Cepia HK Ltd v The Character Group Plc [2016] EWHC 3133 (Comm) (08 December 2016)

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Cite as: [2016] EWHC 3133 (Comm)

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		Neutral Citation Number: [2016] EWHC 3133 (Comm)
		Case No: CL-2015-000166

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT

Royal Courts of Justice
Rolls Building, 7 Rolls Buildings
Fetter Lane, London EC4A 1NL

08/12/2016

B e f o r e :

MR. JUSTICE TEARE
____________________

Between:

	CEPIA HK LIMITED	Claimant
	- and -
	THE CHARACTER GROUP PLC	Defendant

____________________

Colin West (instructed by Shoosmiths LLP) for the Claimant
David Mumford QC and James Kinman (instructed by Duane Morris) for the Defendant

Hearing dates: 15-17 & 21 November 2016
____________________

HTML VERSION OF JUDGMENT APPROVED
____________________

Crown Copyright ©

Mr. Justice Teare :

This is the trial of an action about toys. The Claimant is a Hong Kong company, part of the Cepia group of companies which designs, manufactures and sells children's toys. The Defendant is a UK company, part of the Character group of companies which distributes children's toys and games. The two companies did business together and enjoyed great success with, in particular, a toy known as Zhu Zhu Pets. They are a plush robotic hamster which can act in "an intelligent playful manner" either in the "nurturing" mode which involves the toy making hamster-like noises or in the "adventure" mode in whey explore their habitat and respond to various stimuli. ("Plush" denotes a high quality finish to a toy animal's fur.) When launched in the United States for Christmas 2008 Zhu Zhu Pets were the "must-have" toy of the year. They enjoyed similar success in the UK. In 2011 Time magazine included Zhu Zhu Pets in a list of the "100 Greatest Toys of All Time". But by 2012 their popularity had waned.

The Defendant distributed Zhu Zhu Pets in the UK. By 2010 Zhu Zhu Pets accounted for 30% of the Defendant's sales revenue. In the period 2009-2012 they generated something in the region of £25 million per annum of turnover for the Defendant. The Claimant, in the shape of its sole shareholder and principal Mr. James Russell Hornsby (described by the Defendant's witnesses as a prolific and talented designer of toys), wished to participate in the Defendant's success over and above the price paid by the Defendant to the Claimant for the product. He sought an equity participation in the Defendant. As a result in early July 2010 the parties reached an agreement pursuant to which the Claimant was given an option to purchase up to 1 million shares in the Defendant at a price of £1.225 per share. That option was expressed in a deed dated 23 July 2010 to be conditional upon "the Distribution Agreement" having continued in existence from the date of the Option Agreement until the date of exercise of the Option. The "Distribution Agreement" was defined as being "the exclusive distribution agreement between [the Claimant] and [the Defendant] current at the date hereof pursuant to which [the Defendant] acts as [the Claimant's] exclusive distributor in relation to all of its toy and related products from time in the territories of the United Kingdom of Great Britain and Northern Ireland and Ireland".

When the Claimant purported to exercise the Option on 22 July 2015 the Defendant said that the Distribution Agreement had not continued in existence and so the exercise of the option was invalid. The Claimant responded by commencing these proceedings seeking an order that the shares be issued to it. Unfortunately for the parties, although there was much business between the parties involving the distribution of toys, it is common ground that there never was a distribution agreement in writing. As a result the parties have different views of what the "Distribution Agreement" was and whether it continued in existence. Those are the principal matters which the court must resolve. In order to do so it is necessary, first, to consider the relationship between the parties prior to July 2010 and, second, a meeting or meetings in July 2010 between the parties in Shenzhen, China, which culminated in the Option Agreement dated 23 July 2010.

The relationship between the parties prior to July 2010

There is no dispute between the parties that what in fact happened prior to July 2010 was that the Claimant invited the Defendant and other distributors to bid for the right to distribute the Claimant's products in the UK and Ireland. In this way the Defendant, having offered acceptable terms as to price and quantity, secured the right to distribute a number of toys, in particular, an illuminated toy bear called "Glo-E Bear" and a doll called "TIM". The right to distribute "Zhu Zhu Pets" was also obtained in this way. There is also no dispute that once a right to distribute a product was secured that right was exclusive for the range of toy in question and for the territory in question. However, save to the extent that the parties agreed to sell and distribute particular quantities of product there was nothing to stop the Claimant from terminating its relationship with the Defendant.

Mr. Hornsby described the Defendant as having had a preferred relationship with the Claimant. An invitation to bid was typically preceded by sight of the product either at the Claimant's premises or at a toy fair or at both. Following a bid the Defendant might be provided with "inside information" as to how its bid might be improved. There might also be an "element of negotiation" between the parties before a bid was accepted.

If there is a dispute between the parties as to their relationship prior to July 2010 it is that Mr. Hornsby said in his evidence that "we would always give [the Defendant] a right of first refusal" in relation to any new products whereas Mr. King, a director of the Defendant, does not accept that the Defendant had a right of first refusal, though he accepts that the Defendant might have been the favourite in pitching for any new product range. If the suggestion is that there was a contractual right of first refusal I am unable to accept that suggestion. No attempt was made by Mr. Hornsby or by Mr. West, counsel for the Claimant, to identify the origin of any such suggested right. Mr. Hornsby's evidence amounted to no more than saying that as new product lines were developed they would be shown to the Defendant who would bid for such products as it wished to distribute. When cross-examined Mr. Hornsby described the Defendant as having a preferred relationship and being treated more favourably than other bidders but nothing he said identified a contractual right of first refusal or anything which could support such a right. Mr. King gave (unchallenged) evidence that he did not seek from Mr. Hornsby a commitment that the Defendant would be given a right of first refusal and that Mr. Hornsby did not give any such commitment.

The meeting in Shenzhen, China between 7 and 9 July 2010

This meeting was arranged because of Mr. Hornsby's request for a share in the equity of the Defendant. The request was not immediately agreed and so on 31 May 2010 Mr. Hornsby gave notice of the Claimant's intention "to make a distribution change in the UK for Spring 2011". This caused some concern at the Defendant and on 1 June 2010 Mr. King suggested that he visit Mr. Hornsby in the US or China "to go through the share option issue". On 25 June 2010 the board of the Defendant, having been informed that the Claimant was "looking for share options" felt that since the Claimant was an "important supplier" and came out with "winning products" a share option should be considered. The board authorised Mr. King "to negotiate it on his forthcoming trip to the Far East." That was the context in which the meeting took place.

It is common ground that the meeting or meetings took place in Shenzhen in China between 7 and 9 July 2010. Mr. Hornsby's account of this meeting in his witness statement is limited. He merely says that he and Mr. King "discussed the possibility of [the Defendant] granting [the Claimant] the right to purchase shares in [the Defendant] group." By contrast Mr. King states in his account that he offered "an option over one million shares in exchange for a new exclusive distribution deal for all of the Claimant's products. I do not recall the precise words I said, but there is no doubt in my mind that I referred to [the Defendant] having 'exclusive distribution of all your product lines' or words to that effect, and that we had to have it for the options to be valid." Although the offer was subject to Board approval and to the terms being written up in a manner deemed satisfactory to the Board and its advisers Mr. King said "we shook hands on that deal".

When cross-examined Mr. Hornsby gave this account of the meeting. He said that in addition to discussing personal matters (they were friends) Mr. King said that he wanted Mr. Hornsby to have an option to purchase shares in the Defendant. Mr. Hornsby described the object in offering that option as being to "tether" the Claimant to the Defendant in relation to the distribution of Zhu Zhu Pets. Mr. Hornsby gave evidence that the exercise of the option was conditional on the Defendant continuing to be the exclusive distributor in the UK and Ireland of Zhu Zhu Pets, but not on being the exclusive distributor of all products of the Claimant. There was no discussion of "tethering" the Claimant to the Defendant in relation to the distribution of all products of the Claimant. That would be impossible, he said, because he did not know what those products would be and there would have to be a discussion as to terms. He accepted that there was a shaking of hands on the deal.

