Contractual Liability of Suppliers of Defective Software: A Comparison of the Law of the United Kingdom and United States

Northwestern Journal of International Law & Business, Dec 2005

The common law of contracts has its roots in medieval England. Traditional contract law, evolved from the age of feudalism, focused on "hard copy" documents and their authentication. Today, we frequently find ourselves entering into virtual, digital contracts. Instead of signing the written document with a seal, we merely type in our name on the computer screen and click on "I accept." Should contract law be changed to accommodate the digital nature of the modem contract and, if so, to what extent should it be changed? A traditionalist may contend that there is no need to completely overhaul contract law because the law pertaining to the basic elements of a contract-offer, acceptance, etc.-is still relevant. Nevertheless, most countries and international organizations have modified their contract law somewhat in order to adjust to the peculiar nuances of virtual, digital agreements.

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https://scholarlycommons.law.northwestern.edu/cgi/viewcontent.cgi?article=1617&context=njilb

Contractual Liability of Suppliers of Defective Software: A Comparison of the Law of the United Kingdom and United States

ContractualLiabilityof SuppliersofDefective Software Contractual Liability of Suppliers of Defective Software: A Comparison of the Law of the United Kingdom and United States Stephen E. Blythe 0 0 Thi s Article is brought to you for free and open access by Northwestern University School of Law Scholarly Commons. It has been accepted for inclusion in Northwestern Journal of International Law & Business by an authorized administrator of Northwestern University School of Law Scholarly Commons 1 th Floor , Pokfulam Road , Hong Kong 2 J. D., LL.M, Ph.D. candidate in Law , The University of Hong Kong, Faculty of Law, K.K. Leung Building - law, and the law in general, is never static. Rather, it is always dynamic, responding and adapting to new inventions and occurrences. Software consists of computer programs which, when written and used properly, will enable the user to accomplish a specific objective. A contract to purchase software is inherently different from contracts to purchase most other items because it is debatable as to whether software is a "good" or a "service." The purchaser of software is often unable to determine whether a defect exists until the software is used; the defect is not easily recognizable or easily ascertained. Software must often be custom-ordered to fit the specifications and objectives of the purchaser; the supplier of the software often does not have an intimate knowledge of what the purchaser really wants to accomplish. Furthermore, the divergence of knowledge between the supplier and the purchaser is often great; the supplier is hired as an expert and is entrusted by the purchaser to provide a set of programs which will hopefully enable the purchaser to realize specific objectives. Indeed, more than in most purchases, the purchaser is at the mercy of the software supplier's ability, expertise, and integrity. Moreover, software is seldom perfect. Defective software frustrates the purchaser's objectives and may cause the purchaser to incur monetary damages. Business purchasers, government entities, and even private individuals may pursue litigation because of defective software. In the past decade, more and more suppliers of defective software have been sued for damages caused by defects in the software. The United States and the United Kingdom have experienced a significant amount of litigation pertaining to suppliers' liability for defective software. Furthermore, the two nations account for a significant amount of the world's production of software. A comparison of the drawbacks and the benefits of the laws of the two nations for contractual liability for defective software will illustrate how the laws in both nations might be improved. This article compares U.K. and U.S. law pertaining to the following aspects of contractual liability for defective software: (1) reasonableness/unconscionability; (2) express warranties; (3) implied warranties; (4) limitation of remedies; and (5) standard form contracts (including shrink-wrap licenses). Using the results from the comparisons, this article draws conclusions and makes recommendations for changes to the laws of both countries. II. OVERARCHING CONSIDERATIONS Among the aspects of contractual liability to be discussed, the distinction between the reasonableness test in the U.K. and the unconscionability doctrine in the U.S. provides the backdrop for many of the differences in the two nations' laws. It is more common for a U.K. court to find a situation unreasonable than it is for a U.S. court to find a situation unconscionable. It takes a more extreme situation to trigger the ContractualLiability ofSuppliersof Defective Software 26:77 (2005) unconscionability doctrine than it does to trigger the reasonableness