In March 2018, the Court of Appeal decided a significant case which benefits software owners but detrimentally impacts agents when selling/supplying software licences.

The Commercial Agents Regulations 1993 (Regulations) offer protection to independent commercial agents when they enter into agency agreements with principals to sell products on behalf of the principal. The Regulations provide agents with (amongst other things) the rights to receive commission and either compensation or an “indemnity” payment upon the termination of an agency agreement. The Regulations are the UK’s implementation of EU laws and the Regulations only apply to the sale of goods and not services.

The Facts

The Court of Appeal has recently issued its ruling on the appeal of Computer Associates Ltd (CA) v The Software Incubator Limited (TSI). TSI was appointed as the agent for CA (the principal) to sell software licences. Under the agency agreement there were restrictions which TSI breached and this resulted in CA terminating the agency agreement. TSI claimed compensation from CA under the Regulations and stated that the Regulations should offer TSI protection as software should not be prevented from being determined as goods just because of its intangible nature.

The High Court decided in favour of TSI and held that software amounted to goods under the Regulations as software should be considered as the same as any other tangible goods. This decision contradicted the established legal position which was created by case law (the Regulations do not define “goods”) as the High Court said the law was not up to speed with the modern world.

CA appealed the High Court’s decision to the Court of Appeal on the basis that its ruling misapplied the law (amongst other things) that software should not be classed as goods thus it should fall outside of the scope for the Regulations.

The Court of Appeal agreed with CA and held that the High Court had misapplied the law in that software is not classed as goods thus the Regulations do not apply to protect TSI. The Court of Appeal noted its reluctance to change the well-established legal authority which consistently cites that software is not classed as goods. The decision stated that such a change in policy, and legal authority, is for the UK Parliament and/or the EU legislators to decide and not the courts.

The Court of Appeal further stated that if it upheld the High Court’s decision, that software is classed as goods, then this would have unintended consequences on other legal areas such as insolvency law and criminal law.

The Impact

This judgement has provided certainty for software owners as this confirms that agents are not afforded the protection from the Regulations when they sell software licences. On the other hand, this decision will not be welcomed by agents as they may feel unprotected when principals have a stronger bargaining power and that the law is out of date at a time when they considered the law is changing for their benefit.

As a whole, this decision shows the court’s reluctance to make policy changes as they left the policy issue of technological advancements and the law for the legislators to decide whether the law should change. However, it is highly unlikely that this issue will be considered by the UK and EU legislators in the near future with other topics such as Brexit taking priority.

If you have any questions about the Regulations, agency agreements or software licences please contact Lewis Holroyd at lewisholroyd@eatonsmith.co.uk or on 01484 821 300.