Commercial agents and software – goods rather than services?

Posted by Kevin Manship on
Is software goods or services
The Commercial Agents (Council Directive) Regulations 1993 ("the Regulations") imply important provisions into an agency contract where the agent can show that they satisfy the definition of "commercial agent" in the Regulations.  Amongst other things, that definition requires the agent to have continuing authority to (i) negotiate the sale or purchase of goods on behalf of their principal or (ii) to negotiate and conclude the sale or purchase of goods on behalf of and in the name of that principal.

Since the introduction of the Regulations, there has been considerable uncertainty as to whether transactions involving computer software can be categorised as "sale of goods" for the purposes of the Regulations. 

There is no definition of "goods" in the Regulations, but when the Regulations were implemented on 1 January 1994 there was a generally accepted view (on the basis of guidance given by the Department of Trade and Industry in relation to the Sale of Goods Act 1979) that, for the purposes of the Regulations, the relevant item had to be something physical or tangible in order to be categorised as "goods". 

The issue has been considered to a limited extent in previous cases involving agents, where it was concluded that software by itself would not be categorised as "goods"; the software had to be delivered on some form of tangible media, such as a disk, a CD-Rom or a memory stick.

The position has now been clarified in the case of The Software Incubator Limited v Computer Associates UK Limited.

The case

The Software Incubator Limited ("TSI") was appointed as the non-exclusive agent of Computer Associates UK Limited ("CA") to promote a specific commoditised software product.  The software was intended to co-ordinate and automatically implement the deployment of upgrades for other software applications across different operational environments in large organisations such as banks and insurance companies, so that the underlying applications were fully integrated with the software operating environment. The software could be delivered to customers either on tangible media or electronically and was usually supplied to customers by way of a perpetual licence. 

CA terminated TSI's agency agreement in October 2013.  TSI then brought a claim for compensation and post-termination commission under the Regulations. One of the arguments put forward by CA was that the Regulations did not apply because the supply of software did not constitute "the sale of goods".

The Judge concluded that in the context of the agency agreement and for the purposes of the Regulations, the supply of the software in question in the case did amount to a "sale of goods" for the following reasons:

  1. There should be an autonomous definition of sale of goods for the purposes of the Regulations; how software is treated within the "pure" law of sale of goods is of limited assistance (i.e. how goods are defined in the Sale of Goods Act 1979 does not mean they have to be treated in the same way for the purposes of the Regulations).
  2. Where the "goods" in question (in this case, software) are treated in the agency agreement in the same way as other "tangible" goods, they should be interpreted in the same way when they are clearly a "product" and not a service. 
  3. In the modern world, and in the case of the Regulations, there is no reason to require the particular product to be tangible or a "chattel" in the traditional sense, especially when the software is installed so as to operate in a physical (i.e. hardware) environment.
  4. There is nothing in EU or domestic legislation or case-law to prevent this interpretation.
  5. The fact that the proprietorial character of software is intellectual property, rather than real or personal, does not alter the position.
  6. The fact that sometimes the software in question might be supplied on a limited licence does not affect this conclusion because the Judge has to decide whether TSI was a "commercial agent" in the round and having regard to the principal way in which the software in question was supplied.

The effect of the decision

The decision has been anticipated for some time and will be welcomed by principals and agents as bringing some certainty to this area of law.  However, it should not be taken to mean that software can always be treated as "goods" for the purposes of the Regulations. Despite the Judge's comments on the supply of software on a limited licence, there is likely to be a grey area where software is supplied on a more limited basis than a perpetual licence (e.g. on an annual licence or subscription fee basis or provided through the web as Software as a Service). In those examples, the user effectively rents the right to use the software for a limited period, rather than acquiring an outright perpetual licence (or similar rights which would be akin to acquiring ownership of the software).  It is difficult to see how such arrangements could be treated as a "sale of goods" as required by the Regulations.

Despite this ongoing uncertainty, principals and agents need to consider the likelihood that the Regulations will apply to agency agreements involving software and should check whether existing agency agreements make provision for the Regulations applying to that agency. If they do not, principals in particular will need to consider what their potential liability might be under the Regulations.

Going forward, principals engaging agents who deal with software products should take account of their potential liabilities under the Regulations when setting an agent's overall commission structure and negotiating commercial terms.

If you have any questions about the above please contact our Commercial Agents team. 

About the Author

Kevin acts for a variety of public and private sector clients and advises across the full range of commercial disputes.

Kevin Manship
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