test. A. United Kingdom: The Reasonableness Test In the United Kingdom, an unreasonable contract will not be enforced.2 The Unfair Contract Terms Act of 1977 ("1977 Act") requires the court to consider the following factors in making a determination of reasonableness: whether the goods were purchased in a special order by the customer; the relative amount of bargaining power between the parties; the degree of the customer's understanding of the terms contained in the standard form contract and whether he should have understood them; whether the customer received an inducement to agree to the terms of the contract; and, if the contract limits liability if a specific condition is not complied with, whether it was reasonable at the time of the agreement to expect that compliance with that condition would be practicable. B. United States: The Unconscionability Doctrine In the United States, an unconscionable contract will not be enforced.4 The test of unconscionability is whether the contract is so one-sided as to be unconscionable under the circumstances existing at the time the contract was entered into. The doctrine seeks to prevent one party from using oppression and unfair surprise against the other.6 The doctrine does not seek to alter the parties' relative allocation of risks created by one party's superior bargaining power; 7 this is one of the significant differences between the U.K. and U.S. positions. Accordingly, weak negotiating parties in the United Kingdom are better off than their U.S. counterparts. The Uniform Computer Information Transactions Act ("UCITA") is a model statute written in an attempt to achieve greater consistency in the laws of the fifty states of the United States.8 U.K. law does not have a comparable "computer-specific" statute. 9 UCITA is applicable to "standard software licenses, contracts for the custom development of computer 2 Unfair Contract Terms Act, 1977, c. 50, §§ 2(2)-(3) (Eng.). 3Id. § 112; Photo Production Ltd. v. Securicor Transport Ltd., [1980] A.C. 827, 843 (appeal taken from Eng. C.A.). 4 U.C.C. § 2-302(1) (2003). 5Id. 6Id. 7 Id; RESTATEMENT (SECOND) OF CONTRACTS § 211 (1979). 8 NAT'L CONFERENCE OF COMM'RS ON UNIF. STATE LAWS, UNIFORM COMPUTER INFORMATION TRANSACTIONS ACT (Proposed Official Draft 1999), available at http://www.law.upenn.edu/bl1/ulc/ucita/citaam99.pdf [hereinafter UCITA]. 9University of Strathclyde School of Law, Glasgow, Scotland (U.K.), Course: Liability in the Information Society, Notes for Theme Two (Software Contracts and Quality), page 23. programs, licenses to access online databases, website user agreements, and agreements for most Internet-based information."' 0 UCITA section 803(d) states that a disclaimer of consequential damages for personal injury in a consumer contract for software is prima facie unconscionable; this provision does not apply, however, to non-consumer contracts." III. EXPRESS WARRANTIES In both countries, if the seller promises to provide a specific resulteither in terms of performance of the software, or its suitability to the customer-the existence of an express warranty will be recognized. "2 promise may have been made within the agreement itself or outside of Tith.'e3 An important consideration is whether it was reasonable for the buyer of the software to rely on the statements of the supplier.14 If it is determined that a cwoanrtrraanctty choanstabienesnaqnueaxlipfrieesds owr adrirsacnlatyi m,tehde. 1n5ext consideration is whether the A. United Kingdom 1. CategoriesofPromises:Result vs. Process The case law often distinguishes result-oriented promises and processoriented promises. 16 The former pertains to warranties concerning the achievement of positive outcomes for the buyer of the software. 17 The latter pertains to warranties related to how the work is to be done, e.g., the degree of expertise of the personnel assigned to carry out the installation of the 18 software. a. Result-Oriented Promises A classic example of a case with explicit, result-oriented warranties is St. Albans City v. InternationalComputers, Ltd.19 The city, as the plaintiff, 10Sandy T. Wu, Comment, Uniform Computer Information TransactionsAct: Failedto Appease Its Opponents in Light of the Newly Adopted Amendments, 33 Sw. U. L. REv. 307, 308 (2004). '1UCITA., supranote 8, § 803(d). 12Jeffrey C. Selman, et al., Steering the Titanic Clear of the Iceberg: Saving the Sale of Softwarefrom the Perilsof Warranties,31 U.S.F. L. REv. 531, 542 (1997). 13Noriko Kawawa, ContractualLiabilityfor Defects in Information in ElectronicForm, 8 U. BALT. INTELL. PROP. L.J. 69, 124 (1999). 14Unfair Contract Terms Act, 1977, c. 50, §§ 112 (Eng.). 15 Id. 16Kawawa, supranote 13, at 125. 17 Id. 18 id. 19St. Albans City & District Council v. Int'l Computers Ltd., [1996] 4 All E.R. 481 (Eng. entered into an agreement with defendant software supplier.20 The software was required to be capable of maintaining a reliable database of the names of the city's taxpayers, i.e., it had to be reasonably fit for its intended purpose. 