Demand Media Ltd v Koch Media Ltd

This is a dispute about the termination of a distribution agreement between the Claimant (“Demand”) and the Defendant (“Koch”). The agreement concerned distribution of DVDs, DVD/gift sets, and “gifting products” such as construction sets.

Demand is a company which carries on business designing and distributing DVDs and gifting products. Demand is owned by Mr Jason Fenwick, who is also a director of the company.

Koch is an English subsidiary of a German-Austrian media enterprise. In the UK it manufactures and distributes digital entertainment products and accessories. It distributes the products of others, and it also develops and sells its own products.

Demand entered into two agreements with Koch for the distribution of its products. The first agreement, made in 2014, ran until April 2015 when it was replaced by a second agreement (“the Distribution Agreement”) which is the subject of these proceedings.

Products distributed by Koch under the Distribution Agreement were sold to a range of retailers, both online (such as Amazon) and traditional “bricks and mortar” retailers. Products were commonly sold to retailers on consignment, meaning that the retailers did not themselves have to pay for products until they sold them.

Over the lifetime of the Distribution Agreement (and the first agreement that preceded it) Demand did not, on the whole, supply products to Koch to sell on its behalf. Instead, Demand supplied product ideas and licensing rights. Koch was responsible for manufacturing products and for their distribution and sale. Koch financed the manufacture of products and recouped its manufacturing costs from the proceeds of sale.

Mr Fenwick describes the commercial arrangement at the commencement of the relationship between the parties in his second statement at paragraph 5: “Koch offered us a full production, manufacturing, finance, sales and distribution facility. This meant that Demand could focus on releasing lots of own brand and licensed products with this support. Koch suggested they had supply chains in place for manufacturing and customers to supply to.”

Demand terminated the Distribution Agreement by notice given on 19 January 2018, as it was entitled to do. The agreement ended on 31 March 2018.

There is no agreed List of Issues; each party produced its own. In broad summary the issues I need to determine are as follows. The terms used in this summary are defined elsewhere in the body of this Judgment or are terms defined by the parties and used at trial.

The Re-Amended Particulars of Claim (“RAPoC”) include a claim for breach of a registered design right in a Spitfire construction set. The Re-Amended Defence challenges the validity of the registered design right. The Defendant applied to have that claim, and its challenge to the registered design right, transferred to the Intellectual Property and Enterprise Court (“IPEC”). I heard that application at the beginning of the trial. I made an order transferring that claim to IPEC, and it formed no further part of this trial.

I heard evidence from the following witnesses:

Before coming to the Distribution Agreement it is useful to consider briefly its predecessor. This agreement, and its terms, forms part of the factual matrix against which the Distribution Agreement falls to be construed. On 1 March 2014 Demand and Koch entered into an agreement for Koch to distribute

I note the following terms of the first agreement:

The first agreement was replaced by a subsequent agreement between the parties, made on 1 April 2015. This agreement (“the Distribution Agreement”) is the relevant agreement for the purpose of these proceedings. The

The main changes to the Commercial Terms between the first agreement and the Distribution Agreement were as follows:

The parties agree that the General Distribution Terms and Conditions applying to the Distribution Agreement were the same as those which applied to the first agreement (“the General Terms”). They provide (insofar as material):

On 26 May 2016 the Distribution Agreement was extended to include Demand’s gifting products. This was done by an addendum to the 1 April 2015 agreement which was headed “Non-DVD physical boxed product manufacturing and far east sourcing” (“the Non-DVD Addendum”). That agreement covered the provision of services by Koch in sourcing and manufacturing gifting products on behalf of Demand. I will return to the NonDVD Addendum below, but at this stage I note that it is not referred to by either party in the pleadings, and barely featured in the course of evidence or argument.

A number of issues arise as to the proper construction of the Distribution Agreement, and Demand alleges five implied terms, all of which are in dispute.

There is no disagreement between the parties as to the relevant legal principles, which are well established.

As to the construction of the Distribution Agreement, both parties rely on

Arnold v Britton [2015] AC 1619 per Lord Neuberger at paragraph 15

“15 When interpreting a written contract, the court is concerned to identify the intention of the parties by reference to “what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean”, to quote Lord Hoffmann in Chartbrook Ltd v Persimmon Homes Ltd [2009] AC 1101, para 14. And it does so by focusing on the meaning of the relevant words, in this case clause 3(2) of each of the 25 leases, in their documentary, factual and commercial context. That meaning has to be assessed in the light of (i) the natural and ordinary meaning of the clause, (ii) any other relevant provisions of the lease, (iii) the overall purpose of the clause and the lease, (iv) the facts and circumstances known or assumed by the parties at the time that the document was executed, and (v) commercial common sense, but (vi) disregarding subjective evidence of any party's intentions.”

Koch also draw my attention to paragraph 19 of the same judgment:

“commercial common sense is not to be invoked retrospectively. The mere fact that a contractual arrangement, if interpreted according to its natural language, has worked out badly, or even disastrously, for one of the parties is not a reason for departing from the natural language. Commercial common sense is only relevant to the extent of how matters would or could have been perceived by the parties, or by reasonable people in the position of the parties, as at the date that the contract was made. “

Paragraph 19 forms the third of seven factors emphasised by Lord Neuberger at paragraphs 16-23. I have regard to all of those factors in analysing the Distribution Agreement.

