Fonterra loses legal action brought by former NZ Dairies milk suppliers over inferior supply contracts

Tuesday 1st December 2015

Farmers who formerly supplied milk to the failed New Zealand Dairies’ milk processing plant at Studholme have won a High Court case against Fonterra Cooperative Group challenging the legality of new inferior supply contracts they were offered by the dairy giant.

The nub of the case was whether Fonterra, which bought the Studholme plant from the receivers in 2012, was lawfully able to offer the former suppliers to the plant so-called “growth contracts” on inferior terms in order to keep its existing farmer suppliers sweet.

In a written decision out today, Justice Matthew Muir said Fonterra’s reasons for doing so stemmed from a “perceived need to assuage internal politics within its supplier base and included also an element of ‘messaging’ for the benefit of other farmers who might in the future be persuaded to leave Fonterra and support an independent.”

Fonterra claimed it was legally entitled to do so despite provisions under the Dairy Industry Restructuring Act that require new entrants to be treated on the same terms as existing shareholder suppliers.

The decision comes as the Commerce Commission seeks submissions on its draft report on the state of competition in New Zealand’s dairy industry which found that Fonterra could charge too much for its milk if the industry is deregulated. It found there was still insufficient competition at both the farmgate and factory gate to fully remove the DIRA regime.

The High Court case included claims under the Fair Trading Act and the Contractual Remedies Act arising from statements allegedly made by Fonterra representatives at various meetings before the 20 dairy farmers in south Canterbury and Otago signed the new six-year growth contracts.

The former NZ Dairies suppliers were owed more than $20 million for the previous season’s milk from the receivers and Fonterra’s $50 million offer to the receivers to buy the failed Studholme plant was conditional on all of them signing the long-term supply contracts. These included a discount of 5 cents per kilogram of milk solids over the first three years to the contract milk price payable which was already 5 cents/kgMS below the Fonterra farmgate milk price.

The deal, which saved Fonterra $3 million, gained approval from both the Fonterra board and the Commerce Commission. Kelvin Wickham, now Fonterra’s managing director Global Ingredients also said in an internal email that the former NZDL shareholders shouldn't be allowed to “share up” (buy shares against their production), until potentially the end of the first year so there is a “differential milk price penalty for at least a year – they can’t just expect to waltz back in and get full milk price if they share up”.

The plaintiffs argued that Fonterra was able to make a “take it or leave it” offer because they wouldn’t get the full amount they were owed from the receivers under any alternative deals and that it structured the offer to demonstrate to its existing farmer shareholders that the former NZDL suppliers didn’t receive favourable treatment. They said the fact Fonterra was able to impose “penalties” for essentially internal political purposes was evidence of an uncompetitive market for milk supply.

Fonterra’s defence was that the DIRA clause on treatment of new entrants only applied to share-backed supply and it wasn’t precluded from offering special terms for contract supply.

Justice Muir said he had difficulty with the plaintiff’s argument conferring them new entrant status but he found Fonterra couldn’t treat an applicant outside of the stated application period for supply as a new entrant for some of their supply and not the balance, essentially creating a subcategory of new entrants with inferior rights.

“Fonterra retains a discretion in terms of whether it accepts such entrants into the shareholding farmer “fold” but why, having elected to do so, it should be able to discriminate against the individuals concerned in a way not possible in respect of timely applicants seems to be a proposition which struggles for a basis in principle,” he said.

The judge accepted the plaintiffs argument that no factors provided justification for a difference in terms and he also concluded that Fonterra breached the Fair Trading Act and the Contractual Remedies Act by giving an overriding impression to the new suppliers that the reason they weren’t being allowed to share up was because they were outside the application period.

“The overall message was that the suppliers were not being treated differently from other Growth Contact suppliers in relation to sharing up when in fact they were,” he said.

A further hearing is to be held to determine what losses the plaintiffs have incurred and the question of legal costs.

BusinessDesk.co.nz

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