It is necessary to make findings as to what was agreed in Shenzhen because it is the Defendant's case that the "distribution agreement" referred to in the Option Agreement was a reference to an agreement or understanding reached in Shenzhen.

The witnesses

Mr. Hornsby gave the impression of wishing to assist the court with his recollection of events. However, he was also keen to see where the questions which were put to him were going and that in turn gave the impression that he wished to phrase his answers in a manner which assisted his case. On occasion he appeared to be evasive or to be unwilling to answer a question directly. There are therefore reasons for being cautious when considering his evidence, albeit that on other occasions he gave answers which did not assist his case and therefore suggested that, at any rate on those occasions, he was being frank in his answers. In considering the reliability of his evidence it is necessary to bear in mind certain matters. First, he was giving evidence in 2016 of a meeting in 2010 in circumstances where he kept no notes of the meeting or of what was agreed and where he sent no substantive contemporaneous emails which recorded his understanding of what had been agreed at the meeting. Second, it was particularly striking that he did not make any adverse comment in any contemporaneous emails as to Mr. King's contemporaneous attempts to record what was agreed in the meeting. As I will shortly mention an attachment to one such email referred to the option being conditional on the Defendant being the "exclusive distributor of the ZhuZhu branded products and all derivatives to the time of exercise of the option" whilst the draft option agreement referred to the distribution agreement continuing to exist "in respect of all of [the Claimant's] toy and related products". If Mr. Hornsby's recollection of the meeting was accurate one would have expected him to have made some comment on the difference between these two formulations. His failure to do so suggested to me that whilst he was anxious to ensure that he secured the right to an equity interest in the Defendant he paid relatively little attention to what he had been asked to give in return for that right. I gained the impression that he preferred to do business on a handshake rather than on the basis of a detailed discussion of terms. For those reasons I concluded that his recollection now of what had been agreed in 2010 may not be reliable and that it would be safer (as it so often is) to make findings on the basis of what was said in the contemporaneous documents and on the probabilities.

Mr. King also gave the impression of wishing to assist the court with his recollection of events, though at times he was keen to argue the Defendant's case rather than simply give his recollection. That suggested that his recollection owed something to reconstruction. Unlike Mr. Hornsby, Mr. King did send contemporaneous emails referring to the meeting and they must, having regard to the passage of time, be regarded, along with the probabilities, as being a surer guide to what was agreed than his recollection.

The contemporaneous exchanges

The first email after the meeting was sent by Mr. King on 19 July 2010 which must have been a few days after his return to England. He referred to an attached draft letter which he said "reflects what we discussed". He said:

"As you can see, I have set it out with the condition that the option is only valid if we continue to work together as I discussed with you."

This confirms that Mr. King and Mr. Hornsby did discuss making the exercise of the option conditional.

The draft letter expressed the condition in this way:

"Option exercise will be conditional on Character Options being Cepia's exclusive distributor of the ZhuZhu branded products and all derivatives to the time of exercise of the option ……."

The reference to Zhu Zhu branded products tends to support Mr. Hornsby's recollection of the meeting. That Mr. Hornsby and Mr. King discussed Zhu Zhu Pets is also consistent with the probabilities. They were a great commercial success and were the reason why Mr. Hornsby wanted a share in the equity of the Defendant. It is therefore not surprising that Mr. King's draft press release in the same email also referred to the development of the Zhu Zhu Pets range.

Mr. King asked Mr. Hornsby whether he had any problems with what he had written and Mr. Hornsby replied that he did not ("I do not wish to create any problems for you").

On 20 July Mr. King sent a further email in which he said:

"I have no doubt that we shall continue to do a great job and am equally sure that this option does not constrict your ability to move on if you believe that we are not doing that job! That is why I have worded it loosely and have not tried to create a distribution contract but merely implied that there is one in force and that it would have to remain in force for the options to work."

The first sentence makes clear that what had been agreed did not prevent the Claimant from engaging another distributor if the Claimant was dissatisfied with the Defendant. That indicates that what had been agreed was not a distribution agreement in the conventional sense which committed the Claimant to supply and the Defendant to purchase, market and distribute the Claimants' products for a defined period of time. Consistently with that indication Mr. King stated that he had not tried to create a distribution contract. The reference to "implying" that one was in force and "would have to remain in force for the options to work" is curious and difficult to make sense of in strict legal terms but no doubt reflected his understanding that the share option could only be exercised if a certain state of affairs, the "implied" contract, remained in existence.

On 21 July Mr. King emailed CY Securities who were advising the Defendant on matters connected with their listing on the AIM market. They were the Defendant's nominated adviser or NOMAD. The email was copied to the Defendant's lawyers who had been instructed to draft the option agreement. It is necessary to set out the whole of this email:

"By way of background I should tell you that Cepia, the supplier of ZhuZhu Pets, is expected to supply around 30% of our sales volume for this calendar year.

We have a long history of trading with this supplier over many years.

We have an unwritten agreement whereby we are the exclusive distributor for the UK and Eire which is ongoing season by season and effectively works by our being presented product to show to our retailers several months ahead of the next season.

We have never wished to enter into a long term contract as we have never wished to take on the responsibilities and the purchase obligations which would come with a contract.

Nevertheless, we are comfortable that our exclusive relationship will continue as long as the product continues to sell. Quite frankly, if it stops selling, we don't wish to continue to distribute it.

Russell Hornsby the owner is a friend and has supported us (as we have him) with supplies over the past year and we believe this will continue.

He is a sensitive man and wishes to be recognised for his support of Character.

We have come up with a solution which we believe achieves our recognition for his support and at the same time encourages him to continue to support us over the next few years.

We have proposed to him that we issue him with the option to purchase 1 million shares at £1.20 each to be exercisable in three years provided we remain the exclusive distributor.

By copy of this email, I am asking for Board approval, and requesting from you the requirements to satisfy the Aim REGS.

Ray is finalising a draft option agreement which he will forward to you in the morning."

The third sentence (beginning "we have an unwritten agreement….") is, it would appear, a reference to the pre-existing practice between the parties. It was not a practice confined to Zhu Zhu Pets though that product, which is mentioned in the first sentence, must have been at the forefront of Mr. King's mind because it was such a success. The reference to an "unwritten agreement" is correct in one sense: apart from purchase orders there was no agreement in writing. In another sense it is incorrect because whilst there was a practice whereby the Defendant was asked to bid to distribute products the Claimant was not bound to ask the Defendant, though it seems the Claimant had always done so.

The fourth sentence (beginning "we have never wished to enter into a long term contract….") confirms that there was no long term distribution contract between the parties. The Defendant did not want one because of the purchase obligations which would come with it. The fifth sentence (beginning "nevertheless, we are comfortable …") explained that the relationship the Defendant had with the Claimant ("our exclusive relationship") enabled the Defendant to stop distributing the product when the product was no longer selling.

Mr King then explained that the share option was a way of recognising Mr. Hornsby's support and at the same time encouraging him to continue to support the Defendant for the next few years. He said the share option was exercisable in three years "provided we remain the exclusive distributor." That must, it seems to me, be a reference back to the unwritten agreement referred to in the third sentence, namely, the ongoing practice between the parties whereby products were shown to the Defendant to enable them to decide whether to bid to distribute them.

