Agent awarded £500,000 under the Commercial Agents (Council Directive) Regulations 1993 in landmark ruling

As is well known under Regulation 17 of the Commercial Agents (Council Directive) Regulations 1993 in certain circumstances, an agent has the right to compensation from their principal when the agency agreement is terminated.

The High Court in the recent case of The Software Incubator Ltd v Computer Associates Ltd [2016] EWHC 1587 (QB) has provided a ruling on some significant points relating to the Regulations.

While Brexit causes uncertainty as to whether the Regulations will continue in force following the departure from the European Union, at present, the Regulations still apply and will (it is assumed) continue to do so pending a decision as to those elements of EU law which will be retained in UK law.

The Software Incubator case

Software Incubator Limited (TSI) was appointed as a non-exclusive agent to promote a specific software product for Computer Associates UK Ltd (CA) with a requirement in the agreement to devote a “substantial amount of time” to CA’s business.

TSI were successful in selling the software. They also became an agent for another company and were considering a termination of the agency with CA. However, before these plans were progressed, CA terminated the agency agreement with immediate effect, alleging that TSI’s work for the other company amounted to a fundamental breach. TSI claimed compensation under the Regulations.

The Court did not accept CA’s argument that TSI were in fundamental breach of the agreement. TSI was a non-exclusive agent and therefore free to take on another appointment. The product produced by the other company did not compete with CA’s product and although TSI had cancelled a few meetings and disclosed some information to the new company (alleged to have been confidential), the breaches were held to be minor and were not serious enough to entitle CA to terminate the agency contract.

The court held that it was irrelevant to the question of compensation that TSI had been considering withdrawing from the arrangement themselves and TSI were awarded:

• Compensation of £475,000 based on the value of TSI’s potential future income stream under the agreement with CA.
• $3,724 (sic) and £5,000 by way of further commission due
• Damages for failing to give appropriate notice £15,631

The definition of Goods widened

One of the arguments put forward by CA in their defence, was the fact that the product in question (the software) did not amount to “goods” for the purpose of the Regulations and as the Regulations only apply to agents who sell or purchase goods on behalf of their principal (not services), compensation under Regulation 17 was not payable.

In this landmark decision, the High Court decided that although software was not necessarily tangible it constituted goods for the purpose of the Regulations.

It was considered that similarly, products such as gas or electricity might also be affected by this decision, and could also be seen as “goods” for the purposes of the Regulations.

Impact of the decision

For businesses dealing with “intangible” goods such as digital goods (particularly products such as software), this decision is very important particularly given, as in this case, the large potential financial impact of an award of compensation.

The Court’s decision on the issue of fundamental breach is also of general interest for those advising in cases of this nature.