07 September 2016

Is software classified as goods or services?

Laws drafted in the nineties have frequently been overtaken by technology in recent years, and the Commercial Agents (Council Directive) Regulations 1993 (CAR) is no exception.

Why does it matter whether software is a service?

When businesses are choosing whether to use agents to offer their products or services into the UK market, the question of whether the CAR applies to the agent’s appointment can be critical to the decision. The CAR sets out mandatory protections for agents, including rights to potentially significant payments on termination of the agent’s appointment.

If an agent is appointed to deal in a principal’s services rather than goods the CAR will not apply, essentially freeing the principal from the additional obligations and liabilities imposed by CAR. So the question of whether software offered by an agent constitutes goods or services has always had a significant impact.

Previous cases on this question have been determined by reference to the method of delivery of the software. If the software is made available to customers by a form of tangible media, such as a CD, disk or memory stick, or is bundled into a hardware package it would amount to goods, but if downloadable in purely intangible form, would be a service.

New case – new definition

The latest case to consider this issue has helpfully moved the argument on. The case is that of The Software Incubator Ltd v Computer Associates Ltd [2016] EWHC 1587 (QB) (01 July 2016). Waksman J, in the High Court, determined that it no longer makes sense to consider this issue on the basis of method of delivery, particularly in light of digital content developments.

The Sale of Goods Act 1979 (SGA) has commonly provided the benchmark approach to determining goods by reference to a definition which specifically includes:

“all personal chattels other than things in action and money”

with the term ‘chattel’ itself having a meaning related to an items’ tangible, physical form. This now seems a rather out-dated definition lending an unsuitable approach to the questions of what are goods and what are services in the age of digital technology.

Catching up with technology

Waksman J quoted reports and academic articles on digital content which supported his reasoning that software can constitute goods for the purposes of the CAR, even if there is a narrower definition for SGA purposes. He found that there is nothing in existing laws to expressly exclude this interpretation for CAR purposes.

His decision seems to have essentially boiled down to looking at the context in this particular case of how the software was treated in reality. This treatment was comparable to other tangible goods as the software in this case was a commoditised, commercial product “capable of transfer and commercial exploitation”. The software could be regarded as capable of functioning in a manner equivalent to goods once loaded and running on a computer or other device as intended. In essence, referring to it as a product rather than a service made sense in the circumstances.

This conclusion also seems to have depended to some extent on the fact that this software was commonly sold by way of a perpetual licence. Whilst noting the different context, Waksman J referred to the case of UsedSoft (Legal protection of computer programs) [2012] EUECJ C-128/11, to highlight the effective transfer of ownership of the product, despite no transfer of ownership of intellectual property rights taking place, when software is sold by way of perpetual licence.

Consequences for commercial contracts with agents

The clarification this case now brings to the issue means current agency agreements would benefit from a second look. There are going to be agency agreements which were put in place at a time and in a situation when it seemed clear that the offering of software would be considered to be services and so the CAR wouldn’t apply. As a result specific opportunities to manage a principal’s exposure to liabilities under the CAR will not have been addressed in those agreements. A review and possible variation of those agency agreements could be advisable in the circumstances.

If you’d like some assistance in considering the steps you should be taking to manage relationships between your business and its commercial agents, please contact Emma Roe, a partner in our commercial team, at eroe@shulmans.co.uk or on 0113 288 2817.