As to the implication of terms, both parties rely on Marks and Spencer plc v BNP Paribas Security Services[2015] UKSC 72. At paragraph 23 Lord Neuberger said:

“23 First, the notion that a term will be implied if a reasonable reader of the contract, knowing all its provisions and the surrounding circumstances, would understand it to be implied is quite acceptable, provided that (i) the reasonable reader is treated as reading the contract at the time it was made and (ii) he would consider the term to be so obvious as to go without saying or to be necessary for business efficacy. (The difference between what the reasonable reader would understand and what the parties, acting reasonably, would agree, appears to me to be a notional distinction without a practical difference.) The first proviso emphasises that the question whether a term is implied is to be judged at the date the contract is made. The second proviso is important because otherwise Lord Hoffmann's formulation may be interpreted as suggesting that reasonableness is a sufficient ground for implying a term. (For the same reason, it would be wrong to treat Lord Steyn's statement in Equitable Life Assurance Society v Hyman [2002] 1 AC 408, 459 that a term will be implied if it is “essential to give effect to the reasonable expectations of the parties” as diluting the test of necessity. That is clear from what Lord Steyn said earlier on the same page, namely that “The legal test for the implication of … a term is … strict necessity”, which he described as a “stringent test”.)”

Further, per Chitty on Contract (33^rd edition):

Demand relies on the judgment of Leggat J (as he then was) in Yam Seng Pte

Demand alleges the following implied terms (RAPoC paragraph 5):

Demand alleges that each of these terms is to be implied as obvious and/or to give business efficacy to the agreement. Koch denies all of the implied terms.

There does not appear to be an allegation of breach of implied term (e); accordingly I say no more about it. Implied term (b) is relevant only to the Copycat Products claim and I will deal with it below in the section dealing with that claim. I deal in the immediately following sections with implied term (a) (price) and implied terms (c) and (d) (right to return of stock). These implied terms are central to The Book People claim.

A central issue in The Book People claim is whether Demand was entitled to call for the return of products during the lifetime of the agreement.

A related question arises as to ownership of stock. Demand’s alleged implied term (c) relates to return of stock to which it held title.

Demand alleges that the proper construction of the Supplier Returns clause is that it gives a right to return of stock, or at least that it assumes such a right. In the alternative, it alleges that, as a matter of obvious implication, implied terms (c) and (d) arise. Mr Fenwick says in his second statement (paragraph 14):

“it was obvious to both parties at the time of entering into the Distribution Agreement (and necessary for the proper functioning of the agreement) that Demand could request for its stock to be returned at any time, given that, quite simply, it was Demand’s stock which at the time of the request Demand had paid for in full for the manufacturing of.”

Koch argues that the Supplier Returns clause does not give a right to return of stock, but simply provides for the cost of returns in the circumstances where such rights are provided elsewhere in the agreement. It points to a number of circumstances in which Demand may be entitled to returns: 4.6, 4.7 and 4.11.

The Distribution Agreement makes limited express reference to return of stock to Demand. There is no express provision giving a general right to require stock to be returned. Such a right is a significant one: Koch argues, and I accept, that such a right would interfere with its right to earn commission by selling the Products. That would be an interference with a distributor’s earning ability in any distribution agreement, but is of particular impact in this case, where the cost of manufacturing the products is being met, in the first instance, by Koch. I am cautious to draw such a wide-ranging conclusion from the words “Should you require stock to be returned to you” at the beginning of the Supplier Returns clause. In my judgment, that language does not create a right to require return, nor does it necessarily assume a general right to return. It is, as Koch argues, consistent with a provision that applies in those circumstances where there is a right of return provided elsewhere in the agreement.

Clause 4.10 of the General Terms provides the most wide-ranging express right to require return, but that applies to a situation where a product is deleted or withdrawn from the market. It does not give rise to a general right to return.

It is clear that clause 6.4 of the General Terms permits Koch to retain stock on termination until the final account is settled. That is inconsistent with a general right to require return of stock. Demand argue that the right under clause 6.4 only arises on termination, and that prior to termination it has a right to require return.

It is true that clause 6.4 applies on termination, but the question is what does that clause tell us about the parties’ rights prior to termination. In my judgment, there would be no commercial justification for an arrangement where Demand’s right to require return of stock was more extensive during the period that Koch had an exclusive right to sell the stock than it would be after termination. Demand’s construction, and its alleged implied term, would allow Demand to defeat the purpose of clause 6.4 by serving sixty days’ notice and then calling for return of stock shortly prior to termination taking effect. That cannot have been the parties’ commercial intention: in effect it would give Demand the right to terminate Koch’s right to sell the stock on less than 60 days’ notice, and before expiry of the term, simply by requiring return of all its stock. Implied term (d) highlights this: the effect of that term is that once Demand gives notice, which can be at any time as long as it is at least 60 days before expiry of the fixed term, Koch would no longer be able to deal with stock save as to return it to Demand. Demand would therefore be able to require Koch to stop distributing its stock with immediate effect, and with no warning. This cannot have been the commercial intention of the parties, as it would defeat the purpose of a notice period.

Mr Fenwick’s evidence was that if Koch can keep stock until the final account has been completed Demand would not survive as it would not have stock to sell to maintain its cash flow (paragraphs 14-16, first statement). However, that is the effect of clause 6.4. The alleged implied terms are at odds with that clause. While I recognise the financial position that Demand found itself in, the task of the court is to ascertain the meaning of the agreement, not to protect Demand from what, in hindsight, may appear to have been a bad bargain.

In my judgment, a clause permitting Demand to require return of any stock it wishes during the lifetime of the Distribution Agreement is neither obvious nor necessary to give business efficacy to the agreement. Accordingly, I reject Demand’s argument on construction, and reject the alleged implied terms (c) and (d).

