KARL RIEKER GMBH & CO. KG v. EASY STAR INVESTMENTS LTD AND ANOTHER

HCA 1872/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1872 OF 2012

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JUDGMENT

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1.  This is an application for summary judgment against the 1st defendant. The 1st defendant is controlled by the 2nd defendant its director. The 1st defendant has not appeared to oppose this application.

2.  The 2nd defendant has been adjudged a bankrupt on his own petition filed in November 2014 and the action as against him has been stayed pursuant to section 6 of the Bankruptcy Ordinance, Cap 6.

3.  The plaintiff is a garment trader.  The 1st defendant is a garment supplier.  The plaintiff had placed a number of orders with the 1st defendant for supply of garments.  The plaintiff says that the 1st defendant had defaulted on these orders.  It therefore seeks damages from the 1st defendant to recompense its loss flowing from the 1st defendant’s default.

4.  The plaintiff and the 1st defendant entered into a general suppliers agreement in December 2011.  The provisions relevant to this application are:

“i) Paragraph 1 the Preamble provides as follows:-

‘Rieker specializes in providing large retailers with textiles and accessories items of high quality allowing outstanding value for the end user. Rieker’s customers offer these products in special retail actions for limited time periods only. Rieker, together with the customer, organizes publicity for the action items and arranges special logistics. These special actions are planned well in advance and financial commitments are made. It is essential that the supplier supply goods of a) the specified quality, b) in the specified packaging, c) at the agreed delivery date and d) in the required quantities, in order for Rieker to fulfill the commitments to the customers. Rieker’s customers do not accept slippage of committed delivery dates. Failure to deliver the agreed quality and quantity at the committed time will result in the product not being accepted and in Rieker and Rieker’s supplier suffering contract penalties and losing future orders. If the customers is unable to carry out an action at the planned date he is contractually entitled to have Rieker reimburse expenditure on publicity and logistics and to compensate for lost profits. Rieker can only work with suppliers who can fulfill their commitments and stand behind their commitments by agreeing to the financial penalties laid out in this agreement (these largely reflect the penalties Rieker has with its customers.

This contract lays out the general terms and conditions under which Rieker will purchase and the supplier will sell, Rieker will, at its discretion, issue specific written orders for each purchase. The terms in this agreement are binding and can only be amended in writing. Each order will be separately placed specifying the products, quantities, prices, delivery dates, packaging etc,

ii) Paragraph 14 provided that in respect of delivery dates and production timetable for each order would accompanied by a production timetable that must be adhered to.

iii)  Under paragraph 25 the 1st Defendant guaranteed that its products would meet all conditions specified by the Plaintiff in the Plaintiff’s orders and that they are suitable for the Plaintiff’s purpose.”

5.  The plaintiff had to impose these terms in the general suppliers agreement on the 1st defendant because it had to comply with stringent terms imposed on it by its customer Aldi.  The plaintiff’s Managing Director, Mr Franz Rieker has explained the Aldi’s terms that the plaintiff had to comply with in his witness statement which he has verified on affidavit as true.  He said:

“…

2. Rieker’s principle business is garments trading. As part of my duties I oversee Sven Reinboldt, Rieker’s Head of Global Buying. I work closely with Mr. Reinboldt and he keeps me updated as to the placing and status of orders on a regular basis.

3. One of Rieker’s largest customers is a company based in Germany known as Aldi (“Aldi”). Aldi operates a discount supermarket chain. It is the largest such chain in Germany, where it is based with international branches in Denmark, France, Poland, UK, Hungary, Switzerland, Austria, USA etc.

4. The number of Aldi stores internationally exceeds 10000 shops worldwide. Aldi is run by 3 different entities — namely:

· Aldi — North : 5300 stores in 10 countries — 2530 stores in Germany

· Aldi — South : 4500 stores in 9 countries — 1800 stores in Germany

· Hofer : 500 stores in Austria

5. Aldi’s core business is selling quality food products at a discount rate. However, in Europe it has also become a major European player in the field of ready made garments and similar commodities. Aldi, over the years had a reputation for being selling reasonable quality merchandise at a very eye-catching price level, attracting consumers with several weekly advertisements at a price breaking point. With such an outstanding number of stores, they have a tremendous pricing power in terms of dealing with suppliers. They are able to impose contractual terms upon their suppliers / importers in operational terms very much to their own benefit. They insist upon strict compliance with delivery dates and if goods are not delivered in full on the due date they reserve the right to reject the entire shipment and / or to charge penalties representing their own loss of profit in relation to such late or a non supply. Aldi justify such actions on the basis that they are running advertising campaigns to promote goods on particular dates and once they have committed to that promotional program, they needed to ensure sufficient supply of goods in their stores for such campaigns to be effective. In addition the German government imposes heavy penalties on companies that advertise goods without having sufficient quantities available in their store. Accordingly, Aldi also charge for the cost of their promotional campaign when goods are not delivered on time, their own loss of profits and the penalties imposed upon them by the governing law in Germany. As an example — Aldi spent €48 Million within the first quarter 2012 on advertisements alone.