On 22 July Duane Morris, the Defendant's lawyers, produced a draft option agreement which Mr. King forwarded to Mr. Hornsby the same day pointing out that there had been a change in the share price, asking whether he was happy with that and requesting him to supply information concerning the address of the Claimant's registered office. That draft expressed the relevant condition for exercise of the share option in these terms:

"2.2 Exercise of the Option shall be conditional upon:

2.2.1 the Distribution Agreement having continued in existence from the date hereof to the date of exercise of the Option in respect of all of Cepia's and its Group Companies' toy and related products …………"

Mr. Hornsby replied on the same day saying "this is fine". It is therefore to be noted that although it was Mr. Hornsby's evidence that it had been agreed in Shenzhen that the option would be dependent upon the Defendant being the exclusive distributor of Zhu Zhu Pets he raised no objection to the draft of the option agreement describing the option as being dependent upon the distribution agreement continuing to exist in relation to all of the Claimants' products. This suggests that whilst the discussion in Shenzhen is very likely to have centred upon the Defendant remaining the exclusive distributor of Zhu Zhu Pets there must also have been discussion in that context about all of the Claimant's products.

Mr. King then, still on 22 July, sent a draft press release which stated that the grant of the option was in recognition of the "working partnership" and was dependent on the continuation of a "working relationship" over the next five years.

The details of the registered office were sent and on Friday 23 July the Option Agreement was signed on behalf of the Defendant. Mr. Hornsby was informed that the signed documents would be sent out on the following Monday.

Mr. Shah, the Defendant's company secretary, gave evidence that he printed off a copy of Mr. King's email saying that the documents would be sent on Monday and circled that part of the email. He then attached it to the original Option Agreement and placed a post-it on the email directing the receptionist to send the Option Agreement. The email, the Option Agreement and the post-it were then placed in the receptionist's tray. There is no evidence from the receptionist (she has since left the Defendant). Mr. Shah believes that the Option Agreement would have been sent by courier because that is the way things were usually done. However, there is not in evidence any document from a courier company confirming that the package was picked up and delivered. The registered office to which Mr. Shah believed the package would have been sent (because that address was stated on the face of the Option Agreement) was the office of Deacons, the Hong Kong solicitors. If they had received it is likely that there would have been a letter from them forwarding it to the Claimant. But the Claimant has no such letter and says that it never received the Option Agreement. Thus the Option Agreement remained unsigned by the Claimant. However, there is no dispute that Mr. Hornsby on behalf of the Claimant agreed to the wording of it.

It is necessary to make a finding as to what happened to the Option Agreement (because the Claimant's failure to provide the original Option Agreement when exercising the option is said to have invalidated the exercise of the option). Mr. Shah said he had a clear recollection of his actions because he had talked to Mr. King about sending out the Option Agreement. Mr. Shah had himself signed the Option Agreement. I accept his evidence, notwithstanding the passage of time from 2010, that he left the Option Agreement in the receptionist's tray with a post-it note instructing her to send the Option Agreement on the Monday. The email which contained the Claimant's registered office also contained a "mailing address". There is no evidence from Mr. Shah that the receptionist was provided with a copy of that email but the email only emerged during the trial and so was probably not before Mr. Shah when he prepared his witness statement. Since the email contained a mailing address it is possible that Mr. Shah included it with the documents left in the receptionist's tray. In the result it is not possible to make a finding as to the address to which the receptionist was instructed to send the Option Agreement. There is no evidence either from the receptionist or from a courier company that the package was in fact sent. If it had been the probabilities are that it would have arrived safely. But the Claimant has no letter from Deacons forwarding on the original Option Agreement. If Deacons had received it the probabilities are that they would have forwarded it to the Claimant. If the package had been sent to the mailing address, which was the Claimant's temporary office, the probabilities are that it would have been received, opened and, being a document requiring Mr. Hornsby's attention, provided to him for signature and retained. Mr. Hornsby gave evidence that it was never received.

Mr. Shah said it was the usual practice to send such a document by courier. If that had been done there would have been documentary proof of the collection given by the courier to the Defendant. It is likely that such documentary proof would have been retained by the Defendant. But the Defendant does not have any such proof. Thus it seems to me that the Defendant cannot show that it is more likely than not that it was collected by the courier for despatch to the Claimant. Further, if it had been sent the probabilities are that it would have been delivered and yet there is no evidence that it was received at the mailing address or at the registered office. That suggests that it was never sent. Whilst it is possible that it was received at the mailing address but then lost when that address ceased to be the Claimant's office (sometime in or about mid-September 2010) that appears to me to be unlikely given the importance of the document. I consider it more likely that, for an unknown reason, it was never sent and was therefore never received.

At or about the time when the terms of the Option Agreement had been agreed Mr. Hornsby provided a copy of the draft terms to his lawyer Mr. Kaplan. Mr. Kaplan raised a number of questions and in particular wanted to know what the Distribution Agreement was. He specifically noted that that the exercise of the option was contingent on the distribution agreement being in existence in respect of all of the Claimant's toys and related products. Mr. Hornsby passed the questions on to Mr. King who replied on 26 July that the option was to be valid "as long as we remained exclusive distributors. We both acknowledged this and obviously recognised that our trading was based on a verbal agreement."

Two points are to be noted about this exchange. First, although the fact that the option was conditional on the distribution agreement being in existence in respect of all of the Claimant's products was specifically brought to the attention of Mr. Hornsby he did not suggest that this had not been agreed in Shenzhen. Second, Mr. King made reference to the trading between the parties as having been based on a verbal agreement. That was probably a reference to the same "unwritten agreement" to which he had referred in his email to the NOMAD on 21 July and which referred to the parties' practice before July 2010.

At about the same time Mr. Kaplan asked Colin Lisle (who was the sales agent or broker for both the Claimant and the Defendant) whether there was a distributor agreement between the Claimant and the Defendant. Mr. Lisle replied on 26 July that "the deal is on a handshake nothing else needed." He gave evidence that what he had in mind was the parties' existing arrangements. I accept that evidence. He had not been involved in the share option discussions and only learned of the Option Agreement from a news announcement. In his statement he described the deals he did as having being done "without a written contract."

Finding as to what was agreed in Shenzhen

Having considered the contemporaneous exchanges it is now possible to make a finding as to what, on the balance of probabilities, was discussed and agreed in Shenzhen. The first email of 19 July from Mr. King strongly suggests that when discussing the condition which had to be satisfied in order for the exercise of the option to be valid the focus of attention was on the Defendant continuing to be the exclusive distributor of Zhu Zhu Pets. Not only do the terms used by Mr. King in his draft email expressly refer to the option being conditional on the defendant being the exclusive distributor of "Zhu Zhu branded products and all derivatives" but in circumstances where Zhu Zhu pets were so successful and profitable it is probable that they were the focus of the parties' discussions. To this extent Mr. Hornsby's recollection appears to be correct. However, the wording of the Option Agreement referred to the option being conditional upon the distribution agreement having continued in existence in respect of all of the Claimant's products. This was expressly brought to the attention of Mr. Hornsby by his lawyer Mr. Kaplan and Mr. Hornsby made no comment. That suggests that although the focus of the parties' discussions was probably upon Zhu Zhu Pets when agreeing the condition they must also have discussed and agreed that the condition had to be satisfied in relation all of the Claimant's products. If they had not then surely Mr. Hornsby would have said, when prompted by Mr. Kaplan, that that had not been agreed. To this extent Mr. King's recollection appears to be correct and Mr. Hornsby's recollection appears to be wrong.

