A bug in the system, patched: Court of Appeal weighs in on commercial agents and software sales

• United Kingdom

• Technology, Media and Telecoms

08-05-2018

Computer Associates UK Limited v The Software Incubator Limited [2018] EWCA Civ 518

Précis

In 2016, the High Court held that electronically-delivered software was a “good” in the context of a commercial agency agreement, with the consequence that a software supplier was liable to pay damages, compensation and post-termination commission to its commercial agent following termination of the agency agreement. We commented on that decision here.

The High Court’s decision was surprising, and a departure from the Courts’ longstanding approach in other contexts that software will be treated as a “good” if it is supplied on a physical medium, such as a DVD or a memory stick, but will be treated as a “service” if it is supplied via electronic means, such as via a download link.

The Court of Appeal has now reversed the High Court’s decision, holding that software supplied in intangible form (i.e. electronically) is not a “good” for the purposes of the regulations. This case resolves the uncertainty created by the High Court’s decision and reiterates that whether software is a “good” or a “service” continues to depend on the medium by which it is supplied.

What?

The general background to this case is set out in our previous article, but in brief summary:

In March 2013, the parties entered an agreement under which Software Incubator Ltd (“TSI”) would act as a non-exclusive agent for Computer Associates UK Ltd (“Computer Associates”) to promote its software (the “Agreement”). The Agreement included a non-compete provision for the duration of the agreement and for 12 months following termination.

Computer Associates gave TSI 90 days’ contractual notice to terminate the Agreement, in September 2013. Before the 90 days had expired, however, Computer Associates sought to terminate the Agreement immediately on the basis that TSI was in repudiatory breach of the Agreement.

TSI denied that it was in breach and brought a claim against Computer Associates for damages for wrongful termination of the Agreement, compensation under the Regulations, and post-termination commission. Computer Associates’ defence included the key argument that the Regulations did not apply (and so no compensation could be owed under Regulation 17) because the software being promoted by TSI was not a “good” for the purposes of the Regulations.

The High Court dismissed Computer Associate’s arguments. The High Court held that (i) the software in question was a “good”, even though it was delivered electronically (i.e. downloaded); (ii) on the facts, TSI was not in repudiatory breach; and (iii) TSI was entitled to compensation under Regulation 17, post-termination commission under common law and damages.

The Appeal

The Court of Appeal (i) reversed the High Court’s interpretation of “goods” under the Regulations, holding that software supplied electronically is not a “good” for the purposes of the Regulations but (ii) upheld the High Court’s decision that TSI was not in repudiatory breach.

Lady Justice Gloster acknowledged that “the [High Court] judge had a point when he stated that there is no logic in making the status of software as ‘goods’ (or not) turn on the medium by which they were delivered or installed” and identified a number of problems caused by the current legal position, including that the law’s treatment of software is inconsistent with its treatment of other forms of property, such as gas and electricity (commenting with reference to the case of Tamarind International Ltd v Eastern Natural Gas (Retail) Ltd [2000] that “it is impossible coherently to explain why gas and electricity are any more tangible property than the Software”).

However, the Court of Appeal concluded that it “cannot simply ignore the weight of judicial authority that supports maintaining the tangible/intangible distinction” and “reform must come from the European legislature and/or the UK parliament and not via judicial interpretation.”

The Court of Appeal was also concerned that endorsing the High Court’s approach may have “unjust and unanticipated potential consequences” including “the creation of proprietary rights which may, in the case of an insolvency of an IT company, enable a customer to assert a preferential position to the disadvantage of other creditors or adversely affect lenders who have drafted loan agreements and security rights on the basis of the law as previously understood”, “the recognition of information as property, which the law does not appear to have hitherto done” and “the creation of a new offence under the law of theft”.

Finally, the Court of Appeal noted that other common law jurisdictions, such as New Zealand and Australia, have already clarified the contexts in which software will be treated as a “good” through the introduction of new legislation, rather than via the courts. The Court of Appeal endorsed this approach and encouraged Parliament to consider the issue.

So what?

The Court of Appeal’s decision resolves some of the uncertainty created by the High Court and makes it clear that the status of software as a “good” or a “service” will continue to depend on the method by which it is delivered.

We noted in our commentary on the High Court’s decision that the law’s distinction between software as a “good” or “service” based on delivery method has always been artificial and is increasingly at odds with commercial common sense. The Court of Appeal appears to agree with that assessment, but has left it to Parliament to decide whether any changes should be made.

As noted in our previous coverage, it remains important for principals and commercial agents to give careful consideration to the way in which software sales are treated under an agency agreement, and the parties should consider how “software” is defined in their agreements; whether software is, or should be, treated any differently to the sale of other products; and whether the specific method by which that software is delivered may affect the parties’ rights and liabilities under the Regulations.