2 However, the defective software underestimated the number of taxpayers in the community, causing the city to charge each taxpayer less than it should have, resulting in a loss of tax revenues to the city coffers.22 Since the computer program was not fit for its intended purpose, the software provider was held liable for the amount of the lost revenue.23 b. Process-Oriented Promises Salvage Association v. Cap FinancialService Ltd. recognized that a supplier's promise to use specially-trained personnel must be kept.24 Cap Financial Service had expressly warranted that each person assigned to the project would exercise skills appropriate to that of a competent person. 25 Cap failed to assign sufficiently competent personnel to the project and breached its contract when it failed to deliver a proper computer system and thus, Salvage Association was entitled to termination of the contracts.26 2. DisclaimerClauses Disclaimer clauses are often added to contracts by negotiating parties in an attempt to avoid or limit obligations. Express warranties are difficult to disclaim, ho w28ever, if they pertain to the fitness of the software for its intended purpose. a. Statutory Controls Several U.K. statutes limit the effect of disclaimer clauses in software contracts; 29 U.S. law has relatively less statutory control over disclaimer clauses. The 1977 Act requires that, where a party is a consumer or relies on the other's written standard terms of business, the contract must satisfy the requirement of reasonableness if it attempts to limit liability for breach C.A.). 20 Id. at 686. 21 Id. at 691. 22 Id. at 686. 23 Id. at 704. 24 Salvage Association v. Cap Financial Service Ltd., [1995] F.S.R. 654. 25 Id. at 654. 26 Id. at 656. 27 Daniel T. Perlman, Comment, Who Pays the Priceof ComputerSoftware Failure?,24 RUTGERS COMPUTER& TECH. L.J. 383, 393 (1998). 28 Id. at 389. 29 E.g., Unfair Contract Terms Act, 1977, c. 50, §§ 112 (Eng.). Northwestern Journal of International Law &Business of contract. 30 The purpose of an integration clause is to invalidate any representations made outside of the written contract. 3' In Mackenzie Patten & Co. v. British Olivetti Ltd., an integration clause excluded all other liabilities, obligations, warranties, and conditions. 32 Applying the reasonableness test, the court held that it was not reasonable to allow the supplier to exclude liability for breach of contract.33 The reasonableness test trumped the supplier's attempted disclaimer using an integration clause.34 B. United States American law does not require express warranties to be contained within the "four comers" of the contract; they may be oral.35 Express warranties may be created by any affirmation of fact, a promise, or a description of goods which becomes part of the bargain; this may include affirmations made in brochures or in demonstrations. 1. Case Law RecognizingExpress Warranties In USM v. Arthur D. Little Systems, Inc., the supplier of a computer system made an express warranty that the system would have no design defects and would have acceptable response time.37 The actual response time, however, was substantially greater than the time promised by the supplier and the express warranty was held to have been breached.3 8 2. DisclaimerofExpress Warranties a. Relevant Statutes It is an "uphill battle" to disclaim an express warranty because it is 30 id. 31Perlman, supranote 27. 32Mackenzie Patten & Co. v. British Olivetti Ltd., (Q.B. 11 Jan. 1984) unreported, 1 C.L.&P. 92 (1984); 48 M.L.R. 344 (1985). 33 Id. 34 Id. 31 U.C.C. § 2-313 (2003). See generally Joel R. Wolfson, Express Warranties and PublishedInformation Content Under Article 2B: Does the Shoe Fit?, 16 J. MARSHALL J. COMPUTER & INFO. L. 337 (1997). 36 U.C.C. § 2-313. 37 USM v. Arthur D. Little Systems, Inc., 546 N.E.2d 888, 890 (Mass. App. Ct. 1989). 38 Id. at 895. ordinarily considered to incorporate the "essence of the bargain., 39 Section 2-316 of the Uniform Commercial Code ("UCC") states that "words or conduct relevant to the creation of an express warranty and words or conduct tending to negate or limit warr4a0nty shall be construed whenever reasonable as consistent with each other. b. Inconsistency Inconsistency between the express warranty and the disclaimer clause often leads courts to rule against the applicability of the disclaimer. 4I In ConsolidatedData Terminals v. Applied Digital Data Systems, Inc.,42 the court held that very specific language contained in an express warranty prevailed over a general disclaimer of warranty liability.43 The computer equipment manufacturer made an express warranty in its brochure that the computer terminals would operate at high speed and were reliable.44 The court held that the express warranty was breached because the terminals were not high-speed and were unreliable. The disclaimer clause had stated: "cTovheerrien gis mnoatweraiarrlsanatnyd, ewxoprrkemssaonrshimipp.l'ie5d, other than a ninety-day guarantee c. Integration Clauses U.S. courts sometimes find that a written contract was not meant to be a complete statement of the terms of the agreement. In these cases, the written contract may be supplemented by the parties' course of dealing, usage of trade, course of performance, or evidence of consistent additional terms.46 Some courts have stated that a written disclaimer clause combined with a written integration clause may be enough to override the existence of an express warranty not based on the writing within the contract.47 Before considering anything outside the written contract, the threshold question is whether the parties intended the writing to be the complete statement of their agreement.4 8 All of the documents must be considered by " U.C.C. § 2-316. 