Hong Kong Law Reform Commission

Chapter 2 - What are contracts for the supply of goods ?

• Overview
• Introduction
• Contracts for the transfer of property in goods
• Contracts of hire of goods
• Hire purchase agreements
• What are "goods"?
• Computer software

Overview

2.1 In this chapter, we explain the expression "contracts for the supply of goods". The first part examines "contracts for supply" while the expression "goods" will be discussed in the second part. In particular, we examine three types of contracts for supply, namely, contracts for transfer of property in goods, contracts of hire and contracts of hire purchase. For each of these three types of contracts, we discuss the elements involved, types of transactions not covered, the legislative treatment of each type in other jurisdictions and the respondents’ comments on the Consultation Paper. We then propose definitions for each type of contract in Recommendations 2, 3 and 4 respectively.

2.2 We then examine the appropriateness of the definitions of "goods" in Cap 26, and the legislation in other jurisdictions. We suggest that the definition of "goods" in Cap 26 should be followed in Recommendation 5.

2.3 As computers have now become so commonly used and influential in everyday life, we address the issue whether computer software is "goods". We examine the relevant cases in various jurisdictions and the feedback from the public on this issue, and conclude that it is preferable to await a more comprehensive study of this topic and make no recommendation accordingly. In this respect, our concern is limited to the implied terms for contracts for the supply of computer software only. Issues such as licensing and copyright are beyond the terms of reference of this Report and may have to be separately dealt with.

Introduction

Contract of sale

2.4 A contract of sale is defined in section 3(1) of Cap 26 as:

"... a contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a money consideration, called the price. There may be a contract of sale between one part owner and another."

2.5 As a contract for the sale of goods is defined to require both the transfer of title and the provision of money consideration, where either element is missing, the contract is not a contract of sale but may be called a "contract for the supply of goods". A contract for the supply of goods may thus be generally understood as a contract whereby a supplier transfers either possession or ownership of goods to another person for a consideration which may or may not include money.

Other types of supply of goods

2.6 Where goods are supplied under a contract but the consideration for the contract is not wholly found in the price of the goods, the contract is not a sale. An example of this type of contract is a contract of barter. As discussed later, at common law, a contract of sale of goods is distinguished from a contract for work and materials.

2.7 Contracts which involve money consideration but do not involve the transfer of title in goods are not contracts for the sale of goods. Examples are contracts for the hire of goods and contracts of hire purchase. Under a contract for the hire of goods or a contract of hire purchase, title to the goods does not pass. Only possession of the goods passes.

2.8 Contracts of barter, contracts for work and materials, contracts of hire and contracts of hire purchase are therefore outside the definition of contracts of sale. Cap 26 does not govern these contracts. In Hong Kong, they are governed by the common law so far as the implied obligations of the suppliers under these contracts are concerned.[29]

2.9 Where goods are transferred for no consideration, the transfer is a gift and not contractual in nature. In referring to contracts for the supply of goods, the Consultation Paper excluded non-contractual transactions (such as gifts) and contracts concerning things other than movable property (such as land and choses in action). Professor Hugh Beale, however, wonders whether it would be useful to cover gifts when they are made in the course of a business so as to avoid the kind of artificiality which may be involved in finding consideration in these transactions. We understand the concern about the difficulties and sometimes artificiality surrounding the concept of consideration in the law of contract. We do not however consider it appropriate to recommend piecemeal changes to the long-established requirement for the existence of consideration before a transaction is regarded as contractual in nature. If the so-called "gifts" supplied in the course of a business are supported by consideration, the transaction will be covered by the Recommended Legislation. If however there is an absence of consideration, it is not easy to justify why the implied obligations should be imposed on a "supplier" making a true gift even if it is made in the course of a business.

Three types of contracts for the supply of goods

2.10 In this Report, we will consider three types of contracts for the supply of goods:

1. contracts for the transfer of property in goods – under which the supplier transfers property in goods to the person supplied in a manner which, for some reason, does not fall within Cap 26.
2. contracts of hire – under which the supplier transfers possession of the goods to the person supplied for the latter's use and enjoyment without transferring the property.
3. contracts of hire purchase – under which goods are bailed to a hirer in consideration for the payment by the hirer of hire-rent coupled with an option to purchase the goods.

Contracts for the transfer of property in goods

Elements of contracts for the transfer of property in goods

Elements involved

2.11 The term "contracts for the transfer of property in goods" by itself means any contract under which a person transfers or agrees to transfer to another the property in goods. This covers various types of contracts, for example, sale of goods, work and materials, barter, hire purchase, etc.

2.12 Contracts for the transfer of property in goods for the present discussion should cover contracts under which property in goods is transferred, whether or not services are also provided (for example, contract for work and materials). Since property in goods is transferred, there should be protection by the same statutory implied terms as in a sale of goods contract, even though services are also supplied. In addition, while consideration other than by the presumption by deed is a prerequisite, the nature of the consideration should not matter for a contract to be a contract for the transfer of property in goods. An example of such a contract is one to exchange goods for goods, ie barter.

Transactions not covered

2.13 As Cap 26 already regulates contracts for the sale of goods, the present discussion about contracts for the transfer of property in goods does not cover sale of goods. As hire purchase involves hire, with the possibility of later sale, it will be discussed under a separate heading.

2.14 In referring to contracts for the supply of goods, we are excluding non-contractual transactions such as gifts. A transaction which is made by a deed (and for which there is no consideration apart from that presumed by a deed) should also be excluded since it is more akin to a gift than to supply of goods, although strictly contractual.

2.15 According to section 62(4) of Cap 26, contracts operating by way of mortgage, pledge, charge or other security are specifically excluded from the protection of Cap 26. For example, under a legal mortgage of goods, the property in goods is transferred to secure a debt, but the mortgagor often retains possession of the goods subject to the mortgagee's power to take possession of the goods if the mortgagor defaults on repayment. The mortgagee is not protected under Cap 26. By the same token, contracts for the transfer of property in goods for the present discussion should exclude contracts operating by way of mortgage, pledge, charge or other security.

Two major types of contracts for the transfer of property in goods

2.16 There are two major types of contracts for the transfer of property in goods:

• barter, and
• contracts for work and materials (a table containing the complaint statistics is at Annex 4).