Mr. King gave evidence that he agreed with Mr. Hornsby that the Defendant's right to distribute Zhu Zhu Pets, which had been vulnerable to termination, was now secure. There is no dispute that that was agreed in the sense that if it were terminated the Claimant would lose the option to purchase shares. But Mr. King also gave evidence that he and Mr. Hornsby agreed that the Defendant would have an exclusive right to distribute all of the Claimant's products (in the sense that if it did not then the Claimant would lose the option to purchase shares). This is disputed. I consider it unlikely that this was agreed for these reasons. First, Mr. King did not recall the precise words used. His recollection was that he had referred to the Defendant "having 'exclusive distribution of all your product lines' or words to that effect". I accept that the phrase "exclusive distribution of all your product lines" is capable of supporting Mr. King's evidence as to what was agreed. However, it is apparent from his contemporaneous email to the NOMAD dated 21 July 2010 that Mr. King used the phrase "exclusive distributor" or "exclusive relationship" to refer, not to a binding contract to distribute goods on an exclusive basis, but to the arrangement or practice which existed prior to July 2010 whereby the Defendant was shown the Claimant's products and given the opportunity to bid for the right to distribute them. Second, I consider it unlikely that Mr. Hornsby would have agreed to a request that the Defendant would have, in the conventional sense, an exclusive right to distribute all of the Claimant's products in default of which the Claimant would lose the option to purchase shares. Such an agreement would apply to products which had not been designed, the price of which was unknown and in respect of which the Defendant may have been unable to offer acceptable terms. That seems to me commercially improbable. It is more likely that Mr. Hornsby was willing to agree to put the existing arrangement on a contractual footing in the sense that unless the Claimant gave the Defendant an opportunity to make a bid to distribute all of the Claimant's products the Defendant would not have the right to purchase shares.

I therefore consider it unlikely that Mr. King requested Mr. Hornsby to agree that unless the Defendant had the exclusive right to distribute (in the conventional sense) all of the Claimant's products he would not be able to exercise the option to purchase shares. It is more likely than not, having regard to the terms of his email to the NOMAD, that he requested and secured an agreement that if the existing arrangement or practice did not continue in relation to all of the Claimant's products the Claimant would not be able to exercise the option to purchase shares.

Mr. Mumford QC, on behalf of the Defendant, said that such an agreement would not be much of an improvement upon the Defendant's existing position and so was unlikely to be what Mr. King and Mr. Hornsby agreed. It would however have afforded the Defendant the security of knowing that the Claimant had an incentive to give the Defendant an opportunity to bid in respect of all future products because if such opportunity were not given the right to purchase shares would be lost. It seems to me that that was of real benefit to the Defendant. Mr. King himself acknowledged that "whilst we might have been the favourite in pitching for any new product range, we were no more than that." I agree that on Mr. King's evidence as to what was agreed the Claimant had an incentive not only to give the Defendant an opportunity to bid but also to accept the Defendant's bid. However, I am not persuaded that he agreed this with Mr. Hornsby.

The parties' respective cases on the construction of the written option agreement

The Option Agreement provides as follows:

"2. Grant of Option and the Conditions

2.1 The Company hereby grants to Cepia HK an option to subscribe for the Option Shares at the Option Price, such option to be exercisable (subject to satisfaction of the Conditions and to the other provisions of this Agreement) for the Option Period.

2.2 Exercise of the Option shall be conditional upon:

2.2.1 the Distribution Agreement having continued in existence from the date hereof to the date of exercise of the Option in respect of all of Cepia's and its Group Companies' toy and related products;

2.2.2 either the unexpired term of the Distribution Agreement being not less than one (1) year as at the date of exercise of the Option or Cepia granting (at or prior to exercise of the Option) an extension or renewal of the Distribution Agreement on the then existing terms (or terms otherwise agreed by COL) for a minimum of one year from the date of exercise of the Option;

2.2.3 the Distribution Agreement being in relation to all of Cepia's and its Group Companies' toy and related products as at the date of exercise of the Option.

3. Exercise of Option

3.1 Subject to due adherence by Cepia HK with the applicable provisions of this Agreement, the Option may be exercised at any time within the Option Period in whole or in part in respect of any number of the Option Shares comprised therein.

3.2 The Option may be exercised only by Cepia HK giving notice in writing the Company in the form set out in Schedule 1 hereto. Such notice must be accompanied by a remittance for the Exercise Price and the original of this Option Agreement. Subject to satisfaction of the Conditions at the relevant time, this Option shall be deemed to be exercised in respect of the Exercise Shares upon the receipt by the Company of the said documentation and payment.

3.3 Subject as set out in clause 5 below, the Option may not in any circumstances be exercised before the commencement of the Option period and for the avoidance of doubt it is hereby agreed and declared that to the extent that the Option shall not have been duly exercised prior to the expiry of the Option Period the Option shall lapse and determine."

"Distribution Agreement" is defined in clause 1 as follows:

"the exclusive distribution agreement between Cepia and COL current at the date hereof pursuant to which COL acts as Cepia's exclusive distributor in relation to all of its toy and related products from time to time in the territories of the United Kingdom of Great Britain and Northern Ireland and Ireland;"

The construction of the Option Agreement dated 23 July 2010 is a different exercise from deciding on the balance of probabilities what was discussed and agreed in Shenzhen between 7 and 9 in July 2010. The wording of the Option Agreement must be given the meaning which it would be reasonably be understood to bear bearing in mind the background to the agreement in so far as it was known or reasonably available to the parties. The issue of construction which arises for decision is the identification of the "Distribution Agreement" which must continue in existence in order for the Claimant to be able to exercise the option to purchase shares. The discussions which took place in Shenzhen were part of the negotiations leading up to the making of the Option Agreement on 23 July. They are not admissible for the purpose of deciding what the contract means save to the extent that they evidence the background to the contract.

On behalf of the Claimant Mr. West submitted that the reference in the Option Agreement to the distribution agreement "current at the date hereof" is to the arrangements between the parties in relation to UK and Ireland distribution rights for the Claimant's products as they stood at the date of the Option Agreement. Thus in relation to the existing product lines, such as Zhu Zhu Pets, the distribution agreement was the agreement in place for such products. It follows that the Claimant had a powerful incentive not to move those distribution rights elsewhere, since if it did so it would lose the benefit of the option. In relation to future products to be launched on the market the current "distribution agreement" was the arrangement pursuant to which the Claimant provided the Defendant with an opportunity to bid for distribution rights and appointed the Defendant as distributor so long as the commercial terms offered by the Defendant were acceptable to the Claimant.

On behalf of the Defendant Mr. Mumford QC submitted that the reference in the Option Agreement to the distribution agreement "current at the date hereof" was to the agreement or understanding (which he said did not have contractual force) reached in Shenzhen whereby the Defendant would have exclusive distribution rights in relation to all of the Claimant's product lines within the United Kingdom and Ireland. The effect of this submission was that if any other entity distributed a product of the Claimant in the UK the condition for a valid exercise of the share purchase option would not be fulfilled.

The Claimant's case as to the meaning of "distribution agreement" does not sit happily with the definition of distribution agreement in the Option Agreement. The existing arrangements were not arrangements pursuant to which the Defendant acted "as [the Claimant's] exclusive distributor in relation to all of its toy and related products from time to time in the territories of the United Kingdom of Great Britain and Northern Island and Ireland." Rather, the existing arrangements were arrangements pursuant to which (i) the Defendant acted as the Claimant's exclusive distributor on agreed terms in relation to certain toys (such as Zhu Zhu Pets) and (ii) the Claimant as a matter of practice sought a bid from the Defendant as to the terms upon which it would distribute new lines of product.

The Defendant's case also does not sit happily with the definition of distribution agreement in the Option Agreement. The Defendant does not allege that there was an agreement "pursuant to which [the Defendant] acts as [the Contractor's] exclusive distributor in relation to all of its toy and related products from time to time in the territories of the United Kingdom of Great Britain and Northern Ireland and Ireland." On the Defendant's case there was no more than an agreement that if the Defendant was not the exclusive distributor of all of the Claimant's products then the option to purchase shares could not be exercised. But, for the reasons I have given, no such agreement was in fact reached in Shenzhen and in any event what was agreed was subject to board approval and being put into writing. Thus the meeting could not have given rise to a binding agreement.

