Toby Constructions Products Pty Ltd v. Computa Bar (Sales) Pty Ltd

[1983] 2 NSWLR 48

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(Judgment by: Rogers J) Court:

Judge:
Rogers J

Subject References:
Sale of goods
What are goods
Whether "package" of computer software and hardware included
Trade and commerce
Statutes relating to
Trade Practices Act

Legislative References:
Sale of Goods Act 1923 - s 5
Trade Practices Act 1974 - s 4

Case References:
Brooks Robinson Pty Ltd v Rothfield - [1951] VLR 405
Burroughs Business Machines Ltd v Feed-Rite Mills (1962) Ltd - (1973) 42 DLR (3d) 303; (1976) 64 DLR (3d) 767
Chatlos Systems Inc v National Cash Register Corp - 479 F Supp 738
Clements Auto Co v The Service Bureau Corp - 444 F 2d 169
Computer Servicenters Inc v Beacon Manufacturing Co - 328 F Supp 653; 443 F 2d 906
North American Leisure Corp v A & B Duplicators Ltd - 468 F 2d 695
Public Utilities Commission for City of Waterloo v Burroughs Business Machines Ltd - (1973) 34 DLR (3d) 320
Public Utilities Commission of City of Waterloo v Burroughs Business Machines Ltd - (1974) 6 OR (2d) 257
Robinson v Graves - [1935] 1 KB 579
Triangle Underwriters Inc v Honeywell Inc - 457 F Supp 765; 604 F 2d 737

Judgment date: 16 August 1983

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Judgment by:
Rogers J

The plaintiff sues three defendants. It alleges a variety of causes of action. However, all the plaintiff's complaints are said to spring from the one underlying set of facts. By the statement of claim, it is alleged that, by a deed, bearing date 1st December, 1981, the plaintiff, in its previous name of Aciculare Pty Ltd, purported to enter into a contract for the acquisition of a computer system. The vendor is stated to be Ward Computer Co Pty Ltd. It is part of the plaintiff's case that in truth there was and is no such company in existence. The negotiations leading to the execution of the deed are said to have taken place between a representative of the plaintiff and the third defendant, Kevin John Morrissey acting either for himself only, or as agent for the first defendant and/or the second defendant and Ward Computer Co Pty Ltd. Pursuant to the deed the plaintiff was to be supplied, by way of purchase, with "the following computer hardware and software collectively referred to as 'the Equipment'". The document describes three items of hardware which are collectively referred to in the document, as "hardware" and two items of "software", so described. The two items are respectively, firstly an Executive 5 business management software package, including debtors' ledger, invoicing, statements receivable, creditors' ledger, invoices payable, general ledger, journal, stock control, report generator, payroll, and secondly Wordstar word processing software.

The deed nominated a total price of $14,390 to be paid by the plaintiff, and that price was allocated as to $12,230 for the hardware and $2,160 for the software. Provision was made for times of payment of the amounts payable in respect of the hardware and software respectively. By cl 4 there was a warranty that delivery of the Equipment would be effected within thirty days from the date of the agreement. The entity stated to be the vendor was to install all the Equipment at its expense and train the plaintiffs' staff in the use of the Equipment. There was provision made for continued support to be supplied by the purported vendor to the plaintiff in respect of the Equipment, and for the Equipment to be updated from time to time as required.

The deed also contemplated that the purchaser of the Equipment should give access to the purported vendor and others for the purpose of inspecting the Equipment with a view to the future sale of equipment of similar kind to third parties. Provision was made for the sharing of profits to arise from any such sales, should they eventuate. The deed also contained a number of warranties in respect of the operation of the Equipment.

The plaintiff sues the three defendants in respect of losses alleged to have been suffered by it, caused by and arising from the deficiency in the Equipment supplied to it. Only the third defendant has appeared and filed a defence. Judgment has been signed against the first and second defendants for want of defences, with damages to be assessed.

For present purposes I am concerned only with part of the amended statement of claim. So far as relevant, the plaintiff charges breaches of conditions or warranties implied by the Sale of Goods Act, 1923, and the Trade Practices Act 1974 (Cth). The provisions relied upon have operation if, and only if, the subject matter of the deed sued upon was "goods" within the meaning of the respective Acts. The Sale of Goods Act defines that term in the following words:

"'Goods' include all chattels personal other than things in action and money. The term includes emblements and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale."

The Commonwealth legislation defines "goods" as "including" various specific items not here relevant.

Suffice it then to note that both legislative provisions define "goods" in terms of inclusion. None of the express inclusions bear on the problem which presently arises. At the end of the day the question is whether the sale of the Equipment was a sale of goods in the ordinary sense of those words.

