded, to limit their application and liability. The application of implied statutory warranties to the above matters has been the subject of much debate as the value placed on software by a business may far exceed the cost to the business of that software and naturally software developers will wish to minimize their liability related to consequential loss, loss of profit and direct loss.
In formulating the terms of the software licence a range of issues require consideration in this respect as traditionally developers will seek to impose a series of restrictions on the use of software by the licencee, including by the way of example: restriction to particular hardware and/or operating system combination; restriction to a specified number of users; a restriction to a particular location; a restrictions on copying, adapting, decomposing and testing. However, the EU Directive on the Legal Protection of Computer Programs affected the developer's freedom to impose some restrictions in a software licence.
Article 12 of the Products Liability Directivespecifically precludes any such attempt to evade or limit liability: "The liability of the producer arising from this Directive may not, in relation to the injured person, be limited or excluded by a provision limiting his liability or exempting him from liability." Therefore, under the European law the shrink-wrap licence will be carefully considered and if the terms herein contained would be found not in compliance with the articles of the Directive, they will be considered null and void. It must be noted in this regard that the European position is in clear contrast with the recent orientation in favor of shrink-wrap licence held in the United States as and sustaining its computer industry.
Software is an instrument and people rely upon tools to do their work. It should be noted that sometimes software will fail at a greater rate than more tangible products and most people will accept that. However, there is no reason why software should not be subject to the same laws that products are subject to.
In the U.K., the Copyright Act 1988 states that computer software programs are protected by copyrights and generally it holds that the owner of the copyright is the author of the programs with same exceptions including those cases in which the work has been created in the course of a person’s employment under a contract of service, in which case the employer would be considered to be the first owner of the copyrights. The Copyright (Computer Programs) Regulations1992 gave domestic effect to the EC Directive where the prime objective was to guarantee copyright protection to the developers of computer programs. Under the Regulations a licencee has the right: to make back-up copies of software (so long as they are necessary for the licenced purpose); observe, study or test the functioning of a software program to determine the ideas and principles which undermine any element of the program; and decompose i.e. reproduce the code and translation of its form for the purpose of constructing a link or interface with another program, unless an alternative is available. In doing so, the Regulations attempt to provide a balance between affording such protection while ensuring that program users have certain minimum rights in relation to the use of the program. While these rights cannot be excluded by contract (and any attempt to do so will be void), they can be limited and, to a certain extent, circumvented by express terms in the software licence. Basically, it would be not considered an infringement of copyright for a lawful user of a copy of a computer program to copy or adapt it, providing that the copying or adapting is necessary for his lawful use; and is not prohibited under any term or condition of an agreement regarding circumstances under which his use is lawful.
5. CONTRACTUAL LIABILITY & INTERNATIONAL LAW
When someone buys a computer we can say that he is most probably buying an hardware and a software and therefore, he is legally entering into separate but linked agreements. In fact only with the completion of the various phases involved in the functioning of a computer the supplier can say to have given a functioning computer, since without software the hardware no utility.
International contracts for software are becoming more common since it is now possible for a potential buyer to buy on-line a software product in a different country from where he is located and paying for it by credit card and receiving on-line delivery. Therefore, new issues should be considered in of dispute between the parties as for instance the law of which country should be applied? Where and when the contract is to be considered concluded? If the general rule is that the contracting parties have the right to choose the law governing the contract by inserting a specific jurisdiction clause, the problem arises when the contract does not foresee a pre-selected jurisdiction or the jurisdiction although selected is invalid. In this event, the option available would be to apply the rules contained in a relevant international convention or those of private international law to identify the appropriate national law that should govern the contract.
Should the contract deal with a standard software, classified as “good”, then the relevant convention “United Nation Convention on Contracts for the International Sale of Goods (Vienna) 1980”, which is including all EU countries with the exception of the UK, would apply. This convention applies to contracts made in course of business and excludes contracts for private consumers in the situation when the contracting parties’ place of business are in different states and both states are signatories to the convention. Defective standard falling under this convention may seek remedies such as the right to repair or replace in order to meet the qualitative standard or in certain circumstances ask for damages inclusive of loss of profit and consequential losses.