The circumstance that neither side's case sits happily with the definition of "Distribution Agreement" in the Option Agreement does not persuade me that no objective meaning can be given to that definition. That would be an extreme conclusion to reach. Where businessmen have reached agreement the court will seek to give effect to their agreement. The background to the Option Agreement was the course of dealing between the parties prior to July 2010 whereby the Defendant was able to become the exclusive distributor of a product if terms were proposed which were acceptable to the Claimants. In the absence of any other overarching agreement or understanding that course of dealing must have been what the parties had in mind when referring to an "exclusive distribution agreement current at the date hereof pursuant to which [the Defendant] acts as [the Claimant's] exclusive distributor in relation to all of its toy and related products".

I therefore accept the Claimant's case with regard to the true construction of the Option Agreement.

Mr. Mumford advanced a number of alternative cases on behalf of the Defendant. The first alternative argument was estoppel. It was said that the Option Agreement stated that there was an exclusive distribution agreement in the conventional sense of that phrase and therefore the Claimant cannot contend that no such agreement existed. However, on its true construction the Option Agreement did not state that such an agreement existed. Rather, it stated that a distribution agreement in the sense I have found existed. The second alternative argument was that the Option Agreement was uncertain in that an objective meaning could not be given to the "distribution agreement" referred to in the Option Agreement. However, an objective meaning can be given to that phrase. The third alternative argument was rectification. This argument was put forward in two forms. First, it was said that the Option Agreement was in law a gratuitous grant and that there was a unilateral mistake made by Mr. King in that his subjective intention was different from the meaning of the grant. But on my findings there was no difference between his subjective intention and the meaning of the grant. Second, it was said that there was a bilateral mistake in that the agreement reached by Mr. King and Mr. Hornsby in Shenzhen was different from the meaning of the Option Agreement. But on my findings there was no such difference.

Was the condition upon which valid exercise of the Option was dependent satisfied ?

Mr. Mumford in his closing submissions identified 9 reasons for saying that the condition was not satisfied. However, having regard to my decision as to the meaning of that condition, they are reduced to 5 reasons.

The Happys

The Happys were a range of plush robotic dogs. Although the Defendant was invited in 2013 to bid for the right to distribute The Happys the contract was awarded to another distributor. Mr. Mumford submitted that the arrangement or course of dealing between the parties included "to-ing and fro-ing" in which the Contractor would engage with the Defendant regarding the terms the Defendant was offering and how they could be improved. It was said there was no such "to-ing and fro-ing" and so the previous "distribution agreement" had not continued in existence and therefore the option could not be validly exercised. In response to this argument Mr. West submitted that the Defendant's bid was a poor third to the bids of GP and Vivid (two competing distributors) and that for that reason there was no "to-ing and fro-ing".

It is first necessary to set out what actually happened with regard to The Happys. Between 18 and 20 September 2013 the Claimant presented The Happys to the Defendant, GP and Vivid. A report of these presentations sent on 20 September 2013 recorded that the Defendant "loved" the characters and several features of the toys but had concerns, in particular with regard to the price. On 17 October 2013 the Defendant, through Jon Diver, a director, put in a bid or "top line plan". On 31 October 2013 GP put in a bid or "preliminary business plan". There were also, it appears, bids from Vivid and a fourth distributor, Bandai.

On 31 October 2013 Mr. Lisle emailed GP. He gave details of the lowest fob price which the Claimant was prepared to accept of $7.80 (which appears to be a reference to the Defendant's bid), mentioned other matters (concerning in particular plans for Italy and Holland) and asked GP to get back to him. GP did so between 4 and 8 November 2013 with information about, in particular, Italy and Holland.

The Defendant's bid was valued at $400,000 with a forecast of $750,000 based upon 96,000 units at $7.80 per unit. GP's bid (for the UK) was an opening order of $650,000 with a forecast of $1,270,000. GP made an even larger bid for France and other countries in Europe. Whereas GP was offering in respect of the accessories as well, the Defendant was not. Vivid also put in a bid but the Claimant considered that the net margin or profit on Vivid's bid was greater than on the Defendant's bid. Vivid also bid in relation to (some of) the accessories. By 7 November it appears that the contest was between GP and Vivid.

On or about 8 November GP was awarded the distribution rights not only in respect of the UK but also for certain countries in Europe.

Whilst it is common ground that Mr. Lisle did not go back to the Defendant as he had done in the case of GP there is a dispute as to why he did not go back to the Defendant. Mr. Lisle's evidence was that the Claimant needed GP because GP was able to distribute in Europe as well as in the UK and GP would walk away if they did not get the UK rights. Mr. Hornsby's evidence was that the Defendant's bid was not competitive and that it was clear that the Defendant did not really want to distribute The Happys. He said that Mr. Lisle had told him that this was because the Defendant was already distributing the Teksta Dog and was concerned at the impact that distributing a competing product would have. Mr. Lisle denied that and said that The Happys and the Teksta Dog were not competing products.

Mr. West submitted that Mr. Lisle's evidence was fundamentally undermined by the fact that Mr. Lisle had destroyed all his emails relating to his agency on behalf of the Claimant and he invited the court to infer that Mr. Lisle did so because he knew that there were emails in his records which were not consistent with his evidence. This is a most serious allegation. Mr. Lisle gave evidence that there had been a problem recovering emails relevant to these proceedings and that the "back up disc….is corrupted". He accepted that the disc had been destroyed and that there was no report from Stealth Managed Services who attempted to recover the data confirming that the disc was corrupted. It was suggested to him that he had destroyed the only disc containing the emails relevant to this case. He accepted that he had destroyed the disc but said that he did so at a time before this litigation had commenced. The disc was damaged and corrupt. He said there was no point in keeping it. It was suggested to him (because he had said in his statement that the disc "is" corrupted) that he destroyed the disc after he had made his witness statement. Whilst he could not explain why he had not said in his witness statement that the disc had been destroyed he denied the suggestion.

I am not at all persuaded that Mr. Lisle acted in the way suggested. First, the only basis for this very serious allegation is that Mr. Lisle said in his statement that the disc "is" corrupted rather than saying that the disc "was" corrupted and had been destroyed. I am not persuaded that it is appropriate to infer from this that he committed the crime of perverting the course of justice. Second, his evidence was unshaken in cross-examination. When asked about the absence of evidence from Stealth confirming that the disc was corrupt he explained that Stealth had been sacked for poor services and that the ending was not amicable. Stealth "was not really prepared to give too much information". In the solicitors' correspondence (which he said was correct) it had been stated that Stealth had provided an invoice for their services in seeking to recover the data. That invoice was dated 1 February 2014, long before this litigation commenced. Third, his evidence was given in a manner that did not suggest that he was capable of the serious misconduct alleged against him.

I therefore do not accept the submission that I should reject Mr. Lisle's evidence. His evidence that the Claimant wished for a European deal (including the UK) is consistent with the contemporaneous correspondence between 7 and 8 November. Mr. Katz, who was involved in sales for the Claimant, described the GP programme as "most comprehensive as compared to Vivid and Character". Mr. Hornsby said "France is critical". Mr. Lisle said "GP is overall deal on Happys. They will not do without UK." I therefore accept Mr. Lisle's evidence.

I also accept his evidence that he did not tell Mr. Hornsby that the Defendant was concerned about marketing a higher priced "competing product", namely the Teksta Dog. He gave convincing evidence that they were not in competition. The Teksta Dog "is in a different department completely, different section of the toy shop. One is more boy, one is more girl." Mr. Diver was of the same opinion. I was shown an example of The Happys and of the Teksta Dog and the opinions of Mr. Lisle and Mr. Diver do not surprise me.