6. As an importer to Aldi it is therefore important for Rieker to ensure that our own suppliers / factories operate on similar basis so that Rieker does not bear the brunt of potential claims made by Aldi in the event of a breach of contractual obligations by the suppliers.  Therefore, we are always looking for factories and suppliers with a good reputation and experiences in such kind of volume discount business.”

6.  Mr Reinboldt’s evidence on the terms of dealing of the plaintiff with Aldi and the 1st defendant is the same as that of Mr Rieker. 

7.  The plaintiff pursuant to the general suppliers agreement placed orders with the 1st Defendant in or about April and May 2012 including the following:-

(i) Order 100-12-3218 for supply of a minimum quantity of 440,028 pieces of ladies cut pile leggings at a unit price of Euro 2.28 each with a latest delivery date of 14 September 2012 in Rotterdam (“Order 3218”).

(ii) Order 500-12-3221 for supply of a minimum quantity of 116,700 pieces of ladies cut pile leggings at a unit price of Euro 2.31 each for delivery no later than 14 September 2012 in Rotterdam (“Order 3221”).

(iii) Order 700-12-3222 for supply of a minimum quantity of 3,640 pieces of ladies cut pile leggings at a unit price of Euro 2.31 each for delivery no later than 14 September 2012 in Rotterdam (“Order 3222”).

(iv) Order 200-12-3223 for supply of a minimum quantity of 5,105 pieces of ladies cut pile leggings at a unit price of Euro 2.31 each for delivery no later than 14 September 2012 in Rotterdam (“Order 3223”).

(v) Order 250-12-3224 for supply of a minimum quantity of 265 pieces of ladies leggings at a unit price of Euro 2.31 each for delivery no later than 14 September 2012 in Rotterdam (“Order 3224”).

(vi) Order 550-12-3225 for supply of a minimum quantity of 2,805 pieces of ladies cut pile leggings at a unit price of Euro 2.31 each for delivery no later than 14 September 2012 in Rotterdam (“Order 3225”).

(vii) Order 100-12-3227 for supply of a minimum quantity of 103,600 pieces of infant outdoor sweat jackets at a unit price of Euro 2.97 each with a latest delivery date of 10 September 2012 in Hamburg (“Order 3227”).

(viii) Order 100-12-3270 for supply of a minimum quantity of 55,032 pieces of kids sweat jackets at a unit price of Euro 3.72 with a latest delivery date of 8 October 2012 in Rotterdam (“Order 3270”).

They are referred to collectively as (“the Orders”).

8.  It is not disputed that in July and August, the Plaintiff, at the 1st Defendant's request, advanced to the 1^st Defendant two sums of money as follows:-

a)   €500,000 in early July 2012 (para 7 of the re-amended statement of claim (“RASOC”) and para 18 of the Amended Defence)

b)   €460,000 paid on or about 2^nd August 2012 (para 11(c) RASOC, para 38D(a) of the Amended Defence)

9.  It is the plaintiff’s case that the 1st defendant only delivered 85,520 pieces of ladies cut pile leggings of a value of €293,456 which were out of time for due date shipment and therefore incurred air-freight and additional duties.  The 1st defendant denied the quantity delivered but did not put forth any positive case on the quantity of garments delivered.

10.  As a result of the 1st defendant’s breaches of these orders and the general suppliers agreement, the plaintiff suffered the following heads of loss:

a)   Airfreight charges - in view of the late delivery of goods by the Defendant, it was necessary for the Plaintiff, in an attempt to mitigate its loss, to ship the goods that were actually supplied by the 1^st Defendant by airfreight.

b)   Additional customs duties – it is the Plaintiff's position that as a consequence of shipping by airfreight, additional customs duties became payable as such duties are calculated based upon the total value of the shipment including the cost price of the goods plus the freight charges. 

