The K-Zone: Shrink-wrapped licence agreements: the UK legal position

An issue that frequently concerns users of computer software is the validity of `shrink wrapped' end-user licence agreements (EULAs). A `shrink wrapped' EULA is one that the purchaser does not see before making the purchase. The name derives from the practice of putting the EULA inside the sealed package, so that it cannot be seen in the shop. Although there are other ways of buying software, most PC software is still sold from retailers as shrink-wrapped boxes. Typically the EULA will be found to contain a statement that use of the software will be deemed to constitute acceptance of its terms.

The questions that most commonly arise are these:

If I don't agree to the licence terms when I finally find out what they are, can I expect the retailer to refund my money? Do I have legal redress if he does not? If the licence agreement prohibits me from doing essential operations, like making backup copies of software, can I be held to this? If the EULA states that the vendor will not accept liability for loss or damage, or undertake to supply a product that actually works, is it enforceable?

There is very little case law, or Statute law, that applies directly to EULAs. The little that there is seems to suggest that the answers to these questions are yes, yes, and no respectively. But the situation is far from simple. This article summarises the legal position as it appears to be at present.

Consider a hypothetical shopping transaction between a customer -- let's call him Fred -- and a large computer retailer called CompuSave. Fred enters the shop, finds the software he wants, and takes it to the checkout. Let's suppose that Fred is buying a copy of a word processor -- DogWord -- from DogSlow Software Ltd.

Now, there are potentially three parties to this transaction: Fred, the consumer; CompuSave, the retailer; and DogSlow, the owner of the intellectual property in the software. Agreements between more than two parties have always been troublesome under English law; we have something called `privity of contract' which means, essentially, that only people who are directly parties to a contract can seek to enforce it, or be bound by it. The classical expression of this doctrine is illustrated something called the `wedding list problem'. Mary goes to a department store to buy a wedding present for Joe and Susan, who are getting married. Let's suppose she buys them a toaster. After the wedding Mary, sadly, passes away, as does the toaster. Joe and Susan return the toaster to the department store, hoping for a replacement. However, Joe and Susan don't have a contract with the store -- Mary had that, and she's not going to be able to enforce it, at least not without the use of a ouija board. Joe and Mary are left without a remedy in law, even though the original contract was made for their benefit. As we shall see, this concept is an important one where software licences are concerned. Recently legislation has allowed the courts to recognize the rights of third parties to enforce a contract, under certain limited circumstances. We'll come back to that later.

What contracts are formed in Fred's transaction with CompuSave? First, he has a contract with CompuSave to supply goods. It was established decisively in 1952 (Pharmaceutical Society of Great Britain v Boots Cash Chemists) that when one buys goods from a shop, in the absence of clear indication to the contrary, the contract of sale is concluded at the checkout. That is, once Fred has handed over his money and picked up up his goods, the contract is complete. Although it is not written down and signed, there is a contract nonetheless, and its terms will be those governed by Statute and by the practice of the courts. For example, it will be an implied term of this contract that the goods supplied will be fit for their purpose. Either party may sue the other under the terms of the contract. For example, if Fred found when he got home that the box was empty, he would have a case against ?CompuSave for breach of contract.

But what has Fred actually bought from CompuSave? He has bought the property rights to the physical materials (largely worthless) and the right to use the software in a particular way. He hasn't bought any rights to ownership of the software itself. To people who are unfamiliar with intellectual property law this sounds a bit odd, but really it's no different to the agreement you have with a landowner when you enter the premises on licence. A supermarket grants me a licence to enter their property for the purposes of shopping, but that does not give me the right to carry away the display counters. It's the same with software (or books, or audio recordings): the right of use is sold separately from the right of ownership. All this is governed by the Copyright Designs and Patents Act (1988).

So, in order to use ?DogWord, Fred must either have an agreement with DogSlow, or a Statutory right under the 1988 Act. The tricky part is this: does Fred have a contract with DogSlow? If he does not, can he be bound by the terms of the EULA? Three possible answers seem to be worthy of consideration.

First possibility: Fred has a contract with DogSlow, formed when he accepted the terms of the EULA. This acceptance may be at the point of purchase, or when he begins to use the software. Second possibility: Fred has no contract with DogSlow; nevertheless the terms of the EULA form part of the contract he has with CompuSave. If Fred breaches those terms, then CompuSave can seek legal redress. They will probably only do this if their contract with DogSlow allows DogSlow to seek redress against CompuSave, if CompuSave fails to seek redress against Fred. Third possibility: Fred has no contract with DogSlow, and the EULA does not form part of the contract with CompuSave. The EULA is thus unenforceable, and Fred's right to use the software will then be governed by Statute.

So which of these is correct under English law? In order to have a contract with DogSlow, and indeed with anyone, certain formalities must subsist. Among these is the peculiarly English notion of Consideration. This says, in essence, that both parties to a contract must offer something to one another. If I offer to make a gift to you of my watch, for example -- I'm feeling generous today -- and you accept it, we don't have a contract. You can't then sue me if I refuse to hand it over. Under the principle of consideration, you must offer something in return. It needn't be much, but it must be something. If you offer me tenpence for my watch, and I accept, then we do have a contract.

