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Computer Software Contracts: A Review of the

Caselaw
Andrew Rodau

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Recommended Citation
Rodau, Andrew (1988) "Computer Software Contracts: A Review of the Caselaw," Akron Law Review: Vol. 21 : Iss.
1 , Article 3.
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 Rodau: Computer Software Contracts

COMPUTER SOFTWARE CONTRACTS:

A REVIEW OF THE CASELAW

by
ANDREW RODAU"

The pervasiveness of computers in our society' has led to numerous legal

controversies involving computers and computer transactions.' Conflicts be-
tween buyers and sellers of computer software3 have resulted in, and will con-
tinue to result in, both tort and breach of contract actions to redress disputes.'
This article focuses on those contract actions involving computer software.5
A fundamental issue in resolving a contract dispute involving a software
transaction is whether article 2 of the Uniform Commercial Code (hereinafter

* Visiting Assistant Professor of Law, The Claude W. Pettit College of Law, Ohio Northern University; B.S.,
Hofstra University, 1976; J.D., Western New England College School of Law, 1981; LL.M., Temple Univer-
sity School of Law, 1986.
'The computer industry has been one of the fastest growth industries in the United States with companies in
this field having average annual growth rates of 11.1% for the twenty-five year period ending in 1980. Note,
U.C.C. Section 2-719 as Applied to Computer Contracts-Unconscionable Exclusions of Remedy?: Chatlos
Systems, Inc. v. National Cash Register Corp., 14 CONN. L. REV. 71, 93 & n. 100 (1981). See also Samuelson,
Our Computerized Society, NEWSWEEK, Sept. 9, 1985 at 73 (estimated that 10 million small home computers
will be in use by 1990); Reed, Decades Top Jobs-Where To Writefor Details on 20 Fastest-GrowingCareers,
N.Y. TIMES, Oct. 13, 1985 at 17 J (during next decade the number of computers in use is expected to increase
by a factor of ten).
2
One computer vender had approximately 165 suits brought against them with regard to their line of small
business computers. Another major computer seller had a $2.7 million judgement awarded against them.
Zammit, Computers, Software, and the Law, 68 A.B.A.J. 970 (1982). See also, Holmes, Application ofArti-
cle Two of the Uniform Commercial Code to Computer System Acquisitions, 9 RUTGERS COMPUTER &
TECH. L.J. 1, 4 n.10 (1982) (One major computer manufacturer had more than two hundred and fifty
lawsuits brought against them by dissatisfied purchasers of their computers).
Additionally, controversy has existed over whether computer software is taxable, admissible as evidence,
or eligible for patent or copyright protection. Note, Computer Programs as Goods Under the UCC, 77
MICH. L. REV. 1149 (1979). See also Rodau, ProtectingComputer Software: After Apple Computer,Inc. v.
Franklin Computer Corp., 714 F2d 1240 (3d Cir. 1983), Does Copyright Provide The Best Protection?, 57
TEMPLE L. Q. 527 (1984) (discusses the application of patent and copyright law to computer software).
'Computer software, also called a program, is defined as "a set of instructions arranged in proper sequence
for directing the computer in performing a desired operation, such as the solution of a mathematical problem
or the sorting of data." THE ILLUSTRATED DICTIONARY OF MICROCOMPUTERS 236 (2nd ed. 1986) (See "pro-
gram" definition). For a description of how software is produced see Rodau, Computer Software: Does Arti-
cle 2 of the Uniform Commercial Code Apply? 35 EMORY L. J.853, 868 n. 57 (1986).
Computer software should be distinguished from computer hardware which is the actual physical
machinery that comprises a computer system. See Rodau, supra note 3, at 871-72, n. 66, for a description of
the various types of computer hardware elements that comprise a computer system.
'See Zammit, supra note 2 (discusses potential contract and tort causes of action that are available when a
computer system fails to operate properly); See also Conley, Tort Theories of Recovery Against Venders of
Defective Software, 13 RUTGERS COMP. &TECH. L.J. 1 (1987) and Brenneman, Computer Malfunctions -
What Damages May Be Recovered in A Tort Product Liability Action, 2 SANTA CLARA COMP. & HIGH-
TECH. L.J. 271 (1986).
'One commentator predicts that the bulk of future computer litigation will involve software. Zammit, supra
note 2, at 970.

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UCC) or the common law governs.' It has been recognized that whether article
2 applies to computer software contracts is very significant especially in the
areas of warranties, consequential damages, and limitations on liability.7
However, commentators have disagreed on the answer to this question! This
article categorizes and examines the judicial decisions that have confronted
this question. An analysis of these decisions demonstrates that although only a
limited number of courts have faced this question the decisions are generally
consistent and reconcilable when viewed in the context of commercial transac-
tions generally

TRANSACTIONS INVOLVING THE PURCHASE OR LICENSE OF SOFTWARE WITHOUT

COMPUTER HARDWARE

Review of the Caselaw

In RRX IndustriesInc. v. Lab-Con, Inc., 1 0 the court found the California
version of the UCC applicable to a contract for the purchase of software. The
court, noting that for the UCC to apply the software must be a good, had no
difficulty concluding without analysis that the software was a good under sec-
tion 2-10511 of article 2.12 The court then made a factual determination as to
whether the services provided with the sale of the software were a predomi-
nant or incidental part of the transaction. This determination was necessary
since, under California law, a contract for the sale of goods would be classified
as a service contract outside the domain of article 2 if services provided with
the sale of goods were the predominant aspect of the transaction. It follows
from this decision that the court views software as a good; the investigation of
the services provided in a particular transaction was merely to ascertain
whether the predominant feature of the transaction was the sale of goods or
the providing of services. The court concluded that the seller's contractual
obligation to install the software, to repair any software errors, and to train the
buyer's employees in the operation of the software were merely incidental ser-
vices, and therefore the transaction fell within article 2.13

'Conley, supra note 4, at 2.

'McGonigal, Application of Uniform Commercial Code to Software Contracts, 2 COMPUTER L. SERV. REP.
(Callaghan) 117 (1978). See also Conley, supra note 4, at 2-3 (article 2 more liberal than common law with
regard to admissibility of parol evidence, formalities required to form a contract, and the power of a court to
supply missing contract terms).
'See Rodau, supra note 3, at 855-56 n.9.; see also Conley, supra note 4, at 3 (argues article 2 should not apply
to software).
'Accord Conley, supra note 4, at 4 (Courts will apply UCC to software transactions).
1772 F.2d 543 (9th Cir. 1985).
1
UCC section 2-105 (1) states that "'[g]oods' means all things (including specially manufactured goods)
which are movable at the time of identification to the contract for sale other than the money in which the
price is to be paid, investment securities (Article 8) and things in action."
02772 F. 2d at 546.
Id.
13
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 Rodau: Computer Software Contracts
Summer, 19871 COMPUTER SOFTWARE CONTRACTS

