Gammasonics Institute for Medical Research Pty Ltd v Comrad Medical Sysytems Pty Ltd

[2010] NSWSC 267

Reported Decision: 77 NSWLR 479

New South Wales

Supreme Court

CITATION:	Gammasonics Institute for Medical Research Pty Ltd v Comrad Medical Sysytems Pty Ltd [2010] NSWSC 267
HEARING DATE(S):	26 February 2010
JUDGMENT DATE :	9 April 2010
JUDGMENT OF:	Fullerton J
DECISION:	1. Appeal dismissed. 2. Plaintiff to pay defendant's costs.
CATCHWORDS:	CONTRACTS - appeal from Local Court - breach of contract - whether breach of contract is question of mixed fact and law - whether software package delivered by online download is properly classed as "goods" for application of Sale of Goods Act - applicability of statutory warranties of fitness for purpose and merchantable quality - implied terms - whether equivalent terms of fitness for purpose and merchantable quality implied by common law
LEGISLATION CITED:	Copyright Act 1968 (Cth) Copyright Amendment Act 1984 (Cth) Export Market Development Grant Act 1997 (Cth) Local Court Act 2007 Sale of Goods Act 1923 Sale of Goods Act 1979 (UK) Trade Practices Act 1974 (Cth)
CASES CITED:	ASX Operations Pty Ltd v Pont Data Australia Pty Ltd (No 1) (1990) 27 FCR 460 Adam P Brown Male Fashions Pty Ltd v Philip Morris Inc [1981] HCA 39; 148 CLR 170 Advent Systems Ltd v Unisys Corp (1991) 925 F 2d 670 Amlink Technologies Pty Ltd and Australian Trade Commission, Re [2005] AATA 359; 86 ALD 370 Apple Computer Inc v Computer Edge Pty Ltd [1986] HCA 19; 161 CLR 171 BP Refinery (Westernport) v Shire of Hastings (1977) 180 CLR 266 Castano v Ashglow Pty Ltd as Trustee for the Ashglow Trust [2009] NSWSC 919 Nationwide News Pty Ltd v Naidu & Anor [2007] NSWCA 377; 71 NSWLR 471 St Albans City and District Council v International Computers Ltd [1996] 4 All ER 481 Sherritt Gordon Mines Ltd v FCT (1976) 10 ALR 441 Toby Constructions Products Pty Ltd v Computa Bar (Sales) Pty Ltd [1983] 2 NSWLR 48
PARTIES:	Gammasonics Institute for Medical Research Pty Ltd (Plaintiff) Comrad Medical Sysytems Pty Ltd (Defendant)
FILE NUMBER(S):	SC 2009/14136
COUNSEL:	J Knackstredt (Plaintiff) A Scotting (Defendant)
SOLICITORS:	Adrian Twigg & Co (Plaintiff) Robert Storey (Defendant)
LOWER COURT JURISDICTION:	Local Court
LOWER COURT FILE NUMBER(S):	286/08
LOWER COURT JUDICIAL OFFICER :	Quinn LCM
LOWER COURT DATE OF DECISION:	24 July 2009

- 1 -

IN THE SUPREME COURT
OF NEW SOUTH WALES
COMMON LAW DIVISION

FULLERTON J

9 APRIL 2010

2009/14136 GAMMASONICS INSTITUTE FOR MEDICAL RESEARCH PTY LIMTED v COMRAD MEDICAL SYSTEMS PTY LIMTED

JUDGMENT

1 HER HONOUR: By an amended summons dated 26 February 2010, Gammasonics Institute for Medical Research Pty Limited (“Gammasonics”), seeks leave to appeal against orders made by Magistrate Quinn on 24 July 2009 in respect of a statement of claim in which Comrad Medical Systems Pty Limited (“Comrad”) sought an award of damages for loss occasioned by Gammasonics’ repudiation of a contract for the delivery of a software package. On that date her Honour entered judgment in favour of Comrad in the amount of $58,011.21.

2 The dispute concerned a contract between Comrad, a provider of software and information management systems to radiologists in Australia and New Zealand, and Gammasonics, a business which provides services to radiology service providers in NSW. The contract was for the delivery and installation of a software package known as “Comrad RIS” (“the software package”), designed to facilitate a new aspect of Gammasonics’ business, namely to assist in the management of the workflow of its clients by providing a system of patient registration and appointments, together with online referrals from medical practitioners and the processing of their Medicare claims.

3 The software package was delivered under contract by means of a remote internet download onto the Gammasonics’ server. Gammasonics was responsible for providing and configuring various hardware and networking infrastructure to meet the specifications of the software package.

4 After Comrad delivered the software package, Gammasonics purported to terminate the contract for breach of a number of terms. They included Comrad’s failure to deliver a functioning software package, their failure to provide goods of a merchantable quality, and/or for the delivery of a software package which was not fit for its intended purpose.

The proceedings in the Local Court

5 There were two discrete issues with which her Honour was primarily concerned in considering Comrad’s claim for damages. The first concerned the application of the Sale of Goods Act 1923 (“the Act”), and the implied statutory warranties of merchantable quality and fitness for purpose provided for in s 19 of the Act. This raised the question whether the software package supplied under contract is properly classified as “goods” under s 5 of the Act. The second issue concerned whether the contractual breaches relied upon by Gammasonics entitled it to terminate the contract.