Barter

2.17 Under section 3 of Cap 26, the consideration for the transfer of property in contracts of sale must be money, the price. Barter is usually understood to mean the trading of goods for other goods without fixing the price. Barter can also refer to the supply of goods in return for services, or for both goods and services. Barter arises when goods (or services or other equivalent[30]) are specifically traded for goods of another. The parties themselves can agree that the transaction (what might have been barter) takes the form of reciprocal sales, with a mutual set-off of prices and a cash adjustment (if necessary). For instance, goods "for a price to be satisfied by" other goods would be regarded as reciprocal sales, while goods passed "in consideration of" other goods would be regarded as barter.[31]

2.18 Goods are sometimes supplied under a transaction loosely known as "trading in" or "part exchange". This mode of supply of goods is well established and quite common in the motor trade. Goods are supplied in return for some other, usually less valuable, goods, together with the payment of a sum of money. A price is usually fixed for the more valuable goods. A value is then put on the goods to be traded-in. The sum of money represents the difference in value of the exchanged goods. The nature of "trading in" depends on how the facts of each case are interpreted.[32]

Contracts for work and materials

2.19 At common law, a contract of sale of goods is distinguished from a contract for work and materials. The general rule deducible from the cases in which the distinctions were drawn seems to be that if the main object of the contract is the transfer from A to B, for a price, of the property in a thing in which B has no previous property, then the contract is a contract of sale. But if the real substance of the contract is the performance of work by A for B, it is a contract for work and materials even though the performance of the work necessitates the use of certain materials and the property in those materials passes from A to B under the contract.[33] In the latter case, the passing of goods is only ancillary to the supply of the services contracted for.

2.20 As a result of the distinction, certain contracts of supply[34] have been held to be contracts of sale; whereas other contracts of supply[35] have been held to be contracts for work and materials. Other examples of contracts for work and materials include contracts to repair a car,[36] apply a hair-dye[37] and roof a house.[38]

Other types of contracts for the transfer of property in goods

2.21 Some retailers, such as supermarkets, give stamps, coupons or vouchers upon purchase of goods by customers to promote sales or particular products. Sometimes goods are offered in return for stamps or coupons without the payment of money, and on other occasions goods are offered for a reduced price on the surrender of stamps or coupons which a customer is allowed to trade in as part of the consideration.[39] Goods may also be supplied as a bonus to which a customer becomes entitled on purchasing a certain quantity of the products which are being promoted and in some circumstances the transaction merely involves a free gift.[40]

2.22 Sometimes there is a contract for the supply of goods in return for coupons or labels with or without payment in addition; the contract is either a sale or barter but the distinction is not always clear. For example, in Chappell & Co Ltd v Nestle Co Ltd,[41] the defendants offered a gramophone record to members of the public for a sum of money together with the tender of three of their chocolate wrappers. The nature of the transaction was not in issue in the case but one of the law lords thought that the transaction was not a sale.[42]

2.23 The case of Esso Petroleum Co Ltd v Commissioners of Customs and Excise[43] illustrates the difficulties of distinguishing whether a transaction is a gift, a sale or barter. Esso had a petrol sales promotion scheme. Under the scheme, coins were distributed to petrol stations. The petrol station proprietor offered to give away a coin for every four gallons of Esso petrol bought. The issue was whether the coins were being "sold" and were accordingly chargeable to purchase tax. The House of Lords was divided[44] as to whether the scheme was a gift, collateral contract or sale.

2.24 The importance of distinguishing a gift from a sale or barter is that a person who receives a gift is not protected by the statutory implied terms in the sale of goods legislation. As discussed in the following chapters, the position of barter is uncertain, although terms implied in contracts of sale may be followed.

2.25 Promotion tactics such as those referred to in the previous paragraphs are common in the Hong Kong retail trade. In these transactions there is a transfer of property in goods. It is the substance of the transaction which determines its nature: whether it is a gift, a sale, a collateral contract or barter. In this Report, these promotion tactics are included as contracts for the transfer of property in goods if they are not regarded as sales or gifts.

Australia

2.26 In Australia, the 1974 Act, which stipulates implied terms for contracts for the supply of goods, does not define the scope of contracts for the transfer of property in goods. Instead, it provides in section 4 that:

"supply ... includes ... in relation to goods - supply (including re-supply) by way of sale, exchange, lease, hire or hire purchase"

2.27 Even though it is an inclusive definition, it is not clear whether some types of contract for the transfer of property in goods (for example, the promotion tactics used in retail trade) are covered by the 1974 Act. Contracts for work and materials are covered by section 74 which provides separately some implied warranties for this type of contract. As contracts for work and materials and other types of contract for the transfer of property in goods are common in Hong Kong, it would be sensible for the Recommended Legislation to cover them expressly.

New Zealand

2.28 In New Zealand, the 1993 Act, which regulates implied terms for contracts for the supply of goods, does not define the scope of contracts for the transfer of property in goods. Instead, it provides in section 2 that:

"supply ... in relation to goods, means supply (or resupply) by way of gift, sale, exchange, lease, hire or hire purchase"

2.29 Unlike its Australian counterpart, this is an exhaustive definition and includes supply by way of gift. Section 15 of the 1993 Act provides that the guarantees in the Act apply whether or not the goods are supplied in connection with a service, and contracts for work and materials are therefore also covered.

England and Wales

2.30 In the 1982 Act, the scope of contracts for the transfer of property in goods is defined in section 1 as follows:

"(1) In this Act in its application to England and Wales and Northern Ireland a 'contract for the transfer of goods' means a contract under which one person transfers or agrees to transfer to another the property in goods, other than an excepted contract.

(2) For the purposes of this section an excepted contract means any of the following –

(a) a contract of sale of goods;

(b) a hire-purchase agreement;

(c) a contract under which the property in goods is (or is to be) transferred in exchange for trading stamps on their redemption;

(d) a transfer or agreement to transfer which is made by deed and for which there is no consideration other than the presumed consideration imported by the deed;

(e) a contract intended to operate by way of mortgage, pledge, charge or other security.

(3) For the purposes of this Act in its application to England and Wales and Northern Ireland a contract is a contract for the transfer of goods whether or not services are also provided or to be provided under the contract, and (subject to subsection (2) above) whatever is the nature of the consideration for the transfer or agreement to transfer."

2.31 The definition in section 1 is wide. Professor N E Palmer makes the following comments about the scope of the definition:[45]

"Sections 1 to 5 affect many different transactions, ranging from contracts of work and materials and exchange to the numerous innominate contracts whereunder a party transfers (or agrees to transfer) his property in goods to another. An obvious example of this residual category is the supply of 'free gifts' or 'bargain offers' which are obtainable by some prescribed act on the part of the prospective transferee, such as the despatch of a coupon or label or the entry into an associated contract with the supplier or a trading acquaintance."