In Compu-Med Systems, Inc. v. Cincom Systems, Inc.,'4 a contract for the

purchase of software resulted in an action for fraud and breach of contract
against the seller when the software allegedly failed to perform as represented
by the seller. In denying the seller's motion to dismiss the complaint or in the
alternative to grant summary judgment the court relied upon two sections of
article 2. The court found that the buyer had given the seller adequate notice
of the alleged breach of contract, as required by section 2-607(3)(a),"5 and
therefore the buyer was not barred from bringing the action. Additionally, the
court found section 2-719(2)16 applicable to the question of whether the con-
tract provided an exclusive remedy that precluded the buyer's recovery of con-
sequential, special, or indirect damages. The court applied article 2, under Ohio
law, to this transaction without addressing the threshold question of whether
software was a good. Therefore, it must be assumed that the court viewed soft-
ware as a good within the domain of article 2.
In Harford Mutual Insurance Co. v. Seibels, Bruce & Co., 7 a buyer ob-
tained software under a license agreement and brought suit under South
Carolina law in tort and under the warranty provisions of article 218 when the
software allegedly failed to operate properly. The court dismissed the tort
claim on a motion for summary judgment but denied a motion for summary
judgment with regard to the warranty claim. 9 The court recognized that the
application of article 2 depended upon a finding that the license agreement was
a contract for sale and that the software in question was a good as opposed to a
service. However, the court declined to decide these issues since the court was
deciding a motion for summary judgment and facts relevant to these questions
were in dispute.2"
Analysis of the Caselaw
Three cases involved transactions to provide software without computer
hardware. In both cases involving the sale of software article 2 was applied to
the transaction. In Compu-Med Systems article 2 was applied without any
discussion of whether software was a good. In RRX Industries, although the
court recognized that software must be a good for article 2 to apply, the court
applied article 2 without any discussion of whether it was a good. The cursory
"Unpublished decision, No. 83 Civ. 8729 (S.D.N.Y. Aug. 30, 1984) (Available on Lexis, Genfed Library,
Dist. file).
"UCC section 2-607(3)(a) states that where the tender of goods has been accepted the buyer is barred from
any remedy for breach if the buyer fails to notify the seller of the breach within a reasonable time after buyer
discovers or should have discovered the breach.
I6UCC section 2-719(2) states "Jwihere circumstances cause an exclusive or limited remedy to fail of its essen-
tial purpose, remedy may be had as provided in this Act."
17579 F. Supp. 135 (D.Md. 1984).
"UCC section 2-313 (express warranty), section 2-314 (implied warranty of merchantability), and section
2-315 (implied warranty of fitness for particular purpose).
"Harford, 579 F.Supp. at 138.
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AKRON LAW REVIEW [Vol. 21:1

nature of these analyses indicates little judicial hesitancy with the conclusion
that software is a good under article 2. In RRX Industries the main thrust of
the court's analysis was its finding that the sale of software with accompanying
services was within article 2. The court relied on the predominant feature test
to reach its conclusion. Under this test a contract involving both sale and ser-
vice aspects is classified according to which aspect predominates.2' This ap-
proach is consistent with judicial treatment of commercial contracts in other
contexts since the predominant feature test is the most frequently used test to
evaluate whether a transaction involving both goods and services falls within
article 2.22 RRX Industries indicates, therefore, that conventional legal doc-
trine applicable generally to commercial contracts is still relevant and will be
applied to the sale of software.
Only in HarfordMutual Insurance was article 2 not applied to a software
transaction. In this case the court left open the question of article 2's ap-
plicability because the court was only deciding a motion for summary judg-
ment. However, this result is reconcilable with Compu-Med Systems and RRX
Industries. Both of these cases involved sales which are covered by article 2
while in HarfordMutual Insurance software was provided via a license which
is a non-sale transaction. As will be discussed subsequently, the treatment of
non-sale transactions varies among jurisdictions.23 Therefore, the court's
uncertainty about whether article 2 applied in Harford Mutual Insurance is
consistent with the judicial disagreement generally with regard to applying ar-
ticle 2 to non-sale transactions.2 '
Additionally, as will be discussed later, the type of software involved is
relevant.25 Providing custom designed software 26 may be predominantly a ser-
vice contract outside the scope of article 2 while providing standardized soft-
ware may be within article 2. Consequently, uncertainty about the type of soft-
ware provided in HarfordMutual Insurance may explain the court's deferral
of its determination of whether article 2 applied to the transaction.

"Note, The Goods/Services Dichotomy and the UCC.: Unweaving the Tangled Webb, 59 NOTRE DAME L.
REV. 717, 719 (1984).
"G. WALLACH, THE LAW OF SALES UNDER THE UNIFORM COMMERCIAL CODE 11.05 131at 11-28 (1981). See
also Freeman v. Shannon Construction, Inc., 560 S.W. 2d 732 (rex. Civ. App. 1977).
"See, infra notes 98-101 and accompanying text.
"'HarfordMutual Insuranceinvolved a federal court sitting in diversity and applying South Carolina law.
Under South Carolina law leases for automobiles and refrigeration equipment have been held to be within
article 2 when the lessee has an option to purchase the goods at the end of the lease term. See White v. State,
263 S.C. 110, 208 S.E.2d 31 (1974); Hones Leasing Inc. v. Gene Phillips & Assoc., 282 S.C. 327,318 S.E.2d
31 (1984). However, it is unclear if South Carolina courts will extend article 2 to other non-sale transactions
such a licenses.
"See, infra notes 155-158 and accompanying text.
"See, infra note 149.
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 Rodau: Computer Software Contracts
Summer, 19871 COMPUTER SOFTWARE CONTRACTS