6 Her Honour was not persuaded that the software package supplied by Comrad was a “good” as provided for in s 5 of the Act and, accordingly, held that the Act did not apply. She also found that although Comrad had failed to deliver some components of the software package essential for its proper functioning and Gammasonics’ new business venture, it was Gammasonics’ own acts or omissions and not any conduct for which it had contractual responsibility that rendered the system unworkable, such that Gammasonics’ purported termination was a repudiation of the contract thereby entitling Comrad to sue for damages.

The proceedings in this Court

7 Gammasonics seeks orders quashing the orders made in the Local Court on the basis of what are said to be errors of law and errors of mixed fact and law. The latter require leave under s 40 of the Local Court Act 2007. On the question of leave, Comrad’s counsel submitted that although on a proper construction of the relief sought only questions of law were involved such that leave was not required, he did not oppose leave being granted in the event that I was satisfied that questions of mixed fact and law were involved.

8 Gammasonics’ counsel submitted that leave was required and that it should be granted where the issue for determination concerned a breach of contract which necessitated construction of that contract. In that connection I was referred to Castano v Ashglow Pty Ltd as Trustee for the Ashglow Trust [2009] NSWSC 919, where at [12] Simpson J considered whether an appeal from a magistrate involved questions of mixed fact and law in circumstances where the issue under consideration was the identity of contracting parties. While her Honour ultimately found that no question of law could be identified on the pleadings, the identity of the contracting parties being solely a question of fact, she accepted that a question of law is involved, or at least a question of mixed fact and law, where it is necessary to consider the terms of the contract for the purposes of considering whether breach is established. Counsel for the plaintiff further submitted that leave ought be granted in circumstances where the issue raised by the appeal will have a significant financial effect on both parties, and where substantial injustice would result from leave being refused: Adam P Brown Male Fashions Pty Ltd v Philip Morris Inc [1981] HCA 39; 148 CLR 170 at 175.

9 Without expressing a view one way or the other in relation to the relative injustice that would result from my refusing leave, I am satisfied that one of the matters for determination, namely whether her Honour erred in holding that Comrad (as the plaintiff in the primary proceeding) was not in breach of the contract, involves a question of mixed fact and law and leave to appeal ought be granted.

10 Comrad filed a notice of contention on two grounds. The first that her Honour erred by implying terms into the contract equivalent to the statutory warranties of merchantable quality and fitness for purpose provided for by the Act, and second that her Honour erred in finding that the contract had been breached by Comrad’s failure to provide a software package with a SMS texting capability. It is, of course, only in the event that I am satisfied that her Honour was in error on the question of breach that the defendant’s notice of contention falls to be considered.

The Sale of Goods Act 1923

11 In seeking to justify its termination of the contract in the Local Court Gammasonics relied, inter alia, upon breach of the implied terms of merchantable quality and fitness for purpose under the Act. Section 5(1) of the Act provides:

“ Goods include all chattels personal other than things in action and money. The term includes emblements and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale”.

12 Either by parity of reasoning from decided cases or otherwise by application of the general principles of statutory construction, Gammasonics submitted that Comrad’s software package fell within the statutory definition of “goods”. This was submitted to be the case despite the fact that the package was supplied in an intangible form as a software download and not contained in any physical medium such as a CD ROM or a DVD.

13 After considering the authorities, and noting that they were largely silent on the question whether software simpliciter was a “good” under the Act, her Honour concluded that the software package supplied by the defendant did not constitute “goods” under the Act:

“The nature of property contained in a software program which exists in purely electronic format can only become a good under the Act in circumstances where it is transformed to a medium which gives it the qualities required to bring it within the jurisdiction of the Sale of Goods Act being qualities of tangibility and moveability. This is made clear by the authorities”.

14 Her Honour went on to say:

“It may well be that there exists a level of dissonance engendered by the level of development and utilization of forms of property which were neither in existence, or in much contemplation, when the Sale of Goods legislation was drafted. However, the task of the court is to apply the statute in accordance with the established principles of statutory construction and binding precedent and, in absence of binding precedent, by giving due and proper consideration of obiter decisions of senior courts”.

15 My own review of the authorities to which her Honour was referred, and the additional research I have undertaken, satisfies me that her Honour’s view that the authorities do not address the characterisation of software “simpliciter” in any definitive way is correct. That said, on the appeal the parties have invited me to consider whether there is a fresh analysis of the authorities that might be more consonant with modern consumer law, even if, in the result, I am satisfied the issue of whether software simpliciter can be classified as a “good” can only be addressed by legislative reform.

The authorities reviewed

16 In Toby Constructions Products Pty Ltd v Computa Bar (Sales) Pty Ltd [1983] 2 NSWLR 48 this Court considered the question whether software (in that case a package comprised of various hardware and software components) should be classified as “goods” under the Act. Rogers J held (at 54) that:

“…a sale of a computer system, comprising both hardware and software … does constitutes a sale of goods within the meaning of … the legislation.”

17 His Honour did not however address the question whether software, sold without, or separately from, hardware, may constitute a sale of “goods” within the meaning of the Act.

