Fonterra does not have to file its defence yet to a $1 billion lawsuit from French good giant Danone, says the Court of Appeal.
Danone, the parent company of infant formula maker Nutricia, in January started court action in New Zealand and arbitration proceedings in Singapore to get compensation after the Fonterra whey protein concentrate recall triggered by a botulism scare.
It 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 and lost sales will total €630 million ($1 billion).
Today's court of appeal judgement said Danone seeks damages expected to exceed this amount.
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 Nutricia infant formula - 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 recalled 67,000 cans of its Karicare formula in New Zealand.
Fonterra applied in June High Court at Auckland to suspend the action it is facing in New Zealand pending the determination of the Singaporean arbitration that involves companies in Fonterra Group and Danone.
It said the parties' relationship was that of supplier and customer, governed by the supply agreement, which included an arbitration clause.
Danone's claims should be made in arbitration instead of being determined in isolation by New Zealand's High Court, Fonterra said.
Fonterra also said the local proceedings were a "contrivance" that sought to embarrass the dairy co-op and evade the liability cap in the parties' supply agreement.
The cap is A$10 million ($10.7 million) a claim and A$30 million a year.
Danone claimed 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. 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.
He said the facts underlying Danone's High Court claim and the arbitration "are essentially the same".
There was a risk of inconsistent findings of fact and law in the two proceedings and there would be a duplication of witnesses and evidence.
Danone challenged this decision last month before the Court of Appeal.
Danone's lawyer, David Goddard, argued his client's concerns would be met if the terms of the stay were altered to require Fonterra to file a defence to the New Zealand lawsuit and provide discovery.
He pointed out that if these steps were not taken until the middle of 2016 - when the arbitration award is due to be released - Danone's High Court action would have effectively been delayed by 18 to 24 months.
However, Danone's appeal was dismissed in a decision released at midday.
Justice Douglas White, in the decision, said there would be a "real risk of injustice" to Fonterra if the group was required to be diverted from the Singapore arbitration by taking further steps in the High Court action.
"For completeness, we note that we do not accept Mr Goddard's submission that our decision not to amend the terms of the temporary stay will, as a result of delay in the High Court proceeding, deprive Danone of its right of access to the courts. Danone's High Court proceeding has not been struck out or stayed permanently," the Court of Appeal judge said.
"Any cost to Danone as a result of the delay in the High Court proceeding will be able to be met by an appropriate order for interest in the event that the claim for damages is ultimately successful," Justice White said.
The court ordered Danone to pay costs to Fonterra for the appeal.
What Danone is alleging in its court action:
• In discussions with Fonterra in April last year, Danone says, it was given assurances that there was no food safety risk from the use of supplied whey protein concentrate.
• It says that 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 Fonterra 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.
• Danone alleges that Fonterra knew or should have known the French company was relying on it to give it correct information. Danone says the dairy co-operative had a duty to take care the information it gave was correct and any updates were provided promptly. Danone alleges Fonterra breached these duties.
• Danone also 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.
Lead-up to the 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, a bacterium 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 NZ 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.
• October 15, 2014: Danone challenges the decision to Court of Appeal
• November 7, 2014: Danone appeal is dismissed