TRANSACTIONS INVOLVING HARDWARE AND SOFTWARE SUPPLIED UNDER A

SINGLE AGREEMENT

Review of the Caselaw

In DreierCo., Inc. v. Unitronix Corp.," Dreier entered into a written con-
tract for the purchase of a computer system consisting of both hardware and
custom programmed software. The software allegedly never operated properly
and Dreier brought an action, under New Jersey law, for fraud and for breach
of warranty under article 2 of the UCC. The trial court found the action time-
barred by the statute of limitations and granted summary judgment for
Unitronix. However, the appellate court reversed and remanded for a deter-
mination of when tender of delivery occurred since that controls when the
statute of limitations starts to run under section 2-72511 of article 2. The court
confronted the question of whether article 2 applied to the transaction and
concluded that general agreement exists that the sale of a computer system
comprising both hardware and software is a sale of goods under article 2.
However, the court's discussion indicates that the court viewed the providing
of custom software, as in this case, as simply being an incidental service aspect
of the overall transaction.
In Redmac, Inc. v. Computerland,9 a computer system comprising both
hardware and software was sold. The system failed to work properly and an ac-
tion was brought under Illinois law for breach of express warranty under sec-
tion 2-31330 of article 2. The court applied article 2 to the transaction without
discussion and found that the seller had breached the section 2-313 express
warranty and that the buyer had a right to revoke acceptance of the system
under section 2-608.11
In Triangle Underwriters,Inc. v. Honeywell, Inc.,32 the sale of a computer
system consisting of hardware, standard software, and custom software
resulted in breach of contract claims when the system failed to function prop-
2
'Unpublished decision, No. A-1593, 85T5, Slip Op. (N.J. Super. Ct. App. Div. Nov. 10, 1986).
2UCC section 2-725(1) states that unless the parties have agreed otherwise, an action for breach of contract
must be commenced within four years of the tender of delivery.
"140 I11.App. 3d 741, 489 N.E.2d 380 (1986). See. infra note 50.
"UCC section 2-313(1) states that express warranties result from the seller's affirmations of fact or promises,
descriptions of the goods, or by providing a sample or model which becomes a basis of the bargain.
I'UCC section 2-608(1) states:
(1) The buyer may revoke his acceptance of a lot or commercial unit whose non-conformity substan-
tially impairs its value to him if he has accepted it
(a) on the reasonable assumption that its nonconformity would be cured and it has not been sea-
sonably cured;
or
(b) without discovery of such non-conformity if his acceptance was reasonably induced either by
the difficulty of discovery before acceptance or by the seller's assurances.
32457 F. Supp. 765 (E.D.N.Y. 1978), modified, 604 F.2d 737 (2d Cir. 1979) (reversed in part because district
court improperly applied statute of limitations).
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erly because the software did not operate as promised. The court concluded
that the transaction involved the sale of goods under article 2.33Therefore, the
contract action was barred by the four year statute of limitations under section
2-72514 of article 2 which applied in lieu of the six year statute of limitations
which applied to contracts outside the domain of article 2 in New York state."
In Rochester Welding Supply Corp. v. Burroughs Corp.,36 Rochester con-
tracted to buy two different computers from Burroughs. Under both contracts
Burroughs was obligated to program the computers, but after several unsuc-
cessful efforts Burroughs conceded that.it was unable to properly program the
computers. Rochester sued Burroughs for breach of contract, but the trial
court dismissed after concluding the statute of limitations under section 2-7251,
of article 2 had already run. On appeal the court found that the statute of
limitations had not run and the trial court was reversed." Both the majority
and dissent applied article 2 to the transaction without discussion of its applica-
tion. Their disagreement centered on how to apply section 2-725, not on
whether the transaction was within the scope of article 2.31
In Samuel Black Co. v. Burroughs Corp.,4 a buyer contracted to purchase
a computer as well as software for the computer. The software was never com-
pleted and the buyer returned the computer and sued the seller for, among
other things, breach of contract. The court found that Michigan law controlled
the transaction and stated that "there is reason to doubt whether the courts of
Michigan would treat the computer system transaction.., as falling within the
scope ... of the Uniform Commercial Code's (UCC) article on sales."'4 The
court then declined to resolve the question of the applicability of article 2
because it felt the outcome of the case would be the same whether article 2 did
or did not apply. Based on this reasoning the court simply applied article 2 to
the transaction by analogy. 2
In United States Welding v. Burroughs Corp.,43 dissatisfaction with the
operation of a computer and operating software which were leased resulted in
an action for negligent misrepresentation and breach of an implied warranty of

3457 F. Supp. at 769.

USee, supra note 28.
11457 F.Supp. at 769.
-78 A.D.2d 983, 433 N.Y.S.2d 888 (1980).
3'See, supra note 28.
38433 N.Y.S.2d at 889.
3Id.
4'33 U.C.C. Rep. 954 (D.Mass. 1981).
"d. at 962.
"Id. at 964.
4"587 F. Supp. 49 (D. Colo. 1984).
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 Rodau: Computer Software Contracts
Summer, 19871 COMPUTER SOFTWARE CONTRACTS

fitness," among other things. In denying the motion to dismiss the negligent
misrepresentation claim the court held, under Colorado law, that the contem-
poraneous contract claim (the breach of warranty claim) did not preclude the
negligent misrepresentation claim. 5 Additionally, the court simply presumed
without any analysis that article 2 applied to the overall lease transaction
under Colorado law.
In Jaskey Financeand Leasing v. Display Data Corp., 6 Jaskey purchased
a computer system, consisting of both hardware and software from Display
Data. The transaction involved a contract covering the computer system and
any accompanying programming and installation, and a separate maintenance
contract for the computer system. Dissatisfaction with the operation of the
system resulted in an action by Jaskey against Display Data for breach of ex-
press47 and implied warranties,"8 among other things. In deciding a motion to
dismiss, the court applied Maryland law and found any express warranties in
the advertising or promotional material to be excluded under section 2-20241 of
article 2.50 Additionally, the contract effectively disclaimed any express or im-
plied warranties of fitness under section 2-3 16,1 although any implied warran-
ty of merchantability was not disclaimed under section 2-316.52 The court ap-
plied article 2 to both contracts without discussion of the scope of article 2 or
its application to the transactions involved.
In Aplications, Inc. v. Hewlett Packard Co.," Aplications purchased a
Hewlett Packard computer programmed with a Hewlett Packard computer
language for resale to a third party. After Aplications installed the computer, it
alleged the computer language did not perform as warranted and Aplications
sued Hewlett Packard for breach of express54 and implied warranty,55 among
other things. The court granted summary judgment for Hewlett Packard with
regard to the breach of warranty claims because the court found, under
California law, that any warranties had been effectively disclaimed under sec-

"See, UCC section 2-315.

11587 F. Supp. at 51.
"564 F. Supp. 160 (E.D.Pa. 1983).
'7 See, supra note 30.
"See UCC section 2-315 (implied warranty of fitness for particular purpose).
41UCC section 2-202 governs the admission of parol evidence with regard to transactions covered by article
2.
1'564 F. Supp. at 164.
IIUCC section 2-316 allows the parties, by agreement, to exclude or modify warranties created by sections
2-313, 2-314 and 2-315.
52564 F. Supp. at 164.
11501 F. Supp. 129 (S.D.N.Y. 1980), affd, 672 F.2d 1076 (2d Cir. 1982).
5'See, supra note 30.
'5 UCC section 2-314 (implied warranty of merchantibility) and section 2-315 (implied warranty of fitness for
a particular purpose).
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tion 2-316.56 The court applied article 2 in this case without any discussion of
its applicability to the transaction involved.
In Kalil Bottling Co. v. Burroughs Corp.," Kalil signed a contract to pur-
chase a computer and software on credit. Subsequent to the installation of the
computer, Burroughs rejected Kalil's application for credit and a third party
purchased the computer and software from Burroughs and leased it to Kalil.
The computer did not operate properly and Burroughs failed to install all the
software required in the original contract. Kalil sued Burroughs for breach of
contract and breach of warranty,58 among other things. The parties proceeded
at trial and on appeal on the theory that a contract existed between Kalil and
Burroughs and therefore the court decided the case under Arizona law based
on this theory.59 In reversing a jury award for Kalil and remanding for a new
trial, the appellate court found an implied warranty exclusion valid under sec-
tion 2-316 (renumbered A.R.S. 44-2333 in Arizona).6° Additionally, the court
found any alleged representation made prior to executing the contract inad-
missible due to section 2-202 (A.R.S. 44-2309 in Arizona). 61 Finally, a contract
clause limiting damages and only requiring repair and replacement of any
defective parts was found to be a nonexclusive remedy under section 2-719
(A.R.S. 44-2398 in Arizona).6 Article 2 was applied in this case without any
discussion of its scope or application to the transaction at issue.
In ChatlosSystems Inc. v. NationalCash Register Corp.,63 National Cash
Register (NCR) sold Chatlos a computer via a sale/leaseback arrangement
which involved sale of the computer by NCR to a bank which then leased it

