A High Court decision means more agents trading in software may benefit from rights under the Commercial Agents Regulations, including payment on termination or expiry.

The question of whether the supply of software is a supply of services or a sale of goods is of little practical importance, but it is relevant at law, and as a recent case shows, can have expensive consequences.

Commercial agency claims

The Commercial Agents (Council Directive) Regulations 1993 (Regulations) introduced extensive and unprecedented rights for commercial agents which often surprise those who have not come across them before.

An aspect which often catches out inexperienced principals is the agent’s non-excludable right to a payment in a large number of circumstances where the agreement expires or is terminated, even where the principal is not themselves in breach. The alternatives are an uncapped amount of compensation based on the value of the agency (as if it was continuing) or, where opted for in the agreement, an indemnity capped at one year’s average commission.

Such a right will arise where, for example:

• The fixed term of the agency agreement expires;
• The agent retires at a reasonable retirement age;
• The principal terminates due to the agent’s illness;
• The agent dies; or
• The principal terminates a breach by the agent, other than a breach giving rise to a right to terminate immediately.

No compensation is payable where the principal terminates for the agent’s repudiatory breach of the agreement. However, the range of circumstances in which compensation must be paid makes changing agents an expensive activity.

The practical effect is that principals wishing to end agreements with underperforming agents, without paying a large sum in damages, often find themselves constructing a case for repudiatory breach where, otherwise, the agreement would have simply been terminated for convenience or expired without a major dispute.

Software: a service, intellectual property or a good?

Crucially, the Regulations apply only to self-employed intermediaries who have continuing authority to negotiate (and/or negotiate and conclude) the sale or purchase of “goods”, not services.  However, “goods” are not defined in the Regulations.

Previous case law on the point suggested that software sold on its own, where no hardware was included, did not constitute a sale of goods for the purpose of the Regulations (Accentuate Limited v ASIGRA Inc [2009] EWHC 2655 (QB)).

In other contexts, in particular the Sale of Goods Act 1979, include references to defined by reference to personal chattels.  In that respect ICL v St Albans Council [1996] 4 All ER 481 contained comments that a computer program is not a good for the purpose of that Act, albeit that a computer disk on which it might be contained is.  However, a defective program does not make the disk defective.

Software Incubator Limited v Computer Associates Limited [2016] EWHC 1587 (QB)

The case before HHJ Waksman in the High Court was a typical example of a commercial agency termination dispute: the agent was provided with 90 days’ notice under the contract, but the principal then alleged repudiatory breach by the agent.

The principal denied that compensation under the Regulations was payable for reasons including that the agent was in repudiatory breach and the Regulations do not apply to agencies for the supply of software (not being “goods”).

The judgment concluded that the agent was not in repudiatory breach and that the Regulations did apply, rejecting the hardware / software distinction.  The reasons that software was held to be goods included:

• It is permissible to have an autonomous definition of goods for the purposes of the Regulations separate from the law of sale of goods.
• The application concerned was a sophisticated, commercial, non-bespoke piece of software, which was regarded as a “product”, not a “service” and was treated for the purpose of the agency agreement as tangible goods.
• The application could be supplied either on tangible media or electronically, but the judge suggested, “these days … 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 land, sea or air”.
• There is no contrary EU or domestic legislation or case-law.
• The fact that the proprietorial nature of the software is intellectual, rather than real or personal property, does not change the conclusion.

The agent was entitled to an award of damages, including a payment of £475,000 as compensation on termination and further amounts for commission due and breach of contract.

WAB Comment

The status of software as a good or a service has never been resolved satisfactorily.  HHJ Waksman’s analysis of the way the software was treated in the agency agreement at least adopts a rational approach, but does not settle the matter once and for all in respect of agents negotiating sales of software. Other supplies of software may look considerably less like sales of tangible goods, after analysis.

Importantly, principals in the software industry will need to be aware of the likelihood that agents will claim a significant sum of compensation on termination whether their agreements provide for it or not.  It is very possible that there will be more litigated claims in the sector in the future, as agents assert a right to compensation and principals attempt to resist.

Read the full judgment here.