I also mention for completeness the dispute as to whether Mr. Diver told Mr. Lisle that that if the Claimant did not award the Defendant the UK distribution rights for The Happys that would invalidate the option. I do not consider that this has any relevance because Mr. Diver was not party to the discussions in Shenzhen and what he said in 2013 cannot affect the determination of what was said in Shenzhen or the true construction of the Option Agreement. I shall therefore deal with the matter shortly. There is no dispute that Mr. Diver had said this to Mr. Lisle in relation to an earlier negotiation concerning the Xia Xia toy (a form of crab). If so then it is likely that he did so with regard to The Happys. Mr. Lisle says the remark was made and he passed it on, he believed, to Mr. Adams, a sales director. Mr. Adams has no recollection of that but said that if he had said it he would have filed an email recording it. I was told that his emails had been deleted. In the circumstances it is not surprising that Mr. Mumford did not require to cross-examine Mr. Adams. Mr. West has made several points in support of his submission that the remark was never made (see paragraph 41 of his closing submissions). I have considered them. In essence he says that the fact that there is no email evidence of the remark (unlike the case of Xia Xia), that the financial records for 2014 refer to the option in the same terms as in previous years, that Mr. Diver made no reference to the end of the option to Mr. Adams or Mr. Hornsby and that the board of the Defendant did not appear to have been aware that the option was at an end are all reasons for rejecting the evidence of Mr. Diver and Mr. Lisle. These points have some force and suggest that the recollection of Mr. Diver and Mr. Lisle may be mistaken. It was suggested to Mr. Lisle that his evidence was a fabrication. I reject that allegation. But were Mr Diver and Mr. Lisle mistaken in their evidence? It is possible that they were but on balance, having heard their evidence and considered the opposing arguments, I consider it more likely than not that the remark was made, essentially because their evidence was unshaken in cross-examination and the remark had been made in relation to earlier negotiations.

I can now return to the question whether, although the Defendant had been afforded an opportunity to bid, the Claimant's failure to engage in "to-ing and fro-ing" with the Defendant, as the Claimant did with GP, was a failure to act in accordance with the course of conduct which had been established before July 2010. Although Mr. Diver described his bid as reasonable he accepted that his bid was "miles off the pace". But he did not regard the Defendant as having to beat the competition because he was aware, as he had told Mr. Lisle, that if the Claimant "chose to use another distributor it would break the Option Agreement." If the Defendant's bid was "miles off the pace" such that there was no point in going back to the Defendant it would be difficult to suggest that the failure to engage in "to-ing and fro-ing" was a breach of the previous course of conduct. Mr. Kishon (who in essence took over the role of Mr. Lisle in June 2014) explained in his evidence that the question of "to-ing and fro-ing" depended on the circumstances. For example it might be done if there is only a small difference between two bids. I found this evidence, which he gave easily and without hesitation, compelling. Since the Defendant's bid was "miles off the pace" it is therefore arguable that there was no requirement for the Claimant to go back to the Defendant as it had done with GP. Also, in an email dated 30 October 2013 Mr. Adams, having considered the Defendant's bid, queried whether there had been "a significant change in the relationship". It is possible that this refers to the low quantum of the bid. However, on Mr. Lisle's evidence, which I accept, the reason that he, on behalf of the Claimant, did not go back to the Defendant was that the Claimant wanted a European distribution contract and the Defendant could not assist with that.

Thus the question which the court must answer is whether a failure to go back to the Defendant in circumstances where (a) the Claimant wanted a European deal which the Defendant could not offer and (b) the Defendant's bid was "miles off the pace" was a failure to abide by the practice prevailing before July 2010 such that, in the language of clause 2 of the Option Agreement, the "Distribution Agreement" had not continued in existence. In effect clause 2 of the Option Agreement required the Claimant to give the Defendant an opportunity to bid in relation to new products of the Claimant if it wished to preserve the option. An opportunity to bid, particularly one from a preferred distributor, carried with it the expectation that, in an appropriate case, there would be some "to-ing and fro-ing". Was The Happys an appropriate case for such "to-ing and fro-ing" with the Defendant? It seems to me that it was not. First, the Claimant required a European deal in relation to this product and the Defendant did not distribute in Europe. Second, the Defendant's bid was "miles off the pace". The first reason appears to have been the reason why there was no "to-ing and fro-ing" but if it had not existed it is more likely than not there would still have been no "to-ing and fro-ing" because the Defendant's bid was "miles off the pace". I have therefore concluded, notwithstanding the failure to engage in "to-ing and fro-ing" with the Defendant with regard to The Happys, that the "Distribution Agreement" continued in existence. The Claimant had afforded the Defendant to bid and had considered and rejected the Defendant's bid in good faith. There was no good reason for continuing to negotiate with the Defendant.

Mr. Hornsby's email dated 15 October 2014 and the refusal to invite the Defendant to the toy fair

These two events are treated separately in Mr. Mumford's list of points at which the condition became incapable of fulfilment but they are connected and so I address them together.

In 2014 the Claimant had a new product, the Amazing Zhu, a set of mice which performed stunts and magic tricks. However, the Defendant had agreed to distribute Little Live Pets, another range of mouse toys, manufactured by Moose, a competitor of the Claimant. Mr. Hornsby was most concerned with Little Live Pets. On 20 September 2014 he emailed Mr. Kishon describing them as "cheap and cheerful" but saying that "we need to be ready for WAR". When the Defendant elected not to bid for the right to distribute the Amazing Zhu (because, as Mr. Diver explained in evidence, there was or might be conflict between the Amazing Zhu and Little Live Pets) Mr. Hornsby's trust in, and therefore his relationship with, the Defendant changed. He informed Mr. Kishon that "those who support Moose are not welcomed". He accepted in evidence that this indicated "business frustration and certainly anger." On 15 October he emailed Mr. Diver saying:

"Jon wishing your company great success over the years to come. Please note my decision to decline your visit is not personal but business."

It is accepted by Mr. West on behalf of the Claimant that this email told Mr. Diver that the Defendant was no longer invited to the Hong Kong toy fair in October 2014. Mr. Diver said that they had earlier been invited but that their invitation was rescinded by this email.

Mr. Hornsby accepted that at this time he wished to exclude the Defendant from his business "wholesale". It was suggested to him that his email communicated to the Defendant that the relationship was now at an end. He was evasive in his reply. He was asked again whether he intended to sever the relationship and he replied that "it was certainly a thought to sever it." I consider that the email was intended to sever the relationship. Mr. Hornsby wished Mr. Diver great success over the years to come because the Claimant would not be dealing with the Defendant. The decision not to invite the Defendant to the toy fair was a manifestation of that reality. Mr. Hornsby had difficulty in giving a straight answer to the question because he knew that that was the import of the email.

Mr. West submitted that for several reasons, see paragraph 56 of his closing submissions, the email should not be regarded as a statement that the relationship between the Claimant and the Defendant was at an end.

First, he points out that on 18 November 2014 Mr. Kaplan, on behalf of the Claimant, gave notice that he intended to exercise the option. Similarly, on 11 December 2014 Mr. Hornsby said that the Defendant's exclusive right to distribute the Claimants' products had been in place since 2010 and "continues today". My understanding of these later communications is that Mr. Hornsby had purported to change his mind. The terms of the email dated 15 October 2014 were very clear. He there stated, in effect, that the relationship was at an end.

Second, he refers to the email dated 26 November 2014 from Mr. Dowding, the Defendant's company secretary. In that email he said that the conditions for a valid exercise of the option had not been satisfied. He did not say that there had been a unilateral notice of termination several weeks earlier. Mr. West therefore submitted that Mr. Dowding did not read the email as terminating the relationship. It is true that he did not mention or rely upon the email. But I remain of the view that the meaning of the email dated 15 October 2014 is clear.

Third, it is said that if it were the case that service of a notice of termination would cause the Claimant to lose its rights under the Option Agreement it is unlikely that Mr. Hornsby would do so when there was no commercial necessity to do so. It might very well be unwise to serve notice of termination but the meaning of the 15 October email is, in my judgment, very clear.

