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Absence of Formality in Toy Distribution Contract Leads Straight to Court

Although the risks involved in oral contracts are common knowledge in the business community, it is amazing how often professionally drafted written agreements are unwisely dispensed with. In one case, the absence of formality in a multi-million-pound toy distribution deal led to a costly and unnecessary High Court dispute.

A Chinese manufacturer (company A) had employed a UK company (company B) to distribute an enormously successful robotic toy that achieved annual sales of £25 million in Britain before the craze faded. Company B had granted company A an option to buy one million of its shares at a fixed price on condition that the distribution agreement continued in existence when the option was exercised.

Company A purported to take up the option and launched proceedings against company B after the latter argued that it had not been validly exercised. In ruling on the case, the Court lamented that, although the option was in the form of a deed, the underlying distribution agreement had never been reduced to writing.

Ruling in favour of company B, the Court found that, by the time the option was purportedly exercised, the previous course of conduct between the companies had ceased and the distribution agreement was no longer extant. The option had thus lapsed and company B was not obliged to issue and allot shares to company A.