Court of Appeal determines that electronically supplied Software is not “Goods”

19/03/18

Computer Associates UK Ltd. v. The Software Incubator Ltd. [2018] EWCA Civ 518

Today the Court of Appeal has allowed an appeal from a judgment of the High Court which raised an important question as to whether a licence to use electronically supplied software amounts to the “sale of goods” for the purposes of the Commercial Agents (Council Directive) Regulations 1993 (“Regulations”). This judgment is likely to be significant for other areas of law, including sale of goods, EU, IT and IP law.

Computer Associates UK Ltd. (“CA”) entered into an agreement dated 25 March 2013 whereby the Software Incubator Ltd. (“TSI”) was engaged to promote the grant of licences by CA to customers to use release automation software aimed at large institutions (“Software”).  CA provided the Software electronically via email which contained a link to an online portal from which the customer downloaded the Software. The Software was never provided by CA to its customers using any tangible media.

On 9 October 2013 CA terminated the agreement summarily on the purported basis that TSI was in breach of its duties. Thereafter, TSI commenced a High Court claim for: (1) £6.1M as compensation pursuant to the Regulations; (2) commission due under the agreement; and (3) damages for breach of the notice provision in the agreement.

The Regulations are the UK’s implementation of Council Directive 86/653/EEC of December 1986 on the co-ordination of the laws of members States relating to self-employed commercial agents. Under Regulation 2(1), the Regulations only apply to any agreement if the agent was authorised to negotiate or conclude “the sale or purchase of goods” on behalf of the principal.  

At the trial, CA submitted that TSI’s claim under the Regulations should be dismissed on the ground that TSI was not authorised to negotiate or conclude any “sale of goods” because: (1) electronically supplied Software did not amount to “goods” and/or (2) the supply of the Software by way of a licence did not amount to a “sale of goods”.  The High Court rejected both contentions, 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, and awarded TSI £450,000 as compensation under the Regulations, £5,000 and US$3,724 as commission due, and £15,631 as damages for breach of the agreement.

The Court of Appeal, with Lady Justice Gloster giving the leading judgment, unanimously allowed CA’s appeal on the “sale of goods” issue resulting in the dismissal of TSI’s claim under the Regulations.

Despite acknowledging the “superficial attractiveness” of TSI’s submissions, the Court of Appeal accepted CA’s submission that the meaning of “goods” is limited to tangible property and intangible property, such as the rights to use software, cannot constitute “goods” and that distinction is widely recognised by: (1) case law and textbook authority concerned with the Regulations; (2) English, Scottish, Australian and New Zealand authorities on sale of goods legislation; and (3) a body of European law outside the Regulations/Directive.

The Court of Appeal agreed with CA’s submission that it was impermissible to interpret “goods” beyond its ordinary, commercial meaning on purposive or policy grounds because it was contained in a provision which defines to whom the Regulations apply. Despite expressing some sympathy, the Court of Appeal rejected the approach of the High Court which involved an expansive approach to interpretation of “goods” in order to ensure that the court keeps abreast of recent developments in technology. The Court of Appeal concluded that the commercial parties at whom the Directive/Regulations were aimed were not so in need of protection that the judiciary should adopt an approach to interpreting “goods” that was contrary to precedent and would have unjust and unanticipated consequences, such as the creation of proprietary rights in an insolvency of an IT company which may give a customer an inappropriate preference over secured creditors, the recognition of information as property which the law does not appear to have hitherto done and the creation of a new offence under the law of theft. 

The full judgment is here.