How you can be right but still negligent

 The case of Richards & Anor v Speechly Bircham LLP & Anor [2022] EWHC 935 (Comm) is a cautionary tale for solicitors advising on corporate transactions.

The Defendant Solicitors advised the Claimants on a sale of their cloud-based communications technology company to a private equity investor, where they received £2.3M each in cash plus shares in the buyer Newco and stayed on to manage the company until a planned exit.  Just over 8 months later they had been summarily dismissed from their employment and their shares in the Newco were compulsorily transferred for £1 each on the basis they were "Bad Leavers".

They brought High Court proceedings claiming wrongful dismissal, which they won.  That made them "Good Leavers", but they still received nothing for their shares because May J decided in a subsequent judgment on quantum that the correct interpretation of the Articles was that the "Redemption Premium Provision" (RPP) in Article 13.3 (which allocated the first £11.5M on an Exit by a Share Sale to the private equity investors - this being twice their investment) also applied to the determination of Market Value on a compulsory sale under Article 18.4.1.  The RPP was a negotiated compromise on another commercial point.  As Market Value of the Company at the point they were dismissed was still less than £11.5M, they therefore received nothing for their shares even though they had now been held to be Good Leavers.

They appealed against this judgement, but settled for £87,500 each before the appeal could be heard.

They next sued their solicitors for negligence, including for failing to advise them that the RPP would apply to the calculation of Market Value for a Good Leaver.  They claimed a loss of £1.9 to 1.7M each on their shares plus £895,141.63 between them for the costs of the costs of the previous proceedings re quantum.

These were complex proceedings raising a number of issues, which resulted in a 515 paragraph carefully-considered judgement by HHJ Russen QC, sitting as a High Court judge.  For present purposes, one of the solicitors' points of defence was that May J had construed the Articles incorrectly - so their advice had been correct and the loss was not caused by their advice.  The Claimants, on the other hand, now argued in favour of May J's interpretation of the Articles (contrary to their position in the previous proceedings, in which they had lost on the point but appealed).

HHJ Russen QC agreed with the Defendant solicitors that May J's interpretation of the Articles was incorrect.  The RPP applied on the distribution of the proceeds of a Share Sale between the shareholders.  But what was required under Article 18.4.1 was for the valuer to decide the Market Value of the Company on a hypothetical sale and then divide it by the number of shares to give a price per share.  This was not a Share Sale on an Exit and the price paid by the hypothetical buyer would not be determined by the provisions in the Articles about division of proceeds between the different classes of shares.

But he still held the solicitors liable for negligence, despite having held that their interpretation of the Articles was correct.  He accepted the Claimants’ evidence that they had repeatedly raised with the solicitors their concern that their equity in the company should be protected  ("Adam, tell me how we're going to get f**ked?") and "the reasonably competent solicitor would have questioned the implications of the wording of article 18.4.1 when viewed against the RPP and, having done so and thereby unearthed the principal points of construction addressed in the Quantum Judgment and by me above, highlighted the resulting risk and suggested that an attempt be made to eliminate it."  If they had done so, the Claimants would have instructed them to make that attempt, failing which there was a good chance they would have walked away and found another buyer on terms that did not include the RPP.

Damages were ordered in favour of the Claimants in the combined sum of £1.454m.

Although it seems counter-intuitive from a solicitor's point of view that your interpretation of a document can be correct but you can still be negligent, the point is that the solicitors here were instructed to advise on significant risks and this was an unlikely, but significant risk (as shown by the previous judge having reached a different conclusion when the point was fully argued before her).  In other words, the solicitor should have told them how they might get f**ked.

This is a good example of why solicitors often advise along the lines of "I think it means X but it’s arguable that it means Y instead, so we should try to clarify it for the avoidance of doubt."  In practice you can't always avoid the doubt, as wording is often a negotiated compromise, but you should then advise your client as to the risk that your interpretation may either be wrong or that it might cost a lot in court proceedings to prove it is right…

Are Damages Claims for Data Breaches Viable?

Claiming damages for data breaches has become one of the latest litigation bandwagons.  But recent cases show that it is not as easy to claim compensation for data breaches as some claimant solicitors and litigation funders may like to assert.

