England: The High Court Revisits the Legal Treatment of Software

If you are a software maker and you wish to retain the services of an agent to help you market your software in the UK,  beware! A recent decision by the High Court revisits the legal status of software in England and Wales, and this may not be good news!

The question of whether software constitutes goods or services under English law has always been problematic. The answer can determine if and when certain terms are implied into a commercial contract, which in turn may have have significant financial consequences for the losing party in a dispute.

In the High Court case of The Software Incubator Ltd (“TSI”) v Computer Associates UK Ltd (“CA”) [2016] EWHC 1587 (QB) the judge held that the software promoted by agent TSI was “goods” for the purposes of the Commercial Agents (Council Directive) Regulations 1993, opening the way for TSI to receive compensation on termination of its agency by CA.

Most cases in England and Wales have concluded that the Sale of Goods Act 1979, which governs the sale of goods (defined as “…all personal chattels other than things in action and money”), does not apply to computer software as such. This Act is very important in the commercial world; in addition to being a very comprehensive regulator of contracts of sale it implies important terms into contracts such as requirements that the goods must match their description, be of satisfactory quality and that the seller has the right to sell the goods. As a result software licenses will generally exclude any terms implied by application of the Sale of Goods Act 1979.

In St Albans City and District Council v International Computers Limited [1996] it was held that software constituted goods when provided as part of the medium on which it is stored, such as a CD. The traditional “medium of delivery” method of software classification means, conversely, that where the computer software is delivered by way of product download, it would escape the classification as a good. 

However, the High Court, in finding for TSI, concluded instead that the licensing of software on a perpetual basis constituted a purchase or sale of goods for purposes of the Regulations and that, while recognizing that software in this case was intangible, “the essential characteristics of a piece of software…cannot depend on its mode of delivery any more than the nature of tangible goods depends on whether they are transported by rail, sea or air”.

This is a substantial departure from the traditional classification of software. As a result, software makers who market their software through download under a perpetual license may not, after all, take for granted that they can benefit from the exclusion of the terms implied by the Sale of Goods Act 1979. In addition, where the software maker relies on agents to market, sell and promote its software in the UK, it may not be able to rely on the non-application of the Regulations to deny the payment of compensation or post-termination commission to a disgruntled agent in case it wishes to terminate the agency. It should be noted that the Regulations set no limit on the amount of compensation to an agent for the loss of value of his agency.

If you are a software maker doing business in the UK you may therefore want to review current and anticipated agency relationships to determine whether the Regulations apply and, if so, to what extent. You may also want to seek the advice of UK counsel to assist in drafting agency and referral agreements for your company in a way that minimizes the risk that the Regulations may be deemed to apply. 

It remains to be seen whether this decision may also apply to software licensed on an annual, subscription or “pay as you go” basis, or even as part of a SaaS offering. If it does, then it may indeed trigger software makers to want to revisit the way they structure their licensing agreements from a legal point of vue.

To be continued…