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 Research, Technology, Innovation
Technology Opportunities
Licencing Opportunities
Licensing Agreements: Do's and Don'ts
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 9) Licensing Agreements: Do's and Don'ts - WarrantiesDreadful Drafter sees that his President also has written on the envelope "no warranties". Dreadful Drafter decides that a disclaimer of all warranties of quality(33) should be included and writes a clause which was (and still may be) a standard in the U.S. software industry:"Devco gives no warranties expressed or implied except as specifically provided in this Agreement. WITHOUT LIMITATION, ALL IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A SPECIFIC PURPOSE ARE SPECIFICALLY DISCLAIMED." 9.1 A Warranty by Any Other Name A disclaimer of "warranties" may be useful in the United States under Section 2 of the Uniform Commercial Code. However, in Alberta, the Sale of Goods Act (Alberta), if it applies, refers to implied "conditions" of merchantability and fitness for a particular purpose.(34) The same words are used in Ontario's(35) and England's(36) sale of goods legislation. ****TACTIC: DESIGN WARRANTIES THAT ARE "FIT FOR THE PURPOSE". ****TACTIC: AVOID CLAUSES DRAFTED FOR THE SPECIFIC RULES OF OTHER JURISDICTIONS. 9.2 You Wanted It To Work? It is a moot point whether any of the Sale of Goods Act (Alberta), Section 2 of the Uniform Commercial Code (37), or the English Sales of Goods Act, 1979 applies to computer programs which are not mass marketed. None of these pieces of legislation was designed to cover software.(38) The attempts to force software into the unaccommodating legislative schemes produce potentially absurd results. Is the software a "good" if conveyed to the client on a disk but not a "good" if conveyed electronically with no physical copy being delivered?(39) A prudent licensing drafter might want to assume that the sale of goods legislation applies. It is rare that the implied warranties are appropriate for products (particularly computer programs)licensed by a specifically designed licensing agreement. Accordingly, Dreadful Drafter was correct to disclaim the implied warranties of quality but should structure the disclaimer using words appropriate for Alberta, the United States and England, and at least refer to all "representations, warranties and conditions (expressed or implied, oral or written)".(40) ****TACTIC: TAILOR WARRANTIES FOR EACH TECHNOLOGY TRANSFER. 9.3 Disclaimer "Fundamentally Breaches its Essential Purpose" The Devco President said there shall be "no warranties". However, the courts in Alberta, United States and England are not favorably predisposed to accept complete disclaimers of warranties of quality of goods, particularly if the bargaining powers of the two parties are not equal.(41) Alberta courts look to see if there is a "breach" going to the root of the contract.(42), American courts speak of the agreement "failing of its essential purposes"(43) or of "unconscionability"(44), and English courts look to the Unfair Contract Terms Act, 1977, to see if the exclusion of warranties of quality are "reasonable".(45) Devco will have to decide whether there are sufficient grounds to justify the exclusions of warranties of quality so it can survive arguments of breach going to the root of the contract, failure of essential purpose, unconscionability or unreasonableness. If there is any reasonable risk, Devco should consider providing a few basic warranties designed to prevent opening the door wide to a damage claim. ****TACTIC: BE SATISFIED THAT A TOTAL DISCLAIMER OF WARRANTIES OF QUALITY IS APPROPRIATE. 9.4 Basic Warranties of Quality Dreadful Drafter decides that he should provide some basic warranties of quality. He writes "Devco warrants that the Licensed Software shall function if used in accordance with the user manual". Dreadful Drafter has not specified any standard of quality. Did he mean that it would function in accordance with the specifications expressed in the user manual? Or is use in accordance with the user manual a condition precedent to the warranty? Dreadful Drafter should precisely set out the standards of quality. He might want to consider: (a) What standards of quality will be used: (i) Are there presently developed functional specifications? Are these specifications clearly and precisely written? (ii) If the functional specifications are not yet developed, how will they be approved so they can be used as standards of quality? (b) Will there be acceptance tests and if so, how will they be designed? (c) Who will perform the acceptance tests? Where? At whose expense? What periods of rectification are allowed? What are the consequences of acceptance tests not being passed? (d) Will there be conditions precedent to a warranty claim? Is it fair for the licensee to lose its remedies if a condition precedent is not satisfied? (e) How will the parties resolve disputes over quality? (f) What are the remedies of breach of warranty? Are there any limitations on liability? ****TACTIC: SPECIFY STANDARDS OF QUALITY. 9.5 Conditional Warranties Let us assume that Dreadful Drafter wanted to make the warranty conditional upon the Licensed Software being used in accordance with the user manual. Often the benefits of warranties are available only upon the satisfaction of various conditions precedent. All too frequently, however, the conditions precedent have no correlation with the error that is actually encountered. Did the failure to operate in accordance with the user manual actually cause the quality defect which was encountered? Is it unreasonable to have the warranty voided for the non-satisfaction of an irrelevant condition precedent? ****TACTIC: CORRELATE CONDITIONS PRECEDENT TO A WARRANTY TO THE QUALITY DEFECT. 9.6 Back-Up Remedy Dreadful Drafter might have written as his warranty "Devco warrants that the Licensed Software, when installed, shall perform in accordance with the Functional Specifications [defined elsewhere]. All other warranties expressed or implied, including all implied warranties of merchantability and forms for a specific purpose, are specifically disclaimed." Consider Devco being unable to install the Licensed Software due to technical errors. A court will be eager to hold that the only warranty is ineffective, and therefore the disclaimer is ineffective.(46) Dreadful Drafter failed to provide any back-up remedy in the event that Devco's warranties all proved to be ineffective. Some agreements provide for the possibility that the basic warranties provided are found to be unreasonable or do not cover the breach that actually occurs.(47) This concern is especially significant when the only warranties provided are to repair or replace the defective product. These agreements go on to provide a "backup remedy", such as payment of an amount pre-agreed to be liquidated damages or payment of the Licensee's direct damages up to a maximum dollar amount. (48) ****TACTIC: CONSIDER PROVIDING BACK-UP REMEDY.
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| Created: 2003-02-13 Updated: 2004-03-18 |
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