In Rolfe and others v Veale Wasbrough Vizards LLP [2021] EWHC 2809 the High Court summarily dismissed a claim against a firm of solicitors over an email sent to the wrong recipient (with a one letter difference in the email address) on the basis that no harm had credibly been shown.  The email was a claim for school fees that the Claimants had failed to pay to the solicitors’ client school and the email only contained the Claimants' names and address, the invoice and their statement of account for the past five years.  The level of school fees was publicly available on the school’s website.  The recipient of the email promptly alerted the solicitors of the error, the solicitors promptly requested they delete the email and the recipient confirmed she had done so.  Master McCloud in the High Court commented:

"What harm has been done, arguably? We have here a case of minimally significant information, nothing especially personal such as bank details or medical matters, a very rapid set of steps to ask the incorrect recipient to delete it (which she confirmed) and no evidence of further transmission or any consequent misuse (and it would be hard to imagine what significant misuse could result, given the minimally private nature of the data). We have a plainly exaggerated claim for time spent by the Claimants dealing with the case and a frankly inherently implausible suggestion that the minimal breach caused significant distress and worry or even made them 'feel ill'. In my judgment no person of ordinary fortitude would reasonably suffer the distress claimed arising in these circumstances in the 21st Century, in a case where a single breach was quickly remedied."

He therefore dismissed the case, as "the law will not supply a remedy in cases where effectively no harm has credibly been shown or be likely to be shown".  For good measure he ordered the Claimants to pay the Defendants' legal costs on the indemnity basis, with an interim payment on account of £12,000.

In Johnson v Eastlight Community Homes Ltd [2021] EWHC 3069 a data breach claim was made in the High Court for damages of £3,000, where the Claimants' solicitors claimed to have already incurred £15,000 in costs and estimated the total costs to be just in excess of £50,000!  The data breach occurred when a provider of low-cost social housing emailed the Claimant’s rent statement to a third party, who notified the Defendant immediately and deleted it as requested within 3 hours.  Slightly more plausibly than in Mr Rolfe's case, the Claimant had moved home to escape an abusive partner and claimed to be anxious about her new address becoming known to her former partner.  But, as Master Thornett noted in his judgment, bringing a public court claim over the matter with no attempt to withhold her address seemed contrary to this claimed subjective response to the Defendant’s disclosure.  He concluded that "By a very narrow margin… I am satisfied that the real point in this case is whether the Claimant's entitlement is to purely nominal or instead extremely low damages.  It is never going to be much more, a point that surely was (or ought to have been) obvious to the Claimant and her advisors from the outset."  The Master therefore transferred the case to the Small Claims Track in the County Court, where only very small fixed costs are recoverable (if the claim is successful).

Both these cases were decided by Masters in the High Court, so they have little precedent value but are indicative of the way the Courts are dealing with this sort of claim over minimal data breaches.

However in Richard Lloyd v Google LLC [2021] UKSC 50 the Supreme Court gave judgment in a case claiming damages for a data breach.  This had been brought under the Data Protection Act 1998 (DPA 1998), the predecessor to the GDPR, but the wording of the current Article 82(1) of the UK GDPR is similar to section 13 of the DPA 1998, so the principles should be the same.

Mr Lloyd was attempting (with the backing of a litigation funder) to bring an “opt out” representative class action on behalf of English & Welsh iPhone users against Google for misuse of private information and breach of the DPA Act 1998 regarding the infamous “Safari Workaround”.  Much of the judgement is about the technicalities of bringing such class actions under English law, which you can’t do (except under the Competition Act).  Mr Lloyd therefore made a clever attempt to use the old Chancery procedure for representative actions, which goes back to the 16^th and 17^th centuries.  The Supreme Court agreed this was OK in principle, but the reason his class action ultimately failed was the need for each claimant represented to establish individual loss for the data breach.  Damages for distress were recoverable in principle for data breaches, but different iPhone users would have suffered different amounts of distress, making the case unsuitable for such a representative action.