c)   Plaintiff's own loss of profit – this is calculated based upon the difference between the price at which the Plaintiff had contracted to purchase goods from the 1^st Defendant, and the price that it had to pay to have the goods manufactured by third parties as a consequence of the Defendant's breach of contract.

d)   Payment to the 1^st Defendant's sub-contractor.  The Plaintiff in order to mitigate its loss had effected payment to the 1^st Defendant's sub-contractor in order to have the goods manufactured by sub-contractor released.

e)   The Plaintiff's own purchaser Aldi had contractual claims against the Plaintiff itself in respect of the losses sustained by Aldi.  These losses included loss of profit, the entitlement to return goods that were shipped late, freight charges and compensation for promotional work undertaken by Aldi in relation to goods that were never delivered to them.

f)   Payment of the 1^st advance in the sum of €500,000 and the 2^nd advance in the sum of €460,000.

Order No 3218— ladies cut pile leggings

11.  For Order No 3218, the plaintiff says that because of the 1st defendant’s inability to pay its sub-contractor Bowker Garment Factory (Yun Fu) Co Ltd (“Bowker”), the cut, make and trim sub-contracting charges (“CMT charges”) and secure the release of the garments, the plaintiff in order to mitigate its loss paid Bowker €210,084 to secure the release of 190,000 pieces ladies cut pile leggings.  The plaintiff’s claim under this order is as follows:

(a)	Payment to 1st Defendant's sub-contractor	€210,084.00
(b)	Storage charges	€8,951.80
(c)	Additional custom duties	€25,505.00
(d)	Contractual compensation payable to Plaintiff’s own customer for promotional work undertaken	€4,453.32
(e)	Plaintiff’s own loss of profit	€99,003.62
(f)	Plaintiff’s customer’s claim against the Plaintiff	€175,391.52
	LESS: Sale of stock goods to third parties to mitigate Plaintiff’s loss	€293,665.40
	Total loss sustained	€229,723.86

12.  The 1st defendant’s defence to this claim is that the plaintiff had approached Bowker in late August 2012 well before the expiry of the deadline for the 1st defendant to fulfil this order.  Thus the plaintiff had caused its own loss and is estopped from claiming such loss from the 1st defendant.

13.  However, there does not appear to be any reason why the plaintiff had to incur such loss for itself save the reason given by the plaintiff. The 1st defendant has also not explained why the plaintiff should have so conducted itself but for the 1st defendant’s inability to procure the release of the garments by Bowker.

14.  The 1st defendant also pleaded in its amended defence that the shipment date had been extended by agreement to 30 October 2012 or, by the plaintiff’s own e-mail dated 4 October, extended unilaterally by the plaintiff to 12 October 2012.  But Mr Reinboldt denied that his email of 4 October was a unilateral extension of delivery date to 12 October.  He said it was only an offer of extension subject to the 1st defendant paying Bowker the CMT charges.  Mr Reinboldt further said that the offer was revoked when the 1st defendant wrongfully claimed that there was an agreement in August 2010 to extend the deadline to 30 October 2010.

15.  In any case and regardless of whether the plaintiff only gave an offer of extension to 12 October or that the plaintiff had given indulgence to the 1st defendant by allowing unilaterally an extension up to 12 October, it was on condition that the 1st defendant had to pay Bowker for the release of the garments.  Since the 1st defendant could not pay Bowker, it could not enjoy the extension.  I therefore find that the 1st defendant has no defence to this claim under Order No 3218.

16.  The plaintiff also claims losses under Orders Nos 3221, 3222, 3223, 3224 and 3225 as follows:-

Loss pursuant to Order No. 3221 – ladies cut pile
leggings
(a)	Airfreight charges in respect of the 85,520 pieces actually shipped	€145,370.31
(b)	Additional customs duty paid on the airfreight portion	€12,500.00
(c)	Goods returned by Plaintiff's own customer as a consequence of the Plaintiff's breach of contract with that customer in respect of late shipment	€7,319.33
(d)	Plaintiff's own loss of profit on the short shipment	€21,090.15
(e)	Plaintiff's own customer loss of profit	€200,000.00
	LESS: Value of the goods actually shipped (85,520 pieces x 2.305)	€197,123.60
	Total loss sustained	€189,156.19
Losses pursuant to Order No 3222
	Loss of profit	1,289.68
	Additional custom duty on the air freight portion	1,510.00
	Less:
	Value of goods actually shipped
	2,632 x 2.305	6,066.76
	Sub Total	-€3,267.08
Losses pursuant to Order No 3223
	Loss of Profit	€2,501.45
	Less:
	Value of goods actually shipped
	5,105 x 2.305	11,767
	Sub Total	-€9,265.55
Losses pursuant to Order No 3224
	Loss of profit	€12,985.00
	Less:
	Value of goods actually shipped
	265 x 2.305	610.83
	Sub Total	€12,374.17
Losses pursuant to Order No 3225
	Loss of profit	€1,374.45
	Less:
	Value of goods actually shipped
	2,805 x 2.305	6,465.53
	Sub Total	-€5,091.08

