The company challenging Synlait Milk over its right to build and operate a production plant at Pokeno is suggesting infant formula safety could be at risk if a planned quarry goes ahead.
But Synlait says it's confident that's not the case and that the company is fully compliant with New Zealand legislation.
Neighbour NZIP, which is locked in a court wrangle with Synlait over enforcement of use covenants on the dairy company's $280 million new Pokeno site, said it plans a quarry on its land, which is zoned for quarrying.
"We are consulting with different experts, and the initial feedback is that the dusty quarrying activities and exceedingly sensitive infant formula manufacturing are incompatible," NZIP said in a statement to the Herald.
"Synlait's infant formula plant, which was built next door to our quarrying land after ignoring our numerous alerts that there are covenants restricting buildings on the land, is located directly under the path of the prevailing wind, which will be blowing dust straight onto their air intake system. This has made our planned quarrying activities extremely improbable."
NZIP wants to create a quarry to provide aggregate for planned tourism and housing development on its Pokeno land.
NZIP's statement comes on the heels of a Synlait announcement that it had processed the first milk received at its new nutritional powder manufacturing site at north Waikato.
A Synlait spokeswoman said New Zealand food safety legislation is outcome based and not prescriptive.
"Our own and external advise has reinforced that Synlait is well placed to manage any risk through an appropriate risk management plan. We have met with NZIPL representatives to explain this.
"We are confident that Synlait Pokeno would not prevent NZIPL from achieving their own plans, even if this included a quarry. We remain willing to work with NZIPL to achieve this."
It has made a settlement offer to NZIP, which said discussions were "ongoing".
NZIP has property totalling 148ha next door to the Synlait plant.
NZIP principal Qing Ye, also known as Karl Ye, plans a 1000-section housing development on his land, Herald inquiries revealed in June. NZIP made a submission in October last year to the Waikato District Council to rezone the land residential.
NZIP's claim is the latest parry in a war of nerves between listed Synlait and Ye.
Synlait bought its 28ha site in February last year, conditional on the seller Stonehill Trustee getting two 200-year covenants on the land removed.
But Synlait shortly after started earthworks and in November the High Court removed the covenants and the Canterbury-headquartered company settled the deal.
But NZIP appealed the High Court decision. The Court of Appeal has upheld the covenants which restrict the site's use to grazing, lifestyle farming or forestry. Ye owns the benefits of the covenants, which have only run for 20 years.
In June Synlait filed an application to appeal to the Supreme Court to have the Appeal Court's decision overturned. A hearing is scheduled for October 21 to consider whether leave for an appeal will be granted.
Throughout the legal wrangle, Synlait has continued building and commissioning its plant and contracting milk supply.
Earlier this month Synlait chief executive Leon Clement said in order to stop Synlait from commissioning, NZIP would have to file an injunction to suspend operations.
Clement at the time said: "We are technically in breach of the covenant now, even as we build on the land. Starting to run it and commission it doesn't change that situation".
He said Synlait had made "a reasonable offer that we think reflects the other party's best-case outcome if they were to win in court or we run it through the courts".
If the offer was rejected, Synlait would go to court, he said.
He acknowledged the situation had "created uncertainty".
Responding to Synlait's announcement of the first milk processing at Pokeno, an NZIP spokesperson said the company was cheered that Synlait had "finally admitted their breach of the covenants".
"If New Zealand is to retain its credibility internationally it needs to ensure the law is abided by, no matter how big or small the company may be. This is especially true for a public company which should always respect the law and a neighbour's rights," he said.
"As stated in the Court of Appeal judgement, "Covenants are contractual promises, and damages are an available remedy in the event of a breach. So is an injunction."
An injunction has always been an available remedy in these circumstances, the spokesperson said.