40 Id. 41Kawawa, supra note 13, at 133. 42 Consolidated Data Terminals v. Applied Digital Data Systems, Inc., 708 F.2d 385 (9th Cir. 1983). 43Id. at 398. 4 Id.at 388. 41Id. at 396. 46 U.C.C. § 2-202 (2003). 47E.g., Jaskey Fin. & Leasing v. Display Data Corp., 564 F. Supp. 160, 163 (E.D. Pa. 1983). 48 E.g., L.S. Heath & Son, Inc. v. A.T. & T. Info. Sys., Inc., 9 F.3d 561 (7th Cir. 1993). the court. 49 In SierraDieselInjection Service v. Burroughs Corp., the court determined the validity of the integration clause.5 The Burroughs Corporation ("Burroughs") sent a letter to Sierra Diesel Injection Service ("Sierra") containing an express warranty regarding computer performance. 5' Sierra was not knowledgeable about computers and relied upon Burroughs' representations.5 2 The sales contract was on a pre-printed form prepared by the seller and presented to the buyer without negotiations. 3 The contract contained an integration clause but the court ruled it was invalid because it was overridden by the express warranty in the letter. 4 d. Parole Evidence Rule The parole evidence rule may prevent the admission of any of the supplier's representations made in a prior agreement or in a contemporaneous oral agreement." In Jaskey Finance & Leasing v. Display Data Corp., the defendant sold a computer to the plaintiff.56 The seller had orally represented in advertisements that the computer and software would only require routine maintenance and was suitable for plaintiffs type of business.57 The written sales contract, however, did not make these representations. At trial, the court ruled that the oral evidence was inadmissible, holding that admitting the evidence would violate the parole evidence rule.5 9 3. UCITA's Treatment ofExpress Warranties UCITA allows a licensor to create an express warranty to a licensee with an affirmation or a promise which may be part of an advertisement.60 Samples, models, or demonstrations may also become the basis of express warranties. 6' Language pertaining to an express warranty and language attempting to disclaim an express warranty must be construed, whenever '9 Id. at 164. 50 Sierra Diesel Injection Service v. Burroughs Corp., 656 F. Supp. 426 (D. Nev. 1987), aff'd, 874 F.2d 653 (9th Cir. 1989), amended by 890 F.2d 108 (9th Cir. 1989). 51Sierra, 890 F.2d at 110. 52 Id. at Ill. 51 Id. at 112. 54 Id. 55 Kawawa, supra note 13, at 136. 56Jaskey, 564 F. Supp. at 161. 7 Id.at 163. 18 Id. at 162. " Id. at 164 60 UCITA, supra note 8, § 402. 61Id. § 402(a)(3). reasonable, as consistent with each other.62 IV. IMPLIED WARRANTIES Warranties may be express or implied. Express warranties, as discussed above, are relatively more straightforward and explicit. On the other hand, implied warranties are relatively more subtle and less straightforward. The natural result is that implied warranties are more likely to lead to confusion, misunderstanding, and potential litigation between the parties. 1. Reasonable Care & Skill Required Section 13 of the Supply of Goods and Services Act of 1982 ("1982 Act") provides that a business supplying a service must do so "with reasonable care and skill. ''63 This is an implied warranty, but it is subject to a reasonableness test. In Salvage Association, the court found that the supplier had the obligation to carry out its service with reasonable care and skill.64 2. Software Quality Must Be "Satisfactory" In 1994, the Sales of Goods Act of 1979 and the 1982 Act amended to require the quality of software provided to be "satisfactoryw.e,r6e5 The following factors should be taken into account when determining the quality of goods: fitness for purposes for which the goods are commonly supplied, appearance and finish, freedom from minor defects, safety, and durability.6 3. FitnessForIntendedPurpose In St. Albans City, the court held that, in the contract, there was an implied term that a software program would be reasonably fit for its intended purpose because the supplier knew of the necessity of the program to achieve a specific function. ° In Saphena Computing Ltd. v. Allied 62 Id. § 406(a). 63 Supply of Goods and Services Act, 1982, c. 29, § 13 (1994) (Eng.). ' Salvage, [1995] F.S.R. at 655. 65 Sale of Goods Act, 1979, c. 54, § 14(2) (1994) (Eng.); Supply of Goods and Services Act, 1982, c. 29, § 4(2) (1994) (Eng.). 66 Sale of Goods Act, 1979, c. 54, § 14(2)(b) (1994) (Eng.). 