Information Technology Contracts

A Background to IT Contracts

Information technology contracts are subject to the same statutes and principles of common law as any other lawful contract.  There are, however, several unique features of information technology contracts which have compelled the courts to give such contracts special legal consideration.  This is largely due to the often intangible nature of the information technology world, with products and data frequently being nothing more than a series of binary instructions stored in digital form.  This peculiar characteristic requires delicate thinking as far as the law is concerned, but it is still the case that many issues remain unresolved or are ongoing, with both the courts and legislation striving to keep pace with rapid progression and the fine details of technological jargon.  A word such as ‘database’ might be one which many of us might think we could adequately explain, but in Vogon International Ltd v Serious Fraud Office [2004] a precise definition of what this word meant in the context of a specific contract was not only crucial to the outcome of the case, but also worth several tens of thousands of pounds.

As in other areas the law regarding information technology contracts has its own needs and desires.  The courts are playing an increasing role in determining the application of statutes such as the Sale of Goods Act 1979 and the Supply of Goods and Services Act 1982 to information technology contracts.  It is important, then, to consider where the law is most active.  There are three main spheres: software contracts, software acquisition, and hardware acquisition, though these are not unknown to overlap.   

Software contracts

The law takes the view that contracts for the acquisition of software are not sales of goods contracts.  This is important in determining what legislation is applicable.  Generally, contracts to acquire software do not transfer copyright or other intellectual property rights.  Additionally, computer programs cannot, in the legal sense, be goods.  Under s61(1) of the Sale of Goods Act 1979 goods include “…all personal chattels other than things in action and money…” and copyright is a thing in action.  Having said that, a parallel sale of goods contract might exist if the software is provided, for example, on an optical disc (as opposed to being downloaded).  The optical disc, as distinct from the software on it, would be subject to sale of goods law (being fit for purpose, and so on) and could be returned if, for example, it was badly scratched and consequently could not be read by an optical disc drive.  This ‘dual-contract’ approach seems to be the prevailing view as far as any tangible items delivered with the software are concerned.  An illustrative case is Ashley v Sutton London Borough Council [1994].  Though this case concerned mail-order books and not software the approach taken by the court is of great value when dealing with software contracts.  The court held that the appellant, Ashley, was, for the purposes of s14 of the Trade Descriptions Act, engaged in a contract for providing services, namely the service of providing gambling information in a book.  The book itself was merely a conduit used to impart the information (which the purchasers of the book put great value on and was ultimately what they wanted to receive), so the contract was not a sale of goods contract (a book being within the definition of goods).  In other words, the customers wanted the information, not the book.  This seems to be the most satisfactory approach as far as software contracts are concerned.  The customer ultimately wants the program, so its means of delivery are irrelevant.  St Albans City & District Council v International Computers Ltd [1997] affirmed that computer programs are not goods for the purposes of the Sale of Goods Act 1979 or the Supply of Goods and Services Act 1982.  Consequently, they must be services, subject to the relevant law, and so must, for example, be provided with reasonable skill and care.    

Software acquisition

Software is most usually acquired through a licence granted by the copyright holder to whoever is acquiring the software, often in return for a fee.  The licence is usually non-exclusive, allowing the copyright holder to grant as many licences to as many people as they choose.  The licence will usually contain terms on permitted use, liability for defects, governing law, and so on.  The law excludes copyright from the definition of goods, and a licence is not a sale of goods contract since there is no transfer of property.  This is somewhat unfortunate, as the Sale of Goods Act implies some very important terms into sales of goods contracts which in consumer sales cannot be excluded or modified.  Statutory implied terms do exist for service contracts, though, and if necessary, common law terms may also be implied.

Implied terms in the Supply of Goods and Services Act 1982

Although the Supply of Goods and Services Act 1982 does not define ‘service’, a contract for writing a computer program should fall within sections 12 to 16, which deal with the supply of services.  The Salvage Association v CAP Financial Services Ltd [1995] confirmed that a contract to develop new accounting software was a service contract.  This means that terms can be implied into contracts for writing computer software under the 1982 Act.  These include that the service, that is, the software, will be provided with reasonable care and skill (s13), within a reasonable time (s14), and for a reasonable price (s15).

Hardware acquisition

Computer hardware can be bought outright or hired.  Contracts for the sale of computer hardware are standard sales of goods contracts and are subject to the implied terms in the 1979 Act, which include that the goods must be of satisfactory quality.