'Id. at 133.
5127 Ariz. 278, 619 P.2d 1055 (1980).
"See, supra note 18.
9Id. at 1058.
'See, supra note 51.
"See, supra note 49.
'UCC section 2-719 states:
(1) Subject to the provisions of subsections (2) and (3) of this section and of the preceding section on
liquidation and limitation of damages,
(a) the agreement may provide for remedies in addition to or in substitution for those provided in
this Article and may limit or alter the measure of damages recoverable under this Article, as
by limiting the buyer's remedies to return of the goods and repayment of the price or to repair
and replacement of non-conforming goods or parts; and
(b) resort to a remedy as provided is optional unless the remedy is expressly agreed to be ex-
clusive, in which case it is the sole remedy.
(2) Where circumstances cause an exclusive or limited remedy to fail of its essential purpose, remedy
may be had as provided in this Act.
(3) Consequential damages may be limited or excluded unless the limitation or exclusion in uncon-
scionable. Limitation of consequential damages for injury to the person in the case consumer
goods is prima facie unconscionable but limitation of damages where the loss is commercial is not.
479 F. Supp. 738 (D.N.J. 1979), affd, 635 F.2d 1081 (3d Cir. 1980) (remanded for recomputation of
damages), 670 F.2d 1304 (3d Cir. 1982) (liability upheld after remand).
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 Rodau: Computer Software Contracts
Summer, 19871 COMPUTER SOFTWARE CONTRACTS

back to Chatlos. Under the terms of the arrangement NCR also provided pro-
gramming services to Chatlos which entailed installation of software in the
computer by NCR personnel. The software never worked properly and in an
action by Chatlos against NCR the court held, under New Jersey law, that
NCR had breached both an express warranty6 and an implied warranty of
fitness.6 Damages were consequently awarded under section 2-714.6 The
court addressed the question of the applicability of article 2 by stating that the
transaction was for the sale of goods despite the lease arrangement and the pro-
gramming services which it viewed as only incidental service aspects of the
overall transaction. 7
In Carl Beasley Ford,Inc. v. Burroughs Corp.,68 Burroughs sold Ford a
computer and accompanying software via a "bundled" transaction.69 The
agreement obligated Burroughs to furnish, install, and test thirteen computer
programs. Twelve of the programs were installed late and three crucial pro-
grams failed to work properly rendering the computer useless to Ford. Ford
then rejected the computer and software and brought a successful breach of
contract action against Burroughs to recover the purchase price and conse-
quential damages. The court applied article 2, under Pennsylvania law, to the
transaction without discussion. 0 The court found that Ford had made a valid
rejection of goods under sections 2-60211 and 2-606.2 It then awarded damages

"See, UCC section 2-313.

"5See, UCC section 2-315.
"UCC section 2-714(2) states:
The measure of damages for breach of warranty is the difference at the time and place of acceptance
between the value of the goods accepted and the value they would have had if they had been as war-
ranted, unless special circumstances show proximate damages of a different amount.
67479F. Supp. at 742.
6361 F. Supp. 325 (E.D. Pa. 1973), affid without opinion, 493 F.2d 1400 (3d Cir. 1974).

69See, Rodau, supra note 3, at 873 (explanation of bundled transaction).

70361 F. Supp. at 330.
71
UCC section 2-602(1) states:
Rejection of goods must be within a reasonable time after their delivery or tender. It is ineffective
unless the buyer seasonably notifies the seller.
72
UCC section 2-606 states:
(1) Acceptance of goods occurs when the buyer
(a) after a reasonable opportunity to inspect the goods signifies to the seller that the goods are
conforming or that he will take or retain them in spite of their non-conformity; or
(b) fails to make an effective rejection (subsection (1) of Section 2-602), but such acceptance does
not occur until the buyer has had a reasonable opportunity to inspect them; or
(c) does any act inconsistent with the seller's ownership; but if such act is wrongful as against the
seller it is an acceptance only if ratified by him.
(2) Acceptance of a part of any commercial unit is acceptance of that entire unit.
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based on sections 2-711,"1 2-712,11 and 2-715."

In 0 J & C Co. v. GeneralHospitalLeasing,76 0 J & C obtained a com-
puter and accompanying software via a sale/leaseback arrangement under
which the computer manufacturer sold the computer to General Hospital
Leasing who then leased it to 0 J & C. The lease was for five years with an op-
tion to renew the lease on an annual basis at the end of the five year period.
The lease did not include an obligation or option to purchase on the part of 0 J
& C. In a successful action to recover unpaid rent due on the computer from 0
J & C, the court determined under Texas law that section 2-302"1 of article 2
was not relevant with regard to whether the warranty provision of the lease
was unconscionable.78 The court rejected application of section 2-302 because
the court said article 2 was limited to sales.79
In the Matter of Community Medical Center,80 the court reviewed the
allowance of a claim in a bankruptcy proceeding. The transaction involved a
three year contract which provided that the claimant would provide data pro-
cessing services to the debtor. The claimant leased computers from a computer
manufacturer which were installed on the debtor's premises. These leased com-
puters were then linked to claimant's central computer, located on claimant's
premises, which served the needs of all claimant's customers including the
debtor. The claimant also provided programming services, maintained the
computers, and trained the debtor's personnel in the operation of the system.
In determining the proper amount of the claim under New Jersey law the
court noted in dicta that the transaction was not within the domain of article
2.81 The court stated that the transaction involved a lease that was not the
practical equivalent of a sale because the computers involved were leased by
the claimant and therefore they could not be sold to the debtor. Additionally,
the debtor did not have an option to purchase them at the end of the lease for a
73
UCC section 2-711(1) states:
(1) Where the seller fails to make delivery or repudiates or the buyer rightfully rejects or justifiably
revokes acceptance then with respect to any goods involved, and with respect to the whole if the
breach goes to the whole contract (Section 2-612), the buyer may cancel and whether or not he has
done so may in addition to recovering so much of the price as has been paid
(a) "cover" and have damages under the next section as to all the goods affected whether or not
they have been identified to the contract; or
(b) recover damages for non-delivery as provided in this Article (Section 2-713).
74
UCC section 2-712 provides that if the buyer covers, the buyer can recover damages equal to the difference
between the cost of cover and the contract price plus any incidental or consequential damages.
IIUCC section 2-715 allows the buyer to recover incidental damages and to recover consequential damages
in certain situations.
76578 S.W.2d 877 (Tex. Civ. App. 1979).
"UCC section 2-302 allows a court to refuse to enforce all or part of a contract if the court finds the contract
to be unconscionable as a matter of law.
7578 S.W.2d at 878.
79
Id.
-623 F.2d 864 (3d Cir. 1980).

