A recent High Court decision has confirmed that the supply or sale of software constitutes a sale of goods for the purposes of the Commercial Agents (Council Directive) Regulations 1993 (SI 1993/3053) (the Regulations).

Until this decision, only software bundled with hardware was deemed to be goods.

The case - The Software Incubator Ltd v Computer Associates Ltd [2016] EWHC 1587 (QB) - brings welcome certainty on this point and shines a light on the Regulations, which despite the significant rights they confer, often go unconsidered before entering into agency arrangements.

The ruling provides a useful opportunity to take a look at the application of the Regulations and some of the key provisions and for software licensors using agents to promote or sell their products to familiarise themselves with the Regulations, especially since many cannot be contracted out of.

The background

The Regulations were implemented in the UK on 1 January 1994 (pursuant to EC Directive 86/653/EC (Directive)) to bolster a commercial agent's contractual position due to the perceived imbalance of power between a commercial agent and that of their principal.

The Regulations define a commercial agent as a self-employed intermediary (which subsequent case law has confirmed can mean an individual, a partnership or a company) who has continuing authority to negotiate (and in some cases conclude) the sale or purchase of 'goods', on behalf of or in the name of, another person.

The definition of goods (or lack thereof)

Absent of a definition in the Regulations, what constitutes 'goods' has been the subject of some debate. At the time the Regulations came into force, the DTI's (now BIS) accompanying guidance provided that the definition of goods at s61 of the Sale of Goods Act 1979 (SGA) was a reasonable guide without being determinative.

This approach however raised two main issues in respect of software:

  1. The definition of 'goods' under the SGA refers to 'chattels' and therefore infers that goods must be tangible in nature, which, unless bundled with hardware, software is not; and
  2. The Regulations refer to a sale or purchase, namely the transfer of title between a seller and a buyer, and software is customarily licensed (albeit often on a perpetual basis), not sold.

In coming to his decision, Waksman J addressed such issues and made the following observations:

  • Although software cannot be physically handled or transported, its effects can be likened to gas and electricity (which previous case law has held to constitute goods);
  • The software in question was 'commodified' meaning it was capable of transfer and commercial exploitation;
  • While software itself is intangible, it can only operate in a tangible environment; and
  • The sale of goods should not exclude the supply of software just because the ownership of the IP rights in the software will not usually be transferred absolutely (ie by way of assignment).

Payments on termination

The case also looked at whether the claimant was entitled to a compensation payment on termination of the agency agreement. Such payments are a key tenet of the Regulations and we look at them in more detail below.

The general rule under the Regulations is that, subject to some exceptions (see below), if the principal terminates an agency agreement, the agent is entitled to receive a compensation or indemnity payment in recognition of the goodwill and business the agent has built up. This cannot be contracted out of to the agent's detriment. Unless the contract says otherwise, an agent is entitled to compensation rather than an indemnity payment. The agent is required to give their principal notice of their intention to claim this payment within one year of termination.

The payment may not be payable where the agent is in serious breach of the agreement or where the agent is terminating the agency agreement for convenience. If however the agent is terminating the agreement due to the end of a fixed term contract, the principal's serious breach or their retirement, ill-health or death, the compensation/ indemnity payment will be due.

The basis upon which such payments are calculated is summarised below:

Compensation Indemnity
  • The amount of compensation is worked out by calculating the value of the agent's business and goodwill (or part being terminated) at the date of termination.
  • The purpose is to compensate the agent for the loss it will suffer as a result of the end of its relationship with the principal.
  • There is no maximum cap.  
  • The maximum that can be awarded is one years' remuneration based on the average of the agent's earning over the past five years (or, if the contract for less than five years, over that shorter period).
  • While the indemnity appears to provide greater certainty, the payment of the indemnity does not prevent an agent from seeking damages for loss it has suffered.

Other strict provisions

In addition to a payment on termination, below is a summary of some of the other key provisions that cannot be opted out of to the agent's detriment:

Provision Details
Long-stop date for payment of commission Any commission due must be paid to the agent, at the latest, on the last day of the month following the quarter in which it became due.
Commission statement & information The principal must supply the agent with a statement of commission by the last day on the month following the quarter when commission became due. The agent is entitled to all information necessary to check commission.
Minimum notice periods

Each party must observe the following notice periods and cannot agree a shorter period:

  • one month for the 1st year of the contract;
  • two months once the 2nd year of the contract has commenced; and
  • three months once the 3rd year of the contract has commenced and for subsequent years of the contract.

Where a longer period is agreed, the period of notice to be observed by the principal must not be shorter than that to be observed by the agent.

Good faith Both parties must act dutifully and in good faith.

Conclusion

The case is a good example of how the courts must interpret laws in light of technology not envisaged at the time of its inception, but also of the wider challenge the legislature faces in keeping up to speed with the increasingly digitised environment in which we work.

Following the UK's vote to leave the EU, it is difficult not to reflect on the genesis of the Regulations. Of course, the effect of Brexit on our laws with European origins is uncertain. Just a few weeks ago the repeal of or significant amendment to legislation so embedded in the UK's legal and commercial landscape would have seemed most unlikely yet now, what is certain is that, just as the courts have been doing, we will be moving with the times.