“Dunning” By Embedded Software, Clever or Stupid?

Embedded software refers to the computer software, written to control machines or devices on site or remotely by embedding software, which shall be an invisible component of machines or devices, and shall be delivered with them.

In practice, where the price of a machine is pretty high, both parties would adopt an installment payment. It is not abnormal for the buyer to pay in arrears after the seller has delivered the machine. In view of the time and cost for arbitration or lawsuit, and the execution difficulties occasionally, some sellers try to use embedded software for dunning, which says that embedding software in the machine, when the buyer fails to pay on time, in order to demand the payment, the seller would disturb the running of the machine by using such embedded software. It is said that this clever tip can help the seller to obtain the payment.

However, from the buyer’s perspective, if the buyer has no idea about the embedded software, once delay the payment, sudden stop the production, it would be unfair for the buyer to undertake such losses. This is why the legitimacy of “Dunning” by embedded software is worth to be discussed.
When the seller turns off the machine in whole or partly by the embedded software, it is a restriction on the use of the machine. Then, whether the seller shall be entitled to set such restriction? If yes, which elements shall be considered?

According to “Property Law” Article 23, the creation or transfer of the real right of a movable property shall become effective upon delivery, except it is otherwise prescribed by any law. That is, normally, when the machine has been delivered to the buyer, the ownership shall be transferred to the buyer at the same time, the buyer shall have the rights to possess, use, seek profits from and dispose of the machine. Then what does “except it is otherwise prescribed by any law” mean? Generally, except the regulations in “Property Law”, Article 134 of “Contract Law” is the typical exception on the ownership reservation. It stipulates, the parties to a sales contract may agree that the ownership shall belong to the seller if the buyer fails to pay the price or perform other obligations. Accordingly, if the buyer fails to fulfill payment obligations, the ownership shall remain with the seller regardless whether the buyer possesses or uses the subject matter.

In general, upon the delivery, the buyer shall have the rights to possess, use, seek profits from and dispose of the machine, and the seller shall not be entitled to restrict any rights of the buyer. Under the ownership reservation circumstance, the buyer only has the right to possess, use, and seek profits from the machine other than dispose the machine, before the payment has been accomplished. Otherwise, the seller shall have the right to dispose the machine when the agreed conditions are met. In conclusion, the seller shall not restrict the use of the machine before the agreed conditions are met, because the buyer’s right to possess, use, and seek profits from the machine shall be entire and unrestricted.
Under the current legal system, the seller shall not be entitled to restrict the buyer’s right at its own discretion as the guarantee for the payment; otherwise, such restriction shall be invalid. Such restriction can only be set upon the agreement of both parties in advance.
Where the seller wants to design such restriction in a transition, hereinafter several aspects shall be paid attention to:

Firstly, the contract shall stipulate that the seller has the right to embed software in the machine, when the buyer fails to pay according to the contract, the seller shall be entitled to run the embedded software which may cause the machine to be turned off in whole or partly.

Secondly, a reasonable notification period shall be set. Because the restriction on the use of the machine may cause serious consequence to the buyer, and such restriction is aimed at requiring the buyer to pay other than bringing loss to the buyer, without such a reasonable notification period, the court may not support the seller’s claim in judicial practice. In addition, the notification shall be in written, and the seller shall preserve evidence.

In conclusion, “dunning” by embedded software is feasible under special circumstance. The seller shall pay attention to the legality and rationality of the relevant contract terms; otherwise a “clever” tip may turn to be a “stupid” hit.