Conclusion

2.32 The expression "contracts for the transfer of goods" is widely defined in the 1982 Act and means a contract under which there is a transfer of property in goods. This includes barter and contracts for work and materials. Professor Palmer has pointed out that the definition covers any contract "whereunder a party transfers (or agrees to transfer) his property in goods to another", other than an excepted contract.[46] This was deliberate, according to the England & Wales Law Commission Report[47] which was the catalyst for the 1982 Act, in order to cover all types of contracts under which property in goods is transferred.[48] Section 1 of the 1982 Act is in line with our thinking as to what the scope of contracts for the transfer of property in goods in Hong Kong should be. Professor Palmer has commented that "sections 1 to 5 constitute a valuable reform ... and the clarity which they afford to orthodox supply transactions is unquestionably beneficial."[49]

2.33 Although contracts of barter and for work and materials are the two major types of contracts for the transfer of property in goods, our concern is about contracts for the transfer of property in goods in general. Apart from contracts of barter and for work and materials, other types of transactions under which property in goods is transferred (for example, promotional tactics used by the retail trade: barter or collateral contracts) should also be covered under this category. The Consultation Paper recommended that the definition of a "contract for the transfer of property in goods" should be modelled on section 1 of the 1982 Act but should not, as in its subsection (2)(c), exclude contracts under which the property in goods was or was to be transferred in exchange for trading stamps on their redemption. The effect will be that, the proposed definition will cover such contracts.

2.34 The Hong Kong Bar Association agrees with the Consultation Paper that the proposed definition should cover such contracts. But for the following reasons, it has reservations as to whether simply not adopting section 1(2)(c) of the 1982 Act as one of the "excepted contracts" will be sufficient to achieve this purpose:

(a) before an agreement can in law be a contract for the transfer of property in goods, it has to be supported by consideration. A non-contractual transaction such as a gift is not a contract since there is no consideration;

(b) transactions involving transfer of property in exchange for trading stamps on their redemption often raise the difficult question of whether they are simply gifts (because of the lack of consideration) or collateral contracts. The cases of "Chappell & Co Ltd" and "Esso Petroleum Co Ltd" discussed above are good examples of how uncertain the law in this area can be;

(c) thus, simply adopting the definition in section 1 of the 1982 Act without including the "excepted contract" in section 1(2)(c) will not resolve the uncertainty.

In England the supply of goods on redemption of trading stamps is governed by the Trading Stamps Act 1964. Section 4 of the 1964 Act sets out the obligations to be implied when goods are given on redemption of trading stamps, and there is no equivalent provision in Hong Kong. The Hong Kong Bar Association observes that since trading stamps, coupons or similar devices are commonly used by retailers in Hong Kong as promotional tactics, there should be specific statutory provisions dealing with transfer of property in goods in exchange for trading stamps in the Recommended Legislation so as to avoid any potential loophole.

2.35 We note that the nature of the initial giving away of stamps, coupons or vouchers by suppliers to customers depends on how the transaction is structured. It may amount to a gift, sale or collateral contract. The first problem is that if it is held to be a gift, it would be difficult to justify (at least conceptually) why the supplier’s statutory implied obligations should apply to the subsequent supply of goods in exchange for trading stamps. This is because, as pointed out earlier, the proposed implied obligations should not apply to non-contractual supply of goods not supported by consideration (ie a gift). Secondly, having specific provisions in the Recommended Legislation on transfer of property in goods in exchange for trading stamps as suggested by the Bar Association would imply that the initial giving away of stamps, coupons or vouchers is contractual in nature (ie not a gift). It would deprive the court of an opportunity to decide the true nature of the transaction. We think it more sensible, however, to leave the courts to decide the nature of the initial giving away of stamps, coupons or vouchers by suppliers to customers.

2.36 Some retailers may also supply additional goods directly as a "bonus" to customers for purchasing a certain quantity of the promotion products, without involving stamps, coupons or vouchers. The Esso case illustrates this. Esso had a petrol sales promotion scheme under which customers would be given a World Cup coin for every four gallons of Esso petrol bought.[50] Even if there are specific provisions on transfer of property in goods in exchange for trading stamps as suggested by the Hong Kong Bar Association, the Recommended Legislation will still not cover cases which do not involve stamps, coupons or vouchers such as the Esso case. The recommendation in the Consultation Paper, however, should cover such cases so long as they are not regarded as sales or gifts. The promotion tactics discussed above (whether or not involving trading stamps or similar devices) involve a transfer of property in goods. It is the substance of a transaction which determines its nature (ie whether it is a gift, sale, collateral contract or barter). In our opinion, this should be a matter left to the courts to determine.

2.37 Another point worth mentioning is that when the Trading Stamps Act was enacted in 1964, there was no statutory implied term covering contracts for the transfer of property in goods similar to those in the 1982 Act. This (among other reasons) may make the enactment of the 1964 Act desirable. According to Hansard, there were controversies raging over trading stamps.[51] The 1964 Act regulates generally the issue, use and redemption of trading stamps. The main mischief to be tackled by the Act was the operation of the trade, and the suppliers’ statutory implied obligations appear to be largely incidental. We are not aware of any such controversies over the use of trading stamps in Hong Kong. For the reasons mentioned above, we conclude that the recommendation in the Consultation Paper should remain intact.

Contracts of hire of goods

2.38 The law concerning contracts of hire is found partly in the law of bailment and partly in the general law of contract. As to the law of bailment, Holt C J identified six categories of bailment in Coggs v Bernard:[53] deposit, gratuitous loan, hire, pledge, delivery for carriage (or management or repair) for reward and delivery for carriage (or management or repair) without recompense. All the six categories involve the delivery of goods by one person, the bailor, to the other, the bailee, without transferring title. However, only hire of goods involves supply of goods by one person for the use and enjoyment of another. Therefore, questions of merchantability of the goods and their fitness for use should only arise under contracts of hire. A table containing the complaint statistics is at Annex 4.

2.39 Professor Hugh Beale suggests that "contracts of hire" can be defined to include gratuitous loans if they are made in the course of a business so as to avoid the kind of artificiality which may be involved in finding consideration in these transactions. Gratuitous loans are not contractual in nature as they are without consideration. Even where a gratuitous loan is made in the course of a business, it is still gratuitous in nature. We find it hard to see why the implied obligations should be imposed on the "supplier" in such circumstances. For the same reasons set out above under the heading "Other types of supply of goods", we do not consider it appropriate to recommend piecemeal changes to the long-established requirement for the existence of consideration under our law of contract.

Elements of contracts for hire of goods

2.40 Under a contract of hire of goods, the property in the goods does not pass under the contract to the bailee of the goods (that is, the hirer). The property remains in the owner of the goods and he is the "lessor". Only the right to possession, use and enjoyment of the goods pass when the goods are transferred. This type of contract may be described as a "lease", "rental agreement", "contract of hire" or the like. The present discussion focuses only on contracts of hire but covers all such contracts by whatever description, under which one party bails or agrees to bail goods to another party by way of hire.

Consideration

2.41 Money is the usual consideration for this type of contract. A hirer can hire goods for a specific occasion in return for a single payment or he can hire over longer periods for the payment of a rental payable daily, weekly, monthly or yearly. Examples of the former type are the hiring of video films, cars and clothing such as dinner jackets, and examples of the latter type are the hiring of televisions, photocopying machines, plant and machinery.

