UK: High Court Rules Software = Goods In Commercial Agency Relationship

The question of whether software constitutes goods or services has always been problematic. The answer can determine if and when certain terms are implied into a commercial contract, which in turn may have significant financial consequences for the losing party in a dispute.

This was illustrated most recently in the High Court case of The Software Incubator Ltd v Computer Associates UK Ltd [2016] EWHC 1587 (QB). Here Judge Waksman QC held that the software promoted by agent TSI was "goods" for the purposes of the Commercial Agents (Council Directive) Regulations 1993. The court found in favour of TSI and awarded it £475,000 in compensation under the Regulations and £24,355 in contractual damages.

This decision will be of interest to software agents, principals – including software licensors and anyone involved in negotiating commercial agency agreements, particularly where those agreements relate to software or other intangible products.

What are the Regulations?

Readers will recall that the Regulations aim to protect commercial agents in relation to their principals. This is achieved, in part, through mandatory provisions such as the payment of compensation to an agent on termination of his agency and, in some cases, payment to the agent of a post-termination commission. One practical effect of the legislation, where it applies, is that a principal may have to make sizeable payouts to the agent when the relationship ends.

When do the Regulations Apply?

The Regulations apply to commercial agents, defined in the Regulations as a self-employed intermediary with continuing authority to negotiate the sale or purchase of goods on someone else's behalf. No definition of goods is given. The intermediary can be an individual, partnership or company and the Regulations apply to both sales and purchasing agents. They do not apply to employees.

The Facts

TSI entered into a non-exclusive agreement with CA to market, sell and promote CA's application release automation (RAS) software in the UK. Under the agreement, TSI was to "devote a substantial amount of time and effort" to this. The agreement included a non-compete clause and TSI received a monthly consulting fee in addition to an annual sales-based commission.

Subsequently CA grew dissatisfied with the arrangement and gave TSI notice of termination. Shortly afterwards, CA terminated the agreement for alleged repudiatory breaches by TSI, namely that TSI had failed to put in the requisite time and effort and had engaged in competing activities. TSI denied breach and brought a claim against CA for compensation and post-termination commission under the Regulations and damages for failing to give adequate notice of termination.

In its defence, CA argued the Regulations did not apply because there was no sale of goods. If, in the alternative, the Regulations did apply, then TSI was not entitled to contractual damages because it was itself in repudiatory breach. In particular, CA argued TSI should not be entitled to compensation under the Regulations as these exclude payment of compensation to the agent where the principal terminates the agreement due to a serious breach by the agent.

The Decision

In finding for TSI, the Judge held that the licensing of software on a perpetual basis constituted the purchase or sale of goods for the purposes of the Regulations and that there had been a sale of goods. As such, the Regulations applied.

His approach marked a notable departure from the traditional 'medium of delivery' method of software classification applied in St Albans City and District Council v International Computers Limited [1996]. There it was held that software constituted goods when provided as part of the medium on which it is stored, such as a CD.

The Judge noted that although the software in this case was intangible, it was nonetheless a form of goods: "The essential characteristics of a piece of software. . .cannot depend on its mode of delivery any more than the nature of tangible goods depends on whether they are transported by rail, sea or air". Indeed, for Waksman J, "context is everything".

Lessons and Tips

• Don't assume the Regulations don't apply because an agreement relates to a product (whether software or other intangible) that is not a good in the traditional sense and/or there has been no sale of that product;
• Review current and anticipated agency relationships to determine whether the Regulations apply and if so, to what extent;
• Software licensors in particular will want to review standard form agency and referral contracts with a view to minimising the Regulations' impact;
• Where the Regulations do apply, principals may be able to strengthen their legal position by excluding claims for post-termination commission from the agreement. (However, it should be borne in mind that the agreement in this case contained such an exclusion and TSI, the agent, secured an equivalent payment under common law);
• Be aware that where the Regulations apply, and unless an agreement includes an indemnity clause, the agent will be entitled, on termination, to compensation for the loss of value of his agency. As the Regulations set no limit on this amount, it could be a substantial sum and certainly far greater than if an indemnity clause had been included;
• Consider structuring sales and promotion models to avoid triggering the Regulations by selling/promoting via employees as opposed to self-employed individuals. Another option might be to use a distributor;
• Tread carefully: it is not yet clear how the decision might apply to software licensed on an annual, subscription or "pay as you go" basis; or provided as Software as a Service (Saas) via the web.

Will this be affected by Brexit?

The Regulations were enacted to give effect to corresponding EU legislation, in this case the EU Commercial Agents Directive (86/653/EC). One imagines that this is not an area that would appear high on a list of post-Brexit legislative priorities. For the time being, the Regulations remain in force.

To view the judgment in full visit: http://www.bailii.org/ew/cases/EWHC/QB/2016/1587.html

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.