In its submissions, Demand focussed on the question of ownership of stock. Paragraph 29 of the closing submissions say, in respect of The Book People Stock, that by the time Demand called for return of stock on 19 February 2018 it had paid for and owned the stock, and accordingly had a right to call for it. I will consider briefly below the position in relation to ownership of stock. However, in my judgment Demand’s argument rests on a flawed assumption. Its submission that if it owned the stock “accordingly” it had the right to call for it assumes that it has an unfettered right to return of its property. As I have set out above, that is not right. Even if all the stock was owned by Demand, the effect of the Distribution Agreement is that Demand granted Koch rights to sell its property during the lifetime of the agreement, and the unfettered right to return that Demand alleges is an interference with Koch’s rights.

As I have explained above, Koch were responsible for sourcing and manufacturing products, and they financed manufacture, recouping the manufacturing costs from sales proceeds.

Clause 4.1 of the General Terms provides that if Koch has advanced any form of monies against the Products for manufacture or similar then the Products’ title passes to Koch upon payment of the said amount. Otherwise the Product(s) remain the property of the Supplier until Koch has sold the Product(s) and invoiced its customers.

In practice, almost all, if not all, stock was covered by clause 4.1, as Koch paid the manufacturing costs and is therefore to be taken as having “advanced monies” for manufacture. The starting point therefore is that at point of manufacture products belong to Koch.

Demand’s case is that once manufacturing costs have been paid, Demand has title in the stock. Koch submits that there is no express provision for Demand

It is a curious feature of the Distribution Agreement that almost nothing is said about the right to set prices for the products to which the agreement applies. Recognising this, Demand argues for an implied term that it was entitled to set the prices: implied term (a). Koch, on the contrary, argues that it was entitled to set the price.

The express terms relating to price are as follows:

These terms give only limited clues, if any, as to which party had the general right to set prices at which products were sold to customers.

As part of the factual matrix against which the agreement is to be construed, each party led evidence as to the nature of pricing in this business, and as to the way in which the agreement was operated in practice, and their understanding of the right to set prices.

As to the nature of pricing, the parties agreed that there were different prices to be considered.

Each side took me to documents which, on their account, supported their respective cases that Demand was involved in setting the price or that Koch was setting the prices unilaterally. I did not find these references helpful.

Demand’s case is that implied term (a) falls to be implied because it is obvious, or because it is necessary to give business efficacy to the Distribution Agreement. In my judgment the alleged implied term is neither obvious nor necessary.

Accordingly, in my judgment I reject Demand’s case that the Distribution Agreement falls to be construed so that Koch could only sell Products at prices set by Demand, and I reject the case that implied term (a) forms part of the Distribution Agreement.

Both parties rely on special arrangements made in 2016 in relation to stock sold to WH Smith. They disagree as to what those arrangements were. The dispute on this issue is relevant as when Demand served notice to terminate the Distribution Agreement Koch says a substantial sum was owed by Demand in relation to the manufacturing cost of stock sold to WH Smith. Demand denies that the sum was owing and alleges that stock which had been sold to WH Smith on consignment forms part of the “Missing Stock” that should have been returned to Demand.

Demand say that the final account shows £64,580.71 for the cost of manufacture of goods provided for sale by WH Smith (“the WH Smith Debited Sum”). RAPoC paragraph 23B pleads that the goods were neither sold by WH Smith nor returned, therefore should not have been debited.

There is no dispute that these goods were neither sold nor returned. They represent stock held in store by WH Smith that WH Smith destroyed after an agreed minimum sale period of 36 weeks. The terms upon which WH Smith bought the stock from Koch allowed WH Smith to do so. The issue is whether Koch or Demand must bear the cost of manufacture of the destroyed stock.

The normal position under the Distribution Agreement is that Demand is obliged to pay the manufacturing costs incurred by Koch. Those costs can be treated as a debit transaction by Koch and debited from the next available payment due to Demand.

Demand’s case is that there was a variation in these terms in relation to stock sold to WH Smith. RAPoC paragraph 23B.1 pleads that on 15 April 2016 Mr Fenwick and Mr Penhaligon (of Koch) reached terms, referred to as “the WH Smith Terms” which were “agreed orally by a teleconference of that day and/or in writing by exchange of emails also dated 15 April 2016”. The WH Smith Terms alleged are that:

Koch’s case (Re-Amended Defence paragraph 26B) is that it was agreed that unsold stock in WH Smith stores would be destroyed and stock in its distribution centre would be returned. It was agreed that Demand would pay the manufacturing cost when stock was sold, or when it was destroyed or returned upon the expiry of the sale period.

The relevant documents show the following:

Demand pleads an agreement that Demand would only pay manufacturing costs on stock returned in saleable condition; the pleaded case is that the agreement was made either orally on the telephone, or in emails on 15 April 2016. However:

Mr Cronin (paragraphs 64-69) says that there was an agreement by Demand that WH Smith would destroy unsold stock in store. He relies on the 13 April email above. Mr McNicol pointed to the 14 April emails [3/1581].

Mr Fenwick (second statement paragraph 37) said it was untrue that Demand agreed with WH Smith that WH Smith could destroy some out of date stock. He said he didn’t know when the agreement is alleged to have been made. If Koch did it, he said, it did it without reference to Demand.

In the email exchanges, set out above, between Ms Simpson, Mr Cronin and Mr Fenwick, destruction of stock in store was repeatedly referred to by WH Smith and Mr Cronin agreed to that. Mr Fenwick was cross examined about [3/1581], a document which he did not refer to in any of his three statements. It was put to him that he knew that stock in store was going to be destroyed. His answer was that he said that stock would need a certificate if it was destroyed, the email didn’t say that he agreed to it. He said that the certificate related to a separate point regarding royalty reporting and was nothing to do with an obligation to pay Koch’s manufacturing charges. His evidence was that if Koch wanted to permit WH Smith to destroy stock that was Koch’s business, but it did not follow from this that Demand must now pay Koch’s manufacturing charges for the destroyed stock. He said he would not have agreed to it if there was a risk Demand would have to pay manufacturing costs on units it didn’t sell or get back. In my judgment his answers were unpersuasive, and not a fair reading of the email exchange. It is implicit in the request for a certificate that Mr Fenwick accepted the position that the stock would be destroyed.