Before I turn to consider that question I should mention that the amended statement of claim suggested that the plaintiff's claim sounds in a fairly small amount. When the action was in the list for directions, I indicated that in the light of the amount in issue, I proposed to remit the matter to the District Court for determination. However, both counsel asked that I retain the matter in the list, at least for the purpose of determining whether the legislative provisions I have mentioned have application to the transaction. Because that question seemed to be a matter of general importance, I agreed to the request. I did so notwithstanding some self evident difficulties in the concept of a non existent company effecting a sale. However, somebody supplied the plaintiff with a computer system so the question did require resolution. I refer to the point only to say that the pleadings seem to need further thought given to them.

Arguments were put to me today by counsel for the plaintiff and third defendant respectively in favour of and against the proposition that the contract sued upon constituted an agreement for the sale of "goods" within the meaning of the two Acts.

For the third defendant, two basic submissions were put. The first was that the deed did not provide for the sale of goods, but rather for work to be done and materials to be provided and perhaps for the transfer of intellectual property. Secondly and alternatively, it was submitted that the agreement embodied in the deed was divisible and in so far as there was a sale of the software, the breaches charged being concerned only with the software, the legislative provisions relied upon had no application. It seemed to be assumed by the argument of counsel that an agreement for the sale of computer software only is not one for the sale of "goods" within the meaning of the legislative provisions I have mentioned.

Counsel for the third defendant reminded me of the longstanding distinction which exists in the law of contracts between agreements for the sale of goods and for work to be done and materials provided. That distinction has been the subject of judicial examination from time to time, and recently by the Full Court of the Supreme Court of Victoria in Brooks Robinson Pty Ltd v Rothfield [1951] VLR 405. Their Honours adopted (at 407, 408) as an accurate statement of the law on the subject the words of Greer LJ in Robinson v Graves [1935] 1 KB 579, where his Lordship said (at 587):

"If you find, as they did in Lee v. Griffin, 1 B. & S. 272; 30 L.J. (Q.B.) 252, that the substance of the contract was the production of something to be sold by the dentist to the dentist's customer, then that is a sale of goods. But if the substance of the contract, on the other hand, is that skill and labour have to be exercised for the production of the article and that it is only ancillary to that that there will pass from the artist to his client or customer some materials in addition to the skill involved in the production of the portrait, that does not make any difference to the result, because the substance of the contract is the skill and experience of the artist in producing the picture."

Applying that line of reasoning, it was submitted that here the substance of the arrangement between the parties was the manufacture of and transfer to the plaintiff of the command mechanism in the nature of software designed to make the hardware work. In substance, what was called for by the contract, it was submitted, was the sale of that command module, and that made the arrangement between the parties one for the supply of skill and labour rather than one for the sale of goods.

In order to consider the submission adequately it is necessary to say a few words about what a computer system is. For the description which follows, I am indebted to Mr Joseph P Zammit (Jurimetrics Journal, Spring 1982 at 337) and Mr S Wynton Semple: Canadian Business Law Journal (1983) vol 7, at 450. A computer is a device designed to accept data, manipulate or process it in accordance with instructions, being the programmes, and generate a useful output. Both input and output need physical devices such as readers, teletype printers, video display tubes and discs. The heart of the computer is the central processing unit which performs the actual processing. All these items are tangible physical objects. By itself hardware can do nothing. The really important part of the system is the software. Pro- grammes are the instructions or commands that tell the hardware what to do. The programme is itself an algorithm or formula. It is of necessity contained in a physical medium. A programme in machine readable form must be contained on a machine readable medium such as paper cards, magnetic cards, magnetic tape, discs, drums or magnetic bubbles.

The submissions of the third defendant have to be evaluated in the light of the actual contractual arrangements made. The appropriate criteria for disposing of the first submission, as the Victorian Full Court said, is the substance of the contract. The substance of the contract was the sale of a total system to be supplied to the plaintiff. It would be too simplistic altogether to say that the supply of the system was a sale of goods merely because the bulk of the cost related to the hardware. Rather I think it is necessary to look at all the features of the object of the sale and the various ingredients such as price, the nature of the material which was to be supplied, the terms for installation, and the work which the system was designed to effect. Again it is too simplistic to say that hardware will not work without software, and therefore the contract should somehow be evaluated in the light of that proposition. At the end of the day what weighs with me is that the system, software included, whilst representing the fruits of much research and work, was in current jargon off the shelf, in a sense mass produced. There can be no comparison with a one off painting. Rather is the comparison with a mass produced print of a painting.