18 In ASX Operations Pty Ltd v Pont Data Australia Pty Ltd (No 1) (1990) 27 FCR 460 the Full Federal Court considered the question whether the supply of electronically disseminated information on stock exchange dealings fell within the definition of “goods” in s 4(1) of the Trade Practices Act 1974 (Cth), which relevantly defines “goods” as including:

“(a) ships, aircraft and other vehicles;
(b) animals, including fish;
(c) minerals, trees and crops, whether on, under or attached to land or not; and
(d) gas and electricity”.

19 The Court held that for the purposes of defining “goods” under the Trade Practices Act, the reference to electricity, did not enable the encoded electrical signals to be so defined. Despite specifically discussing Rogers J’s decision in Toby Constructions for the purpose of comparing a software package and stock exchange information, both of which required the transmission of encoded electrical impulses, the Court did not resolve the question whether software is susceptible to being classified as “goods” when it is transmitted electronically.

20 In Advent Systems Ltd v Unisys Corp (1991) 925 F 2d 670, a decision of the United States Court of Appeals Third Circuit, the Court considered whether software should be classified as “goods” under the Uniform Commercial Code which defined “goods” as:

“all things (including specially manufactured goods) which are moveable at the time of the identification for sale”.

21 Emphasising the need to distinguish between software in the form of a computer program and a disk, Weis J observed (at 675) that:

“Computer programs are the product of an intellectual process, but once implanted in a medium are widely distributed to computer owners. An analogy can be drawn to a compact disc recording of an orchestral rendition. The music is produced by the artistry of musicians and in itself is not a “good”, but when transferred to a laser-readable disc becomes a readily merchantable commodity. Similarly, when a professor delivers a lecture, it is not a good, but, when transcribed as a book, it becomes a good.
That a computer program may be copyrightable as intellectual property does not alter the fact that once in the form of a floppy disc or other medium, the program is tangible, moveable and available in the marketplace…”.

22 In the court below and before me Gammasonics relied on this passage as authority for the proposition that once the software package was remotely downloaded to its computer system, it was software that had been “implanted in a medium”, namely its server, and, accordingly, that it took on the character of “goods” for the purposes of enlivening the statutory warranties in the Act. Her Honour was not persuaded by that reasoning. In her view, even where the software package was downloaded onto the plaintiff’s computer system it would not be “available in the market place” as the third criterion of “goods” nominated by Weis J in Advent Systems.

23 That said, it seems to me that the question remains whether the availability of a “good” in the marketplace is necessarily sui generis with the twin concepts of tangibility and moveability as the accepted indicia of “goods” for the purposes of the application of the Sale of Goods Act or its equivalent in other jurisdictions. Her Honour held that because Comrad’s software package was downloaded by Gammasonics from the internet under license, it could not be considered available in the marketplace in the same way that a CD ROM or DVD is available. That much is uncontroversial. However, it does not necessarily follow that because a particular software package is not available in the marketplace in the same way as other programs it ceases to be a “good” for the purposes of the Act.

24 A similar argument concerning what was claimed to be the necessary and intrinsic tangible nature of “goods” was considered by the English Court of Appeal in St Albans City and District Council v International Computers Ltd [1996] 4 All ER 481. In that case the defendant supplied a computer program to a local authority for use in administering its collection of revenue. The Council purchased the program, which was installed on their computer hardware by the insertion of a disk, thereby encoding the program onto its hardware. Thereafter the disk was removed. When the software proved to be faulty the Council sought to recover damages for breach of contract calculated by reference to its loss of revenue. While Lord Justices Nourse and Hirst held that the defendant breached its contractual obligations by reference to general principles, Sir Glidewell considered whether the transfer of the software, without the sale of the disk upon which it was encoded, would give rise to a sale of “goods” under the Sale of Goods Act 1979 (UK). (I note, that the English Act defines “goods” in effectively the same terms as the Sale of Goods Act 1923 (NSW)).

25 Consistent with the reasoning of Weis J in Advent Systems, Sir Glidewell concluded that the software program did not fall within the statutory definition of “goods”. He first distinguished between the (intangible) program and the (tangible) disk carrying the program, and concluded that while the tangible disk would properly be classified as “goods” (if that disk was in fact purchased by the Council), the intangible software program was not. The transfer of the software program by installation in the way described did not, in his view, constitute a sale of “goods”. He analysed the issue (at 493) as follows:

“Suppose I buy an instruction manual on the maintenance and repair of a particular make of car. The instructions are wrong in an important respect. Anybody who follows them is likely to cause serious damage to the engine of his car. In my view, the instructions are an integral part of the manual. The manual including the instructions, whether in a book or a video cassette, would in my opinion be "goods" within the meaning of the [Sale of Goods] Act, and the defective instructions would result in a breach of the implied terms…
If this is correct, I can see no logical reason why it should not also be correct in relation to a computer disk onto which a program designed and intended to instruct or enable a computer to achieve particular functions has been encoded. If the disk is sold or hired by the computer manufacturer, but the program is defective, in my opinion there would prima facie be a breach of the terms as to quality and fitness for purpose implied by the [Sale of Goods] Act.”