While it is true to say that was an arrangement between Koch and WH Smith, it is clear that Mr Fenwick knew these were the terms upon which WH Smith prepared to buy and agreed on that basis. He was included in the email from Mr Cronin to Ms Simpson on 14 June in which Mr Cronin agreed to Ms Simpson’s proposal to destroy stock remaining in store.

Koch also relied on emails between the parties and WH Smith in the Autumn of 2017 when WH Smith indicated that it intended to write off unsold items in store. There was an exchange of emails between Mr Cronin, Mr Fenwick and WH Smith in which Mr Fenwick sought to persuade WH Smith not to write off the stock, but to keep it on sale at a lower price. In summary:

Mr Fenwick was cross examined on these exchanges: it was put to him that Demand was only concerned not to write off stock because it had to pay the manufacturing cost of stock that was to be destroyed. It was put that if the stock had to be returned in a saleable condition for Demand to have to pay the manufacturing cost, then destruction would be of no concern to him. Mr Fenwick had no satisfactory explanation for this, beyond repeating that he wanted the stock back to sell on. He could not, when asked, give a reason to have sent a number of emails to persuade WH Smith not to write stock off because he would incur a cost of £40,000.

Those emails indicate that Mr Fenwick understood that a write off/destruction of stock in store by WH Smith would be to Demand’s financial disadvantage, as it would still have to meet the manufacturing cost of that stock.

In my judgment, on the basis of the exchanges of emails (and to a lesser extent the oral evidence of the witnesses) the terms as to WH Smith stock were as Koch alleges, and not as Demand alleges. That is to say manufacturing costs would be payable on sold stock when sold, and then after the minimum period manufacturing costs would be payable on unsold stock, whether that stock was returned from the WH Smith distribution centre, or destroyed in store:

Mr Fenwick’s evidence was that by the end of 2017 he had decided that he did not wish to renew the Distribution Agreement when it came to an end on 31 March 2018. On 19 January 2018 he served notice that the Distribution Agreement would terminate on 31 March 2018. The parties agree that notice was properly given pursuant to clause 6.1 of the Distribution Agreement and that the agreement did in fact terminate on 31 March 2018.

On 22 January 2018 Mr McNicol wrote to Mr Fenwick [1/124] acknowledging receipt of the notice to terminate, and drawing attention to clauses 4.1, 6.4 and 6.5 of the General Terms.

On or by 23 January 2018 Mr Fenwick proposed terms for a new agreement between the parties. In an email dated 26 January 2018 Mr McNicol responded to Mr Fenwick outlining the termination process and reacting to Mr Fenwick’s proposal. He stated that the contract requires the parties to settle accounts and for Koch to make Demand’s stock available for collection thereafter. He included a schedule which showed £92,600.45 as due to Koch. This figure comprised £44,142.99 due to Demand, less £136,743.44 said to be owed in respect of WH Smith deductions. He went on to explain that return of stock would be charged at £0.05 per unit, and that there was a “WH Smith” retro of £21,000. 68,000 units of stock were held in Koch’s warehouse. Therefore, he stated, a total of £117,680 was owed by Demand, against which would be offset sales of January, February and March, which he estimated between £60,000 and £81,600.

He went on in the same email to make a counter-proposal for the future trading relationship.

Mr Fenwick replied on 26 January 2018 saying “Your counter proposal is wholly unrealistic so we will proceed with the termination. You need to make our stock ready for collection w/c 2 April 2018.” In his email he went on to query the “WHS COGS” figures (sums relating to the cost of manufacturing stock supplied to WH Smith). He also agreed that Demand would need to pay

On 16 February 2018, Mr McNicol reiterated his position regarding WH Smith manufacturing costs, and his position that stock would not be returned until the account had been settled.

On 19 February 2018 Demand wrote to Koch to request the return of 50,000 units of stock held by Koch [1/132]. He did so purportedly pursuant to the

“Supplier Returns” provision of the Commercial Terms. That amounted to around 40% of the stock held by Koch at that time.

Mr Fenwick’s purpose in making the request (Second Witness Statement paragraph 14) was so that Demand would have stock to fulfil orders that it would receive from 2 April 2018 onwards. He was mindful of potential delays while the parties’ final account was reconciled. It appears from his statement that customers were already, in March, placing orders with Demand for the period after 31 March. Mr Fenwick says that the amount of stock subject to the delivery up application would allow Demand to fulfil orders, while allowing Koch to recoup sums due to it on reconciliation of accounts.

Koch did not return the requested stock.

On 2 March 2018 Demand’s solicitors, Keystone Law, wrote to Mr McNicol [1/134]:

On 4 March 2018 Demand became unable to access Koch’s online stock tool,

On 19 March 2018 [1/223] Koch’s solicitors, Shoosmiths, replied to Keystone’s letter of 2 March 2018. They disputed Keystone’s interpretation of the effect of clause 6.4, and stated that Koch was exercising an equitable right to set off the liquidated sums owed to Demand pursuant to recent invoices against the total sums owed to Koch pursuant to the Agreement, including sums that are in relation to the cost of manufacturing goods held on consignment by WH Smith as well as the normal trading account.

