Précis

In Software Incubator Ltd v Computer Associates UK Ltd [2016] EWHC 1587 (QB)software was held to be a “good” in the context of a commercial agency agreement. This meant that a software supplier was liable to pay damages, compensation and post-termination commission to its commercial agent following termination of the agency agreement.

What?

In March 2013, the parties entered an agreement pursuant to which Software Incubator Ltd (“TSI”) would act as a non-exclusive agent for Computer Associates UK Ltd (“Computer Associates”) to promote its software (the “Agreement”). TSI was, amongst other things, to “devote a substantial amount of time and effort in providing the Services”. The Agreement also included a non-compete provision for the duration of the Agreement and for 12 months following termination.

In September 2013, Computer Associates gave TSI 90 days’ contractual notice to terminate the Agreement. However, in October 2013, Computer Associates then sought to terminate the Agreement immediately due to TSI’s alleged repudiatory breaches, on the basis that TSI had started to act as agent for another company and was therefore in breach of the Agreement.

TSI denied that it was in breach and brought a claim against Computer Associates for (i) damages for wrongful termination of the Agreement, (ii) compensation and (iii) post termination commission.

The legal framework

Under the Commercial Agents (Council Directive) Regulations 1993 (the “Regulations”) effective in England, Wales and Scotland (near identical provisions apply in Northern Ireland):

  • A ‘commercial agent’ is “a self-employed intermediary who has continuing authority to negotiate the sale or purchase of goods on behalf of another person (the “principal”), or to negotiate and conclude the sale or purchase of goods on behalf of and in the name of that principal” (Regulation 2.1), provided that these activities are not “secondary” (Regulation 2.3 & 2.4) (Secondary activities are not properly defined in the Regulations, but a series of indicative factors are provided in a Schedule to the Regulations);
  • “Except where the agency contact otherwise provides, the commercial agent shall be entitled to be compensated rather than indemnified” on termination of an agency agreement for damage suffered as a result of that termination (Regulation 17);
  • Subject to an apportionment with any new agent, “a commercial agent shall be entitled to commission on commercial transactions concluded after the agency contract has terminated if (a) the transaction is mainly attributable to his efforts during the period covered by the agency contract and if the transaction was entered into within a reasonable period after that contract terminated; or (b)… the order of the third party reached the principal or the commercial agent before the agency contract terminated” (Regulation 8).

It is important to note that the definition of ‘commercial agent’ only refers to “goods” and not services. Previous case law – such as St Albans City and District Council v International Computers Ltd [1996] and Accentuate Ltd v Asigra Inc (a company incorporated in Canada) [2009] - has held that software will typically be deemed a “good” when it is sold on a physical medium (eg a CD) and a “service” when it is sold without a medium (eg an internet download).

In defending TSI’s claim, Computer Associates argued that the Regulations did not apply as the software being promoted by TSI was not a “good”, on the basis of the cases above and existing legislation in other fields. It also argued that the software was not “sold” for the purpose of the Regulations as it was licensed to customers (usually on a perpetual basis). Nonetheless, if some of TSI’s activities were found to be a negotiation of sale of goods, Computer Associates argued these formed only a part of TSI’s role, and should therefore been seen as “secondary” with the result that the Regulations should not apply to TSI. In the alternative, Computer Associates argued that if the Regulations did apply then TSI had no claim for compensation under Regulation 17 as it was in repudiatory breach of the Agreement (and therefore also did not have a claim for contractual damages), and TSI had no claim for post-termination commission as the transactions were not “mainly attributable” to TSI and in any event such commission was excluded under the Agreement.

The outcome

The Court dismissed Computer Associates’ arguments. The Court held that (i) the software in question was a “good”, even though the software at issue was downloaded (ii) on the facts, TSI was not in repudiatory breach; (iii) TSI was entitled to (a) compensation under Regulation 17, (b) post-termination commission (as a common law claim rather than under Regulation 8), and (c) damages for wrongful termination of the Agreement.

In reaching this conclusion, the Court noted that whilst software is intangible and may, in certain circumstances, only be delivered electronically, it can only operate in a tangible environment (eg on a hard-disk or server) and on a tangible device (eg a computer). The Court recognised that in the modern world “there is no logic in making the status of software as goods (or not) turn on the medium by which they were delivered or installed”.

The Court also noted that in these circumstances, “there can be no doubt that there is a sale because for the vast majority of customers…they receive a perpetual licence…”. The Court, referencing Usedsoft v Oracle [2012] which established that software could be “sold” in the context of EU Directive 2009/24/EC, also stated that the “fact that sometimes, the product might be supplied on a limited licence does not affect this conclusion because one has to decide whether TSI was a ‘commercial agent’ in the round and having regard to the principal way in which the product was supplied”. The Court noted that the ’sale of goods’ should not exclude “the supply of software simply because the ownership of the intellectual property rights therein will not usually be transferred absolutely…”.

Finally, and perhaps more significantly to TSI’s case, the Court concluded that “for the purposes of the Agreement, the Product is treated very much as tangible goods”.

So what?

The classification of software as a “good” or “service” based on whether or not it was sold on a physical medium (such as a CD) was always an artificial one and appeared increasingly at odds with commercial practice. This case provides fresh guidance on the classification of software as a “good” in a commercial agency context. However, the decision brings with it the increased risk of claims by agents retained to promote the sale (or purchase) of software on termination of their relationship with their principal. The agent’s entitlement may, in some circumstances, be for a significant sum, whilst the principal will often have made little or no provision for its liability in advance.

Principals and commercial agents alike should give careful consideration to the way in which software sales are treated under an agency agreement. The parties should consider the definition of “software” in their agreement and whether “software” is, or should be, treated any differently to the sale of other products in their specific circumstances.