A recent High Court case under the Commercial Agents Regulations has opened a new avenue of liability for software companies. It could result in software vendors having to make large cash pay-outs to commercial agents who promote, sell or license software products on their behalf.
In The Software Incubator Ltd v Computer Associates Ltd
This means that for the first time since the passing of the Commercial Agents Regulations in 1993, software companies are subject to the same agency agreement termination rules as companies selling more traditionally ‘tangible’ products from computers to curtains.
What are the Commercial Agents Regulations?
The Commercial Agents (Council Directive) Regulations 1993 (‘Commercial Agents Regulations’, or ‘Regulations’) significantly extend the legal obligations of the product provider (the ‘principal’) to their Commercial Agents. Many of these obligations cannot be excluded from any agency agreement.
The major sticking point for companies using sales agents is that if they give notice to terminate an agency agreement, the agent is entitled to receive commission on sales made after termination (albeit in decreasing amounts as time goes by), and to be paid compensation to recognise the value and goodwill that the agent has created for the principal and their product.
‘Compensation’ is calculated based on the value of the agency business at the time of termination. This could be calculated as an average of the commission the agent has earned from the agency over the preceding 5 years, or by valuing the agency as though it were a business to be sold. According to the Regulations’ explanatory notes, the figure should also reflect the likely future performance of the agent’s business were it to continue in the same pattern of success or decline.
The Commercial Agents Regulations only apply to agents selling and promoting the sale of goods, not services. This is how software companies have traditionally escaped the regulations. Since a sale of software rarely includes any physical product, it could usually be defined as a service, provided on a perpetual or fixed-term licence. However, the Regulations do not actually define ‘goods’ and so deciding what falls within their scope is up to the courts.
Who is a ‘Commercial Agent’?
The Commercial Agents Regulations leave the definition of a commercial agent broad and so a company may enter into agreements covered by the regulations without knowing it.
A commercial agent is a partnership, company or self-employed individual who:
- Has continuing authority to act for their principal in the sale or purchase of goods.
- Does not need to be authorised to finalise sales on behalf of their principal; it is enough for them to be authorised to introduce new customers to the business.
- Does not merely have a limited authority to conduct and conclude a single transaction.
- Does not act solely as an agent for the provision of services.
In effect, any individual with on-going authority to conduct the sale or purchase of goods for a principal company falls under the Regulations. Simply having the authority to introduce new customers to the business can be enough to satisfy the definition of a ‘commercial agent’, which provides a very wide scope for agents and representatives to be included.
What Is My Company’s Liability?
If a company produces and subsequently distributes software (‘goods’) through commercial agents (as outlined above), under the Commercial Agents Regulations they will be liable to pay compensation to those agents when they choose to terminate their agency agreements (see above).
The Regulations apply to any agency agreement that states that English law applies and so even if an agent operates internationally, there is a chance they will still be entitled to a payout upon termination. And as the Regulations are derived from an EU Directive, similar laws will be in effect in other EU member states – so if a company has agents in Spain, Germany or Poland, they will be subject to similar restrictions.
In addition, the liability to pay compensation under the Regulations applies where:
- an agent terminates their agreement to retire due to old age; or
- the agent is terminating due to ill-health where it would be unreasonable for them to continue work; or
- the agency comes to the end of its agreed fixed term; or
- the principal has committed a serious breach of contract.
It could also apply if the principal fires an agent for failing to meet its contractual sales targets, if the agent can show that this failure is due to general market conditions, or due to the principal failing in its own responsibilities. Since any unsuccessful sales person will usually blame ‘the markets’ or ‘the product’ or ‘the lack of marketing’, this provides plenty of opportunity for a departing sales agent to claim under the Regulations.
How Can I Avoid Liability?
Under the Commercial Agents Regulations, the principal does not have to pay compensation to the agent if the agency is terminated on account of the agent’s serious breach of contract.
Aside from this exception, very few of the Regulations can be contracted out of in ordinary agency agreements. It is possible, however, to expressly include provisions for an ‘indemnity’ in the agency contract, rather than having to determine a suitable amount of compensation on termination. Typically, you would calculate an indemnity as one year’s remuneration based on the earnings of an agent for the five years prior to the termination of their agency agreement.
The inclusion of software as ‘goods’ under the Commercial Agents Regulations represents a massive judicial shift towards tighter control on supply contracting. With commercial agency agreements for the sale and purchase of software included within the Regulations, companies that previously operated outside these rules now face making large compensatory payments on any agency agreement that they terminate.
Software providers (alongside producers of more ‘traditional’ goods) should seriously consider the alternative option of expressly including an indemnity in agency agreements. This presents an important opportunity to revisit agency agreements and minimise the principal’s total liability.
Do you or your company produce software? Do you use third-party companies or individuals to market and sell your product? You could be liable to pay them a significant sum of money at the end of your agreement.
We can help you to revisit and draft your agency agreements to ensure your liability is minimised. Contact us for a no obligation chat.
The Butler, Devant