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Ruling highlights gap in the law on software

ANALYSIS: A recent ruling by the Court of Appeal in London highlights a gap in the law on software, and should prompt a change in UK legislation.27 Mar 2018

In overturning an earlier ruling by the High Court, the Court of Appeal held that electronically supplied software does not qualify as 'goods' for the purposes of the Commercial Agents (Council Directive) Regulations.

The ruling means that there is an anomaly in the law in relation to the supply of software in a business-to-business context: on the one hand the supply of software on disks qualifies as the sale of 'goods' under the Regulations because the software is "provided on a tangible medium"; on the other, downloadable software supplied under licence is considered to be intangible property that cannot be classed as 'goods', the supply of which is therefore outside the scope of the legislation.

As a result, commercial agents supplying software on disks benefit from statutory rights to recourse from manufacturers, including where their agent contracts are unfairly terminated, while agents supplying downloadable software are deprived of those rights.

This anomaly is unfair, and does not reflect the way in which software is supplied in the digital age. However, the conclusion reached by the Court of Appeal on the question of whether electronically supplied software qualifies as 'goods' was entirely correct.

From the judgment it is clear that the Court of Appeal was aware of the implications of its finding. In her leading judgment, with which two other judges agreed, Lady Justice Gloster said: "There is little doubt that maintaining the tangible/intangible distinction in relation to the software leads to an undesirable result from the perspective of commercial agents".

Relevant to the court's conclusion, though, was in how EU and UK law makers have drawn up consumer protection laws in recent times. The Court of Appeal referred to the EU's Consumer Rights Directive of 2011, and the UK's Consumer Rights Act of 2015 in this respect.

That legislation demonstrates, the Court of Appeal said, that the law makers have maintained the position that 'goods' are "limited to tangible, moveable items". Those law makers also drew "a clear distinction between software, which is provided on a tangible medium and which can be 'goods', and software which is not provided on a tangible medium, which is not 'goods'", according to the court.

Indeed, the Lady Justice Gloster highlighted the fact that both the Consumer Rights Directive and Consumer Rights Act address the issue of electronically supplied software through "a new category of legal contract, namely a contract to supply digital content".

The High Court ignored those developments in consumer law for the purposes of interpreting the Commercial Agents (Council Directive) Regulations of 1993, and underlying EU Directive of 1986.

You can understand why the High Court judge favoured its approach. Firstly, the Commercial Agents (Council Directive) Regulations apply in a business-to-business context and do not concern business-to-consumer contracts. Second, the High Court was attracted to addressing the clear anomaly in the Regulations in light of the market's shift from software being supplied on physical disks to being directly downloadable.

However, it is the job of the courts to interpret legislation, not to effectively draw up new laws.

In this context, it is clear that the Commercial Agents (Council Directive) Regulations, set in 1993, were developed long before software was supplied by the means of online links for download. The Court of Appeal scrutinised the wording of the Regulations and its legislative background. It factored in developments in UK and EU case law and the subsequent update of consumer laws. It rightly concluded that intangible property such as software cannot be characterised as goods.

The onus is therefore on UK law makers to address this inconsistency that has been highlighted. Commercial agents should not be deprived of statutory rights just because the medium in which software is supplied has now changed.

Legislators should look to the consideration of 'digital content' under the Consumer Rights Act for a starting point on how the law on the supply of software might be updated in a business-to-business context.

This case is just the latest example of the need to ensure that legislation is future-proof as far as possible and regularly subject to review.

Mhairi Mival is a technology law expert at Pinsent Masons, the law firm behind Out-Law.com.