On 20 March 2018 Demand issued an application for interim delivery up of the 50,000 units of stock. The application papers were emailed to Shoosmiths at 16.42 on 20 March and were served at Koch’s registered office at 19.34 the same day. The application was listed for hearing on 26 March 2018.

The stock at that time held by Koch was the entirety of Demand’s trading stock, apart from a small amount of stock that Koch had not taken at the beginning of the Distribution Agreement. Mr Fenwick’s evidence (second statement para 19) was that the stock held by Koch (or on consignment to retailers) cost £228,000 to manufacture and had a retail value of £495,000.

On 23 March the parties agreed terms of a consent order (“the Consent

Schedule 1 was signed by Sharon Mew, Finance Manager of Koch. She dated, and timed, her signature as “23 March 2018 16:32”. The key provisions of the undertaking were as follows:

My understanding of the undertaking is that it would have permitted Koch to sell stock until 29 March 2018: the Stock which is to be delivered up comprises those products which are unsold as at that date. Paragraph 4 is to be read subject to Paragraph 1.

In the meantime, and unbeknown to Demand until 28 March 2018, Koch sold approximately 19,000 units of stock to The Book People.

Mr McNicol’s evidence (statement paragraph 43) was that The Book People sale allowed Koch to recover its manufacturing costs and limited the scope for Demand to go into insolvency and escape its obligation to account for manufacturing costs.

Mr Cronin’s evidence (first statement paragraph 26-27) is that he was asked by Mr McNicol to conclude any sales he could to minimise the loss to Koch/Demand arising from the unpaid manufacturing costs that Koch had advanced.

In cross examination he said that The Book People and Koch shared the same

Mr Cronin said that he was aware that there were legal exchanges but did not know exactly what. He was reluctant to accept that The Book People Sale was put through urgently, but in my judgment it is clear that it was. Mr Cronin said that he was asked to sell stock to recoup the money Koch was owed in respect of the manufacturing costs of the WH Smith stock, and I accept that. It seems clear to me that Mr McNicol’s desire was to recoup as much as possible before Koch became bound to stop selling and deliver up unsold stock to Demand.

It is clear that, faced with the prospect of a court application for delivery up of stock, Koch acted as quickly as it could to make a sale of stock, and that it deliberately tried to keep that from Demand by excluding Demand from KMHub, and by asking The Book People not to communicate with Demand.

Selling stock when there was a live issue as to whether it was entitled to retain or sell stock, and when there was a pending application for delivery up, was a risky strategy. Koch may be regarded as sailing very close to the wind. It was put to Mr McNicol variously that Koch’s actions were “sharp” or “dishonest”. But the real question is whether, as a matter of contract, the terms of the Distribution Agreement permitted Koch to carry on selling products until expiry of the agreement, or until the undertaking in the Consent Order came into effect.

Demand’s case is that the stock sold to The Book People was sold at drastically reduced prices, well below the prices set by Demand, and well below the prices previously obtained by Koch for the same stock. The prices, according to Demand, represented a reduction of some 70% of the trade price.

Demand does not identify prices that were set for the stock sold to The Book People. Paragraph 29 of the Particulars of Claim originally claimed the difference between the prices at which Koch sold the stock and “the Set Price” (defined as the price set by Demand pursuant to its implied term as to price – paragraph 5(a)). However, in the Re-Amended Particulars of Claim reference to “Set Price” is deleted from paragraph 29(a) and replaced with the “average selling price achieved by the Defendant” for the stock.

Mr Cronin (first statement paragraphs 31-33) disputed that The Book People, or any other customer would have paid more for the volume of stock sold. The sale was of 18,699 units, compared to 15,000 of the same gift sets sold in the previous seven months. Mr Cronin pointed to volume sales to The Book People at lower prices than £3.20 per unit: £2.80 for 6,000 camper van units in September 2016 and £2.80 for 20,000 campervan units in February 2017. Mr Fenwick was aware of the pricing in October 2016.

My conclusions on The Book People Sale are as follows:

It follows therefore that Koch did not act in breach of the Distribution Agreement in making The Book People Sale.

Nor did the sale amount to a conversion. I accept Ms Bayliss’ statement of the law at paragraph 21 of her Closing Submissions. Conversion, as she says, consists of dealing with property inconsistent with another’s right. Failure to return on demand may constitute an act of conversion. A person who consigns goods has a right to give directions as to how the goods should be disposed of. The application of these general principles to this case depends on the scope of Koch’s rights in respect of the goods consigned under the Distribution Agreement. Koch dealt with The Book People Stock in a manner consistent with its contractual rights and there was therefore no conversion.

Demand also claims that Koch did not make the monthly payments that it was obliged to make in the period between notice and termination:

Koch accepts that under the Commercial Terms it was obliged to pay Demand sales revenue generated within 45 days of the end of the calendar month when sales were reported. However, Koch argues that it was entitled to debit manufacturing costs from sales invoices 75 days after they had been incurred. I do not understand Demand to dispute that. The dispute is whether there were in fact manufacturing costs outstanding at the time of the February and March monthly payments.

Koch’s case is that no payments were due between December 2017 and March 2018 as the WH Smith manufacturing sums were due and owing, and those sums exceeded the amount that would otherwise be due. Demand argues that WH Smith costs were not owing because of the WH Smith Terms, which meant that manufacturing costs were not payable unless and until stock was sold or returned in saleable condition by WH Smith to Koch. I have rejected Demand’s case on the WH Smith Terms. It follows that the manufacturing costs in respect of WH Smith stock were owing. The amount owed exceeded the monthly payments that would otherwise have been due.

In my judgment there is no breach of contract on Koch’s part in not making monthly payments in February and March 2018 and the claim in respect of those monthly payments fails.