26 In Sir Glidewell’s view, a software program on a computer disk is inseparable from the physical medium in which, or by which, it is transported. I accept that the analysis he employed in the above passage has utility when considering the example of an instruction manual, since without the physical medium by which the instructions are provided (the book, video or computer disk) there are no instructions at all, merely a collection of ideas without any means of being conveyed. I am not persuaded however that the analysis compels the same conclusion when a software package is under consideration. The flaw in the reasoning, as I see it, lies in the proposition that a software program cannot be separated from the disk upon which it is transferred if it is to remain a “good” for statutory purposes. The analysis favoured by Sir Glidewell presupposes that a program cannot be sold as a “good” under the Act without the disk on which it is encoded also being sold (or hired, as were the facts in that case). While it may be self evident that “instructions are an integral part of [a] manual”, for the simple reason that one cannot exist without the other, the same cannot be necessarily said of software that is transferred via an online download without means of any disk or other hardware.

27 Sir Glidewell’s analysis was necessarily referable to the way a computer software system was conceptualised at that time of judgment. He observed (at 492):

“By itself hardware can do nothing. The really important part of the system is the software. Programs are the instructions or commands that tell the hardware what to do. The program itself is an algorithm or formula. It is of necessity contained in the physical medium... ” (emphasis added)

28 While there is force in the proposition that a software program is required to be contained in a physical medium in order for those instructions or commands to tell the hardware what to do, a software program that is able to function without being contained on any physical medium would clearly not be classified as “goods”. What the analysis does not address is the appropriate characterisation of the software package itself in the process of it travelling between one physical medium and another. In other words, does a software program necessarily need to be contained on any particular physical medium for the purpose of transferring algorithms and formulae to the hardware in order for it to retain its status as “goods”?

29 The process of installing a software program by means of a remote internet download might be better conceptualised by recognising that the program is, at least initially, contained in a physical medium or depository, after which in the process of being downloaded it leaves that place and is transferred (either by a conduit, by physical means, or by an electronic transmission of signals or digital codes), during which time it is uncontained in any physical sense. Upon arrival at the new depository, the program is then rehoused in a new physical medium. It is evident that at the beginning of the installation process the software program, being contained on a physical medium, would meet the definition of “goods”, irrespective of the means by which it is to be transferred. However, if Sir Glidewell’s reasoning is followed, one is forced to the conclusion that although the program which is transferred via a disk would remain as a “good” throughout the process of installation, a software program which is downloaded, and which is converted from being a software program possessing the character of a “good” at one point thereafter loses its character as a “good” in the process of being delivered even if it reconverts to a “good” at the end point when it is rehoused in a tangible and moveable form.

30 Although Sir Glidewell’s consideration of the question whether software simpliciter was a “good” in St Albans City was obiter dicta, her Honour regarded the facts in that case as bearing sufficient similarity to the case that she was considering for it to be persuasive. In both cases the plaintiffs had contracted for the installation of a software program onto their hardware which thereafter was revealed to be faulty. The only point of factual divergence between the two cases was the means by which the software was transferred, namely physical installation via a disk in St Albans City or installation via an online download in the present case. In my view, it is precisely that point of divergence which is material when the question is whether the installation of a software package that does not require any tangible or physically moveable commodity to affect its transfer should be treated any differently from software that does require it, if it is to be classed as “goods”. The distinction between the two methods of installation was acknowledged towards the end of Sir Glidewell’s judgment when he accepted (at 494) that:

“[the position may be different] for the transfer of a computer program into the computer without any transfer of a disk or any other tangible thing on which the program is encoded”.

31 The issue has recently been revisited in Australia in Re Amlink Technologies Pty Ltd and Australian Trade Commission [2005] AATA 359; 86 ALD 370, a decision to which her Honour was referred but which she noted was not binding on her. In that case, the Administrative Appeals Tribunal considered the question whether a particular software product should be considered as “goods” for the purpose of a grant application pursuant to the Export Market Development Grant Act 1997 (Cth). “Goods” were not defined in that Act and, accordingly, the definition fell to be determined at common law.

32 Having considered the authorities to which I have already referred, Senior Member McCabe noted that whilst Sir Glidewell’s reasoning in St Albans City had the benefit of relative certainty of application it was not ultimately persuasive. In particular, he questioned the criteria for the classification of “goods”, relied on by Sir Glidewell, namely the delivery of some tangible thing, noting (at [30]) that:

“Taken to its extreme, that reasoning would mean a court would identify contracts for the sale of goods in all manner of situations that were never intended to be treated in that way: consulting a radiologist for the purpose of obtaining X-rays or retaining a lawyer to provide written advice, for example. That cannot be right … Certainty of application is a desirable trait in a rule like the one under consideration here, but one must guard against reductionism.”

33 Senior Member McCabe chose not to adopt the approach taken in St Albans City, but stopped short of rejecting the view that software which is not attached to a physical medium cannot constitute “goods”. Instead, Senior Member McCabe’s conclusion focused on the distinction between the supply of intellectual property and the supply of goods, noting (at [42]) that whilst an author’s manuscript or artist’s portrait, for example, cannot be “goods”,

“the situation is different once the product is sold as a tangible commodity after being copied or mass-produced. At that point, the products cease to be know-how and become goods”.

34 While Amlink Technologies does not deal directly with the question whether software of the kind here under consideration might constitute “goods” for the purposes of the Act, Gammasonics submitted that the Australian authorities reflect a discernible trend toward the characterisation of software “simpliciter” as “goods”. It would appear that this is a view reflected in a recent Trade Practices Law Journal article (see D Svantesson, “Amlink Technologies Pty Ltd and Australian Trade Commission [2005] AATA 359 - Software Finally Recognised as ‘Goods’” (2005) 13(4) Trade Practices Law Journal 232).