Mr Lloyd attempted to get round this by claiming a uniform sum of £750 per person.  If multiplied by the number of people he claimed to represent, this would have made the claim worth about £3billion (which was why this case ended up in the Supreme Court).  He justified this on various bases, including that it was an irreducible minimum harm suffered by every member of the class due to "loss of control" of their data, or that it was “user damages” assessed as an agreed fee for allowing Google to process the personal data.  He won on the loss of control point in the Court of Appeal, but Lord Leggatt, giving the unanimous judgment of the Supreme Court, carefully considered all these arguments and rejected them.  A claim for damages under the DPA 1998 required proof of either material damage (in the sense of some identifiable physical or financial loss) or distress, which had to be distinct from, or caused by, the unlawful processing.

What can we learn from these cases?  A claim by a data subject against a data controller for a data breach involving their personal data is certainly possible, but some actual loss or genuine distress must be proved in order to recover damages.

In cases of minor breaches where the data is not particularly sensitive and the breach has been cured, such loss or distress will be difficult to prove, and even where there is an arguable case it will be a matter for the County Court, where recovery of legal costs will be limited.  The sort of speculative letters that have been written by some claimant solicitors to frighten defendants into settling should therefore be firmly rebutted.

The more serious data breaches (such as where large companies fail to protect consumers’ credit card details from hackers or abuse their data for commercial purposes) are another matter, but even then each claimant will need to establish the loss and distress they have personally suffered, which individually may not be great.  The Supreme Court indicated a bifurcated representative action would be possible, where the representative claimant establishes liability and then members of the class can claim to establish their individual damages.  But there would still be difficulties in arranging funding for such litigation and persuading individual data subjects to bring claims for what may be relatively small amounts with a greater risk of costs.

This may give the impression that there is no real sanction for data breaches.  But the Information Commissioner’s Office still has the power to impose substantial fines under the UK GDPR and reputational damage remains a real concern.

Conflicting Decisions Upheld on Appeal

You might think that if two different employees challenged an employer’s policy on retirement age on grounds of age discrimination before different Employment Tribunals and the two Tribunals reached opposite conclusions as to whether it was discriminatory, the point of a joined appeal of the two cases to the Employment Appeal Tribunal ("EAT") would be to decide which Tribunal was right, so the employer and its staff would know where they stood in future.

However, you would be wrong.  Employment Tribunals have a wide discretion to decide cases on the facts, based on the evidence before them, and the EAT can only overturn their decisions if they have made an error of law or have reached a decision which is perverse on the facts.  If two different Tribunals have reached different conclusions regarding the same retirement scheme on the basis of differing evidence and both have applied the law correctly and come to reasonable (though different) conclusions, then the EAT cannot interfere.

That is what happened in the cases of Pitcher v University of Oxford and St John’s College, Oxford and Ewart v University of Oxford.  The University, and St John’s College, had adopted an Employer Justified Retirement Age ("EJRA") of 67, with a procedure for applying for extensions to the retirement date and subject to future review of the scheme.  The stated aims of the EJRA included (1) promoting inter-generational fairness; (2) facilitating succession planning (in the sense of knowing when vacancies could be expected to arise); and (3) promoting equality and diversity.  The Tribunals also found that these three aims helped achieve a further over-arching objective of safeguarding high academic standards.  These were all upheld as legitimate aims which could be used to justify what would otherwise be direct age discrimination, but the University also had to show that the EJRA was justified as being a proportionate method of achieving those legitimate aims.  This is where the evidence presented to the two Tribunals, and so the conclusions they reached, differed.

Professor Pitcher was an Associate Professor of English Literature.  His application for an extension when he reached 67 was refused by the University and St. John’s College, and he was compulsorily retired.  The Tribunal in his case considered the evidence of the factors considered in establishing the scheme and its first 3 years of operation, and found the EJRA was justified.

Professor Ewart was an Associate Professor in Atomic and Laser Physics. He succeeded in obtaining a two year extension to his retirement age, but his application for a second extension was refused.  Crucially, he submitted in evidence his own statistical analysis of the increase in vacancies as a result of the EJRA, which showed that it was only a trivial 2-4%.  The University had not carried out its own analysis and did not submit any evidence of its own as to the effect of the EJRA in increasing vacancies.  As the legitimate aims were to create vacancies for a younger, more diverse cohort of academics, the Tribunal in Prof. Ewart’s case found that the discriminatory effect was disproportionate to the extent to which the legitimate aims were achieved, and therefore found the EJRA was not justified.