After the Consent Order had been made Koch delivered up stock to Demand.

In her oral evidence in chief Ms Barclay changed her evidence from paragraph 5 of her first witness statement, explaining that the correct figure for the Missing Stock was 2147, not 1,743 as referred to there. 2147 is what the document ([1/578] exhibited to her first statement shows. I accept Ms Barclay’s evidence on that, and she was not challenged on it in any event.

Koch does not dispute that these units were not returned. It gives no explanation as to the whereabouts of the units, or as to why they were not delivered up. It does not say that the units were in fact sold. Accordingly, in the absence of evidence from Koch, I take the documents at face value. I find that the Missing Stock units were in Koch’s possession as at 21 March 2018 and have not been returned.

Ms Barclay’s schedule of the Missing Stock shows Mr Fenwick calculated the value of the Missing Stock to be £10,930.64. That is based on an estimated value that could have been achieved by selling the stock taking into account its age and sales potential. The manufacturing value of the Missing Stock is £3,371.48 (Ms Barclay’s Schedule [1/578]).

Koch’s defence to this claim is to rely on clause 4.5 of the General Terms.

Koch argues that clause 4.5 applies to the Missing Stock. It submitted that on a natural reading of clause 4.5 it applies to discrepancies of warehouse stock at

I am not satisfied that 4.5 provides a defence to Koch in these circumstances.

I also accept Demand’s argument that if clause 4.5 were to apply, Mr

In my judgment, Koch is liable to account for the Missing Stock, and that should be taken into account in the final account. However:

In accounting for the Missing Stock I accept Demand’s case that it is entitled to the market value of the stock and is not limited to manufacturing cost (which Koch argued was the effect of clause 4.5). As to that value, Koch offered no evidence, and Mr McNicol’s evidence in cross-examination was that clause 4.5 meant that Koch was not liable for the Missing Stock and therefore its value was not material to Koch’s case. Having failed in that argument, Koch offers no good basis to depart from Demand’s valuation, which I accept, in the sum of £10,930.64.

The “Further Missing Stock” is 35,484 units that Demand alleges have not been returned. Demand says that the failure to return these units became clear when Koch produced the draft final account in October 2018. The failure to return is alleged to be a breach of contract and/or a conversion, but not (in contrast to the Missing Stock) a breach of the Consent Order. Demand claims the total sales value, which it puts at £105,124.87.

Koch’s case is that part of this stock was stock destroyed by WH Smith. I accept Koch’s case that this is in fact what happened, and I have also accepted Koch’s case that Demand had agreed WH Smith’s terms in this regard. There can be no claim in respect of the WH Smith portion of the Further Missing Stock. I will invite the parties to agree on the WH Smith portion of the Missing Stock before making a final order following judgment and will hear further submissions if necessary.

Koch say that some of the Further Missing Stock is held by Amazon on Demand’s behalf, and Koch presumed that Demand would take over this stock at the end of the Distribution Agreement. Mr Fenwick’s evidence (third statement paragraph 40, confirmed in cross-examination) is that Amazon have said that it does not have this stock. Mr Fenwick points out that the stock is showing as in Koch’s warehouse in an October 2018 stock report. Koch has produced no evidence to substantiate Mr McNicol’s assertion. In any event, the suggestion that it is Demand’s obligation to retrieve the stock from Amazon at the end of the agreement, rather than Koch’s obligation to return it, is at odds with the terms of the Distribution Agreement.

As to the remaining units, Koch has led no affirmative case as to what has happened to the stock. Mr McNicol deals very briefly with stock consigned to Wowudu, Amazon, Gardners, HMV and The Hut at paragraph 134-135. Beyond saying The Hut stock is available for collection, he offers little explanation as to the stock discrepancies and relies on clause 4.5 of the General Terms.

I have rejected Koch’s argument as to clause 4.5 of the General Terms. In my judgment Koch are liable to account for the Further Missing Stock (save for the WH Smith stock) and either to deliver it up or account for it. Having rejected Koch’s argument as to the application of clause 4.5 I accept Demand’s case as to the applicability of the market value of the stock, and as to the quantum of that value. Koch offered no real evidence as to an alternative value.

However, as with the Missing Stock, in my judgment the proper analysis is that Koch are not obliged to return the Further Missing Stock pending the final account. In preparing that account they will have to give credit for the Further Missing Stock, less that part of the Further Missing Stock which is attributable to the WH Smith issue.

One of the construction sets distributed by Koch was a “Flying Scotsman” set. Demand was able to produce and sell the Flying Scotsman set as it had entered into a licensing agreement with SCMG Enterprises Ltd (the SCMG Licence Agreement).

The Flying Scotsman sets formed part of The Book People Sale. I have dealt with The Book People Sale above. I have rejected Demand’s claim that Koch sold The Book People Stock at a price less than that at which it was entitled to sell that stock. Demand make a further specific claim in relation to the Flying Scotsman set. It says that it had agreed with SCMG Ltd. that the retail price permitted for the sets would not be less than £12.99, and that RRP should have generated a trade price of £10.83. The sets were sold to The Book People at £3.20.

I am not satisfied that Koch was obliged to sell the Flying Scotsman at no less than a minimum price set by reference to the SCMG Licence Agreement.

Accordingly, I do not accept that Koch acted in breach of contract in selling the Flying Scotsman sets, as part of The Book People Stock, at the sale price of £3.20. Nor did it commit the tort of conversion. I find no basis upon which Koch is liable to indemnify Demand in respect of sums Demand may have had to pay to SCMG. Demand’s claim, for £634.27, is rejected.