As mentioned earlier, when in case of contracts between software developer o retailers and private consumers there is no applicable international convention then the rule of private international law would apply. In this case the two most followed sources of law would be the Hague International Sales Convention 1955 where in lack of express indication the appropriate jurisdiction would be conventionally fixed at the seller’s place of habitual residence at that time. It is worth to mention that the Hague Convention found its sources in the Roma Convention 1980 and in the International Sale of Goods (Vienna) 1980 convention.
Another convention of international level which regulates international contracts for the sale of software is the Lugano Convention of 1988 . The Lugano Convention, in the event of dispute for breach of contract by delivery of a defective software and the appointment of liability, rules decides that both parties have the freedom to choose up to two jurisdiction of laws provided that at least one of the parties must be domiciled in a state signatory of the Lugano Convention or where neither parties is domiciled in a signatory state but the contract reports a specific clause referring jurisdiction to the courts of a signatory a state member. Art. 14 of the Lugano Convention states that if no jurisdiction clause has been incorporated in the contract of sale on installment credit terms or for financing such sales, the consumer may sue the person with whom he has contracted for the purchase of the software proved to be defective either in the courts of the Contracting State of the consumer’s domicile or in the courts of the contracting State where the consumer is domiciled.
6. LEGAL LIABILITIES & COMPUTER
The issue of legal liability related to defective software products is assuming considerable importance as the software is being increasingly used in all aspects of our life. As the software applications become more critical and our lives depend on these, the public demand for quality software products increases, especially for defect-free products or at least seeking full protection against any possible defect. Software fails due to various factors and it is these failures that software liability stems directly from. There are three classes of problems; erroneous input data (from sensor, humans or stored files), faulty code or a combination of the two.
Although no many claims related to defective software programs are brought to the attention of Courts worldwide, it is quite remarkable that most of these claims were related to customized software and not to standard software packages. The difficulty in this area of disputes is in the identification of the nature of computer software, i.e. whether the supply of software would be considered as a "good" or as a "service". The distinction between the purchase of off-the-shelf products and bespoke software, as already clarified, is that the first will be considered as a contract of sale of goods, while the second as a contract for services.
Software and hardware developers almost always have checks, tests, and quality assurance departments in place to make sure that their products are not defective, and perform as claimed. So how does it happen that defective software is released? Estimates of the economic costs of faulty software only in the US range in the tens of billions of dollars per year and have been predictable to represent approximately just under 1 percent of the nation's gross domestic production. There are a number of factors that can be shown to contribute to this increasingly relevant problem.
7. SOFTWARE’S QUALITY AND FAIR USE
Software’s quality is measured according to its suitability for the works or the problems it is intended to facilitate or solve: whether it can meet the customers’ business requirements and if it can perform with certain reliability. The quality of software is depending basically on two factors: the number of errors (or bugs) and the suitability for its intended use. While the number of errors is quite easy to be verified, the suitability purpose is much more difficult to quantify since it is dependant on a number of elements. However, we can say that the basic technical criteria for such analysis include correct functions, speed and easiness of use. If the buyer purchases particular corrupted software copies, the likelihood is that they will not work at all so that any defect becomes apparent before any damage is caused. However, more often, the realization that the product has defects, appears on later stages. The commonly yield view of the currently state of software quality is described as it is impossible to prove that all defects have been removed from a software products with the availability of defect –free software products which have been developed by the high technology manufacturing companies.
The shrink-wrap licence usually foreseen the process of notification of bugs and problems to the software producer and the extent to which these shall be replaced or repaired. The problem arises if the bugs cannot be repaired and for this reason the producer needs to protect himself from problems that cannot be fixed.
Another problem plaguing the industry is the lack of standards. Many professional products have standards associated with them, either legally imposed or assumed. On the contrary hardware and software so far have not been subject to standards, may be because of the variety of products and services offered, but only those voluntary accepted by the developers, and usually those standards that are adopted are for easy of use or compatibility, not for quality assurance or reliability. The first tool for assuring quality presently is testing. The testing is recognized as an expensive and ineffective way to eliminate defects from any products including software. Moreover, it is impossible to test a piece of software for every piece of use since in some complex cases it would be necessary an indefinite amount of time for the myriad of possibilities of interaction (whether desired or not) between the various elements of the program. Therefore, it has been suggested that the testing could be conducted only up to a “reasonable” level. Usually, the producers company of computers do not guarantee that their products are defects free but they provide warranty and support services to minimize their customers’ damages and inconvenience. The software industry tends to disclaim all responsibility of their products. However, by recognizing the standards to which the programmers and developers should be held it can better consider understand the level of care which may be required from them.