35 In that article Svantesson describes the trend, at least in terms of the Australian authorities, as developing in a number of stages:

“The first step was taken when Rogers J, in Toby Constructions recognised that software is classed as goods when sold together with hardware. The next step – the recognition that software sold attached to some physical medium constitutes goods – has now been taken through Senior Member McCabe’s decision in Amlink Technologies. It is logical, reasonable and desirable that the third step, ie the recognition that software not attached to a physical medium still constitutes goods, is taken next time an Australian court has the opportunity to consider the issue of whether or not software is to be classed as goods.”

36 In regards to the need to pursue the latter objective, Svantesson continues (at 234):

“As long as software manufacturers and retailers were able to argue that software was neither goods nor services, the sale of software did not give rise to any implied terms under the Act or the Sale of Goods Acts. This appears unfair, and in light of Senior Member McCabe’s decision in Amlink Technologies, it seems clear that the terms implied under the … Sale of Goods Act are applicable to software which is sold attached to some physical medium. It would only be natural if the same protection was afforded to those who chose to purchase software and other digital products online.”

37 I have also considered a passage from a conference paper (see D Svantesson and L Bygrave, "Jurisdictional Issues and Consumer Protection in Cyberspace: The View from ‘Down Under’”, Paper presented at the Cyberspace Regulation: E-commerce and Content Conference, 2001: Sydney) which distinguishes between goods and services in an online context by way of an analogy of the online sale of encyclopaedias:

“[If] a consumer buys a paper version of the Encyclopaedia Britannica in an ordinary bookstore, this is clearly a supply of goods. If the consumer orders a paper version of the encyclopaedia via the Internet, this is also clearly a supply of goods. If the consumer buys the encyclopaedia via the Internet and takes delivery of a digitised version , this is still a supply of goods. But if the consumer contracts with Britannica.com for on-line access to the latter's database, the consumer contracts for the supply of a service, since, unlike in the three first instances, the consumer is left with nothing tangible at the time the contract is fulfilled.” (emphasis added)

38 In the authors’ view, this approach has the advantage of being “technology-neutral”, since it affords the same protection to the consumer irrespective of the technical medium used for delivery. Importantly, it adopts a nuanced approach by distinguishing between online downloading that results in the delivery of a digitised version, as distinct from online access to a database, without delivery of any commodity per se. The facts of the present case are clearly analogous to the third scenario identified in the passage above which, in essence, describes a digital delivery of a product via internet download. By contrast, if the software provided by Comrad was not delivered, but was only retrievable via internet access, it would not be “goods” and would fit squarely under the fourth scenario only as a service. Whether or not such a distinction is ultimately necessary it seems to me that the approach of the commentators and their analysis generally has merit, especially insofar as it serves to afford protection to the consumer irrespective of the means by which the software is delivered.

39 Whilst the plaintiff submits that the authorities to which I have referred support a conclusion that the software program supplied by Comrad constitutes “goods” under the Act, it was also submitted that this follows from the application of the principles of statutory interpretation, it being submitted that the definition of “goods” in s 5(1) of the Act is not exhaustive, and that the use of the word includes in the statutory definition indicates an enlargement of the ordinary meaning of the words to which it refers (see Sherritt Gordon Mines Ltd v FCT (1976) 10 ALR 441 at 455).

40 I was taken to the Oxford English Dictionary which defines the word “goods” as “merchandise or possessions” which is said to support the proposition that software is a “good” because it can be owned or possessed in the sense that possession is relevantly defined as “1. the state of having, owning or controlling something … 2. something that is owned or possessed”, and that there is no warrant for limiting that which is owned or possessed to a tangible good.

41 Comrad acknowledged the correctness of the statement of principle in Sherritt Gordon Mines Ltd but submitted that on a proper construction the principle operates such that a word defined by reference to the word “includes” will be defined by reference to its ordinary meaning and any extended meaning referable to the words following thereafter (the interpretative words). The principle does not permit the word “includes” to incorporate all interpretations of the word under consideration, unless the interpretative words allow for that meaning. It was therefore submitted that insofar as the wording of s 5 of the Sale of Goods Act was concerned, both the ordinary meaning and any interpretative words refer to things that are tangible. As such, so it was submitted, because lines of computer code are intangible the position contended for by Gammasonics was inconsistent with both the ordinary meaning of the word “goods” or the extended meaning provided for by the interpretative words.

42 I am not persuaded that an extension of the ordinary meaning of the word goods warrants the conclusion that software may be “goods” by virtue of the fact that it can be possessed. Neither am I satisfied that there is anything which can be usefully gleaned from the Act’s legislative history to enhance the ordinary meaning of the words in s 5, since the definition of “goods” in s 5 has not been amended since the legislation was enacted in 1923.

43 As I observed earlier, I am mindful of her Honour’s observations to the effect that it may ultimately be the provenance of the legislature to ensure that the legislation and new developments in technology can be accommodated. Such was the view of Rogers J in Toby Constructions, in 1983, where his Honour noted (at 54):

“The questions arising here are obviously of considerable importance to the computer industry, and I think it is appropriate that those who attend to matters of law reform should consider whether or not legislative action is required to ensure that the matter is put beyond argument…”.

