The Court of Appeal has overturned a High Court decision and held that digitally supplied software cannot be classified as goods for the purposes of the Commercial Agency Regulations 1993.

What’s the issue?

The issue of whether or not the supply of software counts as a supply of goods or services has been clarified under EU and UK consumer law, which has created the new digital content category of contract. There have not, however, been equivalent updates in relation to business to business supplies. This creates an anomaly between consumer and commercial contracts which is particularly significant to the application of the Commercial Agency Regulations 1993 (Agency Regulations). The Agency Regulations provide commercial agents with certain protections (including against unfair termination) where they sell or purchase goods on behalf of their principal. They do not apply to the sale and purchase of services.

What’s the development?

In Computer Associates UK Ltd v Software Incubator Ltd [2018] EWCA Civ 518, an agent was employed to promote software licensed to consumers and supplied online via a link in an email. The agency agreement was non-exclusive but was terminated by the principal when the agent entered into another agency agreement with an alleged competitor. The agent brought a claim against the principal under the Agency Regulations. The claim was defended on the grounds that the Agency Regulations did not apply because software supplied electronically could not be considered goods. At first instance, the judge held that the sale of electronically supplied software was a sale of goods under Regulation 2(1) and that the agent was not in repudiatory breach of its agreement with the principal.

The Court of Appeal unanimously reversed the High Court’s decision that the sale of software was a sale of goods and held that the Agency Regulations were not engaged. It upheld the High Court’s decision that the agent was not in breach of its agreement with the principal nor of its common law duties as an agent and that, therefore, the termination of the agreement by the principal had been unlawful.

UK and EU case law, both under the Agency Regulations and the Sale of Goods Act 1979 (SGA), is clear that only tangible property will count as goods. Software not supplied on a physical medium will be outside the classification. While “goods” is not a defined term in the Agency Regulations, on enactment, guidance suggested that the definition in the SGA be applied.

The Court of Appeal recognised that this creates an anomaly which can lead to unfair outcomes. Had the software supplied online been supported by backup discs, for example, the Agency Regulations would have been engaged. It acknowledged that it is illogical to make the status of software dependent on the method of its delivery. However, to treat software as goods would also have unjust and unanticipated consequences, for example the creation of proprietary rights or new offences.

The Court held that it could not depart from precedent by re-interpreting the meaning of “goods”, not even solely in relation to the Agency Regulations as the High Court had done. While acknowledging the issue, it was a matter for the legislature, either in the UK or the EU, to resolve.

What does this mean for you?

The Court of Appeal decision is unsurprising but gives welcome clarification following the High Court’s ruling. An agent selling or purchasing digitally supplied software will not have the benefit of additional protection under the Agency Regulations.