Software supplied as a download is not a sale of goods

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A recent judgment in the Court of Appeal has finally clarified the legal status of software provided in the form of a download. The decision in Computer Associates UK Limited v The Software Incubator Limited held that software provided in the form of a download is not a ‘sale of goods’ for the purposes of the Commercial Agents (Council Directive) Regulations 1993.

To summarise the facts of the case, in 2013 Computer Associates (CA) entered into an agency agreement with The Software Incubator (TSI) to promote CA’s software in the U.K. and Ireland, with CA as the principal and TSI the agent. During the course of the agreement, and unknown to CA, TSI entered into an agreement to promote other software which CA believed to be in competition with its software. On becoming aware of the situation, CA terminated its agreement with TSI, claiming a breach by TSI of its obligation not to engage in any activity competing directly with CA’s software.

TSI brought an action for damages, including compensation for termination of the agency agreement, under the Commercial Agents Regulations and was initially successful in the High Court. CA appealed the compensation award of £475,000 on the basis that the Commercial Agents Regulations only apply to the ‘sale of goods’ and that software supplied as a download is not ‘goods’.

Taking into account case law from UK jurisdictions, Australia and the European Court of Justice, the Court of Appeal was persuaded that the definition of ‘goods’ is limited to tangible property although it expressed concern that the distinction between tangible and intangible property leads to a construction that excludes ‘software’ which it said seemed ‘artificial’ in the modern age. As a result, TSI’s substantial award of compensation for termination of its agency was overturned.

Importantly, the decision only applies to downloadable software and not to that supplied on a disk or other tangible medium. However, while the case dealt directly with the status of ‘software’ as a ‘sale of goods’ in the context of the Commercial Agents Regulations, the decision is likely to be followed in other areas where the status of software as a download is in issue. Moreover, the decision could affect other products supplied in digital form only, such as electronic books.

The consequences of the decision will be a blow to the many software Resellers who have assumed that they are protected by the generous compensation provisions in the Commercial Agents Regulations on the termination of their agency. Those anticipating a significant compensation payment on termination of their agencies need to plan their future business and financial strategies on the basis that there will be no compensation upon termination. The decision will undoubtedly impact upon the value of the Resellers’ businesses.

Unless, or until, the law is amended to include software as a download within the definition of a ‘sale of goods’, Resellers should seek to replicate the compensation provisions in the Commercial Agents Regulations when negotiating new agency contracts with suppliers if they have the bargaining power to do so.

In terms of software licensing contracts generally, the decision means that software license agreements will most likely be deemed not to include the implied warranties in the Sale of Goods Act 1979 as to satisfactory quality and fitness for purposes. Most software license agreements contain express warranties as to compliance with specification which will mitigate the effect of the decision. However, customers should be aware that, in the unusual event that no express warranties are agreed, the protection afforded by the implied terms in the Sale of Goods Act will not apply to software supplied as a download.

If you are likely to be affected by the decision or require advice on any licensing or agency matters generally, please contact the Company Commercial team at Buckles Solicitors on 01733 888888.