In a recent decision by the High Court, it was held that software falls within the definition of “goods” for the purposes of the Commercial Agency Regulations 1993 (the “Regulations”).
Given the intangible nature of software, its classification has long been problematic for those operating within the software industry.
Under legislation such as the Sale of Goods Act (SOGA), it is settled law that software constitutes goods where it is provided on physical (tangible) media, such as a CD or memory stick. This is an important distinction, as the SOGA imposes a number of implied terms into the contract of sale that do not apply to a contract for the provision of services.
Software is often promoted by agents or intermediaries, with the agent or intermediary being paid commission for the sales that they facilitate.
The Regulations provide commercial agents with a number of measures to protect the investment that they have made in their agency. The Regulations set out mandatory provisions such as the payment of compensation to an agent on termination of his agency, as well as an entitlement (in certain circumstances) to commission post-termination. These can result in significant pay-outs on the part of the principal.
However, the Regulations apply only in the context of “goods”. They do not apply to the provision of “services”. The legal classification of software is therefore key in determining the application of the Regulations to an agent involved in the promotion and sale of software applications.
Unfortunately, the term “goods” is not defined in the Regulations.
Software Incubator Ltd V Computer Associates: The Facts
The case concerned a non-exclusive agency arrangement between The Software Incubator Ltd (TSI) and Computer Associates UK Ltd (CA), where TSI acted as CA’s agent for the promotion of a particular commoditised software product. The software was licensed on a perpetual basis and was made available electronically, rather than on physical media.
The Court disregarded the SOGA case law and held that the software in question fell within the definition of “goods” for the purposes of the Regulations, despite being supplied in an intangible format.
The Court held that the software was a product, rather than a service, and that the method of delivery was not relevant:
These days I would suggest that the essential characteristics of a piece of software like the Product cannot depend on its mode of delivery any more than the nature of tangible goods depends on whether they are transported by rail, sea or air.
What does the Court’s decision mean in practice?
Organisations involved in the sale or promotion of software under commission-based arrangements will need to review those arrangements to understand the extent to which the Regulations might apply to those arrangements.
In particular, the decision may mean that the principal (ie the software licensor) is liable to pay an introducer or agent compensation upon the termination of that appointment. If those costs were not anticipated then that could have a material impact on the commercial arrangements between the parties.
Software licensors should also review their standard form agency or referral contracts to determine if any steps can be taken to mitigate the potential application of the Regulations.
Does the decision apply to all types of software? What about the Cloud?
What is less clear is how the decision will apply to software that is not licensed on a perpetual basis.
Software is increasingly licensed on an annual licence/subscription fee basis or provided through the web as Software as a Service (SaaS).
Whilst the Court has tried to ensure that the law keeps pace with the “modern world” and the move away from providing software on physical media, it seems that the problem has simply been shifted further down the line – the concerns that the Court attempted to address as between the provision of software on physical media and electronic supply may continue to apply where software is licensed on a subscription licence basis or where it is provided on a cloud hosted basis.
Under those models, the user simply rents the right to use the software for a limited period, rather than acquiring an outright perpetual licence. That is much more akin to a service than outright ownership of goods.
Despite an emphasis on ensuring that the law reflected the “modern world” there is no mention of these other ways of making software available. It seems unlikely that the Court’s reasoning could be extended to apply to subscription licensing or SaaS, meaning that different forms of software distribution are likely to continue to be treated differently.
That means organisations involved in the marketing and sale of software will need to look carefully at the products and services involved to identify whether the Regulations might apply to their marketing and agency arrangements and how that might impact on their commercial model for recompensing sales intermediaries.