The Commercial Agents (Council Directive) Regulations 1993 (the Regulations) are 25 years old this year. An evaluation by the European Commission concluded in 2015 that the underlying Commercial Agents Directive (the Directive) still met its objectives and functioned well.

However, a recent Court of Appeal decision has shown that the legislation is struggling to keep up with technological advances.

In the case of Computer Associates UK Ltd v The Software Incubator Ltd [2018] EWCA Civ 518, the Court of Appeal held that software is not "goods" for the purposes of the Regulations. An agent selling software does not therefore receive the significant protection afforded by the Regulations. The leading judge admitted that the distinction between tangible and intangible goods seems artificial in the modern age. However, she did not feel that it was up to court to update the meaning of "goods" by judicial interpretation. Instead, reform should come from parliament.

Objectives of the Regulations

Historically, EU Member States had different rules regarding the rights of commercial agents which led to difficulties for market operators using commercial representatives across different Member States. The Directive harmonised the rights and obligations of commercial agents and principals and strengthened the compensation payable on termination.

The UK Regulations define a commercial agent as a self-employed intermediary who has continuing authority to negotiate the "sale or purchase of goods" on behalf of another person. Interestingly, a number of other Member States have extended the rules of the Directive to self-employed commercial agents selling services. Since the UK chose to limit the Regulations to the sale of goods but did not include a definition, what constitutes "goods" has been the subject of some debate over the years.

"Goods"

The Computer Associates case concerned release automation software which was supplied as an electronic download. Computer Associates UK Ltd (CA) appointed The Software Incubator Ltd (TSI) as an agent to promote the software in the UK and Ireland. When TSI accepted a similar role for a competitor, CA terminated the arrangement and TSI sued for compensation. The judge at first instance awarded £475,000 under the Regulations.

The most important issue on appeal was whether the software, which was supplied to CA's customers electronically and not on a tangible medium, constituted "goods" within the meaning of Regulation 2(1). CA argued that the Regulations did not apply to the agreement with TSI because the supply of "goods" must involve tangible property.

Despite concerns that the approach was out of step with technological advances, Lady Justice Gloster agreed with CA and was compelled to conclude that the software did not constitute "goods" within the meaning of Regulation 2(1). In reaching her conclusion, she considered case law and text book authority under the Regulations, European law and also authority in the sale of goods.

Difficulties with maintaining tangible/ intangible distinction

Despite her conclusion, Gloster LJ recognised that there are a number of difficulties with maintaining the tangible/ intangible distinction. For example, if a customer had asked for a backup disk, that situation would fall under the Regulations, but the electronic download would not. Similarly, a commercial agent selling hard copy books would be protected whereas an agent selling electronic books would not, even if it was to the same wholesaler for onward sale to the same consumer.

A further difficulty is that the supply of gas and electricity has been treated by the court as a sale of goods (Tamarind International v Eastern Natural Gas [2000]) but it is hard to explain why they are more tangible than software.

The way forward

So if the court is unable to update the meaning of "goods" by judicial interpretation, how should the legislation be updated? Since the Regulations implement an EU Directive, it seems unlikely that any changes will be made prior to Brexit. Post-Brexit, the UK would obviously be free to remove the Regulations entirely, reducing the potential costs for principals – but adopting a significantly different approach to agency law from the rest of the EU could be seen as a retrograde step and pose significant challenges.

It is of course possible that the Regulations could be extended to cover the supply of services by commercial agents, but this would not be a popular route for principals. Instead, a simpler scenario may be to clarify that "goods" specifically include computer software (as Australia and New Zealand have done in updating their sale of goods legislation).

Perhaps the best option, however, would be to adopt the approach taken by the Consumer Rights Act 2015 (as outlined by Gloster LJ) and introduce a new classification for the supply of "digital content". While software supplied on a tangible medium would still be considered to be goods, there would be no need to attempt to classify contracts for digital content supplied electronically (including software) as either sales contracts or services contracts, but rather a category in its own right.