Demand Media Ltd v Koch Media Ltd

A distribution agreement does not generally confer a right to demand return of stock during its term unless the contract expressly provides for one or the implication satisfies the stringent requirements of necessity or obviousness. Ownership of stock does not itself override the distributor’s contractual right to sell it during the agreed term.

A term governing prices will not be implied where the agreement can operate without it and the proposed term would restrict ordinary sales negotiations. A contractual confidentiality clause must be construed according to its wording, and similarity between competing products does not by itself establish misuse of confidential information.

The claimant distributed DVDs and gifting products through the defendant under a distribution agreement. The claimant terminated the agreement and alleged breaches concerning the sale and return of stock, unpaid monthly sums, missing stock, the final account, minimum pricing, competing products and misuse of confidential information.

The court determined the construction of the Distribution Agreement, the alleged implied terms, the parties’ arrangements concerning stock supplied to WH Smith, and the effect of the termination and consent order. The central issues included whether the defendant could sell stock before expiry, whether it had to return stock on demand, and what sums were properly due in the final account.

1. Stock returns and sale. The Distribution Agreement did not give the claimant a general right to require stock to be returned during the agreement. The Supplier Returns clause was consistent with applying only where a right of return arose elsewhere in the agreement. Clause 6.4 permitted retention of stock pending final settlement after termination. A contrary implied term would defeat the notice period and interfere with the distributor’s contractual earning rights.
2. Price setting. No term was implied requiring the defendant to sell only at prices set by the claimant. The agreement could operate whether the claimant or defendant set prices. The proposed term would also make ordinary negotiations and volume sales impractical. The defendant was therefore entitled to sell the Book People stock at the prices obtained.
3. WH Smith stock. The claimant failed to establish the alleged special terms postponing liability for manufacturing costs until stock was sold or returned in saleable condition. The evidence showed that the claimant knew and accepted that unsold stock in WH Smith stores could be destroyed. The manufacturing costs were properly debited.
4. Missing stock and account. Clause 4.5 did not operate as a general defence for unexplained missing stock. The defendant had to account for the Missing Stock and relevant Further Missing Stock at market value, excluding the WH Smith portion. It was not, however, in breach of contract or conversion by failing to return that stock before final settlement.
5. Other claims. The defendant did not breach the Consent Order, commit conversion, breach a minimum price obligation concerning the Flying Scotsman sets, or breach an implied non-compete term. Clause 8 required the parties to remain silent about business and operational matters, but did not clearly prevent use of information for their own purposes. The claimant failed to prove misuse of confidential information in developing or selling the Copycat Products.
6. Disposition. The Further Debited Sum was not properly established and could not be debited. After agreed adjustments for the missing stock and that sum, judgment was given for the claimant for £16,968.47.

First instance decision. No prior appellate decision is stated in the judgment.