44 It is no doubt desirable that the Sale of Goods Act affords protection to consumers purchasing software delivered online equally as it affords protection to software delivered by other means, particularly if by appropriate research and analysis of market trends it is clear that the supply of software by online download is a method of distribution that is likely to become the preferred method of distribution (see B Gordon, “A Lacuna in Cyberspace - Implied Terms in Consumer Contracts” (2000) 14(4) Commercial Law Quarterly 3).

45 In this case, the plaintiff submitted that it is productive of injustice if consumers purchasing software in the form of CDs or DVDs, either sold in retail shops or via the internet, are protected by the statutory warranties in the Sale of Goods Act, whereas consumers who download the same software directly from the internet or from a supplier, (as was the case here), would not. Accepting that to be the case, rectifying that injustice or perceived injustice in this case, is a matter deserving of a legislative review of the operation of the Sale of Goods Act rather than judicial intervention.

46 Legislative amendment dealing with the conceptual status of computer software is not without precedent. The classification of software in the context of the Copyright Act 1968 (Cth) was the subject of consideration by the High Court in Apple Computer Inc v Computer Edge Pty Ltd [1986] HCA 19; 161 CLR 171. However, it was the decision of the Full Federal Court (see (1984) 53 ALR 225) which gave computer programs the status of copyrighted “literary works”. This prompted the passage of the Copyright Amendment Act 1984 (Cth), which provided the protection of copyright to computer software designers.

47 That said, on the existing authorities and after careful consideration of her Honour’s analysis and reasoning I am not persuaded that she was in error in concluding that the Sale of Goods Act did not apply to the contractual dispute between the parties.

Implied terms

48 Although her Honour found that the Sale of Goods Act did not apply, she was nonetheless satisfied that the common law terms as to fitness for purpose and merchantable quality should be implied in accordance with the well settled test for implication in fact in BP Refinery (Westernport) v Shire of Hastings (1977) 180 CLR 266 at 283, recently cited by Spigelman CJ in Nationwide News Pty Ltdv Naidu & Anor [2007] NSWCA 377; 71 NSWLR 471:

“(1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that “it goes without saying”; (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract”.

49 While the question of whether the test is satisfied is addressed as the first ground of the defendant's notice of contention, as I have already noted, it will only need to be considered in the event that her Honour’s findings concerning breach are found to be in error.

Breach of essential terms

50 The plaintiff submitted that her Honour erred in failing to find that Comrad was in breach of the contract by failing to deliver essential parts of the software package in working order. It was common ground that the software package was incapable of performing some of the functions for which it was acquired, namely online Medicare bulk-billing and accounting, remote access, and a SMS messaging capability. Her Honour was satisfied however that the issues relating to both Medicare bulk-billing and remote access were caused by the plaintiff’s failure to register with Medicare and to provide for a functioning computer network at its premises. While the issue of SMS messaging was found to be Comrad’s fault, her Honour was not satisfied it was a breach of an essential term of the contract.

51 Counsel for the plaintiff submitted that these findings were in error and that the evidence identified Comrad as the party with responsibility for resolving the problems Gammasonics encountered in interfacing with Medicare, and the party who was responsible for creating the problems with the network incompatibility, and the contractual responsibility to solve those problems.

Interfacing with Medicare

52 Her Honour was satisfied that the failure of the software package to interface with Medicare was caused by Gammasonics’ failure to obtain the correct electronic certificates from Medicare, a matter for which it had sole contractual responsibility. In this regard, she observed that:

“The [plaintiff] was responsible for arranging the Medicare certificates. Before the certificates could be obtained the [defendant] had to provide information to Medicare regarding the names of doctors using the system and items for bulk billing, amongst other things. The [defendant’s] software system could not be put in place to provide Medicare online services until those certificates were available. The implementation of bulk billing and other functions to and from Medicare was dependant on this step”.

53 The plaintiff’s counsel submitted that although his client was responsible for obtaining the correct electronic Medicare certificates, its failure to do so was not determinative of whether the contract was breached. This was said to follow from Comrad’s contractual obligation to provide ongoing guidance in setting up the system in circumstances where it was well known that Gammasonics was unfamiliar with the process of making application for registration with Medicare. In support of that submission I was referred to the pre-contractual negotiations between the principals of both parties, and, in particular, a conversation on 25 September 2007 between Gammasonics’ chief executive officer Ms Vivien Munoz-Ferrada and Comrad’s managing director Mr Andrew Scott where the plaintiff’s software requirements were discussed:

“Munoz-Ferrada: We are just starting up as a dedicated service for maxillo-facial imaging, with an oral surgeons report verified by a radiologist. We need your guidance – it’s a new area for us and we don’t know much about the software side of things, or how the interface with Medicare is done.
Scott: Our software is set up so you can directly interface with Medicare to do what you want to do”.

