French dairy company Danone invoked the dispute mechanism in its multimillion-dollar contract with Fonterra after it met Prime Minister John Key in Paris last week to discuss the NZ firm's refusal to stump up major financial damages over the botulism food scare.
Danone owns the Auckland-based manufacturer Nutricia, maker of the Karicare infant formula brand which took a punishing after the Fonterra scare resulted in some of its key products being subject to a multi-country food recall.
Much of the alleged brand damage occurred in China where many Chinese consumers boycotted New Zealand-sourced infant formula (which had been selling at a premium on supermarket shelves) after the food scare became public.
The problem the French company faces is it is pursuing its claims against Fonterra at a time when it now also is under fire in China sparked by fresh bribery allegations that its sales staff promoted Nutricia products by providing improper benefits to hospitals.
Nutricia has launched an investigation into the claims.
But it does raise an element of complexity to what otherwise would be a straight compensation dispute.
The Karicare brand was strongly affected in New Zealand after former Fonterra executive Gary Romano wrongly said on TV3's Campbell Live that all Karicare brands were potentially affected. This was later corrected to just two specific Karicare lines, but Danone has since argued Romano's statements compounded the damage.
The scare turned out to be the upshot of a false-positive test.
But the French company is arguing behind the scenes that it has suffered major brand damage and that the recall of some specific infant formula brands across nine countries cost it the thick end of 200 million ($326 million).
Neither Danone nor Fonterra is speaking publicly in detail about the escalation of the compensation wrangle. But it is understood that their commercial agreement provides for a 20-day in period of dispute window in which the parties are expected to try to make some progress in settling their differences.
When I asked Fonterra chief executive Theo Spierings at the company's results briefing last week what financial contingency the NZ co-operative had made for settling damages claims by companies who had faced a loss of earnings from the food scare, he said the figure was $14 million.
The upshot of Spierings' reported comments was that Danone decided to immediately invoke the formal dispute settlement provisions.
If, as is likely, the parties cannot reach agreement, the next step is formal arbitration in Singapore with the ultimate move being litigation.
Key met with Danone Group chief executive Franck Riboud and chief legal counsel Bertrand Austruy, in a 20-minute pull-aside during a NZ embassy reception in Paris. Key later said he assured Danone there would be a thorough investigation of the overall incident and all information would be made public.
Danone is also understood to have its sights set on Government-owned testing agency AgResearch whose false-positive test resulted in the food recall being ordered.
But Key has argued the buck stops with Fonterra - not the Government.
The PM has briefed Spierings on his talks with the Danone HQ executives before last Wednesday's Fonterra results meeting.
Key would have been well across the issues.
The French company had already done the rounds in New Zealand sending Austruy and vice-president corporate communications Laurent Sacchi to Wellington and Auckland to outline their concerns to Trade Minister Tim Groser, Ministry of Primary Industries acting director-general Scott Gallacher and Spierings.
The issue is complex. Credit Suisse is reported as having estimated Danone's baby-food sales in Asia and China dropped by 75-80 per cent in August.
Fonterra is likely to argue the final onus was on Danone to do its own round of testing before putting its infant formula brands into the market. Danone will argue that Fonterra should have blown the whistle earlier irrespective of whether the offshore tests did finally reveal the whole affair had been sparked by a false alarm.
Nutricia recalled 67,000 tins of baby formula. It has invited customers, politicians, bureaucrats and media into its Auckland plant this week in an effort to push ahead with brand recovery.
The Fonterra board inquiry is now understood to be in the final stages. If the inquiry is doing its job it will raise questions over why the whole quality issue was not escalated to chief executive level in March when tests at a Fonterra Australian plant raised concerns about whether a specific batch of whey protein had been affected. The company's level of crisis readiness and the way executives handled recall from a PR perspective has also been under the microscope.
But the big issue is whether the Fonterra board will also have the courage to turn the spotlight on itself and ask whether it should have ensured the management team had a well-rehearsed and effective crisis management plan around food recalls and other quality issues. And whether in Spierings' absence in Europe and China, Fonterra chairman John Wilson should have stepped up and fronted the crisis after Romano's floundering communications failure.
Spierings has made it clear that he just wants to get on and drive Fonterra's rollout of its own brands in China. But it will have to tread carefully on the brand front.