2.42 It is also possible to hire for a consideration other than the payment of money. In Mowbray v Merryweather[54] the plaintiffs were stevedores and they contracted to unload the defendant's vessel on the condition that the defendant would lend them all necessary cranes, chains and other equipment. The stevedores were the "hirers" of the cranes, chains and equipment though they paid nothing for the use of them; and the ship-owner was the "supplier".

Types of contracts not included

2.43 There are contracts under which services are rendered involving the use of goods (such as a ship or a piece of machinery) but the goods remain under the control of the person rendering the services (the ship-owner or the owner of the machinery). As the possession of the goods in question is not transferred, the contract is not treated as a contract of hire for the present purposes. Where possession is transferred, it is treated as a contract of hire for the purpose of the present discussion whether or not services are rendered as well. In daily life, examples of contracts of hire with services provided are the hire of telephones with the facility of making calls and the hire of photocopying machines with servicing provided.

2.44 Contracts of hire purchase are not merely contracts of hire since under a contract of hire purchase, the hirer obtains an option to acquire the title of the goods later, not just the possession, use and enjoyment of the goods. We will discuss hire purchase agreements as a separate category later in this Report.

Australia and New Zealand

2.45 Contracts of hire are not defined in the 1974 Act and the 1993 Act, even though contracts of hire are covered under the definition of "supply" in both Acts.

England and Wales

2.46 In the 1982 Act, the scope of contracts for the hire of goods is defined in section 6:

"(1) In this Act in its application to England and Wales and Northern Ireland a 'contract for the hire of goods' means a contract under which one person bails or agrees to bail goods to another by way of hire, other than an excepted contract.

(2) For the purposes of this section an excepted contract means any of the following –

(a) a hire-purchase agreement;

(b) a contract under which goods are (or are to be) bailed in exchange for trading stamps on their redemption.

(3) For the purposes of this Act in its application to England and Wales and Northern Ireland a contract is a contract for the hire of goods whether or not services are also provided or to be provided under the contract, and (subject to subsection (2) above) whatever is the nature of the consideration for the bailment or agreement to bail by way of hire."

2.47 The definition in section 6 is wide. Professor N E Palmer makes the following comments about the definition:[55]

"A broad definition of contracts of hire is given by section 6 .... The section further provides that the nature of the hirer's consideration is immaterial to the character of the contract as one of hire, .... The result could again be the inclusion ... of a much wider circle of transactions .... The list includes the bailment of furniture or appliances under a lease of furnished premises ...."

Conclusion

2.48 The Consultation Paper recommended that section 6 of the 1982 Act was a useful blueprint for the definition of "contracts of hire" in the Recommended Legislation.[56] We think that it would be inappropriate to limit in the Recommended Legislation the consideration for a contract of hire to money, since at common law the nature of the consideration is also immaterial. We received no specific comment on this recommendation and we now adopt it accordingly.

Hire purchase agreements

2.49 Because sellers are keen to do business, buyers are often encouraged to acquire goods on credit rather than for cash. But one of the risks of a seller who supplies goods on credit is the failure by the buyer to pay. To overcome this problem, different sorts of financing and security transactions have been devised. A type of transaction commonly used in the supply of goods is a hire purchase agreement. It is commonly used in respect of not only consumer goods, such as, electrical appliances, motor vehicles, etc, but also commercial goods, such as, plant and machinery. Because of the widespread use of hire purchase agreements, the Chinese General Chamber of Commerce favours the inclusion of this type of agreement in the present reform.

2.50 In reality, sellers of goods are often retailers and they are not in the business of providing credit to customers. Retailers will sell the goods selected by customers to finance companies which become owners of the goods. The finance companies then enter into hire purchase agreements with the customers to let the goods to them. Contracts between retailers and finance companies are contracts of sale. Contracts between finance companies and hirers are hire purchase agreements. Though finance companies are owners of the goods, their functions are actually to provide finance. This type of arrangement is commonly used in respect of motor vehicles. A table containing the complaint statistics is at Annex 4.

Elements of hire purchase agreements

Bailment with an option to purchase

2.51 A hire purchase agreement is a contract under which goods are bailed to the hirer in consideration for the hire-rent paid by the hirer. It differs from a contract of hire in that a hirer under a hire purchase agreement is also given an option to purchase the goods within the hire period.[57] Sir Roy M Goode stated: "[a] hire purchase agreement as known to common law may be defined as a contract for the delivery of goods under which the hirer is granted an option to purchase the goods".[58] It is expected that a hirer will exercise the option, and the rate charged for the hire will be calculated on the basis of the cash price of the goods plus interest, and not on the market rate for hiring the goods. The House of Lords held in Helby v Matthews[59] that a hirer under a hire purchase agreement had no proprietary interest in the goods hired until he had exercised his option to purchase and, as the hirer was not a buyer in possession, a sale by the hirer before all the instalments had been paid did not operate to transfer ownership to the sub-buyer.

Two classes of hire purchase agreements

2.52 The exercise of the option to purchase is important in the context of hire purchase. Hire purchase agreements fall into the following two classes:

"(a) agreements whereby the hirer takes the goods on hire for a stated rent and is given an option to purchase the goods at the end of the hiring on payment of an additional sum ('the option fee') which in practice is usually nominal; and

(b) agreements under which the price of the option to purchase is paid at the outset, or included in the hire-rent payable, so that the property in the goods passes automatically to the hirer on completion of the instalments stipulated, without the active exercise of any option to purchase."[60]

2.53 In an agreement falling under the first category, the property in the goods does not pass even at the end of the hire period unless the hirer exercises the option by paying the option fee. If the option fee is other than purely nominal, an agreement of this type is a true hire purchase agreement, even though the hirer has no power to terminate the hiring before the expiration of the period of hire.[61] But if the option fee is only nominal, the position has not been clear until recently.[62] It was held in Close Asset Finance Ltd v Care Graphics Machinery Ltd[63] that such an agreement was a hire purchase agreement but not an agreement to buy since "the hirers had not committed themselves to exercising the option or committed themselves to take title to the [goods]".

2.54 An agreement of the second category might be classified as a contract of sale or as an agreement to sell unless the agreement contains a clause enabling the hirer to terminate the hiring before the final instalment of rent becomes payable, for otherwise, except by breaking the contract, the hirer cannot avoid ultimately acquiring the title to the goods.[64]

Distinction between hire purchase and conditional sale

2.55 Both hire purchase and conditional sale may require payment of the consideration by instalments. A conditional sale agreement is a contract of sale[65] under which the performance of a party’s obligation is conditional upon a particular event. For example, a seller’s obligation to transfer the property is conditional upon the payment of the last instalment of the price. What distinguishes a conditional sale agreement from a hire purchase agreement is that a buyer under a conditional sale agreement does not have a right to terminate the agreement or an option to buy. In other words, he is obliged to buy the goods.

