Software and sales agents: time to review your agreements?
A landmark ruling in the High Court has confirmed that software supplied in digital form should be considered “goods” for the purposes of the Commercial Agents Regulations. This has important implications for the software industry.
The use of sales agents is common in many industries, including the software industry. Unlike employed sales representatives, sales agents are self-employed, typically require less supervision and may cost less because national insurance contributions are not payable by the software vendor on sales agents’ commission.
Where a sales agent falls under the definition of “commercial agent” in the Commercial Agency Regulations 1993 (Regulations), they will be entitled to certain mandatory protections (see below). However as the Regulations only apply to the sale of “goods” (which is not defined) it has long been uncertain whether sales agents engaged in selling software would be entitled to benefit from the protections contained in the Regulations.
In The Software Incubator Ltd v. Computer Associates UK Ltd, the claimant (TSI) acted as sales agent for the defendant (CA) in respect of software which automated the process of deploying and upgrading other software applications in complex environments such as banks and insurance companies. TSI received a consultancy fee of £10,000 per month plus commission.
CA sought to terminate its agreement with TSI and TSI claimed that it was entitled to damages for breach of contract plus compensation under the Regulations. As part of its defence, CA denied the claim on the basis that the Regulations did not apply because software was not “goods” for the purposes of the Regulations.
The judge did not agree with CA’s interpretation of the Regulations and ruled that although software is intangible:
“…I believe that as a piece of sophisticated, commercial non-bespoke software, it would be regarded, at the very least as a “product”. It would not be regarded, nor is it, a “service”…Moreover, so far as “tangibility” is concerned, while software itself is intangible and its method of delivery may be electronic, it can only operate in a tangible environment… These days I would suggest that the essential characteristics of a piece of software like the Product 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.”
As such, the judge concluded that the software in question did constitute “goods” and therefore TSI was entitled to benefit from the protections contained in the Regulations – resulting in compensation of £475,000 being awarded to TSI.
How we can help
In light of the ruling in this case, software vendors should take the opportunity to review agreements with their commission-based sales agents. While it may not be possible to amend those agreements until they come up for renewal, gaining an understanding of how the Regulations may apply, implementing risk mitigation strategies and putting in place suitable agreements with new agents would be recommended.
The protections for commercial agents contained in the Regulations include:
- The right to request a written agency agreement
- Minimum termination notice periods
- Entitlement to be paid “reasonable remuneration” where the amount of commission payable has not been specified and there is no ‘industry norm’
- The right to receive commission payable on sales concluded after termination of the agency relationship, in certain circumstances
- Compensation following termination of the agency relationship