If a party is trying to ascertain that a software product fails to comply with relevant quality requirements, the task is almost invariably simpler where defects arise in production phase. In most cases the plaintiff will seek to establish that the purchased product is of inferior quality compared with other examples of identical product. Where, instead, the plaintiff ‘s complaint would be based on the poor quality of performance, it may be difficult to identify an appropriate basis for comparison.
In the UK, Common Law jurisdiction, in the absence of any express term in the contract as to quality or fitness for purpose or of any term to the contrary, the solution must be found in the terms implied by the Sale of Goods Act 1979 (as amended in 1994) where it is implied that that the program will be reasonably fit for the expected use, i.e. reasonably capable of achieving the intended purpose. Software then must, in the absence of any express contractual provisions to the contrary, be reasonably fit for its intended purpose. However, what does 'fit' mean in the software context is described in Section 14 The Sale of Goods Act provides that :
For the purposes of this Act, goods are of satisfactory quality if they meet the standard that a reasonable person would regard as satisfactory, taking account of any description of the goods, the price (if relevant) and all the other relevant circumstances.
(2B) For the purposes of this Act, the quality of goods includes their state and condition and the following (among others) are in appropriate cases aspects of the quality of goods-
(a) fitness for all the purposes for which goods of the kind in question are commonly supplied,
(b) appearance and finish,
(c) freedom from minor defects,
(d) safety, and
The software environment, as for example the co-existence with other programs and sharing of sources, should be also considered an additional element of quality assessment.
Section 27 of the UK Copyright Act 1988 deals with the question of fair dealing in the specific context of computer programs. The Copyright Act was specifically amended in 1988 to provide a new definition of fair dealing as that concept applies to computer software. The provisions of the Act, which apply to computer software programs, define computer programs as "a set of instructions or statements, expressed, fixed, embodied, or stored in any manner, that is to be used directly or indirectly in a computer in order to bring about a specific result." It is clear from the Act that computer software programs are protected by copyright and the full range of remedies set out in that statute is available to the copyright owner. The first part of the Act was divided into two parts. The first is defining the ability to adapt the program to the precise machinery on which it is being used.
“ the lawful owner by purchasing of a program may adapt, modify or convert the program into another computer language if (1) the reproduction is essential for the compatibility of the program with a particular computing device; (2) the reproduction is solely for person’s own use; and (3) the reproduction is destroyed forthwith when the person ceases to be the owner of the copy of the program”.
The second part is dealing with provisions that allow the owner to make a single reproduction of the program or the adapted program for back-up purposes only. Similarly, the 1996 WIPO Treaty amending the Berne Convention confirms that copyright does subsist in computer programs.
8. DAMAGES & LEGAL LIABILITY
Numerous are the world examples where companies or individuals by using software in consequence of its failure have suffered either losses, personal injury or damages to some other items of property. Software cannot be guaranteed error free and therefore it can cause loss or damage.
Since the pre negotiation phases of the IT hardware and software contracts, the extreme articulation of the contractual relation generates reciprocal obligations to be reflected upon the executive phase of the contractual performance. Obligations and correlated responsibility should be assessed for the evaluation of potential damages. The interest for the subject originates from the individuation of new damage figures, which even though they can be brought back to the typical damage figure as enucleated in the European civil discipline, they differentiate themselves for further peculiarities.
The responsibility for presence of vices or defects in the IT products implies an obligation to the compensation of the damage, based on the civil principles. But of which type of damage? The so called IT damage refers to damage caused by software mistakes or by the malfunctioning of the IT system and it can be distinguished between direct and indirect damage. The first one stands out when there is a physical damage to the IT system, for example a fire to the computer. It is a damage to the material good ( property manage) whose evaluation is compared to the value of the damaged good. The indirect IT damage is a damage consequent to the miss functioning or the bad utilization of the IT system that is defined as the damage to the organization. It is an economical damage of difficult evaluation (economic loss), as well as a composed damage, because it is made of loss (for example loss of contracts) and by costs for the prosecution of the activities, such as, for example, the cost for the extra work.