2.56 It is the nature of the transaction that determines whether or not an agreement amounts to hire purchase, irrespective of what the agreement may be called. In Sun Hung Kai Credits Ltd v Szeto Yuk Mei,[66] in deciding whether a guarantee was valid, the court held that the purported hire purchase agreement gave the hirer no right to terminate the agreement and no option to purchase. The agreement was therefore a conditional sale.

Australia and New Zealand

2.57 The expression "hire purchase agreement" is not defined in the 1974 Act and the 1993 Act even though hire purchase agreements are covered under the definitions of "supply" in both Acts.

2.58 In Australia, only Queensland, Tasmania, Victoria and Western Australia retain their Hire-Purchase Acts which contain definitions of "hire purchase agreement". The definitions in the Hire-Purchase Acts in Queensland, Tasmania and Victoria[67] are similar. They define "hire purchase agreement" to include a letting of goods with an option to purchase and an agreement for the purchase of goods by instalments. But it does not include (a) any agreement whereby the property in goods passes at the time of the agreement, or (b) any agreement under which the hirer or purchaser engages in the trade or business of selling goods of the same nature or description, or (c) any contract regulated by the relevant Credit Acts or Consumer Credit Code.[68] This is an expanded meaning of "hire purchase agreement".

2.59 In New Zealand, "hire purchase agreement" is defined in the Hire Purchase Act 1971 (section 2) to mean an agreement whereby goods are let or hired with an option to purchase, or an agreement for the purchase of goods by instalment payments under which possession is passed before the total amount payable has been paid. But it does not include (a) any agreement made other than by retail, or (b) subject to the deeming provisions,[69] under which the property in the goods passes absolutely at the time of the agreement or upon or at any time before delivery. The meaning of "hire purchase agreement" in the Hire-Purchase Act 1971 was also expanded beyond the common law meaning.

England and Wales

2.60 Section 15 of the 1973 Act, which sets out the implied terms for hire purchase agreements, defines "hire purchase agreement" as:

"an agreement, other than a conditional sale agreement, under which –

(a) goods are bailed or (in Scotland) hired in return for periodical payments by the person to whom they are bailed or hired, and

(b) the property in the goods will pass to that person if the terms of the agreement are complied with and one or more of the following occurs –

(i) the exercise of an option to purchase by that person,

(ii) the doing of any other specified act by any party to the agreement,

(iii) the happening of any other specified event."

2.61 The definition of "hire purchase agreement" in section 15 was added to the 1973 Act by the Consumer Credit Act 1974, which contains an identical definition in section 189(1). An academic has called this definition "an expanded and more precise definition".[70]

2.62 Sir Roy M Goode has commented[71] that this definition was wider in scope and covered agreements which had not been regarded as hire purchase agreements before. An agreement is a hire purchase agreement even if the event causing property to pass is not a voluntary act of the owner or hirer but the happening of some other specified event.

2.63 In R v R W Proffitt Ltd,[72] a rental agreement provided that at the end of the hiring the hirer was given the option of purchasing the goods subject to the enactment of the necessary legislation. Jones J held in this case that the rental agreement did not fall within the definition of hire purchase agreement in the Hire-Purchase Act 1938. However, "the enactment of the necessary legislation" could be regarded[73] as "the happening of any other specified event" and the agreement between the parties would then be a hire purchase agreement under the new definition in the 1973 Act.

Conclusion

Wider definition is preferred

2.64 The court has not had occasion to decide on the real nature of the rental agreement in R v R W Proffitt Ltd. From the nature of the rental agreement in that case, the court would probably classify it as a conditional sale agreement, but not a rental agreement (even though it was so named) since the property would pass subject to certain conditions. That agreement would then be a contract of sale within the 1979 Act. The consequence is that the "buyer in possession" exception to the nemo dat quod non habet rule[74] (embodied in section 25(1) of the 1979 Act) would be applicable. The effect of section 25 is that a buyer who is in possession of the goods may confer ownership on a bona fide sub-buyer, even though the buyer himself has not yet acquired the property in the goods. That is unfair to the seller under the first sale agreement, ie the owner of the goods.

2.65 The expanded definition of hire purchase agreement introduced by section 15 of the 1973 Act (as added by the Consumer Credit Act 1974) will cover agreements similar to that in R v R W Proffitt Ltd. Such agreements may then be treated as hire purchase agreements and not conditional sales. The buyer in possession exception to the nemo dat rule would then not apply and this should prevent unfairness to the owner of the goods.

2.66 In Hong Kong, there is an equivalent buyer in possession exception to the nemo dat rule embodied in section 27(2) of Cap 26. To minimise unfairness to the owner of the goods, we believe that an expanded definition of hire purchase agreement would also be appropriate for Hong Kong.

Wider definition but yet still confined to bailment is preferred

2.67 In Sir Roy M Goode's view, "[t]he given elements in any definition [of hire purchase] are:

(1) that goods are being hired

(2) that the property will pass to the hirer

but

(3) the hirer has a right not to go all the way, either because he has to exercise a positive option to buy or because he can terminate the hire agreement before incurring an obligation to pay the full price."[75]

2.68 As to the first element mentioned above by Sir Roy Goode, hiring of goods, the expanded definitions of hire purchase agreement in both Australia (Queensland, Tasmania and Victoria) and New Zealand cover purchase of goods by instalment payments, but not just hire of goods. The definition in the Hire-Purchase Act 1959 in Western Australia is even wider. As mentioned above, the deeming provisions in section 2(5) and (6) in the Hire-Purchase Act 1971 in New Zealand also cover some types of contracts of sale. Such expanded definitions with scope wider than bailment of goods may be too drastic for Hong Kong.

2.69 The definition in the 1973 Act is expanded but is still confined to bailment. It is not limited to "the case where the bailee has an option to purchase - any other contingent agreement, not being a conditional sale agreement, whereby the property in goods may pass to the bailee"[76] would be within the UK definition. Sir Roy Goode is of the view that the definition in the 1973 Act was drafted to be as comprehensive as possible.[77] Professor Paul Dobson stated[78] that the inclusion of sub-paragraph (iii) in section 15 of the Act was "an anti-avoidance provision in case anything which ought to be caught by the definition is not caught by (i) or (ii)". After discussing with Professor Francis Bennion, the draftsman of the Consumer Credit Act 1974, Professor Dobson further stated:[79]

"the definition was drafted this way in order to capture a concept. That concept is one where goods are hired but where there is an additional element in the agreement, namely that property (not will, but) might pass to the hirer. That additional element is then one where property might pass to the hirer and where that passing of property depends upon a contingency. That contingency will often, of course, be the exercise by the hirer of an option. It might, however, be anything and subparagraph (iii) makes this clear .... It would also be accurate to describe such a hiring agreement as an agreement of hire where property in the hired goods might, depending on a contingency, pass to the hirer - ie they are agreements to hire with the chance that they will turn into methods of conveying property in the goods".

