Court Rules that Software is Not an Item of Property, but that Sale Provisions Do Apply
On 1 June 2010 the Amsterdam Court of Appeal, with subsidiary
place of session in Arnhem, for the first time gave a ruling
adjudicating the question as to how software should be qualified.
Such a ruling had been awaited for years by many, hoping to finally
see an end to a long ongoing debate about the question of whether
software is an item of property, and whether the Title on Sale of
Book 7 of the Dutch Civil Code (the "BW") applies. Unfortunately,
the reasons given in the ruling on this point are not only very
brief - one paragraph - but also not very convincing in
substance.
Below, we will first describe the ruling in brief, naturally
with ample attention for the qualification of software chosen by
the Court of Appeal, but we will also briefly discuss the other
important points, such as the opinion on the alleged limitation.
Then we will present a concise overview of the state of affairs in
the debate on the qualification of software, and we will give our
opinion on the ruling.
Ruling
The case is the following. De Beeldbrigade - a producer of
television programs such as Het Blok and
Born2Cook - uses certain software for editing its
programs. For Het Blok, De Beeldbrigade bought a computer
program - ImageSan - from Hulskamp, with which several workers
could simultaneously edit the film footage for one episode.
Hulskamp had bought this program from Bell. Hulskamp supplied the
information carriers - presumably CDs or DVDs - to De Beeldbrigade
in 2004 and the software was installed at De Beeldbrigade.
However, De Beeldbrigade was not satisfied with the software and
installed alternative software. In the first instance De
Beeldbrigade claimed, besides a declaratory judgment, compensation
of €67,258.55 from Hulskamp and compensation of extrajudicial
costs. As Hulskamp had only resupplied software from Bell, Hulskamp
impleaded Bell. The Court allowed the claim of De Beeldbrigade on
all important points, so that Bell had to pay inter alia
the above-mentioned compensation to De Beeldbrigade via
Hulskamp.
Only in the appeal proceedings, both Hulskamp and Bell put
forward that the claim had expired based on Section 7:23 (2) of the
BW. Pursuant to this Section, in brief, a right of action based on
the claim that the item of property delivered does not conform to
the contract becomes expires two years after the buyer has
complained to the seller about the item of property delivered. This
period of limitation of two years for sales is an exception to the
general period of limitation of five years.
The most relevant argument for legal practice for the denial of
the claim of De Beeldbrigade is the argument that Title 7.1 of the
BW concerning sale does not apply to the software supplied. The
Court of Appeal discussed this argument in ground 4.6. First the
Court of Appeal concluded that the software itself is not an item
of property:
"The program ImageSan is stored on one or more data carriers.
The alleged defect in this case is not connected to these data
carriers, but to the operation of the software stored on them.
Unlike a data carrier, this software in itself cannot be designated
as a corporeal object subject to human control, and is therefore
not an item of property within the meaning of Section 3:2 of the
BW."
Further down, the Court of Appeal nevertheless held the Title on
Sale to be applicable:
"Nevertheless, the fact that ImageSan is standard software that
can be bought as a package (here for more than €46,000) and with
which the right to free and durable use of the software is
acquired, combined with the circumstance that this case is about
the quality of that software and not about its copyright-law
dimension, leads the Court of Appeal to the opinion that, pursuant
to the provisions of Section 7:47 of the BW, Title 7.1 must be
considered to apply. This is not altered by the fact that the
software needs to be installed and tested by a specialist - at a
fee of €2,200 - before it can be put into use, since this fact does
not materially change the nature of the agreement concluded between
the parties."
As Title 7.1 applies, the limitation period of two years
specified in Section 7:23 (2) of the BW applies as well. Because De
Beeldbrigade had already complained in 2004 and the period of
limitation has not been interrupted, the claim of De Beeldbrigade
has expired. As a result, the claim was denied on appeal after all.
The ruling contains an extensive list of reasons why the claim has
expired, among other things in view of a number of complications.
We will not discuss these in this article.
Qualification
of Software
A large part of the first Title of Book 7 of the BW is about
sale. "Sale" is defined in Section 7:1 of the BW as an agreement
whereby an item of property is given in exchange for payment.
However, the Title on Sale applies not only to an item of property
but also to property rights, if the application of the provisions
contained in this Title conforms to the nature of these rights.
This is set out in the bridge provision 7:47 of the BW. Section 3:2
of the BW defines an item of property as "a corporeal object which
can be subject to human control", and Section 3:6 of the BW defines
a property right as a right that is transferable, or intended to
procure a tangible benefit to its holder, or which has been
acquired in exchange for actual or expected tangible benefit.
In brief, Dutch literature is divided into two schools with
regard to the qualification (for the sale) of standard software -
as the case at issue was also about:
- The first school considers that the law of sale applies and
that the sale of software is sale, in the same way as the sale
of a TV set, for example. They defend this assertion by arguing
that the regulation on sale applies in any case if the software
is supplied on a carrier, since then the software manifests
itself in a tangible manner. Thus, the requirements of Section
3:2 of the BW are met.
- The authors of the second school are of the view that the
Title on Sale does not apply to software. They often defend
this assertion by referring to the fact that software is
protected by copyright, and that when you buy it you acquire
only a license. It is the functionality of the software rather
than the rights on the carrier that should be looked at. From
this perspective, software is not an item of property and the
law of sale is not applicable. Some authors within this school
do defend the argument that the license as a property right is
nevertheless covered by sale, through Section 7:47 of the
BW.
Both legislative history and case law appear to follow the first
school. The legislative history of Section 7:46d of the BW on
distance sale (part of the Title on Sale) appears to make the Title
on Sale applicable to software, since it is mentioned explicitly
that the Section applies (also) to software.
However, with regard to the electronic supply of software the then
Minister of Justice did state that in such cases there is no
delivery of a movable corporeal item of property. On the other
hand, there could be sale of a property right, so that the Title on
Sale could still be applicable through the bridge provision 7:47 of
the BW discussed above.
In previous rulings agreements relating to software have already
been adjudicated on the basis of the requirement of conformity
included in the Title on Sale (Section 7:17 of the BW) (see e.g.
Court of The Hague, 25 November 1987 (Olyslager/Intermation)), and
it has been stated explicitly that a software agreement should be
adjudicated on the basis of the law of sale (Court of Amsterdam, 24
May 1995 (Coss/TM Data)).
Closing Remarks on the Ruling
The Court of Appeal has not, or at least not explicitly,
substantiated its opinion that software is not an item of property
by any reference to case law, legislative history or literature.
Even if the Court of Appeal did take these into account to arrive
at its opinion, legal practice could have benefited from a better
and more extensive account of the reasons for its judgment. As it
is, the Court of Appeal almost seems to have ignored the discussion
of many years completely.
The reasoning the Court of Appeal uses to still arrive at the
opinion that the Title on Sale applies - through the bridge
provision 7:47 BW - is not only sketchy, but also insufficient.
Apparently, the Court of Appeal sees the software in combination
with the license as a property right. On the other hand, the
consideration of the Court of Appeal makes clear that this opinion
would not have been reached if the software concerned had not been
standard software.
Conclusion
Although it is a great pity that this ruling lacks (proper)
grounds, it is still of great importance to legal practice. If this
ruling will be followed by other courts, the supply of standard
software on a data carrier with a perpetual license will fall under
the rules of the law of sale. This means that the conformity
criterion applies to software, but also, as in this case, that a
short limitation period of two years applies. The latter aspect
will be of great practical importance to parties arguing over the
quality of standard software delivered. De Beeldbrigade has
personally experienced this.