67 St. Albans City, [1996] 4 All E.R. at 691. Collection Agencies Ltd.,68 the court held that the contracts contained a term of implied fitness for the intended puTose because the buyer had communicated the purpose to the seller. 9 However, the court also recognized that it is not a breach of warranty per se to deliver software with defects; rather, a reasonable period of time must be given to cure the defects.7 ° 4. DisclaimerofImplied Warranties Compared to the United States, the reasonableness test makes it more difficult to exclude implied warranties in the United Kingdom.7 ' In a sale to a consumer, the implied conformity of goods with a description or sample, or to their quality of fitness for a purpose, cannot be overridden by reference to a disclaimer. 72 In a sale to a non-consumer, any attempt to override the same implied warranties is subject to the reasonableness test.73 The Sale of Goods Act of 1979 states that an implied obligation can be "negatived or varied by express agreement. ' '74 It also states that "wanithexpirt.e"s7s5 term does not negative an implied term unless inconsistent Likewise, the Supply of Goods and Services Act of 1982 allows an implied term to be overridden or changed by express agreement.7 6 b. Inconsistency In Salvage Association, the court ruled that the seller had successfully disclaimed implied terms of merchantability and fitness for purpose, but not the implied term pertaining to reasonable care and skill.7 7 The court found contract to carry out the service with reasonawbliethcatrheeanexdpsrkeislsl. 7t8erms in the that the latter term was not inconsistent 68Saphena Computing Ltd. v. Allied Collection Agencies Ltd., [1995] F.S.R. 616 (Eng. 1. Implied Warranty ofMerchantability If a seller is a merchant in goods of a particular kind, there is a mandatory implied warranty of merchantability. 79 The UCC establishes standards for determining whether goods are merchantable; for example, if the goods will: 1) pass without objection in the trade; 2) be fit for ordinary purposes; 3) be of a certain kind, quality and quantity per unit; 4) be adequately packaged and labeled; 5) be in conformity with the label's specifications; and 6) as fungible goods, be of fair average quality.8 ° In Neilson Business Equipment Center v. Monteleone,81 the court found an implied warranty that the computer system be "merchantable" and held that the warranty was breached because the computer system was not fit for the ordinary purpose for which it was intended. 2. Implied WarrantyofFitnessfor a ParticularPurpose This warranty attaches at the time of sale if the seller has reason to know of any particular purpose intended for the goods and the buyer relies on the seller's expertise to provide suitable goods.83 In Neilson Business, the court found such a warranty because the buyer depended on the seller to provide a suitable computer.84 This case is comparable to the U.K. cases of St. Albans City85 and Saphena Computing8.6 3. Exclusion ofImplied Warranties warraCntoimespabreecdautsoeUth. Ker.elaiswn,oitreisaseoansiaebrlefnoersas Ute.Sst..8s7eller to disclaim implied a. Relevant Statutes In order to exclude the implied warranty of merchantability, the UCC mandates that the word "merchantability" must be mentioned, and, if in writing, it must be conspicuous, so that an oral exclusion will be allowed.88 Exclusion of an implied warranty of fitness for a particular purpose must be in writing and it must be conspicuous. 89 The Jaskey court found the following clause sufficient to exclude all implied warranties of fitness: "There are no warranties which extend beyond the description on the face hereof."90 4. Treatment of Implied WarrantiesUnder the UCITA UCITA provides that a licensor merchant of a particular kind of software supply a product which is "fit for the ordinary purposes for which such computer programs are used." 91 The software is not required to be completely free of defects, but it must meet average standards for programs having a particular type of use.92 UCITA also recognizes an implied warranty of fitness for a particular purpose.93 The requirements for disclaiming warranties are comparable to those of the UCC and facilitate easy disclaimer.9 4 V. LIMITATION OF REMEDIES There are four methods of limiting remedies: 1) limitation of the situations in which a seller's obligation will be incurred; 2) limitation of the cures to which the buyer is entitled; 3) limitation of the types of damage for which compensation is payable; and 4) limitation of the total amount payable upon breach. 95 A. United Kingdom In the United Kingdom, if suppliers attempt to limit damages to a fixed maximum, the court will determine whether that amount is reasonable. 96 In evaluating the validity of monetary damages, U.K. courts take various factors into account, such as insurance coverage of the parties 97 and relative degree of bargaining power. 98 Ordinarily, courts award damages based on 88U.C.C. § 2-316. 89Id. 90Jaskey, 564 F. Supp. at 162. 91UCITA, supranote 8, § 403. 92 id. 9' Id. § 405. 94 Id. § 406. 95 Kawawa, supranote 13, at 154. 96 Unfair Contract Terms Act, 1977, c. 50, §1 12 (Eng.). 