Series on ALI Software Contract Principles: Clarify Rules on Implied and Express Warranties in Software Contracts

We continue today with our series on the new American Law Institute Principles of the Law of Software Contracts with a discussion of what software companies need to know about the Principles' treatment of warranties.

Again, for any of you who have not read our earlier postings on this subject, the importance of the Principles is that they may be used by courts to interpret and rule on disputes regarding software contracts in the future. Thus, software companies may want to take the time now to review their form agreements in anticipation of the possibility that the Principles may be used to interpret those agreements down the road.

So, what do you as a software company need to know about the Principles' treatment of warranties?

Well, for the non-lawyers reading this blogposting: contracts can have express warranties, which are warranties that have to be spelled out very conspicuously in a contract to apply, and implied warranties, which are warranties which are read into an agreement. So, in talking about this subject, we are addressing what the new Principles say about the language that has to be in an express warranty to be valid, as well as what implied warranties will be read into a software contract, regardless whether the contract specifically talks about those warranties or not. We are also addressing what the Principles say about a party's ability to disclaim certain warranties.

On the issue of express warranties, the Principles adopt the standard Uniform Commerical Code ("UCC") view of express warranty, but interestingly enough do not require use of the words "warrant" or "guarantee" to constitute an express warranty. Also, the Principles clarify that distributors or dealers cannot be liable for breach of a software developer's warranty, provided that they merely "transfer" the warranty provided by the developer but do not "adopt" that warranty themselves. The Principles provide that disclaimers of express warranties are unenforceable only if a reasonable party would not expect the exclusion or modification.While the position on disclaimers is a little unexpected, the Principle's position on express warranties is bascially in line with what we as attorneys would expect.

On the issue of implied warranties, the Principles largely take the UCC position, allowing for an implied warranty of merchantability and an implied warranty of fitness for a particular purpose, and allowing both warranties to be disclaimed. However, the Principles do take a few noteworthy positions on the issue of implied warranties. First of all, the Principles take the position that one warranty cannot be disclaimed: the warranty that the software contains no material hidden defects of which the party was aware at the time of transfer. Also, the Principles say that this warranty does not take the place of any action for misrepresentation or any remedies. Second, the Principles take the position, that no implied warranty regarding material hidden defects that will be read into an agreement, where the purchaser of the software has tested the software in advance as fully as desired or unreasonably has refused to test it, provided that the warranties are with respect to defects that a test should or would have revealed. The position advocated by the Principles suggests that, if software companies are not already offering free trials or evaluation licenses to potential customers, it may be in their best interest to start doing so, in order to ensure that an implied warranty regarding hidden defects is not read into their software contracts.

In addition to addressing express and implied warranties, the Principles also take the position that these warranties automatically extend to certain third party beneficiaries such as immediate family, household members, and guests, and any other person who uses the software in a manner contemplated or that should have been contemplated by the software company. However, the Principles clarify that any disclaimers that would be effective against the purchaser are also effective against third party beneficiaries, so the Principles do not require the inclusion of any express disclaimer against third party beneficiaries.

What should you take away from this posting? Well, the important take-away point is that the Principles read in an implied warranty that there are no material hidden defects that cannot be disclaimed, but that this burden on the part of a software company may be negated by ensuring that the purchaser thoroughly tests the software in advance. So, if you are software company and you are not already taking steps to ensure software purchasers test the product in advance, you may want to implement policies now to ensure that this happens in the future.

Other related postings:

American Law Institute Approves Principles of the Law of Software Contracts
Series on ALI Software Contract Principles: Changes Default Rule from Implied Warranty to Implied Indemnification Against Infringement

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