Digital downloads not “goods”

The Supreme Court of New South Wales has confirmed that the supply of software through a digital download fulfilment mechanism is not a supply of “goods” for the purposes of the sale of goods legislation.  The result, which had been anticipated by commentators and practitioners for many years, may lead to legislative reform.

The case is Gammasonics Institute for Medical Research v Comrad Medical Systems.  Comrad agreed to supply software to Gammasonics.  The product was supposed to assist Gammasonics to register patients and appointments and to process Medicare claims.  Gammasonics downloaded the software from Comrad’s server.  The software was never provided to Gammasonics in tangible form (such as on a DVD).  Gammasonics believed the software was defective.  Although the judgment does not say so expressly, it seems that Gammasonics refused to pay.  Comrad sued Gammasonics in the Local Court for repudiation of the contract.  Gammasonics sought to justify their conduct by arguing that Comrad had breached terms implied into the contract by operation of the Sale of Goods Act, including that the software would be of merchantable quality and fit for purpose.  Gammasonics lost that argument ‑ on grounds that included the finding that the software was not “goods” for the purposes of the sale of goods legislation.  Gammasonic was ordered to pay damages of about $58,000.  Gammasonic appealed to the Supreme Court.  Fullerton J upheld the decision of the Local Court.

It has been apparent in NSW since 1983 that the mere licensing of software, without the supply of any tangible products, may not constitute a sale of goods (this was the result of the decision in the Toby Constructions case).  No subsequent decision of an Australian court had ever answered the question.

Fullerton J recognised the consequence of her decision was that consumers purchasing software delivered online would have fewer protections than those who purchase software delivered by other means.  This, she said, was a matter for the legislature rather than the courts.

The analysis in this decision applies equally to the delivery of content through digital downloads, such as music, ringtones, video or e-books.  And, although it was not decided under Australia’s Trade Practices Act, the definition of “goods” in that legislation is not materially different, so the reasoning will also be applied in claims for breach of non-excludable conditions and warranties implied as a result of the operation of that Act.

The federal government has recently proposed important amendments to the consumer protection provisions of the Trade Practices Act – see our alert for an overview.  The draft legislation (known as the Australian Consumer Law) amends the definition of “goods” to specifically include computer software.  It is curious that software has been singled out for special treatment by the new Australian Consumer Law, and that the same approach is not proposed for other “products” that can, and will increasingly, be delivered as digital downloads.

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