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 Rodau: Computer Software Contracts
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nominal sum. 2 Consequently, the court determined that a contract for the sale
of services, outside the scope of article 2, existed.3
In Aubrey's R. V. Center Inc. v. Tandy, Corp.,84 Aubrey's obtained a com-
puter system comprised of hardware and software from Tandy. Inventory soft-
ware was purchased directly from the software producer with a Tandy employ-
ee acting as an agent for the sale. The hardware and the remainder of the soft-
ware were obtained via a sale/leaseback arrangement in which a third party
purchased the system from Tandy and leased it back to Aubrey's. The
sale/leaseback arrangement was used as a financing scheme and it allowed
Aubrey's to purchase the system at the end of the lease. The inventory soft-
ware and some of the other software failed to function properly and Aubrey's
sought contract rescission and damages for violation of the state consumer pro-
tection act. 5 In affirming the trial court's rescission of the contract the appel-
late court noted that such a remedy was codified in section 2-6086 of article 2
although in code language it was called "revocation of acceptance.""7 The
court, noting that both parties agreed that article 2 applied, applied article 2
under Washington law without any discussion of its application to computer
software. 8
In Neilson Business Equipment v. Monteleone, 9 a physician in private
practice obtained a computer system consisting of hardware, software, and ac-
companying services via a sale/leaseback arrangement. The software failed to
generate proper patient bills or maintain adequate records, and the physician
thereafter terminated the computer system lease and sued for damages. The
trial court awarded damages to the physician under Delaware law, for breach
of the warranties of merchantability' and fitness 9' under article 2 of the UCC.
In affirming the trial court decision, the Delaware Supreme Court recognized
that the central issue was whether the transaction involved goods92 since article
2 is limited in its application to transactions in goods. 93 The court dismissed the
argument that software is an intangible and therefore not a good by con-
cluding that the computer hardware, software, and services were purchased as
92Id.
83
ld.
"46 Wash. App. 595, 731 P.2d 1124 (1987).
"WASH.REV. CODE ANN. section 19.86 et seq. (1978).
"See, supra note 31.
r731 P.2d at 1127.
Uld.
"1524 A.2d 1172 (Del. 1987).
"UCC section 2-314.
"1UCC section 2-315.
92524 A.2d at 1174.
"See UCC section 2-102 which states that "luinless the context otherwise requires, this Article applies to
transactions in goods ..."
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a package. 94 The court recognized that the transaction involves service aspects
but it upheld the trial court's application of the predominant feature test 95 since
substantial evidence supported the conclusion that the transaction involved
goods. The court was also not deterred from applying article 2 because the
computer system was obtained via a lease. The court concluded that the
sale/leaseback arrangement was the equivalent of a sale and that it was used
merely to obtain favorable cash flow and tax treatment.
Analysis of the Caselaw
A total of nine decisions involved the sale of hardware and software under
a single agreement. In eight of these decisions article 2 was applied to the trans-
action. Triangle Underwriters addressed the threshold question of whether
software was a good under article 2. The court, sitting in diversity, concluded
that a New York court would treat both the computer hardware and software
as goods under article 2.96 Dreier also confronted this question and stated:
It is clear that the sale of a computer system consists not only of physical
goods, but of substantial services essential in producing the final product.
Nevertheless, most authorities agree that the sale of a computer system
involving both hardware and software is a "sale of goods" notwithstand-
ing the incidental service aspects of the sale; therefore Article 2 of the
Uniform Commercial Code ... applies.97
In Samuel Black the court was unsure whether the computer transaction
was covered by article 2 of the UCC. Nevertheless, the court applied article 2
without resolving this coverage question because it concluded that the out-
come in this case was the same under both the common law and under article
2. In the remaining five cases that involved the sale of hardware and software
under a single agreement, article 2 was applied to the transaction without
discussion.
Although judicial decisions have found article 2 applicable to most sales
of hardware and software under a single agreement, less consistent results exist
when the computer hardware and software is leased rather than sold. In
United States Welding a lease of computer hardware and software was subject
to article 2 under Colorado law. However, in the Matter of Community Med-
ical Center the court noted that a lease of computer hardware which included
programming services was not covered by article 2 under New Jersey law.
Judicial decisions exhibit similar conflicting results when hardware and

11524 A.2d at 1174.

"See, supra note 21 and accompanying text.
"457 F. Supp. at 769.
'See, supra note 27, Slip Op. at 8-9. Accord Neilson Business Equipment Center v. Monteleone, 524 A.2d
1172, 1174 (Del. 1987) (Court relied on predominate feature test to apply Article 2 to transaction involving
computer hardware, software and services).
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 Rodau: Computer Software Contracts
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software are obtained via sale/leaseback arrangements. In Neilson Business

Equipment Center article 2 was applied to a sale/leaseback arrangement under
Delaware law. In Kalil Bottling article 2 was applied to a saleleaseback trans-
action under Arizona law. An analogous transaction was covered by article 2
under New Jersey law in Chatlos Systems. In Aubrey 's R. V. Center, article 2
was applied under Washington law in a transaction involving both the direct
sale of software and a sale/leaseback of hardware and software. However, in 0
J & C application to a sale/leaseback transaction was unequivocally rejected
under Texas law.
This inconsistent application of article 2 to transactions involving leases
and sale/leaseback arrangements does not represent confusion over whether ar-
ticle 2 applies to software. Instead it merely exemplifies the judicial disagree-
ment over the extension of article 2 generally to non-sale transactions such as
leases. 98 A few courts have extended article 2 to true leases" while other courts
have only extended article 2 to leases that are analogous or equivalent to a
sale.'0 ° Additionally, some courts have limited the scope of article 2 to sales
thereby excluding leases from the scope of article 2.101
The Texas courts have consistently held that article 2 is limited in scope to
sale transactions.' °2 Therefore, the failure of the Texas court in 0 J & C to ap-
ply article 2 to a sale/leaseback transaction involving computer hardware and
software is consistent with the Texas court's interpretation of the scope of arti-
cle 2.
In contrast to Texas, the Arizona courts have extended article 2 to lease
transactions. 3 Therefore the application of article 2 to the sale/leaseback ar-
rangement in Kalil Bottling is consistent with the Arizona court's interpreta-
tion of article 2.
9
Compare Hertz Commercial Leasing Corp. v. Joseph, 641 S.W.2d 752 (Ky. Ct. App. 1982) (article 2 ap-
plied to lease of a muffler pipe-bending machine) with Bona v. Graefe, 264 Md. 69, 285 A.2d 607 (1972) (ar-
ticle 2 limited to sales so lease of gold cart not covered).
"See, e.g., Owens v. Patent Scaffolding Co., 77 Misc.2d 992, 354 N.Y.S. 2d 778 (N.Y. Sup. Ct. 1974), rev'd
on other grounds, 50 A.D. 2d 866, 376 N.Y.S.2d 948 (1975). See also Capitol Assoc., Inc. v. Hudgens, 455
So.2d 651 (Fla. Dist. Ct. App. 1984) (article 2 applies to lease that gave lessee no right to purchase or acquire
title to the equipment).
1'0See, e.g., Westmont Tractor Co. v. Viking Inc., 534 F. Supp. 1314, 1317 n.3 (D. Mont. 1982) (lease of
equipment that gave lessee option to purchase equipment at end of lease was covered by article 2); Sawyer v.
Pioneer Leasing Corp., 244 Ark. 943, 428 S.W.2d 46 (1968) (article 2 applicable to lease where lease
analogous to sale); Hertz Commercial Leasing Corp. v. Transportation Credit Clearinghouse, Inc., 59
Misc.2d 226, 298 (N.Y. Civ. Ct. 1969) (article 2 applied to lease that was analogous to sale, rev'd on other
grounds, 64 Misc. 2d 910, 316 N.Y.S.2d 585 (N.Y. App. Div. 1970).
"I'Dekalb A.G. Research, Inc. v. Abbott, 391 F. Supp. 152, 153-54 (N.D. Ala. 1974) (lease of hens not
covered by article 2since article 2 applies to sales not leases), affdper curiam, 511 F.2d 1162 (5th Cir. 1975).
1"'See, e.g., U.S. Armament Corp. v. Charlie Thomas Leasing Co., 661 S.W.2d 197 (Tex. Ct. App. 1983).
"'Pacific American Leasing v. S.P.E. Bldg. Sys., Inc., 152 Ariz. 96, 730 P.2d 273 (1986) (article applied to
lease of computer); Preston Motor Co., Inc. v. Palomares, 133 Ariz. 245, 650 P.2d 1227 (1982) (article 2 ap-
plied to automobile lease); Broadmont Corp. v. Fashion Floors, Inc., 124 Ariz. 282, 603 P.2d 553 (1979)
(UCC applied to automobile lease).
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Likewise, Washington courts have concluded that article 2 covers leases