Prof. Pitcher was therefore not discriminated against, but Prof. Ewart was - by the operation of exactly the same scheme.  The fact that Prof. Ewart obtained one extension was not material (and if anything you might think that made his case less discriminatory).

The EAT could find nothing wrong with the decision of either Tribunal - on the basis of the evidence on the crucial issue of justification before them, and therefore upheld both decisions, despite their conflicting results.

This shows the limitations of appeals.  But where does it leave the University, or indeed other employers trying to decide how to implement non-discriminatory retirement policies?

Well, it seems Prof. Ewart had the better evidence.  Being a science Professor clearly helped here.  So, unless the University can produce a better statistical analysis which does show it is achieving its aims, it will need to rethink its retirement policy.

For other employers, the aims of inter-generational fairness, succession planning and promoting equality and diversity have all been upheld as legitimate ones, and safeguarding high academic standards could be rephrased as safeguarding high standards of performance in other appropriate industries (e.g. in law firms).  But the tricky question remains of how do you implement them in a proportionate manner?  Monitoring the scheme you do adopt and carrying out some statistical analysis, and amending the scheme based on the results, appears to be one way of doing it.  I do wonder though how many such schemes will achieve results of significantly better than a 4% increase in vacancies becoming available for younger generations?

Mr Green hits the Jackpot

The case of Green v Petfre (Gibraltar) Ltd (t/a Betfred) hit the headlines recently, when Andrew Green succeeded, after a 3 year battle, in recovering his winnings of £1,722,500.24 from a game on Betfred’s online casino.

Mr Green played a game called ‘Frankie Dettori's Magic Seven Blackjack’, in which he could place side bets on ‘trophy cards’.  The game was licensed to Betfred by Playfair in Gibraltar and (unknown to the parties) a software error stopped the game resetting as intended, so that Mr Green ended up with many more trophy cards than he should have.  The chance of a player achieving the jackpot of 7777 times the side bet stake should have been 0.00018361%, but Mr Green had won the jackpot three times before he eventually stopped betting at 5:58 am.  When Mr Green attempted to cash in his virtual chips, Betfred investigated and eventually refused to pay out, citing various exclusions of liability in their online terms and conditions.

Mr Green eventually obtained summary judgement from Mrs Justice Foster in the High Court to strike out Betfred’s defence based on the terms and conditions as having no realistic prospect of success.  Apart from the interesting facts of the case, it also provides a useful illustration of the Courts’ approach to online terms and conditions in a consumer case.

The Betfred terms and conditions were accepted by Mr Green clicking an ‘Accept’ box when he first opened an account with Betfred several years previously.  There was no dispute about their acceptance – Mr Green was even suing on one of the terms and conditions to recover his winnings.  The problem was whether the particular exclusions on which Betfred relied were effective.

The full terms and conditions here consisted of the Terms and Conditions, which were 32 pages long (if printed), an End User Licence Agreement of 9 pages and Game Rules for the particular game of 6 pages.  The Terms and Conditions document in particular was poorly drafted, with what the judge described as a number of infelicities of presentation. It was iterative and repetitive, in places the numbering was absent or inconsistent and it contained typographical mistakes.  The frequent use of capitalisation of whole clauses served, in the judge’s view, to obscure rather than highlight key provisions.

The judge’s conclusions were that:

• As a matter of contractual interpretation the wording of none of the exclusions relied upon by Betfred was sufficient to exclude liability for the particular error that occurred.  Their meaning was unclear, but they appeared to be directed to hardware or communications errors, rather than a behind-the-scenes software error of this kind.  What happened was possible if the game were functioning correctly – just very, very unlikely.
• The manner in which the exclusion clauses were presented and Betfred’s failure adequately to draw them to Mr Green’s attention meant that they were not incorporated in the contract.  Although it is unlikely a punter would ever read these clauses, they needed to be drafted so as to bring them to his attention if he did.
• As this was a consumer contract under the Consumer Rights Act 2015, Betfred was not entitled to rely on the exclusions because they were not transparent or fair.

