At the beginning of this year the Supreme Court delivered a decision of principle interest regarding a computer software distributor’s right to severance pay (case no. T 930-06). Through the decision, the court has clarified that the Commercial Agency Act (1991:352) ( “Agency Act”) can be applied analogously to marketing and collecting of orders for computer software, despite the fact that computer software does not constitute goods under the act. In addition, the court has clarified the extent to which the act’s protective provisions are mandatory to the benefit of the agent even when applying the act analogously. The court also touched upon the classification of a licensing agreement regarding acquisition of computer software and related services from a civil law perspective.
The decision constitutes an important clarification for commercial players in the software industry which regularly sell their products via independent third parties who carry out marketing and receive orders, which are then executed by the principal.
For readers who are not familiar with the provisions of the Agency Act, I shall begin with a brief summary of the act.
The Agency Act
The act was enacted in 1991, i.e. before Sweden entered into the EC. The basis for the act is the EC Council’s directive 86/65/EEC of the 18 December 1986 on the coordination of member states’ laws regarding independent commercial agents. Today, corresponding legislation can be found in a majority of the member states.
The agency act presupposes that there is an interest in providing protection for commercial agents and is therefore mainly mandatory to the benefit of the commercial agent. The act starts with a definition of who can be subject to the protection and which type of business this person must conduct in order to be covered by the act.
1. In this act, commercial agent means a person who, in a business, has agreed with another person, the principal, to work, on the other’s behalf, independently and permanently, for the sale or purchase of goods by receiving offers for the principal or to sign agreements in the principal’s name.
Thus, the act only applies to independent agents who receive offers regarding goods. The term goods is what, in law, is normally called choses in possession (sw. lösöre), which is a narrower term than chattels (sw. lös egendom). For example, agents who work for the sale or purchase of buildings on another’s land fall outside the application of the act. Securities and rights of various kinds also fall outside the application of the act.
As mentioned above, the Agency act is, in many aspects, mandatory. This means that the parties cannot enter into agreements which may be deemed to be less beneficial for the agent than is stated in the act. The issues which arise most often in discussions on agency agreements are the agreement term, the severance pay and the commission. In this article, severance pay is of greatest interest. Under the mandatory provisions of the act, the agent is entitled to severance pay if 1) the agent has supplied the principal with new customers or substantially increased the trade with the existing clientele and the principal will gain a substantial benefit from the change, and 2) the severance pay is reasonable with respect to all circumstances, especially the agent’s loss of commission on agreements with the customers stated in the first section. The severance pay is to be calculated as being no higher than one year’s commission calculated as an average of the commission paid over the previous five years or such shorter period as the relationship has lasted.
The severance pay can often amount to substantial sums. Therefore, disputes often arise concerning how the severance pay is to be determined and which amount is to be paid.
The case in brief
Comtax AB is a Swedish company which develops and sells systems for advanced tax planning for large companies. Comtax engaged EE to market and receive orders, on behalf of Comtax, regarding the system in Germany. The agreement was signed in 1999. The agreement was drafted as an agency agreement and contained, inter alia, provisions which stated that Swedish rules on commercial agents should be applied to the agreement. The agreement contained one provision on compensation which, in principle, meant that EE would receive commission regarding payments of licensing income paid to Comtax, as compensation for his sales work. In addition, he was to receive commission on income received by Comtax for support and after sales service. It was stated clearly that the compensation regarding support and after sales service was not to be deemed commission under the rules of the agency act.
Hence, the parties were in agreement that the Agency Act’s rules should apply to the agreement. However, a dispute arose when the agreement was terminated in 2001. The dispute concerned whether EE was entitled to severance pay at all, the amount of the severance pay, and certain issues regarding the subsequent commission. The most important issue was, however, how the Agency Act should be applied to the agreement. If the Agency Act was directly applicable, the provision that compensation for support and after sales service would not constitute commission, would probably be in conflict with the act, whereas if the Agency Act were only to serve as a complement to the agreement, such a provision would be acceptable.
The district court stated that an agreement on delivery of complicated computer systems which also include services is by its very nature mixed, but that the granting of the right to the computer software is the central object of the agreement. The district court further stated that, with respect to the complexity of the system, this is not to be compared with standard software which is sold over the counter. This circumstance, in combination with the fact that the computer software is made available through licensing agreements, indicates this cannot be a question of the sale of goods. This means that the Agency Act is not directly applicable to the legal relation between the parties. The argumentation of the district court was confirmed by two higher courts. In its decision, the Supreme Court states that “a time-limited license to a data program (sic!) cannot be deemed to be a good”.
However, the courts state that certain provisions in the Agency Act may be applicable analogously. It is natural to seek guidance in section 28 of the Agency Act, when determining the severance pay. The Supreme Court emphasizes however that when applying mandatory provisions by analogy, to the benefit of the agent, outside their proper area of application, the provisions can no longer be deemed mandatory but only optional.
In the agreement, the parties had stated that compensation for support and after sales service should not be deemed to be “agency commission”, i.e. commission. Since the Agency Act, when applied by analogy, is not mandatory, this resulted in the court of appeals excluding this compensation from the calculation of severance pay. The reason for this is that only commission can constitute the basis for severance pay pursuant to what is stated in the Agency Act.
In addition, the decision contains a discussion about the calculation of the severance pay, interest issues and litigation costs.
Concluding comments
The decision is interesting in many ways. The decision provides valuable guidance regarding the possibilities of applying the agency act analogously to the supply of computer software, and what such an analogous application means for the act’s mandatory character.
What is clearly evident in the decision of the Supreme Court is that the Agency Act can be applied analogously to agency-like relations which are not directly covered by the act, among them the very common agreement type with independent sellers who receive orders for licenses to software which are then executed by the software manufacturer.
It is clear that the Supreme Court deems combined agreements, where a license to software is combined with a service undertaking, are dominated by the granting of a license – and thus are principally to be seen as the granting of license, under civil law. The literature (see inter alia Söderlund, Agenträtt: kommentar till lagen om handelsagentur m.m., 1994, p 22) has discussed the question of how the mandatory character of the Agency Act are to relate to analogous applications of the act. The Supreme Court clarifies that in such cases, the act is completely optional, i.e. the parties can, with binding force, completely or partly deviate from the provisions of the act.
The circumstances which the decision concerns are relatively specific. The parties had agreed that the agency act should be applied to the agreement, something which is not particularly common. This made it clear that severance pay, if the requirements under the act were otherwise fulfilled, should be paid. However, the decision does not answer the question as to how an agreement which in all aspects is an agency relation, but does not fall under the act, shall be construed if the parties have not made the explicit reference to the act. Is such an “agent” entitled to severance pay and subsequent commission if the parties have not agreed otherwise? It is obvious that is important to clearly regulate the agreement and for the parties to explicitly state both if the agency act is to be applied and if the agent is entitled to severance pay and subsequent commission. |