Subsequently Koch produced no further monthly account for the period after January 2018 until 4 October 2018 when it produced a final account. That final account was revised on 13 February 2019. In it, Koch shows an amount of £14,820.02 as owing from Demand to Koch. Demand dispute this figure and claim that in fact Koch owe Demand £55,299.72 (leaving aside matters of damages for the claims in these proceedings). The difference is due to two items:

Demand’s claim that it is not obliged to pay the WH Smith Debited Sum depends upon the WH Smith Terms. It claims that it was not obliged to pay for the manufacture of stock which was neither sold by WH Smith, nor returned in a saleable condition. I have rejected Demand’s case that the WH Smith Terms applied and found that Demand knew and agreed that WH Smith would destroy unsold stock in store. In the absence of special terms such as the WH Smith Terms Demand is obliged to pay manufacturing costs of products manufactured under the Distribution Agreement. Koch was entitled to deduct the manufacturing cost from the account, and I find that the WH Smith Debited Sum was properly debited.

The Further Debited sum is said by Koch to have been debited in respect of credits to WH Smith.

Demand accept that WH Smith were entitled to a 5% retro commission on sales but claim that all such retro commission had been paid by the end of the agreement.

The only witness on behalf of Koch to deal with the Further Debited Sum is Mr Cronin. In his second statement paragraphs 7.5 and 30-31 he speaks to the existence of the arrangement for a 5% retrospective credit as a discount to WH Smith on stock sold to them. He does not say anything about the specifics of the particular credit to which the Further Debited Sum relates.

However, when he gave evidence in chief Mr Cronin changed this evidence. He said that the agreed retrospective discount was 10%. That change in his evidence is at odds with Koch’s pleaded case (Amended Defence paragraph 26B(d)) which refers to a 5% discount. It is also at odds with the contemporaneous documents: Mr Cronin’s 19 May 2016 email to Ms Simpson refers to invoicing WH Smith at 45% and allowing a 5% retro. The reference to 45% is, I understand from Mr Cronin’s evidence, a reference to 45% of RRP.

Mr Cronin in his oral evidence said that the arrangement was that Koch would invoice at 50% and the retro would be 10%. On his evidence, the net result would be the same: i.e. the end result would be WH Smith would pay 40%. That may be right, but the late change in evidence to a position that is not supported by the documents leads me to conclude that Mr Cronin does not have a clear recollection or understanding of the arrangements in relation to the retro credit agreement. In addition, he does not give any evidence as to the circumstances of the particular credit said to give rise to the Further Debited Sum. No other witness deals with this on Koch’s behalf.

In the circumstances, I find that no proper basis has been shown for the Further Debited Sum, and Koch is not entitled to debit that amount in the Final Account.

In or around the summer of 2017 Koch began to sell its own construction sets. Demand claims that they were “strikingly similar” to Demand’s own construction sets. Demand refers to twelve construction sets which it labels “Copycat Products”.

One of those sets, the Hawker Hurricane set is the subject of a separate registered design claim that I transferred to IPEC on Koch’s application at the beginning of the trial. Demand claims that Koch’s Hawker Hurricane infringes Demand’s design right in relation to its Spitfire set. Having transferred that claim, I will say no more about it here.

Demand’s claim about the Copycat Products raises two distinct grounds:

The RAPoC paragraph 5(b) alleges an implied term that during the term of the Distribution Agreement Koch would not produce and offer for sale to customers of Demand products that were substantially similar to those that Koch had agreed to sell on behalf of Demand.

Demand’s claim did not focus on implied term (b); the thrust of the claim in relation to Copycat Products was breach of confidence:

There is no express term in the Distribution Agreement limiting Koch’s ability to sell products that compete with, or are similar to, those of Demand. It would have been open to the parties to negotiate such a term, but they did not do so.

Koch dispute the “standard practice” alleged by Demand, and there is no evidence as to whether there is such a practice or not, save for the say so of the parties. On the evidence, I cannot find that there was such a standard practice. I do not in any event understand the basis of Mr Fenwick’s distinction between a distributor selling a third party’s competing products (permissible) and a distributor selling its own competing products (impermissible).

I accept Koch’s submission that there is no general implication as a matter of law that exclusive distributors must not compete with their suppliers. Neither party took me to any authority to that effect.

In my judgment such a term is neither obvious, nor implied as a matter of business efficacy.

I turn then to the claim for breach of confidence. Clause 8 of the General Terms provides that the parties each undertake “to remain silent about all business and operational matters that become known to them within the framework of this Agreement, in particular stock or sales reports, statistics, customer lists etc.”

Demand lists six categories of information it alleges to be confidential at RAPoC 12. Apart from (e), design and packaging specification, the other categories are all commercial data: such as customer lists, sale and manufacturing data.

The design and packaging information cannot be confidential once a particular product is on the market, but I accept that it may be confidential before the product is launched. Similarly, the identity of a licence partner will be public knowledge once a licensed product is on the market; it may be confidential before launch.

I accept that customer lists, sales data, manufacturing data and pricing may be confidential in nature and may be of use to a competitor. Koch’s evidence, which I did not understand to be challenged, was that RRP and trade prices were published at spring and autumn trade fairs. Those prices may be confidential until such fairs. Discounted prices and manufacturing prices remained confidential.

There is however a fundamental difficulty as to whose information this is, and what is the scope of the duty in relation to this information.

The contractual duty in clause 8:

Demand relies in the alternative on an equitable or tortious duty of confidence. Demand relies on the well-known principles for such a duty derived from Attorney General v Guardian Newspapers No. 2 [1990] 1 AC 1091 at 281B.

