Introduction to software contracts

Traditional forms of contract agreements, where both parties sit and discuss the terms of the contract before signing it, are no longer practical for many of today's transactions of goods and services. With the advent of telesales and e-commerce, many goods and services are sold in a rapid manner that does not allow for the duration of time required to properly discuss a contract.

In the area of software sales, traditional contract law is difficult to apply, and as a result vendors have introduced new ways to try to speed up the buyer agreement process in order to make their sales procedures more efficient. In this article, I will discuss two of the most widely used agreement contract methods used in software sales: the click-wrap contract and the older shrink-wrap agreement. I will provide an overview of each contract type, along with case studies where available, and give my argument to why click-wrap contracts may be more applicable than shrink-wrap contracts in the future of e-commerce. An Overview of Shrink-Wrap Contracts When you buy a new piece of computer software, it is not uncommon for that software to be wrapped in cellophane, and for a notice of license agreement to be affixed to the outside of the wrapper. It will state that by opening the software by removing the cellophane shrink wrap, you are agreeing to the terms and conditions of the contract shipped with the software.

Unfortunately for the consumer of such software, the contract in question may actually be contained within the very same cellophane wrapped box, therefore making it impossible to read the terms of the contract before accepting them. Today, however, the agreement is often exposed on the exterior of the product and states, in part, that by tearing the wrapping or using the software, the user agrees to abide by the terms of the license.

Courts around the World are unsure about that validity of these contracts, and there are few cases in Europe that have been brought to court to challenge their validly. In the USA, the case of ProCD v. Zeidenberg is the leading case for the enforce-ability of shrink-wrap cases (Snukal). In the case, the defendant Matthew Zeidenberg purchased ProCD's software from a store. The program contained over 3,000 telephone directories from all over the USA. The shrink-wrap license of the software expressly stated that the terms of the license where contained inside the box. In addition, each time the user ran the software, the license would appear. Zeidenberg breached the terms of the license by making the directories available online via a web site he created, at a substantially lower price than the price he paid at retail. The lower court in this case ruled that since the license was inside the box rather than outside, the shrink-wrap agreement was unenforceable.

When this decision was appealed in a higher court, it was reversed on the basis that shrink-wrap licenses should be treated as "ordinary contracts accompanying the sale of products, and therefore as governed by the common law of contracts". The court also pointed out that "transactions in which the exchange of money precedes the communication of detailed terms are common," such as insurance binders, airplane tickets, consumer electronics, especially those bought over the telephone where the reading of a sales agreement to each and every customer would be to time consuming and impractical. The court also pointed out that the defendant had received continual notification of the license agreement each time he used the software in question.

An overview of click-wrap contracts

Click-wrap licenses are a variation of shrink-wrap. There are two main ways to enter into a click-wrap agreement (Grossman et al), a party may type and click where the consumer must type "I accept" or something similar in an on-screen box, and then a send button of some sort to signify acceptance of the contract. The second way to enter into click-wrap agreements is through icon clicking, where the consumer clicks an "I accept" button on an application screen or web site. In common with both of these methods is that the user may not proceed beyond that point unless they agree to accept the contract agreements presented.

As with shrink-wrap contracts, there is little available case law for click-wrap contracts in Europe, although there are a few cases in the USA. The Hotmail v. Van Money Pie case was the first case involving click-wrap licenses, although the court did not directly address the issue of whether click-wrap licenses were enforceable, it did indirectly suggest that contracts formed online could be enforceable (Horrocks and Natusch).

The case involved Hotmail, an Internet Service Provider (ISP) that provides free e-mail services to subscribers that agree to abide by their online service agreement. Some of the conditions listed in the agreement dealt with the sending of spam (unsolicited e-mails) as well as sending e-mails of an obscene nature. Hotmail learned that the defendants were using their Hotmail accounts to send spam e-mails to advertise both pornographic and "get-rich quick" web sites. Due to the nature of these mails, Hotmail received many complaints about the mails that it claimed adversely affected it's reputation.

Hotmail sued Van Money Pie, and the court, in issuing a preliminary injunction against Van Money Pie, commented on the likelihood of prevailing on the breech of contract of the service agreement. Although the court did not directly address the enforce-ability of the service agreement, the e-commerce community has viewed the decision that the courts are prepared to extend their shrink-wrap position to cover click-wrap agreements as well (Snukal). The Benefits of Click-Wrap Contracts Over Shrink-Wrap Contracts With the software industry increasingly moving in the direction of selling software online rather than from retail outlets, shrink-wrap agreements may very easily become a thing of the past. For example, it is now quite common to have software sold and distributed solely online via interactive downloads, which not only benefit the producer of the software in terms of reduced packaging and distribution costs, but also benefit the consumer as they can gain access to the software they require in a shorter space of time, while lower production costs may also result in lower sale prices for the consumer.

If this model of software distribution is to continue, as it appears likely it will, then the click-wrap license agreement is obviously the way forward. It fact, many software distributors will not allow anyone to download software from their web sites without them accepting their agreement, thereby forcing the consumer to accept the contract before they even try to install the software.

As the ProCD v. Zeidenberg case in the USA showed, shrink-wrap contracts are likely to stand up in court, although this can vary from country to country. Although click-wrap contracts have never been challenged directly, it is likely that they would be treated in a similar fashion by the courts as that of shrink-wrap contracts, although it is important that they are employed by the software producer or service provider it the correct fashion, i.e. that they bar progress to the user unless they have accepted the license agreement in question. In this way, click-wrap contracts point the way forward for protecting large software companies and small software start-ups from excessive liabilities for the foreseeable future.

References

Adam Snukal , "The 21st Century Contract: Packaging Your Protection". http://www.internetindustry.com/Interviews/archives/ss00/package_snukal.shtml

Mark Grossman, Allison Kimberly Hift, Raquel Rothman, "Click-Wrap Agreements - Enforceable Contracts or Wasted Words" http://www.becker-poliakoff.com/publications/article_archive/click_wrap.htm

Craig Horrocks, Chihaya Natusch, "Legal holes may exist in click-wrap trap" http://www.idg.net.nz/webhome.nsf/0/CC256A87000C5F2FCC256834007ACC1Aopendocument

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Updated 2020 : note that the above post was originally published in 2003, but is left here for archival purposes. Most of the external links are now sadly dead, so I have ghosted them out.