Business Law: Analysis of Contract Case Study

AB107 Business Law Written Assignment Advise whether the terms of the Licence Agreement apply and whether the Exclusion of Liability clause is valid and effective in protecting UcanB007 from liabilities. [pic] The foremost issue pertaining to this case is that of whether the terms of the License Agreement are part of the contract between Ah Siong and UcanB007, and hence the enforceability of the terms should Ah Siong decide to sue UcanB007 in contract for his losses.

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Due to the nature of this case being that of a shrink-wrap license agreement, there is contention regarding the point in time when the contract was formed, which clearly affects the incorporation of the terms and thus the term’s legal efficacy. Adhering to the key elements required to form a contract, the purchase of product at the retail store fulfils the formation of a contract. The offer being made when Ah Siong brought the product (hardware and software) to the cashier for payment and the acceptance upon the receipt of the price.

Consideration would have been executed since Ah Siong received the item and UcanB007 received payment. Since this is a commercial consumer transaction, there would be a general presumption that there is necessary intention to create legal intention. Alternatively, the opening of the installation disk envelope could also fulfil the formation of a contract. The offer being the promise of un-exclusive right to use the UcanB2007 software, and the acceptance being the conduct of opening the envelope.

The acceptance is deemed to be at that stage as the purchaser is still able to reject the software if the terms of the licence are unsatisfactory, due to its nature as an “accept-reject” licence. There was an opportunity to reject the offer by returning the product[1], but because Ah Siong did not do so, he is bound to the software licensing contract/the Licence Agreement; however, whether the terms are binding is another matter to be considered consequently. Following the above lines of reasoning, the conclusion that there are two separate contracts at the two points in time.

Firstly, at the retail shop, the formation of a purchasing contract that binds both the hardware and software components of the product. Secondly, the formation of a software licensing contract that binds only the software component of the product, adhering to the terms on the Licence Agreement. Since there are two contracts formed, which of it applies in this context? Given that the question is referring to the terms of the Licence Agreement, it is alluding to the software licensing contract and thus focuses the scope of the discussion on it.

This conclusion is crucial because, should the license agreement terms rely on the first contract, there would immediately be a violation of the rule of contemporaneity, rending the Licence Agreement ineffective without the need to even consider any subsequent factors. [pic] “Commercial realities of software sales, licenses of other software packages are similar in that they came with the software, disclaimed warranties, limited remedies and included choice of law and forum selection clauses. [2]”

Here, the terms of the contract, like any other software package, are listed numerically within the written license agreement. The statements are considered terms because they are an integral aspect of the contract, covering aspects of contractual obligations such as ownership of software & copy right restrictions in general, protecting the legitimate interests of UcanB007 for the period of allowing Ah Siong the benefits of the software. Notably, this licence agreement has been drafted by only UcanB007, hence it tends to favour the party that drafted it.

However most of the express terms, with the exception of the warranty and the exclusion of liability clause, are already implied by statute[3], indicating that the statute would pre-empt the listed provisions of the agreement in any case and are in fact conscionable legally. The terms are considered as conditions as they are essential statements of facts that go to the root of the contract, which involves the express forbiddance of the usage of the software in ways that would breach copyrights. Whether the terms are part of the contract depends if they are incorporated.

This brings up the issue of contemporaneity and reasonably sufficient notice. Firstly, following the reasoning earlier, the terms of the agreement (which is attached and specified to be read before the opening of the package, upon which the software licensing contract is formed), would hence be considered to have had notice given before the contract formation. Thus, contemporaneity is satisfied. However secondly, in this case, the steps taken to bring the notice to the attention of the purchaser Ah Siong was not adequate.

UcanB007 might claim that by bolding and having the word “attention” in caps meant to bring the user to notice the agreement, but the notice referring to the terms being printed in inconspicuous font on the envelope, was very much contrary to Lord Denning MR’s statement regarding sufficient notice in Thornton v Shoe Lane Parking Ltd. Furthermore, the licence agreement is tucked away in the fold of the envelope holding the installation disks. To a reasonable person, the fold of that envelope would not be a place expected to contain contractual terms.

It could be disputed that practical considerations prevent vendors from disclosing full legal terms with [/on] their products[4], but it is notable that there were no other reasonable attempts (i. e. on the cover of the box or by the retail staff) to convey the notice that software usage was subject to the Licence Agreement to the purchaser. Since Ah Siong would not have had the opportunity to read and consider the terms in their entirety at the time of initial contract formation, despite the terms being attached as a note outside the package[5], it is concluded that there is no reasonable sufficiency of notice contract terms.

As such, these shrink-wrap contract terms are effectively not part of the software licensing contract and cannot apply in subsequent legal proceedings with respect to this case. This conclusion is in line with the reasoning that, “a user is not legally obligated to read, let alone consent to any literature or envelope packaging that may be contained inside a product; otherwise such transactions would unduly burden users who have no notice of the terms and conditions of their possession of the object purchased, or the blind, or those unfamiliar with the language in which such terms are provided, etc[6]”.

