A recent decision of the High Court in Software Incubator Ltd v Computer Associates UK Ltd has clarified that software is a good for the purposes of a commercial agency agreement, allowing a commercial agent to claim ‘no fault’ compensation from the software supplier following termination of the agreement.
Software Incubator Limited (Software Incubator) signed an agreement with Computer Associates UK Limited (Computer Associates) to become its non-exclusive agent and promote its software. The agreement contained a non-compete clause which would remain in force for 12 months following termination.
Some time later, Computer Associates attempted to terminate the agreement with immediate effect, claiming that Software Incubator had begun to act as agent for another company. Software Incubator denied breaching the agreement but, crucially, argued that whatever the rights and wrongs of the termination, it triggered a right for Computer Associates to be paid compensation for this loss to the agency business under the Commercial Agents Regulations.
Computer Associates sought to defend the claim by Software Incubator on the basis that the supply and sale of software was not strictly the sale of goods.
The Commercial Agents Regulations define a commercial agent as “a self-employed intermediary who has continuing authority to negotiate the sale or purchase of goods on behalf of another person”. The definition deliberately omits reference to services, instead covering only the sale or purchase of goods. As software was traditionally viewed as a service, agents dealing in it could not benefit from the rights that the Commercial Agents Regulations offer unless the software was delivered on physical media. IT agents in particular have been forced to rely on the traditional, narrow view that whilst software in itself is not a good, software supplied on a tangible device will be.
In the Software Incubator case, Waksman J found that the supply was a supply of goods under the Commercial Agents Regulations. He concluded that where software is treated under an agency agreement in the same way as other tangible goods, it should be treated as a product and not a service. Waksman J continued by stating that in the modern world, there is no requirement for a product to be tangible or a chattel. He noted that software itself operates in a tangible environment. Software is loaded onto a disk, hard drive or server and run on a computer system, even if its supply is through the medium of download or via a licence.
The impact of the decision has clarified that software is likely to be treated as a good under the Commercial Agents Regulations even if it is not supplied on a physical device. The judgment paves the way for agents selling software to rely on the Commercial Agents Regulations and its compensation or indemnity provisions. In particular, agents selling software will be able to rely on Regulation 17, which grants a right of compensation or indemnity for damage suffered from termination of an agency agreement.
The High Court’s decision is likely to lead to an increase in the number of commercial agents bringing claims under the Commercial Agents Regulations. In light of this, software companies now need to review the way that they utilise their agents and carefully consider whether the agency model is the best for them.
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