and bailments. °'1 Consequently, the application of article 2 to the transaction
in Aubrey's R. V. Center is consistent with state law in Washington.
In an early decision extending the implied warranty of fitness to a leased
truck the New Jersey Supreme Court noted, in dicta, that article 2 could ex-
tend beyond sales. °5 Based on this and decisions in other states extending arti-
cle 2 to lease transactions, the application of article 2 in ChatlosSystems seems
logical.
Despite Chatlos Systems a federal court noted in Community Medical
Center that under New Jersey law a lease arrangement was not within the
scope of article 2. These decisions are reconcilable however in light of the trend
of only extending article 2 to lease transactions that are analogous or
equivalent to sales.)0
In Chatlos Systems a sales/leaseback arrangement was used merely for
financing purposes. In this case a computer manufacturer was unable to sell a
computer system directly to a customer because the customer failed to meet
the credit standards of the manufacturer. To prevent loss of the sale, the
manufacturer sold the computer system to a bank which then leased it to the
customer. Despite the use of a lease, the underlying purpose of the transaction
was to accomplish a sale, and therefore the technical lease arrangement was
really equivalent to a sale by the manufacturer to the customer.
In Community Medical Center, the court noted that some leasing ar-
rangements are within the scope of article 2 when they are equivalent to sales.
However, the court did not believe the lease arrangement in this case was
equivalent or analogous to a sale and therefore article 2 was found inap-
plicable.
Finally in United States Welding a federal court sitting in diversity, con-
cluded, without analysis, that under Colorado law article 2 applied to a lease
transaction despite a lack of Colorado precedents on this question.0 7 Such a
result is consistent with other jurisdictions which have extended article 2 to
lease transactions.
A review of the caselaw indicates that the sale of computer hardware and
software under a single agreement is treated as being within the scope of article
2 by most courts. However, when a lease transaction is involved, the courts are
divided on whether article 2 applies. An examination of the treatment of leases
1
''Mieske v. Bartell Drugs Co., 92 Wash.2d 40, 593 P.2d 1308 (1979) (en banc); See also Baker v. City of
Seattle, 79 Wash. 2d 198, 484 P.2d 405 (Wash. 1971) (en banc).
10
Cintrone v. Hertz Truck Leasing, 212 A.2d 769, 775-76 (N.J. 1965).
1"6See, supra note 100.
"'See Neilson Business Equipment Center v. Monteleone, 524 A.2d 1172, 1175 (Del. 1987) (despite lack of
state precedents Delaware Supreme Court applied article 2 to a sale/leaseback transaction based on per-
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 Rodau: Computer Software Contracts
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generally under Article 2 reveals that the courts are divided on the treatment
of leases." 8 Therefore, the different state-to-state treatment of computer lease
transactions is consistent with the varied treatment of leases in general.

TRANSACTIONS TO OBTAIN BOTH COMPUTER HARDWARE AND SOFTWARE

INVOLVING SEPARATE HARDWARE AND SOFTWARE AGREEMENTS

Review of the Caselaw

9 a computer user leased a Bur-
In W.R. Weaver Co. v. Burroughs Corp., 10
roughs computer from the defendant and purchased application software to
run on the computer from the defendant. When the computer and software
failed to operate as warranted the computer user sought consequential
damages based on theories of express"' and implied warranty"' and strict
liability. The appellate court specifically found article 2 inapplicable to the
computer hardware portion of the transaction since the hardware was leased
and article 2, at least in Texas, is limited to sales."' Article 2 was held ap-
plicable to the software sale, however, and therefore the statute of limitations
embodied in section 2-725'" and the warranty exclusion contained in section
2-316" 4 were applicable to the software sale."5 Although the court did not
directly address whether the software was a good, such a conclusion is implicit
in the court's application of article 2 to the software transaction.",
In Hi Neighbor EnterprisesInc. v. Burroughs Corp.,"7 a buyer entered
into two contracts for the purchase of computer hardware and accompanying
training, support services and other material. The buyer also executed two con-
tracts for the purchase of software and computer education courses.
Dissatisfaction with the seller's performance under the contracts led the buyer
to sue for breach of contract and fraud. In analyzing the enforceability of the
damage and warranty limitation clauses of the contracts the court, applying
Florida law, determined that sections 2-719110 and 2-316" 9 of article 2 rendered

'"The judicial disagreement over whether article 2 of the UCC applies to leases has resulted in the drafting
of a new article for the UCC. Article 2A entitled "Leases" applies to all transactions that create a lease. IA
U.L.A. (West) 405-39 (1987 Sup.).
109580 S.W.2d 76 (Tex. Civ. App. 1979).
"*See UCC section 2-313.
"'See UCC sections 2-314 and 2-315.
23580 S.W.2d at 80.
'See, supra note 28.
"'See, supra note 51.
"1580 S.W.2d at 80-81.
116d
11492 F. Supp. 823 (N.D. Fla. 1980).
"'UCC section 2-719 allows contracting parties, by agreement, to limit damages and remedies for breach of
contract.
"'See, supra note 51.
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 Akron Law Review, Vol. 21 [1988], Iss. 1, Art. 3
AKRON LAW REVIEW [Vol. 2 1:1

the clauses valid.2 0 The court failed to expressly address whether software was
a good and simply implied this conclusion by finding article 2 applicable to the
contracts for the sale of software.'
In Office Supplies, Inc. v. Basic/Four Corp.,' the plaintiff purchased
computer hardware and leased software to be used with the hardware. The
plaintiff brought an action for breach of contract alleging defects in both the
hardware and software, but the action was dismissed pursuant to defendant's
motion for summary judgment. 23 In the court's analysis the statute of limita-
tions under the Wisconsin version of section 2-725121 was relied on.'25 In addi-
tion, relying on California law, a warranty disclaimer was found not to be con-
spicuous as required by section 2-316,126 and a damage limitation was found to
be void and not to have failed of its essential purpose under section 2-719.27 In
reaching its decision, the court treated the lease of software as a sale of soft-
ware noting in a footnote that the software was leased for copyright purposes
and that neither party to the action contended that this had any significance
with regard to the application of article 2.120
In Quad Cty. Distributing Co. v. Burroughs Corp.,' 9 a beer distributor
contracted with Burroughs to buy a computer and for the right to use certain
programs provided by Burroughs. The distributor also paid Burroughs $14,000
to have Burroughs develop software for the distributor. The programs to be
developed never worked properly and the buyer covered by purchasing the
programs elsewhere for $18,718.28 and sued for breach of contract under Il-
linois law. The court stated that the measure of damages for breach of a con-
tract for the sale of personal property was the difference between the contract
price and the market price at the time of the breach. "' The court then found
damages to be the difference between the contract price and the cost of
cover. 1 ' The court failed to identify whether the common law or article 2 ap-
plied since the court noted the common law measure of damages in this case
was the same as under the applicable article 2 provision (section 2-712).112 It
11492 F. Supp. at 826.
121Id.
2538 F. Supp. 776 (E.D. Wis. 1982).
3
1 d. at 793.
'2 4Wisconsin modified UCC section 2-725 so it provides a six year statute of limitations instead of a four year
statute of limitations. WIs. STAT. ANN. section 402.725 (Cum. Supp. 1986).
125538 F. Supp. at 781.
1'UCC section 2-316 provides that a written exclusion or modification of implied warranties under UCC
sections 2-314 and 2-315 must be conspicuous.
12538 F. Supp. at 784 & 789. See, supra note 62.
18 d. at 778, n. I.
9'68 Ill. App. 3d 163, 385 N.E.2d 1108 (1979).
"IId. at 1110.