According to the Italian jurisprudence, the so called indirect damage or mediate one, is compensated in obedience to the principle of the causal regularity, as normal effect of the non fulfillment of an obligation. It is of significant relevance, in this regard, the issuance of judgment of Tribunal of Rovereto in Italy which, further to the resolution of a contract for the study and the development of a software, considered applicable the compensation for damages consisting in the unproductive expenses for the maintenance of the unutilized machine and in the payment of the leasing fees of this one in the measure of fifty per cent without considering compensation for the damages due to delay in the company organization of the customer for the missed resolution of problems of electronic elaboration data.
Differing from the European jurisprudential tradition, the common law countries jurisprudence is providing interesting case law experiences. For instance in the Beasley case the decision was about the introduction of a clause in which the hardware provider made himself exempted from any responsibility for the damage suffered by the client restricting himself to change the pieces which were in that case spoilt; the malfunctioning of the machine, at any case, had caused remarkable damages to the client. The Court, in deciding on the occurred controversy, recognized to Beasley a damage consisting in the price of the machine, in the cost of the services given to the client, in the reimbursement of the interests of a debt contracted to buy the computer and compensation of the expenses born to fix the accounting situation on the calculator. It was considered unusual the Chatlos case, in which the Court denied to create a new figure of tort (so called computer malpractice) and to apply the rules of an objective responsibility .
The EEC Product Liability Directive dated 25th of July 1985, n.374 creates an objective responsibility which is chargeable to the producer for damages coming from the product, extending such responsibility also to the supplier which has distributed the product in the practice of a commercial activity.
The Directive is not applied to software considered as a “service” or as an “immaterial good” but only as a “product”. Damage caused by death or personal injury and Property damage may be the subject of a claim under the Directive. The purpose of this Directive is to ensure consumer protection against damage caused to health or property by a defective product and to reduce the disparities between national laws.
Directive 1999/34/EC amended 85/374/EEC by redefining "product" in its Art.2 as all movables even if incorporated into another movable or into an immovable. "Product" includes electricity as well. The Member States were directed to apply the rules of the new Directive as of December 4, 2000.
The relation of causality between the caused damage and the action or the omission of the party compels to the compensation. The injured person has three years to seek compensation. This period begins on the date the plaintiff becomes aware or should reasonably have become aware of the damage, the defect, and the identity of the producer. The producer's liability expires at the end of ten years from the date on which the producer placed the product on the market. The producer may not limit his liability, nor is the producer exempted from it, regardless of what contractual arrangements have been made with the injured party. Such legal instrument is offering to the consumer the advantage in term of proof since it is the producer that would be in the position to prove evidence that there is not causality between the process of fabrication and the denounced malfunction. Liability, or the responsibility to pay for damages, is placed on the producer.
Art. 3 of the Directive defines the producer not only as the manufacturer of a finished product, but also as:
- The maker of any raw material or the manufacturer of a component part;
- Any person who, by putting his/her name, trademark or other distinguishing feature on the product, presents himself/herself as the producer;
- Any person supplying a product if the producer cannot be identified;
- Importers placing products on the European Union market
Under the Product Liability Directive, the injured party is required to prove the damage, the defect in the product, and the causal relationship between the two.
Several are the types of legal liability. Liability is defined, in a legal sense, as "almost any obligation, responsibility or duty that might arise from a cause in a statute, contract or tort”, therefore liability may be contractual or non-contractual.
8.1 THE CONTRACTUAL LIABILITY
The liability under contract arise from a legally binding agreement between the parties and terms and condition forming a contract can foresee some legal restraints. Where a contract exists, the purchaser whose software is defective is entitled to sue the party with whom (s)he has entered into the contract for breach of contract, breach of warranty or both on the grounds that the manufacturer delivered a program that did not perform as warranted or as expected by the user. However, most of software license agreements provide the above mentioned shrink-wrap licenses in order to limit such liability to the paid up amount for the program excluding the consequential damages such as the loss of profits. However, the buyer of a defective software is more interested in the recovery of indirect damages rather then direct damages. In fact, in the event of direct damages, the software can be easily substituted. However, in case of indirect damages, the malfunctioning can create consistent unforeseen damages for example costs to bear in the recovery of lost data, loss of unsatisfied customers or compensation for the lost time of own employees never functioning on programs.
