The Software Incubator Ltd v Computer Associates UK Ltd

For the purposes of the Commercial Agents (Council Directive) Regulations 1993, sophisticated commercial software may constitute goods, even where it is intangible, electronically delivered and supplied under a licence. The relevant question is the commercial context and functional character of the product. An unlimited software licence may amount to a sale. An agent’s obligation to devote a substantial amount of time and effort is not necessarily a full-time obligation. Minor breaches, assessed individually or cumulatively, do not amount to repudiatory breach unless sufficiently serious. Compensation under Regulation 17 is valued by reference to the real-world value of the agency at termination. The prospect of later termination may be reflected in that valuation. Contractual commission rights and damages for failure to give notice may coexist with the statutory compensation award.

The claimant acted as a non-exclusive agent promoting the defendant’s application release automation software under a written agreement. The defendant gave 90 days’ notice of termination, then purported to terminate immediately for alleged repudiatory breaches involving competing activities, inadequate commitment, confidentiality and conflicts of interest.

The claimant sought contractual damages, compensation under Regulation 17 of the Commercial Agents (Council Directive) Regulations 1993, and commission on post-termination sales under Regulation 8 or the agreement. The defendant disputed the application of the Regulations, alleging that software was not goods and that the claimant’s activities were secondary. The central issues concerned the classification of software, construction of the agreement, repudiatory breach, statutory compensation and post-termination commission.

1. Application of the Regulations. The software was a commercial product, not a service. Its intangible character, intellectual-property basis and electronic delivery did not prevent it being goods in the context of the Regulations. The usual supply of the product under a perpetual licence constituted a sale in the relevant commercial sense. The claimant’s activities were therefore not secondary and the Regulations applied.
2. Contractual construction. The 90-day termination right was freestanding and could be exercised at any time. The notice expired on 13 December 2013. Clause 3.2 required a substantial amount of time and effort, but did not impose a full-time or exclusive obligation. The claimant could undertake other work subject to the agreement’s express restrictions.
3. Repudiatory breach. There was no breach of clause 3.2 or clause 12.1. There were minor breaches of clause 11 through disclosure of contractual documents and an analyst’s report, but they were not sufficiently serious, whether separately or cumulatively, to be repudiatory. The alleged conflict of interest was also a largely factual question and was not established on these facts. The defendant’s immediate termination was therefore itself a repudiatory breach.
4. Remedies. The claimant was entitled to contractual damages for the unpaid consultancy fees during the balance of the notice period. It was also entitled to compensation under Regulation 17. Applying the valuation approach in Lonsdale v Howard [2007] UKHL 1338, the court adopted a discounted cash-flow valuation based on a notional four-year agency, allowing for tax, costs, risk and the non-exclusive and terminable nature of the agreement. The award was £475,000.
5. The Regulation 8 claim was excluded by the agreement, but the claimant succeeded in its alternative common-law claim for commission on sales mainly attributable to its efforts. It recovered $3,724 and £5,000. The contractual damages claim of £15,631.06 was additional to the Regulation 17 award.

First-instance judgment of the High Court. The claim succeeded in part, with awards of £475,000 under Regulation 17, $3,724 and £5,000 in commission, and £15,631.06 in contractual damages.