The conclusion to which I come accords with the view taken in the United States. The clearest expression of opinion on this aspect is to be found in Triangle Underwriters Inc v Honeywell Inc 457 F Supp 765 (1978). At first instance the judge said (at 769):

"Triangle contends that the system, which included the software, did not consist solely of 'goods' within the meaning of the U.C.C., and that what was sold was predominantly 'services'. If that were true, not the U.C.C. four year statute of limitations, but the longer six year period applicable to actions on 'contracts' generally would apply. New York C.P.L.R. at 213(2). Triangle cites no authority in support of the argument that a data processing system essentially involves the provision of services. The New York courts have not yet considered this question. In F & M Schaefer Corp. v. Electronic Data Systems Corp., 430 F. Supp. 988, 992 (S.D.N.Y. 1977) the court found that a data processing system was tangible and hence properly subject to replevin, but there the motion for replevin covered only the documentation. This court must therefore consider the nature of this sale in order to predict how a New York court might characterize the transaction.

The court concludes that a New York court would not find that the H-110 computer system principally consists of 'services'. The agreement with Honeywell did not contemplate that it would run a data processing service for Triangle but rather that Honeywell would develop a completed system and deliver it 'turn-key' to Triangle to operate. After the installation and training period, Honeywell personnel were to withdraw, and Honeywell's major remaining obligation was to be maintenance. Although the ideas or concepts involved in the custom designed software remained Honeywell's intellectual property, Triangle was purchasing the product of those concepts. That product required efforts to produce, but it was a product nevertheless and, though intangible, is more readily characterized as 'goods' than 'services'. Intangibles may be 'goods' within the meaning of U.C.C. at 2-106. See, e.g. Silverman v. Alcoa Plaza Associates, 37 A.D. 2d 166, 323 N.Y.S. 2d 39, 37 A.D. 2d 166 (1st Dept. 1971). The system was subject to sale, and the services provided by Honeywell, design, installation, and maintenance, were incidental to that sale. Under these circumstances it is likely that a New York court would hold the sale subject to the U.C.C. statute of limitations."

The decision was taken on appeal to the Court of Appeals 2nd Circuit which upheld the decision on this aspect. The court said (604 F 2d 737 (1979) at 742, 743):

"But the district court was justified in concluding, as a matter of law, that the contract was one for a sale of goods. A contract is for 'service' rather than 'sale' when 'service predominates' and the sale of items is 'incidental'. North American Leisure Corp. v. A. & B. Duplicators Ltd. 468 F. 2d 695, 697 (2nd Cir. 1972). Here precisely the converse is true. Triangle bought Honeywell's equipment in the hope it would outperform IBM's equipment - the essence of the contract was for sale of goods. While certain services by Honeywell were contemplated, the contract remains one for sale if those services were 'merely incidental or collateral to the sale of goods', Dynamics Corporation of America, 429 F. Supp. 341 (S.D.N.Y. 1977), at 347, clearly the case here. The contract declares itself unequivocally to be an 'Agreement for the Sale of Data Processing Equipment'. The district court accurately stated, at 457 F. Supp. 769:

'The agreement with Honeywell did not contemplate that it would run a data processing service for Triangle but rather that Honeywell would develop a completed system and deliver it "turn-key" to Triangle to operate. After the installation and training period, Honeywell personnel were to withdraw, and Honeywell's major remaining obligation was to be maintenance.'

Honeywell's compensation was limited to the purchase price for the hardware; it did not bill for services prior, during or subsequent to installation. These are recognized indicia of a contract for the sale of goods, and not the rendition of professional services. Aluminum Co. of America v. Electro Flo Corp. 451 F. 2d 1115, 1118 (10th Cir. 1971)."

The view of the judge in Chatlos Systems Inc v National Cash Register Corp 479 F Supp 738 (1979) was similarly that a sale of a computer system was a sale of goods. The court said (at 742, 743):

"This transaction was for the 'sale of goods' notwithstanding the incidental service aspects and the lease arrangement; therefore Article 2 of the Uniform Commercial Code, as adopted by the State of New Jersey, is the applicable law. N.J.S.A. 12A: 2-101 et. seq., see, Atlas Industries, Inc. v. National Cash Register, 216 Kan. 213, 531 P. 2d 41 (1975); Acme Pump Company, Inc. v. National Cash Register, 32 Conn. Sup. 69, 337 A. 2d 672 (C.C.P. 1974). Because of this application and the following conclusions it is unnecessary to consider the common law breach of contract claim."

The third defendant's argument is also discordant with the actual decisions arrived at by Canadian courts, although the question was not discussed in terms. In Public Utilities Commission for City of Waterloo v Burroughs Business Machines Ltd (1973) 34 DLR (3d) 320, Donohue J in the High Court of Ontario was concerned with an action for rescission of a contract for the purchase of a computer system and for damages arising from alleged failure of the system to do the work required by the plaintiff. The subject of the contract was both hardware and software. In the course of argument, reliance was placed upon the provisions of the Sale of Goods Act, RSO 1970. Notwithstanding that, no argument appears to have been advanced or considered by the judge as to whether or not the Act applied. Rather the point was assumed. When the decision went on appeal, to the Court of Appeal of Ontario, reported as Public Utilities Commission of City of Waterloo v Burroughs Business Machines Ltd (1974) 6 OR (2d) 257, that court again accepted, sub silentio, that the Sale of Goods Act applied. The reporter summarized the decision of the Court of Appeal, in part, as:

"Where goods are delivered that are, in breach of the implied condition in s 1.5 par. 1 of the Sale of Goods Act, R.S.O. 1970, c. 421, unfit for the buyer's purpose, there is a fundamental breach of contract which entitles the buyer to rescission and damages."