97 St. Albans City, [1996] 4 All E.R. at 687-88. 98Id. what was foreseeable when the contract was created. 99 In Salvage Association , the contract restricted the cure, the damage for which compensation was payable, and the total amount payable upon breach. 10 0 The court held that the limitation of damages to £25,000 was unacceptable under the reasonableness test.' 0' In the United Kingdom, lost profits are not considered a part of consequential damages, but rather they are treated as a loss flowing directly and naturally from a brea10c3h. 10 2 This differs from U.S. law, which treats lost profits as consequential. B. United States U.S. suppliers can limit remedies more easily because they need not contend with the reasonableness test. 10 4 American courts tend to accept the amount of liquidated damages agreed to by the parties. 10 5 A plaintiff may pursue all available remedies whenever circumstances cause an exclusive remedy to fail in its essential purpose. 0 6 Contractual limitations on consequential damages are acceptable, unless the limitation is unconscionable. 10 7 UCITA their respective UCC provisiosnesc.t1i0o8ns 803(b) and 803(d) are comparable to In Fargo Machine & Tool Co. v. Kearney & Trecker Corp.,'0 9 the contract limited the buyer's remedy to either repair or replacement of defective parts and excluded consequential damages. The court held that the remedy was invalid because it failed in its essential purpose since the repairs would not cure all defects. The court awarded the buyer damages. 10 99 Hadley v. Baxendale, 9 Ex. 341 (1854). 10 Salvage, [1995] F.S.R. at 657. 101Id. 102 Kawawa, supra note 13, at 158; British Sugar Plc. v. NEI Power Projects Ltd., 14 Const. L.J. 365 (Eng. C.A. 1998). 103 Kawawa, supra note 13, at 158 (treating lost profits as consequential makes them relatively more difficult to win in the U.S.); see, e.g., Consol. Data Terminals v. Applied Digital Data Sys., 708 F.2d 385 (9th Cir. 1983). 104 Unfair Contract Terms Act, 1977, c. 50, §112 (Eng.). 105 See, e.g., Colonial Life Ins. Co. v. Elec. Data Sys. Corp., 817 F. Supp. 235 (D.N.H. 1993). 106 U.C.C. § 2-719(2) (2003). 107 Id. § 2-719(3). 10 Id. § 2-719(2)-(3). 109 Fargo Machine & Tool Co. v. Kearney & Trecker Corp., 428 F. Supp. 364 (E.D. Mich. 1977). 110 Id. VI. STANDARD FORM CONTRACTS Both countries have statutes designed to offer protection for contracting parties who are offered a standard form contract on a "take it or leave it" basis.111 Such situations are often characterized by unequal bargaining power between the parties. 12 Both nations resolve any ambiguity in the contract against the party who wrote it.113 This rule is especially important for standard form contracts. 14 1. Unfair ContractTerms Act of 1977 The 1977 Act protects both consumers and any business that is not computer-related." 5 The seller's implied warranties pertaining to conformity of goods, or to their quality of fitness for a particular purpose, cannot be disclaimed in a standard form contract. 16 The reasonableness requirement applies to every situation involving a standard form contract, even if both parties are business firms.17 This act implemented the Council Directive on Unfair Terms in Consumer Contracts."' Unlike the 1977 Act, the 1999 Regulations only apply to consumers, not to firms making business purchases." 9 Standard form contracts are "unfair" if they are not written in good faith, but instead "cause a significant imbalance in the parties' rights and obligations arising under the contract, to the detriment of the consumer.' 20 B. United States Unlike the 1977 Act, the UCC and the Magnuson-Moss Act' 2' allow implied warranties to be disclaimed in consumer transactions in some situations. However, the Magnuson-Moss Act restricts disclaimers in contracts for the purchase of "consumer products," defined as "any tangible personal property that is distributed in commerce'22and which is normally used for personal, family, or household purposes."' VII. A SPECIAL TYPE OF STANDARD FORM CONTRACT: THE SHRINK-WRAP LICENSE The shrink-wrap license is a standard form contract that may be delivered with software. Its purpose is to protect the intellectual property rights of the owner of the software. 123 Typically, the agreement is on the outside of the software's package, and its purpose is to achieve implied acceptance of the agreement if the package is opened. 124 The license terms may limit liability, use, the warranty, or designate the law which governs the contract. 125 Since it is a standard form contract offered on a "take it or leave it" basis, it is debatable whether the person opening the package has entered into a contract. 126 In both the United Kingdom and the United States, all terms in a shrink-wrap license are enforceable if the terms are clearly re2a7dable, and the person accepted them before buying the software.1 A. United Kingdom Warranty disclaimers in shrink-wrap licenses are subject to the statutory control of the 1977 Act. 128 The terms of the agreement must pass the reasonableness test. 129 license after the date of its creAantiyonatwteimllpotrdtoinalraitleyr fcahila.n'3ge the terms of the B. United States Case law exists to support the notion that opening a shrink-wrap package is usually considered to imply acceptance of the license 122 Id. § 2301(1). 