Fourth, it is said that in the absence of clear words such as "serve" or "notice" (as Mr. Hornsby had used in 2010 before the Option was agreed and in 2011 at the time of the Squinkies episode – on which it is unnecessary to expand) it is not possible to spell a termination notice out of the "pleasantries" accompanying the message about declining the visit. I disagree. My understanding of the "pleasantries" is that, in conjunction with the message about not inviting the Defendant to the toy fair and having regard to the context in which the email was sent, Mr. Hornsby was terminating the course of dealing between the parties. He was saying goodbye but wishing the Defendant well. He had difficulty in answering questions about this email because he appreciated that.

There were toy fairs in Hong Kong in October 2014 and January 2015. The Defendant's invitation to the October 2014 fair was rescinded and the Defendant was not invited to the January 2015 fair. Mr. Diver and two colleagues attended the latter but were not allowed into the Claimant's showroom. The products available for viewing which were seen by other distributors were the Amazing Zhu, Kraken, Moonbeams and Gloe. Mr. Hornsby accepted when being cross-examined that the distributors were seeing the products with a view to bidding to distribute them. However, in the event there was no bidding process in relation to any of the products because insufficient interest was expressed in them.

The Defendant was familiar with Gloe because it had distributed the toy before July 2010. In 2012 efforts were made to persuade the Defendant to re-start distribution of it but the price did not appeal to Mr. Diver. The price in October 2014 and January 2015 may have been different. The Defendant had also seen Moonbeams, then called Crystal World, during the October 2013 toy fair in Hong Kong and also at the January 2014 toy fair. There was now a different format and branding. Kraken, under its earlier name of Bad Barnacles, had been seen at the toy fair in January 2012. This was when the toy (a form of fighting crab) had been in its prototype stage.

In determining the consequence of the Claimants' conduct in sending the email dated 15 October 2014 and in refusing to invite the Defendant to the toy fairs in October 2014 and January 2015 two different analyses were discussed. It was suggested by Mr. Mumford that the email was a repudiatory breach or renunciation of the "distribution agreement" referred to in the Option Agreement which the Defendant accepted by not attending the toy fair. I was not attracted by that analysis. The Claimant had no obligations under the "distribution agreement" referred to in the Option Agreement (it merely stood to lose the option if the previous course of dealing – the "distribution agreement" – did not continue) so it is difficult to see what obligations there were to repudiate or renunciate. Further, whilst repudiation or renunciation can be accepted by conduct the conduct in question must clearly be referable to an acceptance. Failure to attend a toy fair when not invited to attend does not appear to be a clear or unequivocal acceptance of the suggested repudiation or renunciation. Mr. Mumford submitted in the alternative that the email was a notice of termination of the relationship between the parties. Although the Option Agreement makes no reference to a notice of termination there is no reason why the Claimant could not give such notice or inform the Defendant that the relationship between them is at an end. The Claimant was not obliged to maintain that relationship. Mr. West submitted that one year's notice was required and pointed out that on two earlier occasions the Claimant had given one year's notice. However, there was no contractual requirement to do so, save perhaps when there were relevant purchase orders to be performed.

If, as I have held, the Claimant's email of 15 October 2014 told the Defendant that their relationship was at an end and if, consistently with that, the Defendant's invitation to the October toy fair was rescinded and the Defendant was not invited to the January 2015 toy fair, what is the effect of such conduct? The Option Agreement requires the court to consider whether the Distribution Agreement continued in existence from 23 July 2010 until the date on which the option was exercised on 22 July 2015. In my judgment the Distribution Agreement in the sense of the prior course of dealing between the parties cannot be said to have continued in existence in circumstances where the Claimant had made it clear by its email dated 15 October 2014 that the relationship between them was at an end and had given effect to that termination by not inviting the Defendant to the toy fairs in October 2014 and January 2015.

Mr. West submitted that in circumstances where there was no product in respect of which bids were sought after 15 October 2014 it cannot properly be said that the prior course of dealing had not continued. That could only be said, he submitted, if bids were sought in relation to a product and the Defendant was not invited to submit a bid. Whilst a failure to invite a bid from the Defendant in circumstances where bids were sought from other distributors would enable one to conclude that the prior course of dealing had not continued I do not consider that that is the only circumstance in which one could draw that conclusion. Where the Claimant makes it clear that the relationship is at an end and does not invite the Defendant to the forthcoming toy fairs (where the Defendant would otherwise expect to view products with a view to considering whether or not to make a bid to distribute them) it seems to me that the prior course of dealing has been stopped and is not being continued.

Mr. West further submitted that a failure to invite the Defendant to a toy fair to see Gloe, Moonbeams and Kraken in circumstances where those products had been seen on earlier occasions did not mean that the prior course of dealing had not been continued. I disagree. First, the fact that products may have been seen in an earlier state of development, branding, packaging or pricing does not appear to me to be a reason for concluding that the prior course of dealing had in fact continued in existence. That course of dealing would, I consider, have included seeing products in their latest state of development, branding, packaging and pricing. Second, the failure to invite the Defendant to the toy fair must be seen in the context of the email dated 15 October 2014, which email made plain that the relationship was at end.

Finally, Mr. West submitted that the Defendant had a legitimate commercial interest in not inviting the Defendant to the toy fair because the Amazing Zhu was being shown and the Defendant was distributing Little Live Pets in competition with the Amazing Zhu. Since the Defendant did not wish to distribute the Amazing Zhu there was no obligation upon the Claimant to show the Defendant that toy. But if the previous course of dealing was to continue in existence the Claimant had to invite the Defendant to those shows where the Claimant's latest products were on display so that the Defendant was able to decide whether or not to bid. How they did so in circumstances where the Amazing Zhu was also being shown was a matter for them. In any event the Claimant did not say in the email of 15 October that it would invite the Defendant to the show so long as the Defendant did not see the Amazing Zhu. The Claimant said in effect that the course of dealing had come to an end.

Whilst the emails from the Claimant dated 18 November and 11 December 2014 suggest that the Claimant then expressed the view that the Distribution Agreement in the sense of the previous course of dealing continued in existence the Claimant nevertheless refused to invite the Defendant to the toy fair in Hong Kong in January 2015. That failure shows that notwithstanding those emails the reality was that the previous course of dealing no longer continued in existence.

The email dated 9 March 2015

By an email dated 9 March 2015 the Defendant informed the Claimant that it had ceased to be the Claimant's exclusive distributor since at least July 2014 and that in any event it gave notice that the previous arrangement or agreement was at an end. Mr. Mumford submitted that this email served to bring the relationship to an end.

If, as I have held, the previous course of dealing had already ceased to continue by reason of the Claimant's email dated 15 October 2014 and the Claimant's conduct in not inviting the Defendant to the Hong Kong toy fairs in October 2015 and January 2015 the email dated 9 March 2015 adds nothing. It is only if the email dated 15 October 2014 and the Claimant's conduct did not have this effect that the question arises whether the Defendant's email dated 9 March 2015 enables the Defendant to say that from that date the Distribution Agreement in the form of the previous course of dealing hand not continued in existence. It is unnecessary for me to deal with this further argument and I do not propose to increase the length of this judgment by considering on a hypothetical basis the questions of law, or questions of mixed law and fact, to which the argument gives rise. Those questions include the following: (i) was the letter of 9 March 2015 a repudiation or renunciation of the previous course of dealing or was the Defendant, who had no obligation to bid for the right to distribute the Claimant's products, entitled to say that it did not wish to bid for such rights; (ii) if the former, was the repudiation or renunciation accepted by the Claimant as bringing the previous course of dealing to an end or did the Claimant affirm the previous course of dealing; (iii) in either event was the Claimant released from any obligation to offer the Defendant the opportunity to bid (by reason of the doctrine or waiver or estoppel) but still entitled to exercise the option to purchase.