On a side note, there are actually few of the express terms (the warranty and the Liability clause) that are actually applicable in this context. [pic] To determine if a liability clause is valid or enforceable, there are four factors to consider. Firstly, an exemption clause becomes incorporated into a contract by two means—signature or notice. Since there is no signing of the contract involved in this case, the clause can only be incorporated by giving reasonably sufficient notice of the exemption clause to the injured party.

While Ah Siong is unable to plead inadequacy of notice based on his unfamiliarity with technical legal language,[7] he can rely on the lack of reasonable sufficient notice as mentioned earlier. Hence the exemption clause is not considered incorporated successfully into the contract. Secondly, the effectiveness of the clause is dependent on its construction. The exclusion of liability clause, “Except to the extent provided, under no circumstance shall UcanB007 or any related company be liable for any loss, damage or injury… 8]”, has been composed using clear and unambiguous words, such that there is no ambiguity with regards to the company’s liabilities, barring the use of the Contra Proferentum Rule. Furthermore, the clause does not defeat the main purpose of the contract (which is simply to provide non-exclusive use of the software). Despite this, the lack of incorporation pre-empts the effectiveness of the clause and still renders the clause invalid. Thirdly, the unusual factors aspect is not applicable in this context.

Lastly, the Unfair Contract Terms Act (UCTA) affirms the prior conclusion. UCTA applies here under s3 and s6, as the agreement is in the nature of a consumer transaction and constitutes the sale of goods. S 6 of the UCTA states that “As against a person dealing as consumer, liability for breach of the obligations arising from… cannot be excluded or restricted by reference to any contract term. ”, clearly indicating that a seller cannot exclude his liability under the Sale of Goods Act by using an exemption clause.

Moreover, since the clause falls within 6-7 UCTA, then s 11(2) UCTA requires the court to consider, the guidelines for determining reasonableness as specified in the Second Schedule. In the context of this case, the party relying on the exemption clause, UcanB007’s bargaining power as a corporation is significantly stronger as compared to Ah Siong, a mere consumer, thus the clause is likely to be construed as unreasonable.

Furthermore, there was no inducement for Ah Siong to accept the clause, and neither was the product specifically tailored for him, in addition to the inconspicuous notice of the existence of the exclusion of liability clause, indicating that it is indeed unreasonable. Considering the extent of unreasonableness of the clause, it would be difficult for UcanB007 to establish otherwise. Thus it is most probable that the clause would be deemed to not comply with the UCTA.

Moreover, in accordance to s 5(1) of the UCTA, it provides that any contractual term would be unable to exclude liability should the damage of the good result from the “negligence of a person concerned in the manufacture or distribution of the goods” which in this case applies suitably to the context of UcanB007 that declared their product “Keep N Eye” as defective. UcanB007 might try to dismiss suit on the basis that the license contained a clause limiting any claim that could be asserted for consequential damages, citing that “limitations on consequential damages in commercial transactions are prima facie conscionable[9]”.

However contrasted with the UCTA which is a Singapore statute, the argument based in native law is likely to take precedence over that of foreign case laws. In summary, considering the aspects of the validation of exemption of liability clause, whereby the clause was not deemed incorporated, prohibited by the UCTA under the specific law and also due to unreasonableness, it leads to the conclusion that the liability clause is invalid and will not be effective in protecting UcanB007 from liabilities with respect to the performance (or non-performance in this case) and usage of the software.

Furthermore, given that the terms of the Licence Agreement are not applicable due to insufficiency of notice in the first place, the Exclusion of Liability clause also found in the same agreement is inevitably not valid as well. On another note, since the liability clause does not extend to the hardware of the product, even if the malfunction was due to a hardware defect, it will similarly not be effective in protecting UcanB007 from liabilities arising due to the performance and usage of the hardware as well.

Given the extent of UcanB007’s lack of legal grounds to evade liabilities, Ah Siong will most likely be able to sue UcanB007’s on the basis of fundamental breach of the software licence contract. (However, as to whether Ah Siong is able to claim for damages successfully, the issue is not pertinent to this question. )

However should UcanB007 argue that the malfunctioning of the product may be due to Ah Siong’s failure to install it according to instructions and thus they are not liable for the breach, it can be counter-argued that there was no strict term to adhere to the installation instructions in the licensing contract and thus UcanB007 still bears the liability. Thus in conclusion, Ah Siong should be able to successfully claim for damages under fundamental breach of the purchasing contract. ———————- [1] ProCD Inc v Zeidenberg [2] M. A Mortenson Company, Inc. v Timberline Software Corporation [3] Copyright Act Chapter 63: s 39A [4] Hill v Gateway 2000 Inc [5] Interfoto v Stiletto [6] Klocek v. Gateway, Inc [7] Thompson v LM&S Railway Co. [8] Assignment Appendix A. [9] M. A Mortenson Company, Inc. v Timberline Software Corporation

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