Diageo slams 'baseless' Serrallés suit as Captain Morgan sails into storm

By Ben Bouckley

- Last updated on GMT

Related tags Contract

Captain Morgan: The privateer behind the brand at the center of the legal storm (Picture Copyright: Dakota Starr/Flickr)
Captain Morgan: The privateer behind the brand at the center of the legal storm (Picture Copyright: Dakota Starr/Flickr)
Diageo has dismissed as 'baseless' legal action taken by Destileria Serralles (DSI) in the US, which alleges contractual breaches linked to the former's move to shift production of Captain Morgan rum from Puerto Rico to the US Virgin Islands (USVI).

On its side, DSI also criticized a 2008 agreement between Diageo and USVI, claiming that excise rebates handed to Diageo were so generous that the drinks giant could sell Captain Morgan below cost price, disadvantaging DSI and “threatening competitive balance in the...Caribbean rum industry”.

Puerto Rican rum maker DSI seeks damages for evaporation losses, storage costs and lost profit relating to rum it says Diageo agreed to buy, but has not paid for or provided delivery instructions.

‘Case is without merit' - Diageo

Additionally, DSI insists Diageo should be made to ‘disgorge’ profits relating to sale of USVI rum in the US (rather than DSI-made rum), since (the filing says) “it will reap millions…in undeserved gains”.

Through a jury trial, DSI – via its October 3 filing in the US District Court of Puerto Rico – also seeks declaratory relief on whether Diageo can legally sell DSI-made rum in Europe rather than just the US.

Diageo hit back in a statement sent to BeverageDaily.com today: "Diageo has honored all of its contractual obligations with Distelleria Serralles and properly exited from the supply contract in Puerto Rico,"​ the drinks giant said.

"Any assertions to the contrary are baseless. Once all relevant facts are disclosed, it will be clear that this case is without merit and Diageo acted appropriately."

A 2008 move saw Diageo end a deal with DSI – which had distilled Captain Morgan sold in the States from 1985 – and sign a new agreement whereby the Puerto Rican firm would supply it until 2011, after which time Diageo’s USVI rum would be aged and ready for bottling.

The new deal also saw Diageo agree to buy 1m additional gallons of rum from DSI to guard against anticipated shortfalls at USVI plant, the suit alleges, but Diageo had not paid for roughly 90% of this volume, and was in breach of contract for not giving DSI delivery instructions.

‘Much more seriously…’

However, DSI alleges that Diageo had breached the agreement by substantially delaying delivery of rum without justification (due to not supplying delivery instructions), and “much more seriously, has just announced its intention to sell the rum outside the United States”.

“Diageo seeks to sell DSI’s rum outside the US so that it can substitute Virgin Islands rum for DSI’s, and thereby reap for itself the extravagant cover-over revenues that the Virgin Islands has agreed to give Diageo,” ​DSI claims.

But DSI claims its contract with Diageo prohibited the latter from selling DSI-produced rum anywhere but in the United States.

Both parties understood that US sale alone was fundamental to the pricing structure of the Bulk Rum Supply Agreement, DSI said. (The governments of Puerto Rico and the Virgin Islands receive substantial cover-over excise taxes on locally produced items such as rum sold in the US.)

Since some excise taxes collected on DSI-made Captain Morgan ultimately rebounded to its benefit, DSI said it had agreed a lower rum price with Diageo “in express reliance on this fact”.

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