The High Court has held in The Software Incubator Ltd v Computer Associates UK Ltd that software should be considered "goods" in the context of the Commercial Agents (Council Directive) Regulations (1993) (the Regulations) and that the licensing of software on a perpetual basis does constitute a purchase or sale of goods for the purposes of the Regulations. This case could have a significant impact on software providers and their resellers.
The Software Incubator Ltd (TSI) had a contract with Computer Associates UK Ltd (CA) under which TSI was appointed to promote specific software to CA customers. The agreement was non-exclusive on both sides, but TSI was obliged to "devote a substantial amount of time and effort in providing the Services". The agreement also included a non-compete provision. TSI was paid a monthly consulting fee plus commission based on annual sales figures.
On 13 September 2013, TSI was given three months' notice of termination by CA. However, on 9 October 2013, CA terminated the agreement with immediate effect, alleging that TSI's work for another software company amounted to a repudiatory breach of the agreement. TSI claimed against CA for compensation under the Regulations, commission on post-termination sales and damages. CA sought to defend the claim on the following grounds:
- There was no claim under the Regulations because the sale of software was not "the sale of goods" for the purpose of the definition of "commercial agent" in the Regulations; and
- TSI's activities as a commercial agent were "secondary" for the purpose of the Regulations and so the Regulations did not apply.
The Regulations set out a number of duties and obligations which apply to relationships between a commercial agent and its principal. Under the Regulations, agents are afforded various rights with the most notable being a right to compensation or to an indemnity payment when the agreement comes to an end. If the compensation or indemnity is payable then this will be the case even if the agent has no right to damages at common law in respect of the termination of its agency contract.
The intention of the Regulations was to enhance and protect the position of commercial agents in relation to their principals as well harmonise the different national laws on commercial agency agreements. The Regulations apply to self-employed intermediaries who have continuing authority to negotiate or to negotiate and conclude the sale or purchase of goods on behalf of and in the name of another person.
Status of software
The High Court held that software can be goods for the purposes of the Regulations. In coming to this conclusion the High Court noted:
- There is nothing in EU or domestic legislation or case-law to prevent this interpretation;
- The definition of software within the "pure" law of sale of goods is of limited assistance;
- If the "goods" in question are treated in the same way as other tangible goods in the agency agreement, they should be interpreted in the same way;
- There is no reason to require the software to be tangible or a "chattel" in the traditional sense, especially when installed so as to operate in a physical environment;
- The Regulations are not intended to set a narrow scope for the trading of goods;
- The fact that the proprietorial character of software is intellectual and not real or personal does not alter the position; and
- The fact that the software might be supplied on a limited licence does not affect the conclusion that the intended supply amounted to a "sale" of goods. One has to decide whether TSI was a commercial agent having regard to the principal way in which the software was supplied.
The High Court noted Fern Computer Consultancy Ltd v Intergraph Cadworx & Analysis Solutions, which considered whether software is "goods" for the purposes of the Regulations. In the Fern Computer case, obiter comments suggested the Court was open to the interpretation of software being "goods" stating, "It was arguable that, as a matter of policy, "goods" should bear a wide interpretation, particularly given the widespread use of downloaded digital material (such as books and media) which does not correspond to a traditional view of "goods" but which has the same net effect as the provision of physical media".
A key aspect of the High Courts' decision was the distinction between perpetual and term licences. The High Court commented that where a perpetual licence is granted, the intention, as with the sale of any product, is that the purchaser has the unfettered ability to use it forever, subject to certain restrictions. This is different to a limited term licence where a customer is only offered temporary use of the software. It is important to note that it is still unclear whether the licensing of software for a fixed term would be considered a sale of goods for the purposes of the Regulations, as this was not fully addressed by the High Court.
Future for Software Resellers
This case is more likely to affect the software licensor/reseller relationship rather than the systems integrator model, due to the requirements under the Regulations for the agent to have continuing authority to negotiate or to negotiate and conclude the sale or purchase of goods on behalf of and in the name of another person. In the traditional systems integrator model, this is rarely the case.
The impact of this case could be significant for software licensors who use resellers to sell their software, as the Regulations afford a commercial agent entitlement to significant levels of compensation or indemnity payments upon termination of an agency contract. Software licensors will therefore need to consider the contractual relationship with their software resellers carefully. If they do not, the no fault, automatic protection afforded by the Regulations to agents may result in software companies incurring considerable costs when agency agreements come to an end.
1  EWHC 1587 (QB)
2  EWHC 2908 (Ch)
3 Para 74 Fern Computer Consultancy Ltd v Intergraph Cadworx & Analysis Solutions Inc