The exclusions therefore failed for three different reasons.  In addition, Betfred’s defence based on the doctrine of mistake also failed, because any mistake did not render the contract incapable of performance, just less advantageous to one party.

Cases like this always turn on their particular facts, but this case shows the dangers of poorly drafted terms and conditions, particularly when dealing with a consumer.  When drafting, you need to think carefully about exactly what liability your client wishes to exclude, draft clearly to cover it and signpost it to the reader.  If you must use CAPITALS, do it very sparingly or they could well be counter-productive.  When you have done all this, you may well have satisfied the transparency requirement of the Consumer Rights Act, but you will still have to persuade a Court that the exclusion is fair.  Maybe a clearly drafted exclusion of liability for obvious software errors would be fair, but an error like this which produced a possible but highly unlikely result seems trickier to argue it would be fair to exclude.  The punter will simply assume it his lucky day, rather than that it must be a software error.

What we don’t know is whether Playfair’s business to business exclusions of liability in their contract with Betfred proved effective.

Can a funder be liable for refusing to provide further funds to a company?

Often limited companies are undercapitalised, relying on a funder’s willingness to lend further money when needed in order to stay solvent.  The funder is typically a holding company or the individual behind the company.  The funder may be under no legal obligation to provide further funds when required by the company, and accounts are prepared on a going concern basis on the mere expectation they will do so.

Third parties contracting with such an undercapitalised limited company would be well-advised to seek guarantees from the funder, but in practice funders are often unwilling to give guarantees.  The perils of contracting with such a company without a guarantee were revealed by the case of Palmer Birch (A Partnership) v Lloyd & Another [2018] EWHC 2316, as the judge in that case noted in his judgment.  As he went on to say, the case “also reveals less directly the potential pitfalls for those individuals who choose to operate through the medium of such a limited company which proves not to be good for its contractual obligations, including those who may have directed its affairs from the shadows (or quite openly but perhaps not quite constitutionally).”

Michael Lloyd had acquired a mansion house in Devon through a corporate structure and was refurbishing it to serve as his English home and for proposed business activities of corporate hospitality, conferences, educational purposes, shooting and grazing.  The freehold of the property was owned by Seizar Holdings Limited, a Cypriot company, which granted a 21 year lease to Hillersdon House Limited (“HHL”), an English company of which Michael’s brother Christopher was sole shareholder and director.    HHL contracted with the Palmer Birch partnership for the refurbishment at a contract sum of just over £5M.  This structure enabled HHL to recover the VAT on the building works, which Michael personally could not have done.  Michael funded the project through a £5M loan facility to HHL, which was in turn part financed with his bank.

By December 2014 the project was running over time and over budget and Michael was running out of patience and of money, though further funds were expected when a property development in Kenya produced a return on his investment.  Invoices from the contractor went unpaid and by a solicitors’ letter of 22 April 2015 HHL gave notice to terminate the building contract, purportedly on the basis of its own insolvency.  As the contract only allowed termination on the basis of the other party’s insolvency, this was of itself a repudiatory breach of contract.  Subsequently a new company, Country Sporting Experience Ltd. (“CSEL”), of which Michael was sole shareholder and director, took over the property and was funded by the eventual returns from the Kenya investment, which crucially came through just before the formal liquidation of HHL.

Unusually Palmer Birch took legal action not against the insolvent company but against its director Christopher and its funder (and arguably shadow director) Michael personally, alleging that Michael had committed the torts of inducing breach of contract and unlawful interference and that Michael and Christopher had committed the tort of unlawful means conspiracy.  Some of the claims have now succeeded on a preliminary trial of the liability issues, though damages have still to be established.

Importantly for funders, the claim failed that Michael’s failure to fund, which resulted in HHL failing to pay the sums due to Palmer Birch, amounted to his inducing a breach of contract by HHL.  The judge followed earlier cases that “the inducement tort is not committed simply through a suggested failure on the part of the defendant to feed the coffers of a limited liability company, to enable it to meet its contractual obligations, when in fact there is no legal obligation to do so”.  This is known as “mere prevention”, as distinguished from “inducement”.