Hirer has the right but not the obligation to buy the goods

2.70 The second element, passing of property to the hirer, is straightforward and requires little elaboration. The third element, a hirer's right but not obligation to buy the goods, can be illustrated by the following cases.

2.71 In Lee v Butler,[80] the hirer agreed to hire some furniture by paying rental in two instalments. On paying the second instalment, the property would pass to the hirer. The court held that since the "hirer" was bound to make that payment, the agreement in question was a contract of sale. On the other hand, in Helby v Matthews,[81] the hirer hired a piano on the basis that he paid 36 instalments of rental and, on paying the last instalment, the property of the piano would pass to him. In addition, the hirer was free to terminate the agreement at any time. The House of Lords held that the agreement in question was a hire purchase agreement since the hirer was not bound to buy the piano. The English Court of Appeal in a recent case, Forthright Finance Ltd v Carlyle Finance Ltd,[82] held an agreement to be a conditional sale agreement because the "hirer" was contractually obliged to pay all the contractual instalments. In this case, the "hirer" could exercise an option to decline to receive the title after paying all instalments. Despite this, the Court of Appeal still held that it was a conditional sale agreement because the "option not to take title, which one would only expect to be exercised in the most unusual circumstances, [did] not affect the true nature of the agreement".[83]

2.72 Professor Paul Dobson also stated, "[i]n a hire-purchase agreement, the debtor is not committed to acquiring title to the property".[84]

2.73 However, it must be pointed out that paras (b)(ii) and (iii) of the definition in section 15 of the 1973 Act may not necessarily be in line with the important element of hire purchase that a hirer has the right but not the obligation to buy the goods. Paragraph (b)(ii) refers to "the doing of any other specified act by any party to the agreement". "[A]ny party to the agreement" can be any party other than the hirer, and the doing of the specified act by that party will trigger the passing of the property. Whether that party does that specified act or not may be beyond the control of the hirer. The same applies to "the happening of any other specified event" of para (b)(iii), since the happening of that specified event may be beyond the control of the hirer. The happening of that specified event will also trigger the passing of the property. Therefore, under some circumstances, the hirer may be obliged to buy the goods because the "doing of the specified act" in para (b)(ii) or the "happening of any other specified event" in para (b)(iii) may be beyond his control. Such a scenario is practically indistinguishable from a conditional sale agreement under which the buyer is obliged to buy the goods. Professor Francis Bennion, however, has no doubt that the definition does not cover a conditional sale agreement because it is expressly excluded. If an agreement is not a conditional sale, it ought to be regarded as a hire-purchase agreement even though the hirer has agreed to a term whereby he may lose control.

2.74 It is true that the 1973 Act definition expressly excludes conditional sale agreements. But under the 1973 Act the property of goods may pass to a hirer because of "the doing of any other specified act" or the "happening of any other specified event" which may be beyond his control or desire. In such a case, he has an obligation, but not a right, to buy the goods. It is in this sense that the agreement in question is similar to a conditional sale agreement. Sir Roy Goode is of the view that the definition in the 1973 Act was drafted "to cover all types of situation in which property would pass where the hirer nevertheless had the right to prevent this happening".[85] Even though he stated that the important element of a hirer's right but not obligation to buy the goods was "covered by saying that a hire purchase agreement is an agreement 'other than a conditional sale agreement' [in the definition of the 1973 Act]",[86] it would be appropriate for Hong Kong to spell out this important element explicitly for the sake of certainty and the avoidance of doubt.

Other aspects of the definition in the 1973 Act

2.75 Section 15 of the 1973 Act defines a hire purchase agreement as an agreement under which the property in the goods will pass "if the terms of the agreement are complied with" and "one or more of the following occurs ...."[87] These two elements overlap with each other. Sub-paras (i), (ii) and (iii) should already form part of "the terms of the agreement". Once all the terms have been complied with, there would by definition be no further terms requiring "the exercise of an option", "the doing of any other specified act" or "the happening of any other specified event" before property is to pass. Any such "further" terms would already have been complied with.

2.76 Furthermore, Sir Roy Goode is of the view that "the definition is over-elaborate".[88] The definition of "hire purchase agreement" in the 1973 Act is wider than that in the Hire Purchase Act 1965 and, in effect, it avoids the operation of the buyer in possession exception to the nemo dat rule, but yet is still confined to the scope of bailment. Nonetheless, because of the reasons mentioned above, the definition in the 1973 Act may not be appropriate for Hong Kong.

The definition for Hong Kong

2.77 On the basis of the elements of a definition of "hire purchase agreement" he identified, Sir Roy Goode suggested that:

"it would be sufficient to say that a hire purchase agreement is an agreement, or a combination of agreements, by which goods are supplied on hire and the hirer has the right, but not obligation to buy the goods."[89]

2.78 For Hong Kong, a wider definition is preferred, but it should not be outside the scope of bailment since the basis of hire purchase must be hire. In addition, the important element that a hirer has the right, but not an obligation, to buy the goods must be reflected unequivocally in the definition. The definition should also be concise. To this end, the Consultation Paper recommended that the definition suggested by Sir Roy M Goode, which included all the required elements without compromising conciseness, was appropriate for Hong Kong.

2.79 Professor Francis Bennion prefers the 1973 Act definition which, in his opinion, spells everything out clearly, and he further states that the objections to it lack substance. He suggests that the term "a combination of agreements" is otiose and may cause difficulties. He refers to the Consumer Credit Act 1974 which speaks only of one agreement because under the Interpretation Act 1978 the singular includes the plural. We agree that the term "a combination of agreements" can be discarded.

2.80 Professor Bennion further comments that Recommendation 4 in the Consultation Paper on the definition of "hire purchase agreement" simply hinges on the meaning of the term "hire", and there is also a question as to the meaning of the word "supplied". We, however, note that the definitions in the 1965 Act and 1973 Act use the word "bailment". We believe that either the concept of "hire" or "bailment" is needed to convey the essence of the term "hire purchase agreement". The word "hire" is more user-friendly, and the phrase "supplied on hire" should create no problem. In the circumstances, we have decided to retain the recommendation proposed in the Consultation Paper, subject to the deletion of the term "a combination of agreements".

What are "goods"?

Definition in Cap 26

2.81 In section 2 of Cap 26, "goods" is defined as including:

"all chattels personal other than things in action and money. The term includes emblements, industrial growing crops, and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale".

2.82 This is a general definition and makes it clear that "goods" includes "all chattels personal other than things in action".

