Ted Baker Plc and Another v AXA Insurance UK Plc and Others

JurisdictionEngland & Wales
CourtQueen's Bench Division (Commercial Court)
JudgeMr Justice Eder
Judgment Date30 Oct 2014
Neutral Citation[2014] EWHC 3548 (Comm)
Docket NumberCase No: 2010 Folio 209

[2014] EWHC 3548 (Comm)

IN THE HIGH COURT OF JUSTICE

QUEEN'S BENCH DIVISION

COMMERCIAL COURT

Royal Courts of Justice, Rolls Building

Fetter Lane, London, EC4A 1NL

Before:

Mr Justice Eder

Case No: 2010 Folio 209

Between:
(1) Ted Baker Plc
(2) No Ordinary Designer Label Ltd
Claimants
and
(1) AXA Insurance UK Plc
(2) Fusion Insurance Services Ltd
(3) Tokio Marine Europe Insurance Ltd
Defendants

Mr Stephen Cogley QC and Mr Tim Marland (instructed by Browne Jacobson) for the Claimants

Mr Jeremy Nicholson QC and Mr James Medd (instructed by Kennedys) for the Defendants

Hearing dates: 8–10, 14, 16, 17 & 22–24 July 2014

Approved Judgment

I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.

Mr Justice Eder Mr Justice Eder

Part I: Introduction

1

This is an insurance claim brought by the claimants for business interruption ("BI") losses in respect of goods allegedly stolen by an employee. The background (which I do not propose to repeat) is set out in my earlier judgment which dealt with a number of preliminary issues in relation to liability: see [2012] EWHC 1406 (Comm). In summary, I held in favour of the claimants i.e. that the relevant insurance policies covered "employee theft". A late application for permission to appeal was refused by the Court of Appeal: see [2014] EWCA 134.

2

The claimants are related companies engaged in the sale and distribution of the well-known Ted Baker brand of merchandise. The first claimant is the overall holding company. However, it is common ground that it owned none of the stock which is the subject of this claim and suffered none of the losses claimed. In the course of the trial, Mr Cogley QC on behalf of the claimants accepted that it could not and did not advance any claim. The second claimant is the UK operating company. For convenience only, I shall refer to the second claimant (albeit incorrectly) as Ted Baker or TB.

Summary of TB's business operations

3

By way of further background, it is convenient to explain briefly the general nature of TB's business operations which were, in the main, uncontroversial. Subject to minor modifications, the following is a convenient summary which I have taken in large part from the parties' skeleton arguments.

4

TB's business consists of wholesale and retail sale of fashion clothing and accessories. TB orders and buys goods from overseas manufacturers, predominantly in China, which are shipped to the UK. The goods comprise mainly fashion items which are designed for one of the two retail seasons in each year i.e. spring/summer ("SS") from 1 February to 31 July normally with a 'sale' period from mid-June and autumn/winter ("AW") from 1 August to 31 January with a 'sale' period normally from 26 December.

5

The goods are generally ordered once, some months before the start of the season for which they have been designed. However, further orders can be placed during the season for lines which early sales indicate will be particularly popular. In addition, TB also sells perennial items which are designed for a number of seasons. These are ordered initially and further orders are then placed as necessary to maintain stocks. The goods typically come in different styles, colours, and sizes, some also with secondary sizes (e.g. for trousers: leg lengths). Each item with a particular combination of style, colour, size, and any secondary size is known as a Stock Keeping Unit ("SKU") and designated with a unique alpha-numerical code. Each item of an SKU is normally labelled with a bar code reflecting the alpha-numerical code.

6

TB's main warehouse is located in north London and is known as the Ted Baker Distribution Centre ("TBDC"). On any view, it is a very busy warehouse with TB receiving up to 1300 cartons of new stock a day during busy periods. By way of example of the volumes of stock flowing through the TBDC in 2012, TB shipped over 2,920,000 items of stock to their retail stores and 1,015,000 to their wholesale clients. The TBDC is served by road transport. The TBDC receives goods when called in from freight forwarders, stores them until required and then sends them out to TB's wholesale customers and TB's retail stores. In addition, from July 2006, TB has had another warehouse nearby known as Country Balloons. This is used to store unsold stock left over at the end of each retail season, until the next equivalent retail season, when it is sent to TB's outlet stores for sale at discounted prices.

