The Court of Appeal has ruled that the provision of a licence to use electronically supplied software does not constitute a “sale of goods” for the purposes of the Commercial Agents (Council Directive) Regulations 1993 (the “Regulations”). The Regulations only apply to the sale and purchase of goods and not to the supply of services.

The case, The Software Incubator Limited v Computer Associates UK Limited [2018] EWCA Civ 518, concerned release automation software, which is used by large institutions to facilitate the introduction of new software across their computer systems. Computer Associates UK Limited (“CA”) supplied this software as an electronic download along with a licence for its use, as is usual in the industry. The Software Incubator Limited (“TSI”) promoted the software in the UK and Ireland, until CA terminated the arrangement on the grounds that TSI had accepted a similar role for a competitor. TSI sued for compensation under the Regulations and was awarded slightly under £500,000 at first instance. CA appealed, arguing that software supplied without any tangible medium did not constitute “goods” and that, in any event, a licence did not transfer ownership in the software and therefore there was no “sale”. If these arguments were correct, the Regulations would not apply.

Gloster LJ, delivering the leading judgment with which Irwin LJ and Henderson LJ agreed, expressed concern that the Regulations may be outdated in the light of more recent technological advances, but considered herself compelled by existing authority to conclude that electronically supplied software does not constitute “goods” within the meaning of the Regulations. Neither “goods” nor “sale” are defined in the Regulations, but a number of authorities draw a distinction between tangible property, which is generally treated as “goods”, and intangible property – including software – which generally is not. The authorities cited by Gloster LJ include Accentuate Ltd v Asigra Inc [2010] 2 AER (Comm) 738 (considering the same Regulations), St Albans DC v International Computers Ltd [1996] 4 AER 481 (considering the Sale of Goods Act 1979), and Your Response Ltd v Datateam Business Media Ltd [2014] EWCA Civ 281 (on the scope of a common law lien) as well as Scottish, Australian and CJEU cases and a leading textbook. Based on these authorities, Gloster LJ concluded that commercial parties would not typically expect electronic software to be classified as “goods” and that the Regulations should be strictly interpreted when considering whether or not they applied to a particular contractual relationship.

Gloster LJ highlighted a number of difficulties with using the distinction between tangible and intangible property. She concluded, however, that given the weight of the authorities, any change in England and Wales would have to be made by the legislature rather than the courts. She also noted that in the Consumer Rights Directive 2011/83/EU, the European Parliament had chosen to deal with the equivalent issue in relation to consumer transactions by creating a new category for digital content rather than by reclassifying software as “goods”. The European legislature had therefore opted to create a sui generis category for software in that context.

Given her conclusion that the software did not qualify as “goods”, Gloster LJ was not required to decide the question of whether or not a licence constitutes a transfer of ownership such as to be characterised as a “sale”.

Since the Regulations were held not to apply, TSI’s claim to compensation under Regulation 17 failed in full.

This decision will be encouraging to software companies. It will be interesting to see whether or not the Government responds to the suggestion in the judgment that the status of software in the sale of goods context is ripe for legislative review. Given that the Regulations implement an EU Directive, however, it seems unlikely that there will be any appetite to make changes until the outcome of the Brexit negotiations is settled. It may be that the Regulations will ultimately disappear in the United Kingdom as a result of Brexit. It may equally be that the Court of Appeal’s decision, on a point which has been uncertain until now, prompts greater scrutiny of the underlying Directive elsewhere in Europe.