Is software a “good”?


Author: Leigh Callaway, Chris Wilkinson


Leigh Callaway, Senior Associate, Fladgate LLP (lcallaway@fladgate.com)

Chris Wilkinson, Trainee Solicitor, Fladgate LLP (cwilkinson@fladgate.com)


 

In a recent decision, the Court of Appeal has determined that the Commercial Agents (Council Directive) Regulations 1993 (Regulations) do not apply when the agent in question is engaged in respect of the sale of intangible property – electronic goods cannot be regarded as such. Thus agents engaged in the sale of electronic items (such as computer code or software) should be aware that they may not be provided with the protections offered by the Regulations and should take steps to ensure that appropriate contractual protections are in place.

Computer Associates UK Ltd. (Computer Associates) entered into an agency agreement with Software Incubator Ltd (Software Incubator), where Software Incubator were engaged to promote the grant of licences by Computer Associates to customers to use software developed by Computer Associates.  Notably, the software, provided via email, was never provided to any customers through any tangible medium such as a CD.

Following termination of the agreement by Computer Associates, Software Incubator commenced a High Court claim for, among other things, £6.1 million as compensation pursuant to the Commercial Agents (Council Directive) Regulations 1993. As the Regulations only apply to “the sale or purchase of goods” the decision rested on whether software supplied without any tangible medium did, in fact, constitute “goods” for the purposes of the Regulations.

Reversing the High Court judgment at first instance, the Court of Appeal held that the supply of software in the form of a download is not a “sale of goods” for the purposes of the Regulations.

The court found that English, Commonwealth and European authority has consistently held that only tangible property can be “goods”. The decision has, therefore, maintained a separation between where software is supplied in a tangible form, such as on a disk or CD (which is capable of being a sale of “goods”), and where it is delivered purely in electronic form, such as a download (which is not a sale of “goods”). The court did, however, note the tension created by the Regulations which would “protect a commercial agent selling hard copy books…. but not one selling electronic books. This is an area that appears open to further legislation.

The Court of Appeal concluded that commercial agents were not in need of the further protection afforded by an interpretation of software as goods. Indeed the court’s decision does avoid some possible unanticipated consequences, which are also noted in the judgment:

  1. 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;
  2. the recognition of information as property which the law does not appear to have previously done and something that should, therefore, be addressed through legislation; and
  3. the creation of a new offence under the law of theft.

Until the classification of software is explicitly decided by legislators, the judiciary has staked its claim that it will maintain what some might call an arbitrary distinction between when software is treated as goods and when it is not.

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