17.  The 1st defendant’s defence is that it had delivered goods that were worth €921,633.60.  This sum was to be set off against the 1st and 2nd advances of €500,000 and €460,000 respectively and the damages payable under the above orders under a global repayment agreement made between Mr Reinboldt for the plaintiff and the 2nd defendant for the 1st defendant in a meeting on 14 September 2012 in Hong Kong.  The sort-fall after the set-off as owed by the 1st defendant to the plaintiff would be paid to the plaintiff by deduction from money payable by the plaintiff to the 1st defendant in future orders from March 2013 to December 2013.

18.  However, there is no evidence that the 1st defendant had delivered any goods to the worth of €921,633.60 or anything near it.  There is also no contemporary document to support this alleged global repayment agreement. I find that the 1st defendant has no defence to this claim made under these orders.

19.  The last claim is made under Orders Nos 3270 and 3227 for children jackets as follows:

Losses pursuant to Order No 3270, infant outdoor wear
jacket
On or about 3rd August 2012 the Defendants informed the Plaintiff that they would be unable to produce this order and the Plaintiff therefore had to arrange for alternative supply at a higher price and incurred air freight charges in respect of this order in order to mitigate its loss and avoid further claims from its own customer.
Loss of profit, the original purchase price from the Defendants was Euro 3.685 x 55,860 pieces. The replacement manufacturer charged a price of Euro 4.444 per piece. Therefore the Plaintiff’s loss is Euro 0.759 per piece x 55,860	42,397.74
Increased custom duty charges based upon the higher price	5,087.73
Air freight charges and additional custom duty on air freight	48,251.78
Compensation payable to the Plaintiff’s own customer in respect of the return of goods that were shipped late	78,791.17
Plaintiff’s own customer freight charges in respect of the returned goods	3,000.00
Sub Total:	177,528.42
Losses pursuant to Order No 3277, infant sweat jacket
On or about 3rd August 2012 the Defendant informed the Plaintiff that they would be unable to produce this order and the Plaintiff therefore had to arrange for alternative supply at a higher price and incurred air freight charges in respect of this order in order to mitigate its loss and avoid further claims from its own customer.
In order to mitigate its loss the Plaintiff placed orders with a replacement manufacturer at a cost of Euro 0.455 per piece higher than the price agreed with the Defendants (Euro 0.455 x 108,000 pieces)	49,100.00
Air freight charges and increased custom duty	53,334.74
Of the 108,000 pieces manufactured, 50,000 pieces were rejected by the Plaintiff’s customer in view of the late shipment. Compensation payable to the Plaintiff’s customer 50,000 x Euro 4.4189	220,945.00
Plaintiff’s customer freight charges in respect of returned goods	5,000.00
Sub Total	328,379.74

20.  The 1st defendant’s defence to this claim is that the orders under this claim were cancelled without any liability on either side. But no particulars have been pleaded for the cancellation agreement.

21.  The plaintiff disagreed that the cancellation was without recourse to the 1st defendant as the plaintiff owed contractual obligations to its customers.  The plaintiff said that it agreed to the cancellation as the 1st defendant had made it plain that it would not comply with the orders.  The plaintiff was left with no choice but to agree to the cancellation and to seek an alternative manufacturer to produce the orders by way of mitigation of loss.  I agree with the plaintiff that there was no commercial sense for it to have agreed to the cancellation without recourse to the 1st defendant.  I find that the 1st defendant has no defence to this claim.

22.  In the premises, I give final judgment to the plaintiff against the 1st defendant as follows:

	Description
(1)	1st advance	€500,000.00
(2)	2nd advance	€460,000.00
(3)	Order No. 3218	€229,723.86
(4)	Order No. 3221	€189,156.19
(5)	Tag Nos. 3222 – 3225	-€5,249.54
(6)	Order No. 3270 and Order 3227	€505,908.16
	TOTAL	€1,879,538.67

23.  I also make a costs order nisi that the 1st defendant do pay the plaintiff the costs of this action in so far as it is brought against the 1st defendant.