123 Batya Goodman, Note, Honey, I Shrink-Wrapped the Consumer: The Shrink-Wrap as an Adhesion Contract,21 CARDOzO L. REv. 319, 320 (1999). 124 Id. 125 David L. Hayes, ShrinkwrapLicense Agreements: New Light on a Vexing Problem, 9 No. 9 COMPUTER LAW. 1, 2 (1992). 126 Garry L. Founds, Note, Shrinkwrap and Clickwrap Agreements: 2B or Not 2B?, 52 FED. COMM. L.J. 99, 101 (1999). 127 Clive Gringas, The Validity of Shrink-Wrap Licenses, 4 INT'L J.L. & INFO. TECH. 77 (1996). 128 Kawawa, supra note 13, at 172 (citing Unfair Contract Terms Act, 1977, c. 50, §§ 3, 6(2) (Eng.)). 129 Id. (citing Thorton v. Shoe Lane Parking Ltd., [1971] 2 Q.B. 163, 169). 130 Id. agreement.13' Pursuant to the UCC, a purchaser must agree to any proposed changes to an existing contract.132 UCITA differs from the UCC on this point, however. UCITA allows new, modified terms proposed after the commencement of performance to become enforceable, if the party had reason to know at the time of purchase that such new terms might be proposed and later assents to them. 133 In the case of massm-moraerksettrinligceennts.e1s3,4 however, the requirements imposed for later changes are A number of commentators have severely criticized UCITA for allowing later mo3d6ifications to the agreement. 11 Only a few have defended UCITA. 1 The two nations take different approaches in statutory control of contractual terms. U.K. law has the more potent reasonableness test; U.S. law has the less stringent unconscionability doctrine. U.K. courts offer more automatic statutory protection when the buyer has significantly less bargaining power than the supplier. By contrast, U.S. law does not accept disparity in bargaining power as a default and does not attempt to protect a weak party. U.S. law is more seller-oriented and focuses on whether the buyer had sufficient sophistication to understand the terms of the contract and to evaluate the quality of the software. If the buyer had an understanding of the terms of the agreement and the degree of the software's quality, the buyer will be held accountable for the bargain entered into, regardless of the lack of bargaining power the buyer had when entering into the purchase agreement. Suppliers often make express warranties regarding the suitability of the software for the buyer's needs. Under U.K. law, any terms in the contract that seek to disclaim express warranties are subject to the reasonableness 131ProCD, Inc. v. Zeidenberg, 86 F.3d 1447 (7th Cir. 1996); see also Joseph C. Wang, ContractualLiability ofSuppliers of Defective Software 26:77 (2005) test, making it more difficult to disclaim an express warranty. Moreover, an express warranty of fitness for the buyer's intended purpose is especially difficult to disclaim. In the United States, express warranties are also difficult to disclaim, since the express warranty and the disclaimer must be construed as being consistent with each other. However, U.S. law does not subject disclaimers to a reasonableness test and is therefore more selleroriented. Both countries have statutes that create implied warranties for the quality of the software and its fitness for the buyer's purpose. The actual impact of implied warranties, however, depends upon whether the law allows them to be disclaimed by agreement of the parties. U.K. law offers more protection for the buyer of the software because the reasonableness test applies to any attempt by the supplier to disclaim implied warranties. On the other hand, U.S. law under both the UCC and UCITA ordinarily permits easy disclaimer of implied warranties, so long as the specific language and format requirements are met. The two countries also differ in terms of limitation of remedies. In the United Kingdom, the reasonableness test is used to assess the appropriateness of the limitation. If monetary damages are to be restricted, a relevant factor is whether the user of the software could have obtained insurance coverage. In some cases, limitation of damages to the amount of the contract price has been considered reasonable. In the United States, liquidated damages clauses are generally held to be valid if the language and conspicuousness requirements are met. However, courts may rule that the limitation of remedies is invalid if the remedy fails in its essential purpose or is unconscionable. The United Kingdom is relatively less tolerant of standard form contracts and has more statutory control of contractual terms. By comparison, the United States is more accepting of standard form contracts, provided that the buyer had an opportunity to attain an understanding of the agreement and that the contract terms were conspicuous and noticeable. Similarly, U.K. shrink-wrap license law provides more protections for the buyer of the software by making it more difficult for suppliers to disclaim express or implied warranties, or limit remedies. By comparison, UCITA allows a shrink-wrap license to be modified by the supplier during the middle of the contract period. IX. RECOMMENDATIONS A. United States: Needs More Consumer Protections The United States can learn from the United Kingdom's greater protections for consumer rights. As a long-time supporter of consumer empowerment, this author finds that U.S. law is deficient in its consumer protections. Shrink-wrap agreements are too one-sided in favor of the supplier. 