Australia

2.83 In section 4 of the 1974 Act, "goods" is defined to include ships, aircraft, other vehicles, animals, minerals, trees, crops, gas and electricity. This is an inclusive definition and the word "goods" is "defined in terms based upon, but wider than, the definition in the sale of goods legislation".[90] Reference should therefore be made to the more general definition of "goods" in the sale of goods legislation in each individual state or territory in Australia. For example, in section 5(1) of the Sale of Goods Act (NSW), "goods" is defined in identical terms to those in Hong Kong.

New Zealand

2.84 In section 2(1) of the 1993 Act, "goods" is defined to include goods attached to or incorporated in real or personal property, ships, aircraft, vehicles, animals, minerals, trees, crops, etc. This is also only an inclusive definition, and reference should be drawn to the more general definition of "goods" in the Sale of Goods Act 1908.

England and Wales

2.85 In section 18(1) of the 1982 Act, "goods" is defined as follows:

"'goods' includes all personal chattels, other than things in action and money, and as regards Scotland all corporeal moveables; and in particular 'goods' includes emblements, industrial growing crops, and things attached to or forming part of the land which are agreed to be severed before the transfer bailment or hire concerned or under the contract concerned".

2.86 This definition is almost identical to that in the 1979 Act. "Goods" is not defined in the 1973 Act and the definitions in the 1979 Act and the 1982 Act should be followed.

Conclusion

2.87 The Consultation Paper recommended that, for the sake of clarity and consistency with Cap 26, the more general definition of "goods" in Cap 26 should be adopted for other types of supply of goods, instead of the inclusive definitions found in the 1974 Act (Australia) and the 1993 Act (New Zealand). Professor Hugh Beale supports the proposal in the Consultation Paper and agrees that it is sensible to have the same definition in the context both of sale of goods and supply of goods. We so recommend.

Computer software

2.88 In Hong Kong, computers are more and more commonly used both at home and in business (including non-profit organisations such as government, charitable groups, etc). However, it is not clear whether the definition of "goods" in Cap 26 covers computer software and there is no Hong Kong authority on this.

2.89 A physical copy of computer software is very often supplied to a customer by way of sale. For the present purpose, we focus on the supply of goods other than by way of sale. Computer software as the subject matter of a contract of hire or hire purchase agreement is relatively uncommon. However, computer software can be the subject matter of a contract for transfer of property in goods as defined in this chapter, such as, contracts for work and materials or other types of contracts for transfer of property in goods. The cases cited in the following paragraphs mainly concern sales of computer software. Nonetheless, since the emphasis of the following discussion is whether computer software is "goods", the analysis should also be applicable to the supply of goods other than sale.

Hardware vs software[91] - the common law position

2.90 Computer hardware is a tangible personal chattel and therefore should be goods within the definition of "goods" in Cap 26.

2.91 As for a computer system comprising both hardware and software, Toby Constructions Products Pty Ltd v Computa Bar (Sales) Pty Ltd,[92] an Australian case, held that this was "goods" within the definition of the Sale of Goods Act 1923 (NSW) and the 1974 Act. In this case, the plaintiff acquired a complete computer system comprising hardware and software and there were defects in the computer system. The question was whether the computer system was "goods". Rogers J held:

"Confronting the question specifically, I come to the conclusion that a sale of a computer system, comprising both hardware and software, as in the present case, does constitute a sale of goods within the meaning of both the [Trade Practices Act 1974] and the [Sale of Goods Act 1923 (NSW)]. There is a sale of tangible chattels, a transfer of identifiable physical property. It is true that it is necessary for the effective working of the system that there should be comprised within it software. That does not disqualify the aggregate operative system from the appellation or description of 'goods'."[93]

2.92 The English Court of Appeal endorsed this decision in St Albans City and District Council v International Computers Ltd.[94] Sir Iain Glidewell stated[95] (obiter) that "that decision was in my respectful view clearly correct". In this case, the plaintiff local authority entered into a contract with the defendant company for the supply of a computer system and there was an error in the software. The Court of Appeal held that there was an "express contractual obligation to supply the plaintiffs with software which would enable them accurately to complete the return by [a certain] date"[96] and the defendant had breached that express term.

2.93 Sir Iain Glidewell went on to express his opinion as to whether, assuming that there was no such express term, a term to the same effect (ie as to quality or fitness for purpose) would be implied either by statute or general contract law. Sir Iain Glidewell first decided whether such a term was implied by statute and said:

"In both the Sale of Goods Act 1979, s61, and the Supply of Goods and Services Act 1982, s18, the definition of goods includes 'all personal chattels other than things in action and money'. Clearly, a disk is within this definition. Equally clearly, a program, of itself, is not ....

There is no English authority on this question, and indeed we have been referred to none from any common law jurisdiction ....

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 1979 Act, and the defective instructions would result in a breach of the implied terms in s14.

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 1979 Act or the 1982 Act."[97] (emphasis added)

2.94 However, in this case, an employee of the defendant went to the plaintiffs' premises, taking with him a disk encoded with the required program, and transferred the program into the computer. Since Sir Iain Glidewell was of the view that the program itself was not "goods" within the terms of either the 1979 Act or the 1982 Act, the statutory implied terms in those acts did not apply to this case. But he was of the opinion that a term as to fitness for purpose would be implied under general contract law.

2.95 In the United States, the Court of Appeals for the 3rd Circuit held[98] that software in a physical medium was "goods" within the meaning of the Uniform Commercial Code:

"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 ....

The importance of software to the commercial world and the advantages to be gained by the uniformity inherent in the UCC are strong policy arguments favoring inclusion. The contrary arguments are not persuasive, and we hold that software is a 'good' within the definition in the Code."[99] (emphasis added)

2.96 Even though the US Court of Appeals stated that "software [was] a 'good'", it is clear from reading the passages quoted that the court meant software in a physical medium.

2.97 With the possibility and growing popularity of on-line distribution of informational products, the question as to whether software supplied through the Internet is "goods" arises. It was held in ASX Operations Pty Ltd and others v Pont Data Australia Pty Ltd,[100] an Australian case, that information supplied by electronic means was not "goods" for the purposes of the 1974 Act. Judge Lockhart stated:

"it does not follow ... that it should be read as if there was a further inclusion, by way of extension of the ordinary meaning of 'goods', so as to draw within the definition encoded electrical signals".[101]

Summary and options

2.98 It should be safe to say that hardware is "goods". As for a computer system comprising hardware and software (such as the boot-up, start-up or operating system program stored on computer chips or a disk inside a computer), it may be regarded as "goods" within Cap 26 since the hardware and software can be considered as constituting one entity. The Toby case referred to earlier provides authority for this.

2.99 The sale (supply) of a floppy disc containing computer software is similar to a sale of a compact disc containing recorded music or a videotape containing a movie. There is a sale (supply) of a chattel embodied with a copy of "work" in which intellectual property rights exist in each case. The fact that the "work" of which a copy is sold (supplied) also constitutes intellectual property does not undermine the fact that the physical medium containing the "work" is a chattel and, therefore, "goods".[102] The view of Sir Iain Glidewell in the St Albans case supports this. As to software supplied through the Internet or other electronic means, it is more difficult to argue that it falls within the definition of "goods" in Cap 26 since it is not in a tangible medium.