Now, in the `agreement' between Fred and DogSlow, where is the consideration, and who is offering what to whom? It could be argued that DogSlow is offering Fred the right to use the software, but, if that is the case, what consideration is Fred offering? In any event, Fred may have a Statutory right to use the software (we'll get on to that later), so it could be argued that DogSlow aren't offering anything of value. So, it seems likely that there is not an explicit contract between Fred and DogSlow.

In that case, are the EULA terms part of the contract between Fred and CompuSave? In 1997, in the case of Beta Computers (Europe) Ltd v Adobe Systems (Europe) Ltd , it was determined that the EULA was part of the contract between the retailer and the end user. Moreover, it was held that the contract for sale was not concluded at the checkout -- as is the usual assumption -- but later when the package was opened. The facts of the case are that Adobe bought a piece of Informix software from Beta. When they read the terms of the licence agreement, Adobe decided not to accept the terms, and refused to pay Beta. Beta sued Adobe for the money. The court held that Adobe did not have to pay, because they did not have any contract with Beta -- that contract could not be formed until Adobe had accepted the licence terms.

Now Beta is a Scottish case, heard in the Outer House of the Court of Session. It is therefore not binding on an English or a Welsh court. However, the stature of the Court makes the ruling persuasive, and it may well be followed outside Scotland were the issue to be raised.

However, it has been strongly argued that Beta made a fundamental error of law, and that it ought not to be followed. In order to see why, we have to understand the reasoning applied by Lord Penrose in that case. First, he decided that there was no agreement between Adobe and Informix. Informix could not seek to enforce the licence terms itself. Now, if there was no agreement, the outcome was either that the EULA was incorporated into the contract of sale, or that Adobe could not use the software. Why could Adobe not use the software? Because the software could only be used by copying it onto Adobe's computers. Such a copying, if not authorised by an agreement with the copyright owner (Informix) would be illegal under the Copyright Designs and Patents Act (1988). Clearly it is of no benefit to buy a piece of software which one has no right to use. Therefore, reasoned Lord Penrose, the EULA must for part of the contract between the user and the retailer, because its terms are necessary to allow the software to be used, and there is no contract with the intellectual property holder. Moreover, since one can't accept terms that one hasn't seen, the contract can't exist until the terms are accepted, which are when the user starts to use the software (or unpacks it, if it is sealed).

The logic is inescapable: the EULA must be enforceable because, if it were not, the purchaser of software could not use it at all, lacking an agreement with the copyright owner. It was also argued that if the EULA were unenforceable, this would be bad for the computing industry as a whole, because it relies on licence agreements to limit the fiscal damage caused by people using software without paying.

Unfortunately, although the logic is sound, its premises are not. The principle that one could not use software without an explicit agreement with the copyright owner is simply wrong. Section 50C of the Copyright Designs and Patents Act (1988), which was inserted in 1992 to comply with an EC directive, says that a person who legally acquires computer software has the right to copy it if that is what is necessary to make it useable. Therefore, an EULA is not required to make it possible for the purchaser to use the software: this right is in Statute. Moreover, it can easily be argued that software authors cannot claim that licence agreements are necessary to protect their business interests. First, the 1988 Act prohibits unlawful copying of software. No additional agreement is necessary for this, and prosecutions have been brought successfully. Second, although software authors often seek to use EULAs to limit their liability for loss or damage arising from the use of the software, this is probably unlawful under the Unfair Contract Terms Act (1977). An attempt to force the consumer to agree that the supplier is not liable if the goods fail to live up to expectation is also likely to be prohibited by the Unfair Terms in Consumer Contract Regulations (1999). So, in short, the EULA is neither necessary for the consumer's benefit, not helpful for the suppliers'.

So where does this leave Fred? The decision in Beta, if it were followed by another court, has two consequences. First, if he did not want to accept the licence terms, he could expect a refund from CompuSave. The retailer would not be allowed -- as Beta did -- to claim that the EULA was none of its concern. This would be true whether or not the EULA said that he could expect a refund: under Beta there is simply no contract, and CompuSave has no right to retain the money it received. Second, if Fred misused the software -- by making illegal copies, for example, then CompuSave would have a cause of action against him. To give this teeth, the EULA would probably need to state that it could be enforced by DogSlow -- this would allow DogSlow to invoke the Contracts (Rights of Third Parties) Act (1999) to hold Fred to the agreement. Third, Fred could not be bound by provisions in the EULA that tried to limit the vendor's liability for loss or damage, or for supplying an inadequate product, because these provisions would be unenforceable under Statute.

The problem with all this is deciding whether an English court would follow the ruling in Beta. I have tried to show that there is every reason not too: the case was decided without consideration of a relevant Statutory provision. If Beta is not followed, then there seems little alternative than to assume that EULAs are unenforceable. Vendors can avoid this problem very easily: they simply need to print the licence terms on the box, and ensure that they are seen by the customer before purchase. This, I suggest, could be made part of the contract of sale and therefore enforceable.

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