Supply of Software not Sale of Goods

April 8, 2018

In an important decision, the Court of Appeal has held in Computer Associates UK Ltd v The Software
Incubator Ltd
[2018] EWCA Civ 518
  (reversing the judgment of
HHJ Waksman QC at first instance) that the supply of software in the form of a
download is not a ‘sale of goods’ for the purposes of the Commercial Agents
(Council Directive) Regulations 1993.  

As the Court found, English, Commonwealth and European
authority has consistently held that only tangible property can be ‘goods’. The
caselaw has accordingly maintained a distinction between the situation where
software is supplied in tangible form on a disk (which is capable of being a
sale of goods) and where it is delivered purely in electronic form (which is
not a sale of ‘goods’).

For example:

In St Albans DC v
International Computers Ltd
[1996] 4 All ER 481, the Court of Appeal
expressed the view (obiter) that a software programme is not ‘goods’ for the
purpose of the Sale of Goods Act 1979, but distinguished the situation where
the programme was supplied on disk. This distinction was followed and applied
in the case of an electronic database in Your
Response Ltd v Datateam Business Media Ltd
[2015] EWCA Civ 281.

In a first instance decision on the Commercial Agents
Regulations, Tugendhat J held that ‘software is intellectual property, not a
chattel’, and that the Regulations did not apply to the supply of software
because there is no sale of ‘goods’: Accentuate
v Asigra
[2010] All ER (Comm) 738.

The New South Wales Supreme Court has held that software
supplied as an internet download is not ‘goods’ for the purposes of the
Australian Sale of Goods Act 1923 because ‘goods’ are limited to tangible
items: Gammasonics Institute
for Medical Research Pty Ltd v Comrad Medical Systems Pty Ltd
NSWSC 267.

The 6th VAT Directive expressly states that ‘goods’ for the
purposes of that Directive are limited to tangible property, with the result
that the CJEU has held that the supply of electronically downloaded books and
software is a supply of services, not a supply of goods: see Levob Verzekringeren BV v OV Bank NV,
Case C-41/04 [2005] ECR I-9433, Commission
v Luxembourg
, Case C-502/13 (ECJ) and Commission
v France
, Case C-479/13 (ECJ).

Gloster LJ (with whom both Henderson LJ and Irwin LJ agreed)
repeatedly expressed sympathy for the argument that this distinction between
goods supplied on a tangible medium and goods downloaded from the internet is
outdated. She noted that the distinction leads to odd and inconsistent results.
For example, a commercial agent promoting hard-copy books on behalf of its
principal would be protected under the Regulations, but an online bookseller
promoting online content would not. Also, if the software was initially downloaded,
but a backup copy was then provided on disk, the backup supply would be a
supply of ‘goods’ but the initial supply would not: a distinction for which
there is no rational basis.

However, Gloster LJ took the view that it was not for the Court
to depart from the weight of prevailing authority by giving ‘goods’ a
sufficiently wide interpretation to cover software supplied in electronic form.
She said that this was an area where reform needed to come from the legislature
and not via judicial interpretation. She noted that in Australia and New
Zealand, the legislature had done just that by amending their consumer
legislation to extend the definition of ‘goods’ to computer software. It was
also relevant that the Commercial Agents Regulations are designed for the
protection of commercial agents rather than consumers, and thus a narrower
interpretation was justified.

What is of particular interest is that, as Gloster LJ noted,
the Consumer Rights Act 2015, which implements the Consumer Rights Directive
2011/EU of 25 October 2011, has not gone down the Commonwealth route of
extending the definition of ‘goods’ to include software but instead has come up
with the new concept of ‘digital content’ (which is defined as ‘data which are
produced and supplied in digital form’). The Directive preserves the existing
view that software supplied in a tangible medium should be considered to be ‘goods’,
but expressly recites (in Recital 19) that contracts for the sale of digital
content should not be classified for the purposes of the Directive as sales
contracts or service contracts.

Gloster LJ observed that if the Court were to uphold the
interpretation of the court at first instance and find that software was ‘goods’,
this could lead to uncertain and potentially unjust consequences. In
particular, it would involve recognising information as property, which the law
has stopped short of doing until now. It might also lead to the creation of
proprietary rights which could give the supplier of the software preferential
or security rights in the insolvency of the customer, to the disadvantage of
the creditors.

It is submitted that the caution of the Court of Appeal is
well-founded. There is a superficial attraction in doing away with the outmoded
and irrational distinction between software supplied on disk and software
supplied by download. However, the better approach is not to reinterpret
legislation drafted before the advent of the internet, but to craft new
legislation which specifically addresses the realities of the supply of intangible
property online. In doing so, it will need to address such issues as the
implication of terms as to quality and fitness for purpose.

It seems likely that the approach of the Court of Appeal
will be applied in relation to other legislation relating to the sale of goods,
and in particular the Sale of Goods Act 1979. If so, unless and until the gap
is filled by legislation, there will be no scope for the implication of the
statutory implied terms under that Act into software licensing contracts, including
the terms as to satisfactory quality and fitness for purpose. In practice, this
may have little impact, as software contracts generally replace the statutory
implied terms with express warranties as to compliance with specification. It
should also be noted that the approach of the Court of Appeal in St Albans DC v ICL was to hold that
similar terms as are implied by the Sale of Goods Act 1979 can also be implied
at common law. 

Zoe O’Sullivan QC is a barrister at One Essex Court. Zoe is
registered as a Registered Foreign Lawyer with the Singapore International
Commercial Court. She also sits as an arbitrator and is on the arbitration
panels of the ICC and the LCIA.