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Current as of 28/11/14 07:40PM NZST

Hamish Fletcher

Business reporter for the NZ Herald

Fonterra halts Danone legal action

Danone put the cost of Fonterra's recall of 38 tonnes of whey protein from a feared botulism scare at euro 350 million.
Danone put the cost of Fonterra's recall of 38 tonnes of whey protein from a feared botulism scare at euro 350 million.

Fonterra has successfully put Danone's legal action against it in New Zealand on hold, with the High Court this week saying arbitration in Singapore should happen first.

Danone, the parent company of infant formula maker Nutricia, in January launched court action in New Zealand and arbitration proceedings in Singapore to get compensation after the whey protein concentrate recall by New Zealand's biggest company, triggered by a botulism scare.

The Paris-based company put the cost of the recall at €350 million when it revealed its third-quarter results last year but in its court action it alleges projected costs - together with lost sales - will be €630 million.

Danone wants compensation from Fonterra for losses from the botulism scare and the harm it says was caused to its reputation.

Fonterra wrongly suspected in August last year that 38 tonnes of whey protein - used to make products including infant formula manufactured by Nutricia - had been contaminated with a botulism-causing bacterium.

The whey protein was ultimately cleared but not before a recall of baby formula products amid fears that children could be harmed. Nutricia had to recall 67,000 cans of its Karicare baby milk brand in New Zealand.

Fonterra applied last month in the High Court at Auckland to suspend the action it is facing in New Zealand pending the determination of the Singaporean arbitration that involve companies in the Fonterra group and Danone.

Fonterra said the parties' relationship was that of supplier and customer, governed by the terms of the supply agreement, which included an arbitration clause.

Danone's claims should be brought in arbitration instead of being determined in isolation by New Zealand's High Court, Fonterra said.

If there was anything that could not be dealt with at arbitration, these claims could be picked up once the Singaporean process was complete.

Fonterra also said the local proceedings were a "contrivance" that sought to embarrass the dairy co-op and seek to evade the liability cap in the parties supply agreement.

This liability cap is for A$10 million per claim and A$30 million per year.

Danone, on the other hand argued against the stay of proceedings. It claimed that the arbitration would not decide whether it could take action against Fonterra's parent, Fonterra Group, rather than Fonterra Ltd, which the arbitration proceedings were against.

Danone said it was the actions of Fonterra Group's employees which were at issue in the New Zealand proceedings.

Justice Geoffrey Venning granted the stay application in a decision released publicly today.

The judge said the facts underlying Danone's High Court claim and arbitration "are essentially the same".

He said there was a practical risk of inconsistent findings of fact and law in the two proceedings and that there would be a duplication of witnesses and evidence.

"Given the substantial degree of factual overlap between the claims in the Singaporean arbitration and these proceedings I consider that it would not be in the interests of justice for both claims to proceed in tandem. It is in the interests of costs, convenience and justice that the factual matters be determined first, either in these proceedings or in the Singaporean arbitration," he said.

"In my view the arbitration should go first because the parties agreed the arbitration process was to apply to claims arising out of the supply of product by Fonterra to Danone AP ... I am satisfied that this is one of the rare and compelling cases where the circumstances require a stay," Justice Venning said.

However, the judge said if Fonterra delays the arbitration, Danone could come back and ask the stay to be lifted. He said if any issues were not resolved at arbitration, Danone can pursue them once that process was concluded.

THE LEAD UP TO THE BOTULISM SCARE:

While the botulism scare blew up in August, the court action from Danone relates to events that happened months earlier.

March 2013: Fonterra Australia manufactured product for Danone using a type of whey protein concentrate (WPC80) from the dairy co-op's Hautapu plant. Testing across the Tasman as part of this manufacturing process showed elevated levels of sulphite reducing clostridia (SRC) in the final product.

March/April 2013: This testing-confirmed that the WPC80 was the likely cause of the elevated SRC levels and it was sent to Fonterra's research and development centre to establish whether or not clostridium perfringens was present. Clostridium perfringens is a common cause of food poisoning.
The research centre confirmed that the whey protein concentrate contained clostridia sporogenes, which is bacteria that poses no risk to human health.

April 22 and 23 2013: Fonterra issued a report to Danone and held a conference call about issues raised by the elevated SRC levels.

July 19 2013: AgResearch indicates the SRC levels were more comparable with clostridium botulinum - which can cause botulism.

July 26 2013: Fonterra put the product with the affected whey protein concentrate on hold.

July 31 2013: AgResearch testing showed a strongly positive result for toxin.

August 1 2013: Fonterra contacted customers on the botulism scare.

January 9 2014: Danone launches legal action in the New Zealand High Court and arbitration proceedings in Singapore against Fonterra.

June 23 2014: Fonterra applies to stay Danone's local court action.

July 17 2014: The High Court imposes a temporary halt on Danone's case.

WHAT DANONE IS ALLEGING IN ITS COURT ACTION:

* In discussions with Fonterra during April 2013, Danone claim they were given assurances that there was no food safety risk from the use of supplied whey protein concentrate.

* Danone claims by giving these assurances Fonterra Co-operative Group breached the Fair Trading Act and engaged in misleading and deceptive conduct because the New Zealand company had information that it did not disclose.

* The French food giant also says that if the co-op had not made false and misleading representations it would have refused to accept the New Zealand company's product and would have made a more orderly recall of its baby food.

* Thirdly, Danone alleges that Fonterra knew or should have known the French company was relying on it to provide it with correct information. Danone says the co-op owed a duty to take care the information provided by it was correct and any update on it was provided promptly. Danone alleges Fonterra breached these duties.

* In its fourth cause of action, Danone says Fonterra Group breached its duty of care when manufacturing the whey protein concentrate to ensure it was free from any defect giving rise to a risk to health and safety.

Read the court judgement here:

- NZ Herald

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