7

TB sells goods through a range of different channels including wholesale customers, associated companies overseas, retail stores operated by TB (either occupied by TB or concessions in department stores), internet sales, outlet stores operated by TB in 'factory outlet' developments and TK Maxx (a large discount retailer).

8

The TBDC despatches stock for wholesale customers before or in the early weeks of each retail season. In order to encourage sales at full retail price so far as possible, TB then stocks its retail stores as follows:

i) Before each retail season, setting an Ideal Stock Level ("ISL") for each store for each SKU. This is generally 'wide but not deep': involving stocking each store with only a limited number of each SKU for any particular style or range. It follows that, in the normal course of business, stores may run out of stock of particular SKUs and thus lose sales.

ii) When a new style is 'launched', either at the start of each retail season or during it, sending to each store an initial allocation so that it starts with its ISL and keeping the rest for replenishment during the season (Retained for Replenishment – "RfR").

iii) During the retail season, after each trading day's sales, automatically selecting for despatch to stores items from the RfR stock to replace items sold and thus to restore ISLs.

9

Seasonal stock which is not sold at full retail price is then sold at a range of discounted prices, generally with increasing levels of discount, as follows:

i) In seasonal sales at retail stores, towards the end of each season.

ii) At outlet stores, during the next equivalent season (e.g. stock that was bought for SS2006 would be sold in the outlet stores during the Spring and Summer of 2007), at heavily discounted prices.

iii) To TK Maxx, generally discounted to less than cost price.

10

Most of the stock is eventually sold, at either full retail or discounted prices. But some is not and any remaining unsold stock is disposed of by being either given to charities or destroyed ("scrappage").

11

TB has a range of computer systems for managing its business including a sophisticated merchandising and stock control system, known as 'CIMS'. This is operated using servers at TB's head offices and terminals at each of TB's warehouses, retails stores and outlet stores. Stock movements at the TBDC are recorded, and stock is checked, primarily using hand-held scanners which read bar codes on labels.

12

Stock is checked at various different times. By way of regular stock check for audit purposes at the TBDC, a "Perpetual Inventory" or "PI" system is used, including cyclic checking of all stock in every area of the warehouse 1.6 times per year.

13

When the items of stock in any particular location are checked, CIMS identifies any differences between the physical stock checked and the information held on CIMS. There is a wide range of possible reasons for any differences including omission to check and scan some items in that location, misplacing of some items, e.g. in an adjacent bin or rack, incorrect labelling, errors in CIMS software and theft. Differences are investigated and, in some cases, resolved. Where the difference cannot be resolved, a PI Variance is recorded in CIMS. For the purposes of this case, PI Variances may be divided further into:

i) 'Non-zero PI Variances': PI Variances in respect of SKUs of which stock remained at the TBDC.

ii) 'Zero PI Variances': PI Variances in respect of SKUs of which stock had been exhausted at the TBDC.

14

It is common ground that there is always likely to be some variance in any distribution and retail operation of this kind ("Base Variance"), however well managed and controlled.

Thefts by Mr Joseph Okyere-Nsiah

15

In essence, it is TB's case that a substantial amount of stock held in the TBDC was stolen by Mr Joseph Okyere-Nsiah ("JON") over a number of years stretching back to 2003 although this was only discovered as a result of a tip-off in December 2008. JON was a trusted employee of TB who had worked for TB for a number of years, being promoted to Returns Manager in June 2004. During this period and at least since 2005, TB had noticed unexplained increases in the level of its PI variances in the stock levels at the TBDC. However, TB says that there was no obvious reason for such variances. TB initially thought that these variances were caused by or attributable to deficiencies in the CIMS system. However, this was not the case: the parties' stock control experts both agree that the CIMS system was, in fact, very good and any temporary "glitches" in that system were picked up and remedied promptly.

16

On Tuesday 9 December 2008, TB received an anonymous telephone call stating that a member of staff (subsequently identified as JON) was stealing stock at the TBDC in collusion with a TNT driver " … at a rate of six or seven boxes at a time …" usually on a Friday between 10 am and 11 am. After reviewing certain CCTV footage, TB duly reported this information to the Police and carried out its own surveillance over a 3-day period. The surveillance revealed that JON was indeed stealing stock at the TBDC with the assistance of third party delivery drivers. In summary, it was discovered that returns of TB goods to the TBDC were...

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