The New South Wales Supreme Court has found the parent company of global coffee and cafe franchisor Gloria Jeans breached its agreement with a US-based coffee supplier, in a decision that is likely to cost Gloria Jeans more than $13 million in damages, plus legal costs and on-going commission payments.
Judge Justice David Hammerschlag has also criticised the evidence provided by Gloria Jeans founder Nabi Saleh, who is also a senior figure in the Hillsong Pentecostal Church community, by rejecting his claims that he did not believe the agreement with the US coffee supplier was binding.
Colorado-based coffee supplier Western Export Services launched legal action against the parent company of Gloria Jeans, a company called Jireh, seeking damages over unpaid commissions.
Jireh is owned by Saleh and another Gloria Jeans executive, Peter Irvine.
WES claimed Jireh entered into an agreement in March 1996, whereby Jireh was to pay WES a commission of 5% of the ex-factory costs on products sourced from the US (where WES was the sole supplier); on Gloria Jeans-branded products sourced from outside the US and supplied to stores in Australian and other countries; and on coffee beans roasted by Jireh or an associated company and supplied to Gloria Jeans stores.
The agreement also specified that WES was entitled to receive 4% of the proceeds from any sale of Jireh, which holds the master franchise agreement to Gloria Jeans in Australia.
Jireh claimed that the agreement with WES was not binding, and also filed cross-claims against Western Export Services and its two directors, Steven Meier and David Cisneros.
However, Justice Hammerschlag dismissed those cross claims and found in favour of WES for “$8,387,656 representing damages for the period to June 30, 2009”.
The case will return to the Supreme Court on June 25, where further submissions will be heard to determine interest, costs and updates to on-going commissions.
It is expected the damages will be in the order of $13.5 million plus costs, although the upholding of the agreement by Justice Hammerschlag suggest that Jireh will also be liable for on-going commissions of 5% of the ex-factory costs of coffee and other products, and will be required to pay WES 4% of the sale price on any sale of the business.
Nabi Saleh said in a statement that the finding in favour of WES was “surprising” and as a result, the company will carefully review the judgment and consider its options.
Lawyer Ross Koffell, who represented WES and its directors, said his clients were “very pleased” with the judgement.
While the evidence from WES directors Steven Meier and David Cisneros, was praised by Justice Hammerschlag, Saleh’s was not.
“During cross-examination various documents were put to Mr Saleh as reflecting conduct on the part of Jireh consistent only with there being a binding agreement with WES,” the judge said.
“Mr Saleh is an intelligent man and he is articulate. He was to my observation acutely aware of the significance of the documents being put to him as being inconsistent with his position.”
“No less than seven times (in some instances evasively and not responsively to the question), Mr Saleh’ s evidence was that the parties were continually negotiating and working towards an agreement or mutually satisfactory relationship which was never achieved.”
“I reject this evidence. It is inconsistent with his own behaviour and with a significant body of contemporaneous objective material.”
Justice Hammerschlag also questioned part of Saleh’s affidavit, where he recalled telling Irvine the agreement with WES “was not a binding agreement. It is the foundation of a working relationship going forward”.
Hammerschlag said he was “not satisfied that this conversation occurred. What was allegedly said is inconsistent with the outward behaviour of both. “
It is not clear what impact the judgement may have on the financial performance of Jireh in its capacity as parent company of Gloria Jeans, which has 917 stores in 38 countries around the world.
The judgement cites net profit figures of $792,716 for 2002-03 and $946,442 for 2003-04, but further figures were not supplied to the court.
However, Hammerschlag said “it may be assumed that its position in later years became even stronger, given its acquisition at the end of 2004 of the international franchise operation (excluding the US and Puerto Rico) for $US16 million.”
James was the editor and publisher of SmartCompany and LeadingCompany for five years. He is now the Australian Financial Review‘s companies & markets editor, and a former BRW editor.