However this can be a “thin dividing line” and Michael was held to have crossed it in this case by causing HHL “to repudiate the Contract, when the funds which were then made available to CSEL could instead have been made available to HHL in time to enable it to perform the Contract and to meet its contractual obligations”.  On the evidence, Michael was found to have been behind the decision to instruct the solicitors to give notice purportedly to terminate the contract and the insolvency practitioners to arrange the creditors’ voluntary liquidation of HHL, when the last minute funds had become available which he could have used to save the Contract and HHL.  The judge also found that “the evidence safely supports the inference that by no later than late January 2015 Michael and Christopher had reached an agreement to bring about the liquidation of HHL so that it might escape from the Contract and thereby avoid meeting PB's existing and anticipated claims”, which was sufficient for the claim of an unlawful means conspiracy to succeed.

The advice for funders is that yes you can set up such a structure (a claim that the setting up of the structure was itself an unlawful interference or unlawful means conspiracy had been struck out at an earlier hearing as having no prospect of success) and in principle you can withhold further funding that you are under no legal obligation to provide, even if it results in the borrowed failing to meet its contractual obligations and becoming insolvent.  But you have to be careful not to cross that “thin dividing line” and become actively involved in inducing that breach of contractual obligations - especially if you do have the funds that could have been used to comply with them.  If you do set up a structure which is run by a third party, let them get on with it and be very careful not to interfere – especially when it runs into trouble.

The advice for contractors with such companies is to seek personal guarantees from undercapitalised companies.  If they are refused, you proceed at your own risk.  Although Palmer Birch succeeded on liability for some of their claims in this case, they have still to establish quantum, and each case turns on its own facts, which can often be difficult (and expensive) to prove.

“No Oral Modification” – does it mean what it says?

“Boilerplate clauses” are a standard part of most written contracts and are rarely given much thought.  They provide the basic provisions which are considered appropriate in nearly all contracts.  A common one provides that any variation to the agreement must be in writing and signed by or on behalf of the parties.  This is known as a “No Oral Modification” clause, or “NOM”.  Its purpose is to reduce the potential for future disputes where one party seeks to argue that the other had orally agreed to their departing in some way from the terms of the written contract.  This helps create certainty (which is the point of putting contracts in writing), but the problem is that in practice the parties don’t read their contracts (and especially not the boilerplate clauses, which are considered “legalese”) and so do sometimes actually agree such oral variations, which they then proceed to act upon.

Take this example:

“All variations to this Licence must be agreed, set out in writing and signed on behalf of both parties before they take effect.”

This wording was in a licence to occupy serviced offices in central London granted by MWB Business Exchange Centres Ltd to Rock Advertising Ltd.  Rock fell into arrears and claimed to have agreed a revised payment schedule over the phone with MWB’s credit controller.  The credit controller’s boss didn’t approve the proposed payment schedule, and MWB evicted Rock and claimed the arrears.  Rock counterclaimed for wrongful eviction.  The judge found there was indeed an oral agreement to vary the licence, which the credit controller had authority to conclude, but it was ineffective as it didn’t comply with the NOM.

The case went all the way up to the Supreme Court, as there was no clear authority under English law whether NOM clauses were effective.  The general view, supported by recent cases (and by the Court of Appeal in this case), was that they were not – because the parties had freedom to contract orally and so could agree a subsequent oral contract which would impliedly override the NOM.  But lawyers still included NOMs in contracts – just in case they did work.

The Supreme Court, in Rock Advertising Ltd v MWB Business Exchange Centres Ltd [2018] UKSC 24, held 4 to 1 that NOM clauses did indeed work (so we lawyers were right to include them all along).  Lord Sumption, delivering the lead judgment, explained his view that:

“What the parties to such a clause have agreed is not that oral variations are forbidden, but that they will be invalid. The mere fact of agreeing to an oral variation is not therefore a contravention of the clause. It is simply the situation to which the clause applies. It is not difficult to record a variation in writing, except perhaps in cases where the variation is so complex that no sensible businessman would do anything else. The natural inference from the parties’ failure to observe the formal requirements of a No Oral Modification clause is not that they intended to dispense with it but that they overlooked it. If, on the other hand, they had it in mind, then they were courting invalidity with their eyes open.”