The Claimant's conduct after 9 March 2015

Mr. Mumford's final argument is that the Claimant has admitted that, following the email dated 9 March 2015, it conducted its business in the UK "through distribution partners other than the Defendant" and so the "Distribution Agreement" in the form of the previous course of dealing did not continue in existence up until the date of the purported exercise of the option on 22 July 2015. In response Mr. West submitted, based upon the evidence of Mr. Kishon, that there were no new products launched until October 2015 and so it cannot be said that by reason of any conduct of the Claimant between the 9 March 2015 email and the purported exercise of the option on 22 July 2015 that the Claimant had conducted its business without reference to the Defendant. The evidence of Mr. Kishon, initially touched on when being cross-examined, but then more fully set out when being re-examined, was that new products in the form of Chuckle Ball and Charm U were not revealed until October 2015.

It is unnecessary to deal with this final argument but since Mr. Mumford has objected that Mr. West is not entitled to make the response he has put forward I ought to deal, briefly, with that objection and the point itself.

Prior to trial the Defendant sought from the Claimant disclosure of documents after 9 March 2015 because it was not clear whether the admission made by the Claimant included the period after 9 March 2015 or referred only to the period after the purported exercise of the option on 22 July 2015. The application was resisted and Mr. West referred the court to evidence from his solicitor that the "undisputed fact is that our client has continued to carry on its business through other channels, as it has had to do so in view of the Defendant's letter of 9 March" (see paragraph 51 of the judgment of Mr. Richard Salter QC on 7 October 2016). Mr. Salter dismissed the application saying that the documents did not go directly to any pleaded issue and seek to deal with an argument that the Claimant is not currently putting forward. He observed that "if the Claimant attempts to put forward the argument at trial ….Mr. Mumford …….will say that this was expressly disavowed at a disclosure hearing and is, therefore, not open to the Claimant to raise unpleaded at this late stage. That submission would have force ……." Mr. Mumford submitted that in those circumstances it would be unjust to permit the Defendant now to rely upon the evidence of Mr. Kishon when it had resisted disclosure of the relevant documents.

It is true that disclosure was resisted. However, it is to be noted that there was at that time no pleaded case by the Defendant concerning action of the Claimant after 9 March 2015 and when the point was articulated before Mr. Salter Mr. West said that that was a new way of putting the point and he could take instructions. In the event the point was not followed up after the hearing. But the Defendant amended its pleading to allege "breach of contract" by the Claimant in distributing its products via other distributors after 9 March 2015.

Since the hearing the Claimant has confirmed that apart from documents concerning the Amazing Zhu it has no documents showing that it distributed products between 9 March and 22 July 2015. That is consistent with the evidence given by Mr. Kishon at the trial.

It is unfortunate that this matter has emerged in the way it has. That is no doubt a consequence of the fact that the Defendant was amending its pleadings very shortly before the start of the trial. It seems to me that, notwithstanding what was said at the hearing of the disclosure application, in circumstances where the relevant breach was only clearly pleaded after that hearing Mr. West ought to be entitled to rely upon the evidence of Mr. Kishon in resisting it. I accept Mr. West's assurance on behalf of the Claimant that there are no relevant documents to disclose. In those circumstances there is no real unfairness in allowing Mr. West to rely upon the evidence of Mr. Kishon.

There is no reason to doubt Mr. Kishon's evidence and accordingly the suggestion that the Claimant conducted its business through distribution partners other than the Defendant between 9 March and 22 July 2015 must fall away.

But in any event the position on my findings is that from October 2014 the Distribution Agreement in the form of the previous course of conduct had ceased to continue and so the Claimant was not entitled to exercise of the option in July 2015.

Other points

It was also submitted that the exercise of the option was invalid because the notice of its exercise was not accompanied by the original of the Option Agreement; see clause 3.2 of the Option Agreement. It is unnecessary to deal with this further objection but I shall deal with it shortly. It was accepted by Mr. Mumford that it must have been an implied term of clause 3.2 that that requirement only applied in the event that the original had been despatched by the Defendant to the Claimant. In view of my finding that on the balance of probabilities the original was not despatched by the Defendant to the Claimant this further submission must fail.

The final point concerns the number of shares comprised in the option. Since the option was not validly exercised this point also need not be decided. I shall deal with it briefly. There does not appear to be any dispute (subject to one point concerning the issue of shares to directors or employees) that there were variations of share capital in 2012, 2013, and 2014. Clause 7 of the Option Agreement provided that in the event of a variation the number of shares comprised in the option "shall be adjusted in such manner as the Auditors (acting as experts and not as arbitrators) shall in writing advise the Directors to be in their opinion fair and reasonable…………As soon as reasonably practicable after making any such adjustment the Company shall give written notice thereof to Cepia HK and at the written request of Cepia HK and upon the delivery up of this Option Agreement shall endorse a memorandum thereon recording such adjustment and return the same to Cepia HK." No such notice was given until after the Claimant had purported to exercise the option. Mr. West submitted that on the true construction of the Option Agreement such notice had to be given before the exercise so that the Claimant knew what number of shares to insert into the required form.

Mr. West accepted that the intention underlying clause 7 was that the number of shares comprised in the option should, notwithstanding variations in the share capital, be the same percentage of the varied share capital of the company as 1 million shares had been of the original share capital of the company. That being so one would expect that if a variation of share capital occurred just before the Claimant exercised its option the number of shares comprised in the option could subsequently and properly be varied notwithstanding that notice of the change had not been given before the option was exercised. Clear words are therefore required stating that notice must be given before the option is exercised. I accept that clause 7 contemplates that such notice would usually be given before the option is exercised (see the reference to the Option Memorandum being endorsed with the adjustment and returned to the Claimant) but I do not consider that there are clear words providing that that must happen. Mr. West submitted that clause 6, which provides that the shares shall be allotted and issued within 20 days of the exercise of the option, cannot have contemplated that the number of shares could be varied after shares and had been allotted and issued to the Claimant. I accept that the very last date for giving notice of a variation of share capital must be the date of allotment and issue. But it does not follow that notice must be given before the option is exercised.

In the present case the option was exercised on 22 July 2015 and notice of the adjustment was given on 30 September 2015. No shares have been issued or allotted to the Claimant. I consider that the Defendant is entitled to rely upon the notice of the adjustment given on 30 September 2015 in order to ensure that the number of shares comprised in the option should, notwithstanding variations in the share capital, be the same percentage of the varied share capital of the company as 1 million shares had been of the original share capital of the company.

There is also a dispute as to the adjustment. However, the Option Agreement provides that the adjustment shall be in such manner as the Auditors acting as experts and not as arbitrators shall in writing advise the Directors to be in their opinion fair and reasonable. I accept the submission of Mr. Mumford that the Claimant is entitled to the number of shares which the auditors regard as fair and reasonable. So long as they act in good faith, and there is no suggestion that they did not, then the Claimant is bound by their opinion. I therefore shall not consider Mr. West's submission that the grant of shares to directors or employees under share option schemes must be taken into account and that they were wrongly not taken into account by the auditors.

Conclusion

The Defendant is not obliged to issue and allot shares to the Claimant because the Distribution Agreement in the sense of the prior course of dealing between the parties had not continued in existence from 23 July 2010, the date of the Option Agreement, until 22 July 2015, the date on which the Claimant purported to exercise the option to purchase shares in the Defendant. The prior course of dealing did not continue in existence from 15 October 2014.

Note 1 I am told that the business was in fact done between associated companies of the Claimant and the Defendant but no material distinction was drawn between those companies and the Claimant and the Defendant at the trial and so I have also drawn no distinction. [Back]

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URL: http://www.bailii.org/ew/cases/EWHC/Comm/2016/3133.html