121d. See, supra note 74.

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 Rodau: Computer Software Contracts
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follows, however, from the court's analysis that it at least viewed software as
personal property even though the court failed to explicitly determine whether
the common law or article 2 controlled the transaction.
In Westfield Chemicals Corp. v. Burroughs Corp.,"I Burroughs sold a
computer with a one year service contract to Westfield. Westfield alleged that
the computer did not work properly and sued for damages based on breach of
contract and breach of express"' and implied warranties'35 among other things.
The Court applied article 2 under Massachusetts law without discussion. The
Court dismissed the action because it determined the contract was not uncon-
scionable based on Official Comment one to section 2-30236 because the con-
tract effectively disclaimed all warranties under section 2-3 16, 1'3 and because
the contract effectively limited Westfield's remedy to repair or replacement of
defective computer parts under section 2-719.138 The Court also noted in dicta
that the parties signed a second software contract under which Burroughs was
to program the computer for Westfield. The Court stated that the provisions of
this contract also disclaimed all warranties and limited liability as in the sales
contract, although the Court failed to state explicitly that article 2 applied to
the software contract. "9
In H.MO. Systems Inc. v. Choicecare Health Services Inc.,"4 H.M.O.
purchased computer hardware from Hewlett Packard on credit. H.M.O. then
leased this hardware to Choicecare and Choicecare made monthly lease pay-
ments equal to H.M.O.'s monthly payments directly to the bank that financed
the transaction between Hewlett Packard and H.M.O. Choicecare was respon-
sible for all maintenance of the hardware and had an option to purchase the
hardware at the end of the lease. Choicecare also entered into an agreement
with H.M.O. under which H.M.O. granted Choicecare a non-expiring license
for $15,000 to use software developed by H.M.O. especially for Choicecare.
The software agreement also provided that Choicecare would make space
available to H.M.O. to demonstrate the software to other potential customers
in return for Choicecare receiving a royalty for each system sold. Choicecare
subsequently became insolvent and was placed in receivership. H.M.O. then
sued, under Colorado law, for breach of the hardware lease and breach of con-
tract with regard to the software agreement. The court held that the lease
21 U.C.C. Rep. 1293 (Mass. Super. Ct. 1977).
...
UCC section 2-313.
3
"'UCC section 2-315 (implied warranty of fitness for particular purpose).
""The principle [of unconscionabilityl is one of the prevention of oppression and unfair surprise.., and not
of disturbance of allocation of risks because of superior bargaining power." 21 U.C.C. Rep. at 1296, quoting
UCC section 2-302 Official Comment one.
"'See, supra note 51.
21 U.C.C. Rep. at 1295-96.
"'Id.at 1299.
4665 P.2d 635 (Colo. Ct. App. 1983).
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AKRON LAW REVIEW [Vol. 2 1:1

agreement was governed by article 9 of the UCC'4 ' since the intent of the par-
ties was to create a security interest in the computer hardware.'42 The breach of
the software agreement, however, was treated as a breach of contract claim
and damages were determined based on the common law without any discus-
sion as to whether article 2 should apply to the software agreement.'43

Analysis of the Caselaw

A total of six decisions involved transactions to provide computer systems
in which a separate agreement was executed for the hardware and software
segments of the system. Article 2 was consistently applied to contracts for the
sale of software in W.R. Weaver and Hi Neighbor. However, the decisions are
less consistent when custom software'" is involved or the software is provided
via a non-sale transaction such as a lease or license.
In Westfield Chemicals the court implied that a contract to provide
custom software was governed by article 2. However in Quad Cty.
Distributing,the application of article 2 to a similar custom software contract
was left undecided because the outcome of the case was the same under the
common law or article 2. Additionally, article 2 was found applicable to leased
software in Office Supplies while H.MO. Systems applied the common law to
an agreement to license custom software.
These decisions indicate that software was viewed as a good covered by
article 2 in the majority of cases. The decisions in which article 2 was not ap-
plied or in which its application was left undecided do not necessarily represent
confusion with regard to whether article 2 applies to software. Both of these
decisions involved custom software which under existing law may not be sub-
ject to the application of article 2. As will be discussed in the next section, such
contracts may be service contracts outside the domain of article 2.145
Additionally, the failure of H.MO. Systems to apply article 2 may be due
to the nature of the transaction. H.MO. Systems involved a license to use soft-
ware which is a non-sale transaction. As previously discussed, the treatment of
non-sale transactions generally varies among different jurisdictions.'l" In Col-
orado no state court precedents exist with regard to the extension of article 2 to
non-sale transactions.'4 7 Therefore, the failure to apply article 2 may indicate

"4'Article 9 of the UCC is applicable "to any transaction (regardless of its form) which is intended to create a
security interest in personal property or fixtures including goods. UCC section 9-102(1 )(a).
14665 P.2d at 635.
"'Id.at 639.
'"See, infra note 149.
14'See, supra notes 153-155 and accompanying text.
'"See, e.g., supra note 98.
"'But see United States Welding v. Burroughs Corp., 587 F. Supp. 49 (D. Colo. 1984) (federal court sitting in
diversity found article 2 applicable to lease transaction under Colorado law).
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 Rodau: Computer Software Contracts

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reluctance of the intermediate appellate court in H.M.O. Systems to apply arti-

cle 2 to a non-sale transaction absent Colorado precedents.

AGREEMENT TO DEVELOP CUSTOM SOFTWARE

Review of the Caselaw

In Data ProcessingServices Inc. v. L.H. Smith Oil Corp.,48 the court
squarely addressed the issue, under Indiana law, of whether a contract to
develop custom software'49 designed to meet the specific needs of the user was
a contract for the sale of goods subject to article 2, or a contract to perform ser-
vices subject to the common law. 150 The trial court found article 2 applicable
and awarded $33,000 damages for breach of contract based on a finding that
the software failed to perform as promised. On appeal, the court affirmed the
award of damages but its decision was based on the common law since the ap-
pellate court determined that the contract to develop software was a contract
to provide services and not a contract to sell goods.' It should be noted that
the court distinguished the custom software involved in this case from the sale
of "generally-available standardized software" which other courts have held to
be within article 2.152

Analysis of the Caselaw

In Data ProcessingServices the court confronted the question of whether
a contract to develop custom software was a contract for the sale of goods or a
service contract. 53 The court concluded that the development contract was a
service contract and therefore article 2 did not apply since the scope of article 2
does not extend to service contracts.' However, the court recognized that it
was dealing with custom made software and that its decision might not apply 55
to standardized software which is sold as a mass-marketed commodity.
The distinction between standardized software and custom made software
with regard to the application of article 2 is analogous to the application of arti-
cle 2, by some courts, in other commercial transactions. For example, in Art
Metal Products Co. v. Royal Equipment Co., 156 a contract to supply and install
1-492 N.E.2d 314 (Ind.Ct. App. 1986), reh. denied, 493 N.E.2d 1272 (nd. Ct. App. 1986).
14
Computer software can be classified as "canned" or "off the shelf" software or as "custom" software. Canned
software is software that is suitable for many users without modification. Custom software is specially
designed for the specific needs of the user and is not readily usable by other users. Measurex Systems, Inc. v.
State Tax Assessor, 490 A.2d 1192, 1195 (Me. 1985). See also Rodau, supra note 3, at 861, n. 31.
15492 N.E.2d at 318.
1Id.
"'Id.at 319.
1531d.