Lord Briggs disagreed with this analysis, but agreed the appeal should be allowed.  He took the view it was theoretically possible to agree orally to dispense with a NOM clause, but the Courts would only imply that the parties had done so where “strictly necessary”, rather than as a matter of course just because they had not complied with the NOM.  He therefore agreed with the majority that the oral variation was ineffective in this case.

So we now have clear authority that NOMs work, and that you can’t agree to delete them except in writing.  This is good for legal certainty, but is likely to create problems in those cases where the parties have agreed an oral variation anyway and gone ahead and acted upon it.

In such cases, as Lord Sumption pointed out, “the safeguard against injustice lies in the various doctrines of estoppel”; i.e. if something is agreed orally and one party acts in reliance on it to their detriment, the party who allowed this to happen will be “estopped” from relying on the NOM.  You might think this is the same thing as allowing oral variation of NOMs, but the subtle legal difference is that estoppel is an equitable doctrine which allows the Courts to do justice in individual cases rather than a hard and fast rule that a party can always rely on.  So the contract remains as per the written terms, but that doesn’t mean you’ll be able to enforce it if you’ve allowed the other party to believe you agreed you wouldn’t.

Downloaded software is not "Goods"

The Commercial Agents (Council Directive) Regulations 1993 provide for the payment of compensation to a commercial agent whose agency agreement is terminated by the principal without cause, even when terminated under a notice clause in the agreement.  However an important limitation is that they only apply to to agents authorised to negotiate or conclude "the sale or purchase of goods" on behalf of their principal.  Agencies to negotiate the supply of services by the principal are not covered.

So what is the position when an agency for the supply of software is terminated?  Is software "goods" for this purpose?  The Regulations, and the EU Directive which they implemented, do not define "goods".

This question came up in the case of Computer Associates UK Ltd v The Software Incubator Ltd [2018] EWCA Civ 518 decided by the Court of Appeal on 19 March 2018.  In that case Computer Associates had terminated an agency agreement to resell their release automation software, which was supplied by electronic download only, and not on disks, by way of perpetual licence.  The judge held that the Regulations should be interpreted so that "goods" included downloadable software, and that Computer Associates had wrongly terminated the agency, as the agent was not in breach of contract.  He therefore awarded the agent £475,000 in compensation for the loss of its future income stream.

Lady Justice Gloster, delivering the judgment of the Court of Appeal agreed that Computer Associates had not been entitled to terminate the agency, but disagreed that downloadable software was "goods" under the Regulations.  She referred to the earlier St. Albans and Your Response cases, which had made a distinction between software provided on physical disks and software provided by electronic download, and held that only the former constituted "goods".  She noted that the Consumer Rights Act 2015 (which implements the EU Consumer Rights Directive and now governs the sale of goods to consumers - though not to businesses) accepted this distinction as being the existing law and provided for a new category of "digital content" to give consumers equivalent rights for downloaded content to those they had for physical goods.  As the software here was not "goods", the Regulations therefore did not apply, the agent's £475,000 compensation was disallowed, and it was left with the £15,000 the judge had awarded as damages for breach of contract.

This case confirms the orthodox understanding that packaged software sold on physical disks is "goods" but software downloaded from the internet is not.  The reality nowadays is that almost all software is sold by download.  Consumers have the protection of the digital content provisions of the Consumer Rights Act 2015, but those do not apply to businesses, who cannot therefore claim that downloaded software is not of satisfactory quality under the Sale of Goods Act 1979.

In any case, much software is now supplied as a Cloud-based service, especially in a B2B context.  This will definitely not be "goods" when the sale is negotiated by an agent, but is more likely to be considered as a "service" given the way Cloud subscription agreements are typically structured.  The Commercial Agents Regulations will not apply in such cases, but the implied warranty that the supplier has used reasonable skill and care in the provision of the services under the Supply of Goods and Services Act 1982 would apply if not contractually excluded.