Where the contract is with a retailer in respect of packaged software, it will generally be replaced upon presentation of a valid receipt and satisfying the seller that it is indeed unfit for the purpose for which it has been purchased. Where more serious (consequential) losses have been suffered, the ‘victim’ is in a better position if (s)he has a contract with the software developer responsible for the defect, otherwise an action in torts, potentially more time consuming and thus more expensive than an action in contract, must be pursued in order to seek legal remedy. The contract of sale drawn up in respect of a software package will define the legitimate rights and expectations of contracting parties in respect of a breach.
Any such contract will, of course, be subject to various legal provisions at international, national level. In order to identify the applicable laws, some distinctions must first be made, such as: is the software being purchased for business or personal use? What is the mode of delivery – physical or online? It is of extreme importance to evaluate if the software program will be classified as a good or as a service in order to apply the satisfactory form of protection.
8.2 NON-CONTRACTUAL LABILITY
Injury or damage may be caused to persons who have no contractual relationship with the software producer. In such situations software failure creates potential liabilities and software manufactures become an obvious target for legal action. Any action against the producer will require to be brought on a non-contractual basis. In most cases this requires that the claimant establish that loss was due to the negligence of the defendant.
The question on what level of conduct will reasonably be required from a software developer will be considered as will the issue whether it might be considered negligent for a user to rely (or not to rely) on software aids.
Ordinary negligence applies in case of not-contractual liability when a software developer does not use the degree of care that a reasonably prudent person would have used when developing a software.
Negligence consists of four basic "elements:"
- the existence of a "duty of care"
- a breach of that duty;
- damages caused by the breach; and
- evidence that the injuries suffered by the plaintiffs were reasonably foreseeable .
In court cases where negligence is concerned, it is either proven that the developer of a product exercised his "duty of care" causing loss or damages in the manufacture and sale of said product. For example, a reasonably prudent driver does not drive with red lights; to do so is a breach of the duty of care. A consulting firm that uses flawed software to forecast market trends may be liable for negligently causing a client to spend millions developing a new product that has no market, if using that particular program is found to constitute a breach of the duty of care. If that breach results in damages (such as a collision), a claim for negligence exists. If it can be determined that there is something a software developer should have done, and would reasonably have been expected from him by all others involved in the use and distribution of the software, then he can be found guilty of negligence, and required to pay damages to the plaintiff. Negligence theories may be advanced against those who rely on software to discharge non-contractual or professional obligations. Nevertheless, it can be quite difficult to prove that software failed due to a breach of the duty of care because the mere fact that the software failed does not mean that its manufacturer breached the duty of care. This is the reason why an end uses typically limits its claims to the breach of contract.
Malpractice is a failure to employ the higher standard of care that a member of a profession should employ. It has not been determined whether malpractice can always be applied to computer cases. This is simply because it has not been unequivocally concluded if computer professionals are, in fact, professionals although computer professionals posses some of the appropriate characteristics. However, some computer professionals possess little autonomy, and there is no legally recognized professional organization. In some cases the courts have "declined to invent such a tort (i.e. wrong) on the basis that simply because an activity is more technically complex and important does not mean the greater potential liability must be attached". However, there are examples of cases in which a verdict was issued in favor of the plaintiff suing under "computer malpractice," when it was determined that a consulting firm did not "act reasonably in light of its superior knowledge and expertise in the area of computer systems". We see the beginning of a trend here: information and decisions regarding computer liability cases are confusing and often in conflict.