2.100 None of the cases referred to are from Hong Kong and the remarks in the St Albans case on the issue in question are only obiter dicta. The position in Hong Kong therefore remains uncertain. The Recommended Legislation could therefore define "goods" to make it clear that computer systems comprising hardware and software and tangible mediums containing software do not disqualify the systems and the mediums respectively from being "goods". It should be noted that such a definition will be different from that in Cap 26 and there will be inconsistency between the two definitions. The definition in Cap 26 may then have to be amended consequentially.

2.101 Another option would be to leave it to the courts to decide. The advantages of this approach are that this is in line with Australia, New Zealand and England and Wales and that there is no need to consider whether to amend the definition of "goods" in Cap 26. However, the disadvantage is that the issue remains unclear.

Conclusion

2.102 Computers are widely used for both domestic and business purposes in Hong Kong, and affect many aspects of everyday life. Users of software, whether consumers or not, should be protected just like users of any other goods and should not have to put up with uncertainty. Certainty and predictability in the law are important. Both the Democratic Alliance for the Betterment of Hong Kong and the Judiciary Administrator’s Office note that contracts for the sale or supply of Internet-related services and software programmes have mushroomed, and consider that certainty and predictability of the law can be enhanced if the definition of "goods" covers computer software.

2.103 It is reasonable that users of software should be protected in the same way as users of any other goods. However, expanding the definition of "goods" so that it clearly covers computer systems incorporating software, as well as a disk or other physical medium on which the software is written, only addresses one aspect of software use. It may be preferable to await a more comprehensive study of this topic, covering issues such as software licensing and Internet contracts.[103] Professor Hugh Beale and the Consumer Council endorse the recommendation in the Consultation Paper that extending the definition of "goods" to cover computer software should be dealt with cautiously, even though both of them consider that the increasing use of computers and the Internet warrants reform. In addition, as noted in the Consultation Paper, according to the Consumer Council,[104] the number of complaints about software were not significant. A table containing the complaint statistics on software is at Annex 5. The Judiciary Administrator’s Office responds that the fact that the complaint statistics are low may not accurately reflect the extent of commercial disputes in relation to contracts of this nature. We agree that the complaint statistics may not be conclusive, but they at least provide an objective means to assess the situation. After considering the arguments, we have come to the conclusion that a highly technical topic such as this deserves a separate study in its own right. Piecemeal changes may not necessarily be to the benefit of software users.

2.104 It must be pointed out that the discussion of the supply of computer software in this Report is not intended to cover all matters relating to computer software. Our concern is limited to the implied terms for contracts for supply of computer software.

[29] The service element under a contract for work and materials is governed by the Supply of Services (Implied Terms) Ordinance (Cap 457).
[30] Benjamin's Sale of Goods, 5th Ed, 1997, at para 1-037.

[31] Benjamin's Sale of Goods, 5th Ed, 1997, at para 1-037. In Aldridge v Johnson (1875) 7 EB 885, the parties agreed 32 bullocks should be transferred by Aldridge to Knights and 100 quarters of barley should be transferred by Knights to Aldridge, the difference to be paid in cash. It was held that there were mutual sales. Professor L Sealy is of the view that had the deal been that 100 quarters of barley be traded for 32 bullocks, or for 32 bullocks plus a sum of money, without any valuation of consideration on either side, it could only be regarded as barter (Benjamin's Sale of Goods, 5th Ed, 1997, at para 1-037).

[32] A deal can be regarded as reciprocal sale with a set-off of prices, or as one contract of sale, of the principal goods, together with a subsidiary arrangement that if the buyer delivers to the seller the other goods, an agreed allowance will be made. Benjamin's Sale of Goods, 5th Ed, 1997, at para 1-039.

[33] Michael Mark, Chalmers Sale of Goods, 18th Ed, 1981, at 80-81.

[34] For example, supplying a meal in a restaurant, Lockett v Charles [1938] 4 All ER 170; making and fitting false teeth, Lee v Griffin [1861] 30 LJ QB 252 cf Samuels v Davis [1943] KB 526; making mink jackets from skins selected by the customer, Marcel (Furriers) Ltd v Tapper [1953] 1 All ER 15; [1953] 1 WLR 49; providing and laying fitted carpets, Philip Head & Sons, Ltd v Showfronts, Ltd [1970] 1 Lloyd's Rep 140.

[35] For example, printing 500 copies of a treatise, where the printer supplies the paper, Clay v Yates [1856] 1 H & N 73; painting a portrait, Robinson v Graves [1935] 1 KB 579.

[36] G H Myers & Co v Brent Cross Service Co [1934] 1 KB 46.
[37] Watson v Buckley, Osborne, Garrett & Co Ltd [1940] 1 All ER 174.
[38] Young & Marten Ltd v McManus Childs Ltd [1969] AC 454.

[39] In England, the supply of goods on redemption of trading stamps is governed by the Trading Stamps Act 1964.

[40] cf Esso Petroleum Co Ltd v Commissioners of Customs and Excise [1976] 1 WLR 1.

[41] [1960] AC 87.

[42] In a Canadian case on similar facts, Buckley v Lever Bros Ltd [1953] 4 DLR 16, the Court treated the transaction as one of sale. See also the diverging views of the law lords in the Esso case below.

[43] [1976] 1 WLR 1.

[44] Lord Fraser thought there was a sale. Viscount Dilhorne and Lord Russell both thought that the Court of Appeal were right in holding that the coins were being distributed as gifts. Lord Simon and Lord Wilberforce, on the other hand, ruled that the supply of the coins to the motorists was contractual but without there being a sale; the consideration for the transfer of the coin or coins was not a money payment but the undertaking by the motorist to enter into a main contract to purchase the appropriate quantity of Esso petrol. Professor Atiyah has mentioned that if there were a collateral contract, "it would presumably be a contract for the transfer of goods within" the 1982 Act. P S Atiyah, The Sale of Goods, 10th Ed, 2001, at 11.

[45] N E Palmer, "The Supply of Goods and Services Act 1982", (1983) 46 MLR 619, at 620.

[46] N E Palmer, "The Supply of Goods and Services Act 1982", (1983) 46 MLR 619, at 620.

[47] Law Com No 95, at para 28.

[48] These include the promotional tactics used by the retail trade, for example, goods supplied for labels, wrappers, coupons or vouchers with or without money, so long as they are not regarded as gift or sale.

[49] N E Palmer, "The Supply of Goods and Services Act 1982", (1983) 46 MLR 619, at 623.
[50] For the significance of this case, please see the discussion earlier in this chapter.
[51] Hansard HL, 8 June 1964, col 714.