54 On receipt of the defendant’s written proposal the plaintiff issued a purchase order. However, it is the following email correspondence which, in the plaintiff’s submission, make clear its request for guidance consistent with the process of Medicare registration being a contractual term:

Plaintiff to defendant - 29 October 2007
“Penny,
I have not received the invoice template or the medicare form. I have not got the list of questions from you either. Please advise.”
Defendant to plaintiff - 29 October 2007
“Hi Vivienne
…
Can you advise what you mean by the Medicare form? The scoping document I sent you has the minor site id in it, which is CDS00701. You need to quote this number when you register for Medicare on line.
…
Can you please provide the following:-

1. Medicare: please supply item codes list and advise what type of exams Gammasonics will do?
2. Have you registered for Medicare on line yet?
3. Please advise list of billing organizations
4. Supply referrers lists
5. How many people require training?
We will have more questions but this will give us something to work on for the present.”
Plaintiff to defendant – 5 December 2007
“Dear Andrew,
…
I am still waiting for the medicare guidelines to be sent to me and I need to invoice gap payments which I cannot do currently. Currently Gammasonics has not received Medicare registration. She was unwilling to bill Medicare manually so everything is going through as ‘Private’ case type and invoices (hopefully) are being forwarded to Medicare by the patient. I forwarded a copy of the HICONLINE User Guide over a week ago.
…
Can we get some service to rectify these points please.”
Defendant to plaintiff – 6 December 2007
“Hi Vivien,
I am following these issues up for you.”
Defendant to defendant – 11 December 2007

“Hi Andrew,
…
I will resend the Comrad HIC User Documentation to Vivien today – I did send this over a week ago. Currently billing is set up so that everything is billed under Case Type ‘Private’ at the Schedule fee. This was to be a stop gap measure until Canada Bay received HICOnline registration at which point I was under the impression that everything would be bulkbilled. I am happy to set the system so that Vivien and Michelle can invoice with a gap component.”
Defendant to plaintiff – 13 December 2007
“Hi Vivien
1. Please find attached information relating to Medicare Online Claiming.
2. The Development team has created a patch for Quick Codes to fix the issue where the item codes lose the MRT user id. I have loaded this onto your system and tested it.”

Medicare Online Claiming (HIC [Health Insurance Commission] Online):

Attached:
Overview of online claiming
Online claiming fact sheet
Registration fact sheet
Online claiming checklist
Additional info

Registering for Online Claiming:

Comrad offers lodging of bulk billing claims and online patient verification (OPV) at this time. Private Patient Claims and Dept. of Veteran Affairs claiming will be available in 2008.

The web address … to apply for claiming is ... or phone the Medicare Australia eBusiness Service Centre ... and ask for Medicare Online Claiming registration details.

If applying for online claiming, you need to apply for location certificate (“Option B” on the Registration fact sheet) – Comrad does not require individual certificates for radiologists …

To use online claiming, all claimform radiologists (“servicing providers”) must also be registered with Medicare and have a provider code for each site they report for/from …

Once registration is completed, we would need to install the server-side software and upload their certificates into Comrad. To do this requires:

A system outage of approximately 2 hours and application server restart

Vivian to email us their digital certificates and the PIC code that Medicare has sent them”.

Defendant to defendant – 30 January 2008

“Hi Jenny,

I have had a chat with Vivien. She is prepared to give us one more go with getting the system right. In particular we need to get the Medicare Online set up. I understand the certificates are the wrong ones. Can you (first thing please), advise her of this and which certificates we do require. Once received can we get this set up immediately and baby-sit her through the first batch or two.”

Defendant to defendant – 31 January 2008

“Andrew,
…
Re feedback for Vivien, you could say something like:

Just to confirm, Maree Henderson-Fitzgerald has installed the Medicare software on your server and has completed all set-up tasks within Comrad as far as we can go. Unfortunately, the disk supplied to you by Medicare was for their iKey software and did not contain the certificates we require. Could you please contact Medicare, quoting the certificates listed below, and arrange with them to supply? We will then be able to complete your install and get you up and running with online claiming.

Note, I do not say point blank “you applied for the wrong thing again” but that is the case.”

55 The correspondence of 29 October 2007 makes plain that the plaintiff was informed that they needed to register online with Medicare, and that they were provided with a code to enable registration to be effected. Moreover, it was accepted by the plaintiff’s counsel in the course of argument that this in fact amounted to the provision of guidance. In my view the fact that the advice was either misunderstood or otherwise not properly acted on falls well short of supporting a finding that the guidance was inadequate.

56 In the email of 13 December 2007 further guidance is provided, with the reference to “information relating to Medicare Online Claiming”. The plaintiff’s counsel submitted that this was not guidance of any practical or substantive kind, being nothing more than a “cut and paste” of a government issued document from the Health Insurance Commission website. He failed however to elucidate in oral submissions the type or extent of guidance the defendant was obliged to provide beyond what was provided. Nor was he able to point to any aspect of the advice which might explain the plaintiff’s lack of comprehension as to what it was required to do to effect registration with Medicare. On the contrary, what the evidence before me demonstrates is that the defendant’s initial request on 29 October 2007 for the plaintiff to register with Medicare remained unanswered until at least some time after the defendant’s email of 13 December 2007, after which point it became evident that incorrect certificates had been issued. As such, even if it were open to infer that the type or extent of guidance supplied to the plaintiff was either inadequate or non-existent (an inference I do not regard as open on the evidence), the simple fact is that for almost six weeks the plaintiff did not address the question of registration for itself.

