Commercial agency update

31st August 2016

The Commercial Agents Regulations (the Regulations) [1] govern the relations between commercial agents and their principals.  They do not apply to services, but to agents who sell or purchase goods on behalf of their principal.

In The Software Incubator Ltd v Computer Associates Ltd [2] TSI (the corporate vehicle for consultant Mr Dainty) was appointed to promote a software product for CA.  The agency was non-exclusive, but TSI was required to devote a substantial amount of time and effort to it.   TSI started operating as agent for another company.  CA terminated the agreement without notice and TSI sought damages for repudiatory breach, commission on post-termination sales, and compensation under the Regulations [3].

CA argued that:

• The Regulations did not apply at all, because, for their purposes, the supply or sale of software promoted by TSI was not “the sale of goods”; alternatively TSI’s activities as a commercial agent were “secondary”.
• Even if the Regulations did apply, TSI was itself in repudiatory breach of the agreement, so that: (a) there could be no contractual damages claim and (b) there could be no compensation claim.
• There was no separate claim for commission in respect of post-termination transactions because they were not, for the purposes of the Regulations, “mainly attributable” to TSI; alternatively, that claim was excluded by the agreement.

Is software “goods”?

In a notable departure from the approach taken in previous cases, which focused on whether the software was supplied on tangible media (i.e. in physical form), the judge held that the product in this case was “goods” under the Regulations, even when delivered in an intangible way (i.e. electronically).

Key points to note are:

• The product was an application, as opposed to simply data. Like other software, it was intangible in the sense that it did not exist in three-dimensions and could not be physically handled or transported, but its effects could be observed (as with, for example, gas or electricity).
• While software itself is intangible and its method of delivery may be electronic, it can only operate in a tangible environment (for example, being loaded onto a hard disk or server or some other permanent storage system) and will be run on a computer or similar device – in the modern world, and in the case of the Regulations, there was no reason to require the product to be tangible or a “chattel” in the traditional sense, especially when installed so as to operate in a physical (i.e. hardware) environment [4].
• The product could be delivered either on tangible media or electronically. However, the judge suggested that the essential characteristics of a piece of software such as this one could not 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 a piece of sophisticated, commercial non-bespoke software, it would be regarded, at the very least, as a “product” and not a “service”.
• For the purposes of the parties’ agreement, the product was treated very much as tangible goods, involving promoting, marketing and selling.
• The sale of goods includes software sold by way of perpetual licence (compared with full transfer of ownership).
• The fact that this particular product might sometimes be supplied on a limited licence did not affect the judge’s conclusion that the intended supply of it amounted to a “sale” of goods – for the purposes of the Regulations, the court had to decide whether TSI was a “commercial agent” in the round and having regard to the principal way in which the product was supplied.

Other findings

Given that the supply of the software amounted to a “sale of goods”, it followed that the activities of TSI were not “secondary” activities under the Regulations. The only thing TSI was appointed as agent to do was to sell the software; there was no associated hardware to be supplied or promoted.

TSI was not in repudiatory breach. The agency agreement did not seek to restrain TSI from assuming an additional appointment and the products Mr Dainty (through TSI) marketed for his second principal did not compete with those he marketed for CA.  While he had disclosed some confidential information to his new principal and missed some meetings with CA, these breaches were not of sufficient gravity to constitute a repudiatory breach, either collectively or individually.  Accordingly, TSI was entitled to compensation under the Regulations and the judge awarded £475,000.  There was also a separate damages award of just over £15,000 for CA’s breach in terminating without notice.

With regard to quantifying the compensation award, it did not matter that TSI had been planning to terminate the agency, nor that there had been minor breaches of the agreement. The judge did, however, take into account in his calculation the prospect that the agency might terminate (lawfully, on notice) at some point in the future – in this case, he assumed a notional term of four years.

Under Regulation 8(a), a commercial agent is entitled to commission on transactions concluded after termination of the agency contract, where the transaction is mainly attributable to his or her efforts during the period covered by the contract and if the transaction was entered into within a reasonable period after termination.  The judge ruled that the agency agreement in this case excluded a Regulation 8 claim for commission.  However, he awarded TSI a sum for contractual claims in this regard, having found that certain of the post-termination transactions were attributable to TSI’s efforts.  The judge also went on to consider what would constitute a “reasonable period” under the Regulations (if they had applied) and resolved upon nine months.

While in some cases the compensation payable under Regulation 17 might need adjusting downwards to reflect the post-termination commission (because it could reduce the amount a purchaser might pay for the agency), this was not such a case – the modest award did not affect the notional value placed on the agency.   Similarly, as to the argument that there could be no separate damages claim if Regulation 17 compensation was payable, the judge found that the damages were too low in this case to reduce the valuation.

WM Comment

This decision is a further welcome clarification of the law in relation to commercial agency. Principals and agents alike should check their existing arrangements in light of it, and keep it in mind during future negotiations.

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[1] The Commercial Agents (Council Directive) Regulations 1993
[2] [2016] EWHC 1587 (QB)
[3] Unless the agency agreement provides that the agent shall receive an indemnity on termination, by virtue of Regulation 17(2) and (6), the agent shall be “entitled to compensation for the damage he suffers as a result of the termination of his relations with his principal”. See our earlier articles on the subject: Commercial agents: recent developments; Commercial agents: entitlement to compensation or indemnity?
[4] Section 61(1) of the Sale of Goods Act 1979 – previously considered by the Department of Trade and Industry to be a reasonable guide in the context of commercial agency – states that ‘”goods” includes all personal chattels other than things in action and money’.  The judge in this case said that it was permissible and desirable to have an autonomous definition of “sale of goods” for the purpose of the Regulations; how software is treated within the “pure” law of sale of goods is of limited assistance.