The alternative formulation of the claim does not assist Demand. I accept that in a suitable case a duty of confidence in equity may arise alongside a contractual duty of confidence and may differ in scope from a contractual duty. In this case, the question of the meaning and scope of the contractual duty is highly relevant to the questions (a) whether the information is

Demand further relied on a passage from Gurry on Breach of Confidence (2^nd ed) at 9.37-9.38. That passage, in a chapter entitled “Common Classes of Obligation”, deals with distribution agreements. The passage is largely descriptive of common factual situations rather than a statement of law. I accept the proposition that, in the absence of an express contractual term as to confidentiality, the court may hold that confidential information disclosed by one party to the other was disclosed for the purpose of the agreement only. The case referred to, where technical drawings were disclosed to a distributor, is an illustration of that proposition. However, everything depends upon the circumstances. In contrast to the cases to which Gurry refers, (a) the significant information in this case (e.g. sales and manufacturing data) was not disclosed by Demand, but generated by both parties (and in most instances by Koch) in the performance of the agreement; (b) this is not a case where there were no terms as to use of information: the parties had expressly agreed to clause 8, which provides Demand with more limited rights in relation to that information.

I am not, in any event, persuaded that Koch has used any of this information in manufacturing and selling the Copycat Products.

Demand submits (relying on Snell’s Equity 33^rd edition at 9.18 and Wade v British Sky Broadcasting Ltd. [2014] EWHC 634 at para 59) that where there are significant similarities between the result of A’s work and the confidential information there is a strong inference that the work done is a result of breach of confidence. The burden of proof then passes to A to establish independent derivation.

The passage from Snell is drawn from Wade. In Wade Birss J at paragraph 59 summarised principles well established in copyright cases. He said the legal burden remained on the claimant throughout. The claimant may raise a strong inference that copying must have taken place by pointing to significant similarities between the claimant’s work and the defendant’s work and the existence of an opportunity for the defendant to copy. Such an inference may shift the evidential burden to a defendant to rebut the inference.

Birss J said “The logic is capable of applying in some breach of confidence cases”. Having considered the facts of the particular case (which concerned a proposal for a new television programme) Birss J considered that the similarities in the parties’ programmes meant that an inference of copying had

“some substance but it is not overwhelming”. The inference was not strong enough to leave him in any doubt as to the defendant’s evidence, which he accepted, of independent derivation.

Wade demonstrates that whether an inference arises, and whether such inference is rebutted, depends on the evidence. In Wadethe claimants had shared a programme idea with the defendant; the defendant rejected it, but then went on to produce its own programme which the claimants claimed was strikingly similar in its elements. The information alleged to have been misused was a PowerPoint deck setting out a proposal for a television programme. The judge found the deck itself was confidential, but ultimately did not make a finding as to whether individual ideas within it were confidential. He found that the defendant’s programme idea had been reached independently. The claimants’ case was based on the similarity of the two “products”: that is to say the two programme formats. In the circumstances where the claimants had given the defendant their ideas for their programme one can see the relevance of considering whether the two programmes were sufficiently similar to call for an explanation of whether the defendant’s idea had been reached independently.

In my judgment, the present case is very different. Similarity between

Demand does not argue that the concept of the construction sets was confidential, nor (apart from in the transferred registered design claim) does it claim confidentiality in the particular design of the sets. Nor could it have made such arguments. There are other similar construction sets on the market, some made by well known brands. The evidence indicates that some of Demand’s own sets were designed by reference to the sets of competitors publicly available in the market. Mr Fenwick’s own evidence (second statement paragraph 43) is that he suggested the factory use a set previously sold by Meccano as a guide to what Demand wanted for its Spitfire

The confidential information upon which Demand relies is commercial information: customer lists, price lists, and sales data. In my judgment any similarity in product does not give rise to an inference that such data was used by Koch. Nothing in the evidence as to the nature of the products, nor as to the way in which they were sold and marketed, indicates that Koch had made use of customer, price or sales data.

Koch argues that Demand’s gifting business commenced in 2016, yet Koch indicated it intended to produce its own gifting products (including construction sets) in August 2016. In fact the email upon which it relies is dated 27 September 2016 [2/827], but the point remains valid: at the time

In conclusion on the Copycat Products breach of confidence issue:

In this section I set out a summary of my conclusions, by reference primarily to Demand’s List of Issues.

Did Koch breach the express or implied terms of the Distribution Agreement by failing to return The Book People Stock as requested by Demand?

Did Koch breach the express or implied terms of the Distribution Agreement by selling The Book People Stock at a substantial discount without notice to Demand and without its agreement?

Did Koch commit the tort of conversion by failing to return The Book People Stock and/or by selling the stock at a substantial discount?

Did Koch breach the express and/or implied terms of the Distribution Agreement and/or commit the tort of conversion and/or breach the terms of the Consent Order by failing to return the Missing Stock?

Did Koch breach the express and/or implied terms of the Distribution Agreement and/or commit the tort of conversion by failing to return the Further Missing Stock?

Did Koch breach the terms of the Distribution Agreement by failure to make the monthly payments required under the Distribution Agreement?

What losses were caused to Demand by the above breaches and/or torts?

Did Koch breach the express and/or implied terms of the Distribution Agreement, and/or its duty of confidence to Demand in manufacturing and selling the Copycat Products?

Is Koch obliged to indemnify Demand for losses incurred by it in respect of the Flying Scotsman Stock including in respect of its obligations under the SCMG Licence Agreement?

Did Koch breach the WH Smith Terms and/or the express and/or implied terms of the Distribution Agreement in respect of the WH Smith Stock?

Was the WH Smith Debited Sum lawfully debited by Koch in the final account?

Was the Further Debited Sum lawfully debited by Koch in the final account?

What is the correct quantum of the Final Account sum?