A similar course was followed in Manitoba. In Burroughs Business Machines Ltd v Feed-Rite Mills (1962) Ltd (1973) 42 DLR (3d) 303, the Manitoba Court of Appeal upheld a verdict for the plaintiff for breach of

conditions implied by the Sale of Goods Act. There again the contract was for the sale of a computer system comprising, naturally enough, both hardware and software. The question was not the subject of an express statement but the provisions of the Sale of Goods Act, RSM 1970, cS 10, were required to be applied by the court. It did so without comment. I should mention that an appeal from the decision was dismissed by the Supreme Court of Canada without calling on the respondent ((1976) 64 DLR (3d) 767). It would appear that their Lordships in the Supreme Court did not consider the question of the applicability of the Sale of Goods Act as one requiring argument.

Confronting the question specifically, I come to the conclusion that a sale of a computer system, comprising both hardware and software, as in the present case, does constitute a sale of goods within the meaning of both the Commonwealth Act and the State legislation. There is a sale of tangible chattels, a transfer of identifiable physical property. It is true that it is necessary for the effective working of the system that there should be comprised within it software. That does not disqualify the aggregate operative system from the appellation or description of "goods".

It may be a debatable question whether or not the sale of computer software by itself is sufficient to constitute a sale of goods within the meaning of the legislation I am considering. However, I have no doubt that the sale of a system in toto is within the legislation. Equally I have no doubt that the contract was for the sale of a complete computer system.

I do not wish it to be thought that I am of the view that software by itself may not be "goods". The authority which is usually quoted for the affirmative answer is Clements Auto Co v Service Bureau Corp 444 F 2d 169 (1971) a decision of the Court of Appeals for the 8th Circuit. However, reference to that decision does not bear out in full the proposition for which it is cited. That was a dispute involving programming for computerized inventory control of warehouse merchandise. The court assumed the applicability of the sale of goods legislation without discussion of the point. As is rightly said, by Mr Semple (supra at 457), the point has never been squarely decided: cf Nycum Liability for Malfunction of a Computer Programme (1979) 7 Rut J Comp Technology L 1 and Raysman Warranty Disclaimer in the Data Processing Contract 6 Rut J Comp Technology L 265. For those interested in the topic, reference may also be made to two other decisions Computer Servicenters Inc v Beacon Manufac- turing Co, 328 F Supp 653 (1970); affirmed 443 F 2d 906 (1971) and North American Leisure Corp v A & B Duplicators Ltd, 468 F 2d 695 (1972) also see "Computer Programmes as Goods Under The U.C.C." (1979) 77 Mich L Rev 149.

The questions arising here are obviously of considerable importance to the computer industry, and I think it is appropriate that those who attend to matters of law reform should consider whether or not legislative action is required to ensure that the matter is put beyond argument. As computers and programmes become more accessible to the ordinary consumer, it seems appropriate in the public interest that the question which heretofore has troubled only commercial purchasers should be clarified.

In the result, then, I am of the view that the agreement for the purchase of the computer system by the plaintiff attracted the operation of both the Sale

of Goods Act and the Trade Practices Act. That determines the only issue which I said I would be disposed to retain in this list. Nothing that has happened today has inclined me to think that this is a dispute which could not appropriately be determined in the District Court. In so far as there are matters of expertise to be considered, the District Court judge, who may otherwise have to consider the dispute between the parties, may think it appropriate to utilize the provisions of the Arbitration Act, 1902. He may remit, to an expert arbitrator, with or without the consent of the parties, the particular matter of expertise which needs to be considered in determining whether or not the computer system was of merchantable quality and fit for the purpose, as well as other matters in relation to which the breach of the contractual obligations has been charged.

One of the particular reasons, in addition to the amount involved, why I think it is appropriate to remit the matter to the District Court is the allegations which are made in the earlier part of the amended statement of claim, which do not seem to call for the exercise of any commercial skill.

Accordingly I determine the only issue I have decided in accordance with the reasons I have given, and I remit the balance of the action for the District Court to proceed in accordance with the rules of that court. I order the third defendant to pay the plaintiff's costs of the issue which has been argued before me. The exhibits may be handed out.

Ruled accordingly