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Fonterra's Dira breach appeal rejected by Supreme Court

Thursday 21st December 2017

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Fonterra Cooperative Group breached the Dairy Industry Restructuring Act (Dira) by imposing less favourable terms on farmers who had previously supplied the failed New Zealand Dairies, the Supreme Court has confirmed.

In 2015, the High Court ruled that Fonterra had breached Dira after buying the independent processor's plant out of receivership in 2012 for $48.5 million and taking on the farmers, who supplied milk from farms in North Otago and South Canterbury. Fonterra made a deal with the farmers, agreeing to buy their milk under a "growth contract", rather than a fully share-backed supply, where farmers purchase one Fonterra share for every kilogram of milk solids they supply in a season and are paid the farmgate milk price plus a dividend on each share.

Under the growth contract, the farmers were entitled to 5 cents less per kilogram of milk solids than the contract milk price and bought 1,000 Fonterra shares but couldn't "share up" - become fully share-backed - in their first year of supplying Fonterra.

Fonterra appealed the ruling to the Court of Appeal, which rejected it in 2016 and this year to the Supreme Court. It was granted leave to appeal to the highest court on the question of whether the appeal court was correct to find that the farmers counted as "new entrants" and, if so, whether Fonterra breached section 106 of the act in offering the terms that it did.

In a majority ruling, the court dismissed the appeal. Four sets of reasons were delivered in the ruling: one from Justice Ellen France and Justice Mark O'Regan, one from chief justice Sian Elias, one from Justice Susan Glazebrook, and a dissenting argument from Justice William Young.

Justices Ellen France and O'Regan said the argument made by the farmers' lawyer David Goddard QC and accepted by the lower courts, that Fonterra penalised the farmers to avoid bad optics with its existing suppliers and to show there would be consequences for leaving, "have not been shown to be wrong and they undermine what may otherwise have been seen as a rational link between the respondents’ different position and all three different terms of supply."

The different terms offered to the South Canterbury farmers "were thus not rationally linked to the difference in circumstances", the judges said. This was particularly clear when it came to the restriction on the farmers preventing them from sharing up.

Chief Justice Elias and Justice Glazebrook agreed that the farmers counted as new entrants and that Fonterra had breached s106 of Dira. Elias also said that Fonterra hadn't proved that the price it paid for the plant was inflated to cover the money owed by New Zealand Dairies to the farmers, as its lawyers argued.

"Without such foundation, it seems to me that the arguments that the respondents had received a “windfall” through the payment of the money owed to them by New Zealand Dairies cannot be substantiated," Elias said. "The fact that the purchase price for New Zealand Dairies was structured around the value of the plant obtained and the cost to allow the receivers to clear indebtedness to the bank and meet the obligations for milk supplied does not mean that the respondents received a “windfall” or a benefit that differentiated their position from that of other shareholding farmers, to Fonterra’s cost."

Justice William Young accepted Fonterra's argument that the farmers were not share-backed suppliers, but instead contract suppliers, and s106 of Dira does not cover contract suppliers. The farmers' holding of 1,000 shares was "nominal", Fonterra argued.


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