137 For example, to protect buyers, UCITA could be amended by adding a clause comparable to one found in the U.S. Restatement (Second) of Contracts, which provides that: "Where the other party has reason to believe that the party manifesting such assent would not do so if he knew that the writing contained a particular term, the term is not part of the agreement."' 138 This would provide additional protection for the buyer who hurriedly purchases software online lengthy agreement containing legalese. w139ithout bothering to read an often B. United Kingdom: Should Consider a UCITA-style Statute Perhaps the United Kingdom should consider adopting a computerspecific statute comparable to UCITA, but modified to incorporate more consumer rights and protections. UCITA is flawed in its present form, but it is a work-in-progress that is still being amended. Over time, more U.S. states are expected to embrace it. We have entered the digital millennium; contract law needs to be modified to accommodate the unique aspects of electronic contracting and the sale and lease of software. Adoption of a UCITA-style statute would be a good first step for the United Kingdom to update its laws to the contract law challenges of the digital millennium. 137 One commentator has described shrink-wrap agreements grounded in state contract law as "unconscionable" and has called for their preemption by federal copyright law. See Nathan Smith, Comment, The ShrinkwrapSnafu: Untanglingthe "ExtraElement" in Breach of Contract Claims Based on Shrinkwrap Licenses, 2003 B.Y.U.L. REv. 1373, 1406-07, 1410-18 (2003) (arguing that copyright law would better preserve the rights ofboth software sellers and purchasers, affording copyright protections for the sellers and the related rights of fair use for the purchasers). 138 RESTATEMENT (SECOND) OF CONTRACTS § 211(3) (1979). 139This portion of the Restatement was used by Nathan Smith as one argument for the federal preemption of shrink-wrap agreements by copyright law. Citing Section 211(3), Smith states that "[i]t is reasonable to believe that prospective licensees would not enter into shrink-wrap agreements if they understood that entering into such constituted a waiver of their federal rights." Smith, supra note 137, at 1405; but see Founds, supra note 126, at 107 (opining that shrink-wrap agreements are enforceable under contract law, notwithstanding the impact of Section 211(3) and adhesive qualities, after considering the entirety of Section 211 because "contracts of adhesion usually are enforced as an implied agreement between the parties.") 79 U.C.C. § 2- 314 ( 2003 ). See generally Robert W. Gomulkiewicz, The Implied Warranty of Merchantability in Software Contracts:A Warranty No One Dares to Give and How to Change That, 16 J. MARSHALL J. COMPUTER & INFO L. 393 ( 1997 ). 80 Id. 81Neilson Business Equipment Center v . Monteleone, 524 A.2d 1172 (Del . 1987 ). 82 Id. 83 U.C.C. § 2- 3 15. 84 Neilson, 524 A.2d at 1173. 85 St. Albans City , [ 1996 ] 4 All E .R. at 691. 86 Saphena, [1995] F.S.R. at 643. 87 Unfair Contract Terms Act , 1977 , c. 50 , § 6 ( 3 ) (Eng.). 2. Unfair Terms in Consumer ContractsRegulations of 1999 Note, ProCD,Inc. v. Zeidenberg and Article 2B: Finally, the Validation of Shrink-Wrap Licenses , 16 J. MARSHALL J. COMPUTER & INFO. L. 439 ( 1997 ). 132 U.C.C. § 2- 209 ( 2 ) ( 2003 ). 133 UCITA, supranote 8 , § 208 ( 2 ). 114 Id. § 209 ( a) & cmt . 2a ( 2001 ) (if the licenses are for a "mass-market," the licensee must be told the potential terms, to be modified no later than the initial use of the information, and the licensee is given a right of refund if he/she refuses to accept). 13 E.g., Roger C . Bern, "Terms Later" Contracting:Bad Economics, Bad Morals, anda Bad Idea for a Uniform Law , Judge Easterbrook Notwithstanding, 12 J.L. & POL'Y 641 ( 2004 ) ; Jean Braucher, Amended Article 2 and the Decision to Trust the Courts: The Case Against Enforcing Mass-Market Terms , Especiallyfor Software, 2004 WiS. L. REV. 753 ( 2004 ); Ajay Ayyappan, Note, UCITA: Uniformity at the Priceof Fairness?,69 FORDHAM L. REV. 2471 ( 2001 ). 13 E.g., Erika E. Schinler , Comment, Trouble at the Sausage Factory:Has the Uniform Computer Information TransactionsAct Been Unjustly Stigmatized?, 75 TUL. L. REv. 507 ( 2000 ).


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Stephen E. Blythe. Contractual Liability of Suppliers of Defective Software: A Comparison of the Law of the United Kingdom and United States, Northwestern Journal of International Law & Business, 2005,