Court of Appeal Decides That the Electronic Supply of Software Does Not Amount to a “Sale of Goods”
The Court of Appeal has allowed an appeal from the judgment of a High Court case, which concerned the question of whether a licence to use electronically supplied software amounts to the “sale of goods” under the Commercial Agents (Council Directive) Regulations 1993 (“Regulations”). This question is important, given the significant protections and post-termination payouts afforded to agents who qualify under the Regulations.
In a judgment with which the other Lord Justices agreed, Lady Justice Gloster concluded that the electronic supply of software does not amount to the sale of goods. Although the Court acknowledged that distinguishing “goods” by their tangible nature in this modern age seemed artificial, it concluded that it was justified in a commercial context. As a result, agents who promote software which is supplied electronically do not benefit from the protections provided by the Regulations.
The case concerned an agreement entered into on 25 March 2013 between (“CA”) and The Software Incubator Limited (“TSI”) which appointed TSI as an agent to act on behalf of CA to promote certain release automation software (“Software”).
TSI entered into an agreement with a third party (Intigua) on 1 October 2013, which was on similar terms to TSI’s agreement with CA, under which TSI agreed to promote and market Intigua’s software.
On 9 October 2013, CA terminated its agreement with TSI claiming that TSI was in breach of its duties: (1) to devote substantial time and effort to performing its obligations under the agreement; and (2) not to engage in any activity competing directly with the Software.
TSI sued CA in the English High Court claiming, amongst other things, that the Regulations entitled TSI to compensation due to CA’s termination of the agreement. At the trial, CA argued that TSI’s claim under the Regulations should be dismissed on the grounds that TSI had not been authorised to negotiate or conclude any “sale of goods” because: (1) the electronically supplied Software did not amount to “goods”; and/or (2) the supply of the Software by way of licence did not amount to the “sale of goods”. At first instance the High Court rejected CA’s submissions and held that the grant of a perpetual licence to use the Software that was supplied electronically amounted to the “sale of goods” within the meaning of the Regulations. On appeal to the Court of Appeal the Court engaged in a review of the original High Court decision.
The Regulations are the UK’s implementation of Council Directive 86/653/EEC of December 1986 (the “Directive”) on the co-ordination of laws of member States relating to self-employed commercial agents. Pursuant to Regulation 2(1), the Regulations only apply to agreements whereby the agent is authorised to negotiate or conclude “the sale or purchase of goods” on behalf of the principal. The application of the Regulations allows an agent to rely on a number of beneficial provisions in the Regulations in respect to compensation upon termination of the agency agreement or minimum notice periods for such termination, for example.
Therefore, in order for the Court to determine the appealed issues, the question centred around whether the Regulations apply to this arrangement in the first case.
Does the electronic supply of software amount to the sale of goods?
The Regulations do not include a definition of “goods” or “sale” and so the Court looked to case law and the context of the Regulations and the Directive in order to consider the correct interpretation of these terms and, more particularly, how the term “goods” was understood by the commercial parties at whom the Regulations and the Directive were aimed.
Gloster LJ considered the widely recognised distinction between tangible property (which has been held to be “goods”) and intangible property (which, authority on the whole, has not held to be “goods”). She sympathised with the approach taken by the High Court, stating that she was uncomfortable with a conclusion that the tangible/intangible distinction leads to a construction of “goods” that excludes the Software, on the basis that this would seem artificial in the modern age. However, she was not persuaded that it was the Court’s obligation to impute the “common-sense” meaning of “goods” to the legislators of the Directive and the Regulations.
This approach was further reinforced when the Court considered the different protections available to consumers in this context. Gloster LJ specifically addressed the approach to electronically supplied software in the Consumer Rights Directive 2011/83/EU of 25 October 2011 (“CRD”). The CRD refers to such supply as a supply of “digital content” – a new category of contract. Therefore, instead of widening the definition of “goods”, the Court contended, legislature created a unique obligation. This, the Court concluded, reinforces the concept of “goods” being limited to tangible, moveable items and draws a clear distinction between software provided on a tangible medium (which can be “goods”) and software which is not provided on a tangible medium (which is not “goods”).
The Court considered that commercial parties are not so in need of the same protections as consumers to require the judiciary to adopt a completely different approach to interpreting “goods” than that established by precedent.
In this case, customers downloaded the Software via an online portal, the link to which was provided to customers by email. The Court held that the judge in the High Court was wrong to hold that this supply of Software (i.e. not on any tangible medium) constituted “goods” within the meaning of Regulation 2(1). It appears then that the agent would have fallen within the ambit of the Regulations had the Software been provided on a CD or on a USB stick.
Despite grappling with its decision in the context of the modern age, the Court conceded that this is an area which must be reformed by European legislature and/or the UK parliament and not by the Court. The UK government is unlikely to have any appetite to even contemplate such changes before Brexit.
It remains to be seen whether this case will be taken to the Supreme Court. However, in the meantime, agents and suppliers may like to take note of this case and, in particular, consider how delivery of their products/services are being effected. The decision will be welcomed by software suppliers but will concern agents and ‘distributors’, particularly smaller or individual traders. Given the increasing prevalence of the electronic supply of software, this is an area to watch.