Im
ld.
l"'ld.
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'670 S.W.2d 1988
152 (Mo. Ct. App. 1984). 19
 Akron Law Review, Vol. 21 [1988], Iss. 1, Art. 3
AKRON LAW REVIEW [Vol. 2 1:1

custom built athletic lockers was held to be outside the scope of article 2. The
court reasoned that the main purpose or predominant feature of the contract
was to install the custom lockers. The providing of the lockers, which are
goods under article 2, was viewed as only an incidental aspect of the
contract."7 In reaching its conclusion, the court distinguished Anderson Con-
struction Co. Inc. v. Lyon Metal Products,Inc., 58 in which a contract to pro-
vide and install school lockers was held subject to article 2. In Anderson Con-
struction, the lockers were standard lockers and therefore the court concluded
the sale of the lockers was the predominant feature of the contract. Therefore,
a determination that standard software is a good and that custom software is
not a good under article 2 is reconcilable with at least some existing caselaw
dealing with non-computer transactions.

AGREEMENTS TO PROVIDE DATA PROCESSING SERVICES

Review of the Caselaw

In Liberty FinancialMgmt. v. Beneficial Data,59 Beneficial Data entered
a contract to provide on-line data processing services to Liberty, a consumer
loan company. Dissatisfaction with the services resulted in Liberty bringing a
breach of contract action under Missouri law which yielded a jury award of
over one million dollars. On appeal, the trial court decision was reversed and
the case was remanded, in part, because a clause in the contract limiting conse-
quential damages for negligence was withdrawn from the consideration of the
jury by the trial court. In analyzing the validity of the clause limiting conse-
quential damages, the appellate court found the clause valid, but rejected ap-
plication of section 2-7 19160 of article 2 because it concluded the scope of article
2 was limited to transactions in goods. 6 ' The court determined that the con-
tract in this case was primarily for data processing services with reels of tape
and other tangible items provided to Liberty being only incidental to the con-
tract, and therefore the contract was not within the scope of article 2.162
In Computer Servicenter, Inc. v. Beacon Manufacturing Co.,'63 an oral
contract was entered into which provided that Computer Servicenter would
provide data processing services to Beacon in the form of analysis, collection,
storage, and reporting of certain data supplied by Beacon. The services had
been provided for three months when Beacon notified Computer Servicenter
that these services were no longer required. Computer Servicenter brought an
"5 See id. at 155. But see Lake Wales Publishing Co., Inc. v. Florida Visitor, Inc., 335 So.2d 335 (Fla. Dist.
Ct. App. 1976) (contract to print specially manufactured pamphlets covered by article 2).
15s370 So.2d 935 (Miss. 1979).
59670 S.W.2d 40 (Mo. Ct. App. 1984).
IwSee, supra note 62.
161670 S.W.2d at 48.
162
Id "

16328 F. Supp. 653 (D.S.C. 1970), affd, 443 F.2d 906 (4th Cir.1971).
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 Rodau: Computer Software Contracts
Summer, 1987] COMPUTER SOFTWARE CONTRACTS

action for breach of contract but Beacon's motion for summary judgment was
granted based on the oral contract being unenforceable under the statute of
frauds. In reaching its decision, the court determined under South Carolina
law that the transaction was a contract to provide services as opposed to a con-
tract for the sale of goods and therefore the common law statute of frauds ap-
plied rather than section 2-201164 of article 2.165
Analysis of the Caselaw
In both Liberty FinancialMgmt. and Computer Servicenter, computer
hardware and software were used to provide services to customers. In Liberty
FinancialMgmt., reels of tape and other tangible things which are goods under
article 2 were supplied to customers. In Computer Servicenterdata supplied by
the customer was collected and analyzed. Presumably this data was reported to
the customer in some tangible form which would also be a good under article
2. However, in both cases, article 2 was found inapplicable because the pre-
dominant feature or purpose of the transaction was found to be the providing
of services with the goods only being incidental to the transaction. This result
is consistent with the predominant feature test which has already been dis-
cussed.
The conclusion that article 2 was inapplicable in both Liberty Financial
Mgmt. and ComputerServicenter,is also consistent with judicial decisions out-
side the computer area. A contract to supply blood'" as well as contracts for
the installation of glass,'67 flooring, 68 carpet, 69 and a sewer system 70 were all
held to be service contracts outside the domain of article 2. In each of these
cases the goods involved in the transaction were found to be incidental to the
predominant service aspect of the transaction. The decisions in Liberty Finan-
cialMgmt. and ComputerServicenter are therefore consistent with an existing
body of judicial decisions.

CONCLUSION

An overview of these decisions and the accompanying analyses indicates

that the majority of courts faced with transactions involving software have
relied on the same analysis applied generally to commercial transactions. The
predominant feature test was used to determine if a software transaction
'UCC section 2-201 requires contracts for the sale of goods for $500 or more to be in writing to be en-
forceable.
165328 F. Supp. at 655.
'"Lovett v. Emory University, Inc., 116 Ga. App. 277, 156 S.E.2d 923 (1967).
' 67Coakley and Williams, Inc. v. Shatterproof Glass Corp., 778 F.2d 196 (4th Cir. 1985), cert. denied, 106
S.Ct. 1640.
'"Ranger Construction Co. v. Dixie Floor Co., Inc., 433 F. Supp. 442 (D.S.C. 1977).
69
' Dionne v. Columbus Mills, Inc., 311 So.2d 681 (Fla. Dist. Ct. App. 1975).
'7 Semler v. Knowling, 325 N.W.2d 395 (Iowa 1982).
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 Akron Law Review, Vol. 21 [1988], Iss. 1, Art. 3
AKRON LAW REVIEW [Vol. 2 1:1

which includes services is a service contract outside article 2 or a contract for

the sale of goods within article 2. Such an analysis is generally consistent with
commercial decisions not involving computer hardware or software. Addi-
tionally, the judicial disagreement over whether article 2 applies to software
transactions involving a lease or sale/leaseback arrangement is consistent with
judicial decisions outside the computer area. Disagreement exists generally
over whether article 2 is applicable only to pure sales or to non-sale transac-
tions such as leases.
The different treatment of custom and standardized software is also con-
sistent with decisions outside the area of computers. The conclusion that a con-
tract to develop custom software is a service contract outside article 2 while
the sale of standardized software is within article 2 is analogous to the same
distinction made by many courts between custom and standard goods in
general.
The judicial treatment of software is therefore consistent with judicial
treatment of commercial transactions generally. Any inconsistencies or con-
flicting results with regard to the application of article 2 to different types of
software transactions are a product of varying judicial treatment of commer-
cial transactions generally rather than confusion over how to deal with soft-
ware.

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