COLES' biggest beef supplier Australian Country Choice is suing the supermarket giant alleging breaches of a contract that gave exclusive rights to the cattle producer to export about $150 million worth of beef every year.
The dispute surrounds a contract that gave exclusivity to ACC for the sale and distribution of surplus domestic Coles beef to export markets.
ACC managing director David Foote said the company had "no choice but to commence legal action" against Coles after "exhaustive negotiations" failed to resolve the dispute.
The legal challenge is yet another major conflict between key suppliers and one of Australia's retail heavyweights.
ACC, which is one of the biggest land owners and beef producers in Australia, provides more than 50 per cent of Coles beef every year worth about $600 million – or roughly 300,000 head of cattle.
ACC set up export contracts and distribution channels including a prized registration number for the export of beef to China – one of the more difficult markets to break into.
Coles then paid ACC commissions on all the export sales of its meat ranging from 2 per cent to 1.25 per cent when sales go over $250 million per year.
Now Coles has established its own trading company and claimed that it wants to take control over the sales and trades of the meat that ACC has had control of since setting up the export business.
Coles is arguing that while ACC had exclusivity over the sales and trading the exclusivity did not exclude Coles itself.
ACC commenced legal action in the Supreme Court of Queensland against Coles on Monday evening.
"For most of our 40-year partnership with Coles, the relationship has been a strong and mutually beneficial one but we consider that, in recent times, Coles has repeatedly breached its obligations, failed to act in good faith and taken steps that threaten the very core of our business," Mr Foote said.
"The ACC beef supply chain is well-known and highly-regarded, which gives us great confidence in our long-term future and in our ability to build new customer relationships."
The Wesfarmers-owned Coles has not yet responded.
Coles managing director John Durkan has previously challenged suppliers over prices being too high. He has been stepping up pressure on suppliers to reduce wholesale prices or to absorb rising input costs so the retailer can pass savings to consumers by "permanently" reducing shelf prices.
Some analysts believe Coles has become too focused on price in its attempt to regain sales growth momentum and ascendancy over competitor Woolworths.
The dispute with ACC is unusual in that it does not target the company on the cost of the beef produce but instead challenges the company for control of a lucrative export business.
Law firm Kinneally Miley is representing ACC while Allens Linklaters is defending Coles.
In the statement of claim filed in the Supreme Court, the plaintiff said that it could not continue to employ highly experienced staff to maintain its export sales business if Coles continued to try and take over such sales.
It said such employees would likely leave to other competitors leaving ACC struggling to maintain its export sales business.
The statement also asserts a number of claims that Coles did not act in good faith in relation to trading practices and that it misused confidential information.