In addition to the traditional system of negligence based liability, systems of no-fault liability are emerging. Generally referred to under the heading ‘product liability’ these seek to impose liability upon the producer for certain forms of damage arising through its use unless the producer can establish that the damage was not caused by a defect in the product. The type of liability is called strict liability. Essentially, strict liability provides that a producer of a goods will be liable in the case of a defect to its product if the victim can prove damages and a causal relationship between the defect and the suffered damages. "Manufacturers and sellers of defective products are held strictly liable, (that is, liable without fault) in tort (that is, independent of duties imposed by contract) for physical harms to person or property caused by [a] defect" . The application of this system to software has been the cause of some controversy since it is not clear whether software, or information generated as a consequence of its operation, can be regarded as a product. This type of responsibility has been clearly stated in CEE Directive 85/374 where it is introduced the objective liability on the manufacturer for defects borne by its products irrespective of fault or malice. In fact, under certain situations, a party other than an end user could sue a software manufacturer for a defective program. These cases, however, are generally limited to situations involving personal injury and not merely economical losses. For example, if an air traffic control system fails due to a software defect, people injured in a collision could sue the software manufacturer for damages under a negligence theory. Strict liability is usually only applied in extreme cases, where a product defect is obvious. In general, strict liability cannot be applied carelessly, since holding some manufacturers liable in all cases will cause the consumer to behave ineffectively.
It is interesting to note that as example in the Aetna case in the U.S.A. if the courts are willing to apply strict liability for defective charts they may consider as well the same for defective software or for those that represent a complete reliance and regarded as mass produced with exclusion of all software products destined for professional use.
Since the problems with software are often not clear or entirely understood by members of the legal system, rarely is strict liability used in computer-related cases. One of the reasonable suggestions that have been made to the industry was to cease the publication of software incompatible with never operating systems and that fixing bugs should take priority over adding new features and better customer support, since that can often prevent the losses that would be associated with a liability case.
Fraud or misrepresentation. If the end user is a consumer and the software agreement is provided with limitation clauses that by jurisdiction would be in most instances enforceable he may choose to sue the software manufacturer for common law fraud or for violation of the anti-fraud provisions of certain consumer protection laws. Fraud actions, however, require evidence that the defendant made a false statement about a material fact, intending that the recipient rely on the statement and that the recipient did rely on the statement to his or her detriment. If the manufacturer knew that the program would not perform as described but misrepresented that fact to the end user, who acquired the software based on the statement, the manufacturer could be liable for resulting damages under a fraud or misrepresentation theory. A successful fraud claim, moreover, may subject the defendant to punitive damages. While difficult to prove, injured parties may resort to these cases when recovery for breach of contract is unlikely.
The use of computer systems has increased significantly during the last decade and hardware and software liability are not new issues in our society and law. We cannot avoid to purchase, develop, deploy or otherwise rely on software programs as they have become part of our modern life in the Information Age.
The application of existing laws to these products and services is still not completely clear and the process of enacting new adequate directives and regulations is still not yet finalized as in continue evolution following the rapid development of the computer itself. Moreover, the fact that different theories in doctrine and jurisprudence are not uniform by giving different prospects and solutions for their application is not helping the matter. Therefore, the interest of software’s consumers would be the awareness and assessment of the extension of legal liability in advance. The students and regular users of computer software programs should be trained with a minimum of software technical practices as well. On the other side, software providers can avoid most of legal actions brought against them if they would be willing to invest more time and investments in improving software quality or rely in legal protections. The solution would be in developing new high software standards making clear that quality is normal responsibility of the supplier of software products and services. Governments on their side should also provide assistance to their citizens by monitoring mass software products, providing warranty periods of consistent length, imposing licences to professionals, developing code of conduct and ethics, issuing proper liability law in order to protect the consumers and producers rights and introducing a proper behavior on the part of both the consumer and the producer. It is essential to identify the applicable laws, starting by distinguishing whether the software is purchased for business or personal use; as well its delivery mode, such as physical or online and finally if the software is classifiable as goods or services. The contract of sale drawn up in respect of a software package will define the legitimate rights and expectations of contracting parties in respect of a breach subject to various legal provisions at international and national level. However, while the different interpretations are given by the doctrine and the jurisprudence in the attempt to bring software within the confines of the general law, the enactment of a specific uniform legislation to protect mass software consumers, valid for all major economic countries areas, should be reached in the aim to solve this growing problem.
Court Strikes Down Shrink-Wrap License Agreement.
Non-Negotiable Terms and Conditions in the Sale or Transfer of Computer Software and Other Digital Work (Approved by the IEEE-USA Board of Directors, 12 Feb. 2003).