57 In my view, the plaintiff’s submission that her Honour was in error in failing to attribute breach to the defendant was further flawed by its failure to demonstrate where in the evidence the provision of the incorrect certificates was shown to be Comrad’s responsibility. The plaintiff’s counsel sought to persuade me that after Medicare was given the code they had been given by Comrad that the failure thereafter to obtain the correct certificates was more likely the fault of Comrad than that of Medicare, an inference he invited me to draw on the basis that human error on the part of the defendant was much more likely to be the cause of the problem than that of a long standing online service operated under the authority of the Commonwealth government. I am simply unable to safely draw that inference. In my view, the inferences as to who was at fault are, at best, competing and equal, such that I cannot safely draw an inference either that the defendant supplied an incorrect code, or a Medicare officer was responsible for a registration error. In these circumstances I am not satisfied that there is any error in her Honour’s finding, on the evidence available to her, that the failure to provide a Medicare online bulk-billing system was the responsibility of the plaintiff and a breach of its contractual obligations.

Network incompatibility

58 Consistent with the agreed position of the parties, her Honour found that the hardware and network connections provided by Gammasonics were in place by 29 October 2007. Her Honour’s conclusion that Gammasonics was generally responsible for providing a networking system, and for the associated problems of providing remote access to its clients, was however, said to be a finding not reasonably open on the evidence. The plaintiff submitted that it was the mutual incompatibility of both networks (or, as counsel for the plaintiff put it, the inability of the two networks to “talk” to each other), which hampered the installation and implementation of the software package and that it was not reasonably open to her Honour to attribute sole responsibility for that problem to the plaintiff. Her Honour described the situation as follows:

“The emails also record a history of difficulties with poor network performance that related to network compatibility. The network connected to the site where the software was being installed was not a dedicated network. It had been “piggy backed” off another network of the defendant and it was a temporary connection. On the evidence it appears that the firewalls operating on the connection were prohibiting the smooth performance of the network at the new site.”

59 Counsel for the plaintiff submitted that despite finding that the performance of Gammasonics’ computer network was problematic, her Honour stopped short of concluding that the network incompatibility was caused by problems with the plaintiff’s system, as opposed to the defendant’s system. Indeed, it was submitted that no such finding could have been made, since an explanation for the incompatibility of the networks was not resolved on the evidence. Whilst Gammasonics conceded that it was their obligation to provide appropriate hardware and ensure network capability in order to be able to operate the software package, it submitted that the contract did not attribute to it the sole responsibility for ensuring network compatibility. At most, the plaintiff submitted that the resolution of any network incompatibility was the joint responsibility of the parties.

60 I am not persuaded by this submission, especially in circumstances where the evidence demonstrated that the network incompatibility arose as a result of the plaintiff’s failure to purchase a “dedicated” VPN (virtual private network), opting instead, because of time pressures, to connect, or “piggy back”, off a temporary VPN.

61 Counsel for the defendant submitted that there was ample evidence upon which her Honour was entitled to rely in coming to the view that the plaintiff had responsibility to ensure network compatibility. In this regard he directed me to an email of 1 February 2008 from Gammasonics’ agent Mr Craig Smith. Mr Smith was an approved Comrad network installer and was familiar with what was required to ensure network compatibility. His assessment of the issue, so it was submitted by counsel for the defendant, evidences the plaintiff’s breach:

“Hi Vivien,
After speaking with Andrew last night I wrote a very long email to explain all the issues. After going through this exercise I was able to analyse where the real problem lies.
Originally we had discussed a dedicated network connection for Canada Bay Medical [the radiology practice]. This had not been arranged by the time the server had arrived and we were under the pump to get access for Comrad because of a tight window to get up and running. We piggy backed off the Gammasonics network as a temporary connection but never followed up the dedicated link.
…
With the current network, inbound VPN connections need to pass through the Gammasonics firewall. I believe this is not happening for the IPSEC VPN protocol. The only time the IPSEC VPN works is when we rest the CBM Router and it attempts to make the connection. Since this is done from behind the Gammasonics firewall Comrad’s VPN equipment has trouble authenticating and this router needs a push to get the link up.
…
I believe the IPSEC support access can be resolved if we move back to the original plan of having a dedicated internet connection for CBM.”

62 In my view, this evidence puts beyond doubt that responsibility for network compatibility rested with the plaintiff. I reject the submission that the evidence was silent as to the cause of the network incompatibility. Her Honour assessed the problem to be consequent upon the plaintiff’s “piggy-backing” off an undedicated network, which in turn gave rise to the interposition of a firewall preventing the performance of the network at the plaintiff’s premises. Moreover, I am unpersuaded by the plaintiff’s submission that while it had responsibility to set up its own network, it did not have responsibility for making sure the networks were compatible. In my view, her Honour was entitled to determine the question of breach by the approach she adopted, rather than, as the plaintiff submitted, determining the precise question of which party had responsibility for fixing the network in the event that a problem arose. In the result, I am satisfied that there was sufficient evidence to support her conclusion that the network incompatibility problem was the fault of the plaintiff and that the networking problem did not amount to a breach of the defendant’s contractual obligations entitling the plaintiff to terminate the contract.

63 Since I am not satisfied that her Honour’s findings on the issue of breach are vitiated by error, I need not concern myself with the defendant’s notice of contention.

64 Accordingly, I make the following orders:

1. The appeal is dismissed.

2. The plaintiff is to pay the defendant’s costs.
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