Commercial agents and software – back to where we were

17th April 2018

We reported previously on the High Court decision in The Software Incubator Ltd v Computer Associates UK Limited, which seemed to clarify a longstanding area of uncertainty in the Commercial Agents (Council Directive) Regulations 1993 (“the Regulations”) around whether transactions involving computer software could be classified as a “sale of goods”, which is part of what is required for the Regulations to apply to an agency contract.

The issue had been considered in passing in previous cases involving agents and the prevailing view seemed to be that software supplied by electronic means only (e.g. by way of download) would not be classified as “goods” and the software needed to be provided in some physical or tangible form (such as a disk or memory stick) to be classified in this way.  That position seems at odds with advances in technology and commercial practice relating to the supply of software.

In this case, Computer Associates UK Ltd (“the Principal”) and The Software Incubator Ltd (“the Agent”) entered into an agency agreement under which the Agent promoted and sold the Principal’s software product to large institutions in the financial services industry in the UK and Ireland.

In the High Court, the Judge felt that the mode of delivery of software should not be a determining factor and attempted to bring the law up to speed with developments in technology by focussing on how the software was treated in the agency agreement.  He concluded that the software in question could be classified as “goods” under the Regulations and that supply of the software to customers by way of a perpetual licence could be treated as a “sale of goods”, which meant that the Regulations applied to the agency agreement.

The Court of Appeal took a more traditional and restrictive view, noting that the software was supplied to customers only in electronic format, via an email which contained a link to an online portal from which the customer could then download the software.  Crucially, it was found that the software was not provided to customers in any tangible form.  The Court had been referred to a wealth of caselaw and legislation from the UK, EU and further afield and, somewhat reluctantly it has to be said, felt compelled to follow this extensive authority and conclude that the software supplied by the Principal did not constitute “goods” under the Regulations because it was not supplied in a tangible format.

Having reached this decision, the Court did not need to decide whether the supply of products via a perpetual licence would amount to a “sale of goods” for the purposes of the Regulations.  We will need to wait for another case to determine that issue.

The Court of Appeal agreed that the law in this area is out-moded and needs be updated but, crucially, felt that this needed be done by way of legislation (to be passed by the EU legislative bodies and / or the UK Parliament) rather than in case law decided by Judges.

While the decision is bad news for agents who sell software products that are supplied to customers only in an electronic format, there is at least some certainty on the position (i.e. software would only be considered to be “goods” under the Regulations if it is supplied to customers in some physical or tangible format).  It remains to be seen whether the case will proceed to the Supreme Court and, if it does, whether the Supreme Court would take a different view to the Court of Appeal.  It also seems unlikely that the UK Parliament will have the time or resources to update the law in this area (and in relation to the sale of goods more widely) given the demands arising from Brexit.  It could be that the Court of Appeal’s decision on this point remains in force for some time.

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