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Is it time to revisit your software agency arrangements in the UK?

Is it time to revisit your software agency arrangements in the UK?

How your company may be impacted by the recent English High Court ruling that software is 'goods'.

The case is particularly relevant to any organisation, including New Zealand and Australian software companies and their UK agents, that may be operating on the assumption that the CARs (Commercial Agents (Council Directive) Regulations) do not apply because the product supplied to customers is not 'goods' and/or there is no 'sale'

Michael Bywell, Arnold & Porter

The recent English High Court decision in The Software Incubator Ltd v Computer Associates Ltd [2016] EWHC 1587 is essential reading for parties to agency contracts for the sale of software in the UK.

Northern Ireland has separate but similar regulations (the Commercial Agents (Council Directive) Regulations (Northern Ireland) 1993).

So why is this case important? Let us review the background of the case.

  • The English High Court has clarified that commoditised software can be “goods” for the purposes of the Commercial Agents (Council Directive) Regulations 1993 (CARs) irrespective of its mode of delivery to the customer (i.e. electronically or via physical media).
  • The court also said that a “sale” can occur even where software is licensed on a limited (or non-perpetual) basis.
  • The court awarded The Software Incubator Ltd (TSI) (the agent) a total of £500,000 even though:

(i) TSI was planning to terminate the agency contract with Computer Associates Ltd (CAL) (the principal) anyway; and

(ii) had already concluded a new agency contract with another software vendor (or principal) called “Intigua” to sell a different (but non-competing) software product in the UK.

  • The contract allowed either party to terminate on giving three months’ notice to the other. Indeed had TSI terminated on that basis it would not have been entitled to: (i) contractual damages; or (ii) compensation under the CARs.
  • In the event it was CAL that sought to terminate first (i.e. before any termination notice was given by TSI) and (at the time) on the basis that TSI had breached a non-compete clause in the contract through its dealings with Intigua.
  • The court found that whilst there were breaches of contract by TSI, these were not serious enough to justify termination of the contract.
  • Finally, the court held that it was possible to effectively exclude claims under Regulation 8 of the CARs for commissions on transactions concluded after termination.

Take, for example, subscription-based or 'pay as you go' type licensing arrangements. Are these models more like rental rather than 'sale' agreements?

Michael Bywell, Arnold & Porter

The case is particularly relevant to any organisation, including New Zealand and Australian software companies and their UK agents, that may be operating on the assumption that the CARs do not apply because the product supplied to customers is not “goods” and/or there is no “sale".

Following TSI v CAL those assumptions may no longer apply, meaning principals could find they are now required to pay damages and/or compensation to outgoing agents in the event of termination - subject of course to the overall requirements of the CARs and the particular circumstances involved (for example, not every type of termination triggers compensation under the CARs).

Secondly, this case was concerned mainly with commoditised software and perpetual licensing arrangements. There is no detailed discussion (in the written judgement at least) about software sold on lesser or more limited terms - although the Judge, HHJ Waksman QC, did say that his overall conclusions would not change if the CAL software was “supplied on a limited basis.”[1]

Take, for example, subscription-based or “pay as you go” type licensing arrangements. Would these be treated in the same way? Or are these models more like rental rather than “sale” agreements meaning the customer does not (to quote HHJ Waksman QC) “have the unfettered ability to use it [the software] forever subject to copying restrictions and so on.” If so, it is hard to see how the CARs could apply.

Thirdly, the clarification provided by the court in relation to excluding claims under Regulation 8 for commission on post-termination sales is worth noting and a point that parties may wish to consider when negotiating UK agency contracts in the future.

Read more: CIO Upfront: Independent Assurance on ICT projects: A legal perspective

Michael Bywell is a partner in the IP & Technology Group at Arnold & Porter in London. He covers this issue further in this advisory for clients and contacts of Arnold & Porter.

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