Software: Goods or services?

Software: Goods or services?


Author: Michelle Sherwood

Software is an elusive product when it comes to determining whether supplying it should be classified legally as goods or as services.

The position under English law is not that clear and there is little case law to add clarity. This makes it difficult for suppliers to know what terms have been implied into the contracts for the supply of the software and accordingly what remedies may be available to the consumer if there is a problem with the software.

The issue was considered by the Court Appeal over a decade ago in the case of St Albans City and District Council v International Computers Limited. The Court determined that when the software is supplied together with the medium on which it is stored (for example a disk) then this falls within the definition of 'goods' under the Sale of Goods Act 1979.

It is the definition of 'goods' under the Sale of Goods Act 1979 as being 'all personal chattels other than things in action and money' that is still used in current legislation although this definition was established long before digital technology became a feature of day-to-day life.

This definition encompasses the traditional 'off the shelf' packaged software. It is clear that when a consumer enters a shop and physically buys a disk (or other format), that consumer has the benefit of the usual Sale of Goods Act 1979 implied terms - for example satisfactory quality - and is entitled to a variety of remedies if the products are not of satisfactory quality. These remedies include the right to request a repair or replacement or a refund of the purchase price.

However, the position is less clear when the software is purchased over the internet and downloaded directly to a consumer's computer. In this scenario no physical disk is sent to the consumer. The absence of a physical product has meant that similar transactions have tended to be classed as a supply of services. However, this classification is by no means certain.

Accordingly, such contracts are covered by the Supply of Goods and Services Act 1982, which implies a term that the services must be carried out with reasonable skill and care, a lower standard than that of satisfactory quality under the Sale of Goods Act 1979. Remedies available to consumers for breach of these terms are a claim for damages.

The legal treatment of software in this way may not fit comfortably with how both suppliers and consumers would imagine the supply of software to be classified. The European Commission is currently consulting on the future of consumer law across Europe. It remains to be seen whether this reform will result in the UK being forced to reconsider the concept of goods to include intangible products, such as software. We will keep you updated on this.

What is evident from the current status of the law is that there is no definitive answer on whether software is classified as a good or a service. This leaves both suppliers and consumers unclear as to what remedies will apply in the supply of it.

In order to remove this uncertainty, whether you are supplying or receiving software, you should seek to ensure that express provisions are made in the contract stating exactly what remedies are to be available in the event of a problem occurring.

Shoosmiths has advised clients on the supply of software to consumers, and is well placed to assist you in determining which law regulates the supply of your software and your obligations under those contracts.