Millions at stake in milk scare stoush

The dairy cooperative has already fronted up to its failings.

French supplier Danone claims Fonterra misled it over the risks associated with botulism scandal.

It's high-stakes for Fonterra and its more than 10,000 farmer shareholders as the dairy cooperative tries to halt Danone's multimillion-dollar action in the High Court at Auckland.

The French food conglomerate wants compensation for alleged damages of the more than half a billion dollars it claims to have suffered as a result of last year's botulism scare. The scare ultimately proved false, but Danone's valuable China trade was severely affected as its New Zealand subsidiary Nutricea recalled several Karicare infant formula brands and other potentially affected products from Chinese supermarket shelves.

Fonterra is arguing that the correct place to settle Danone's claim is behind closed doors at arbitration in Singapore. The New Zealand company argues that because Danone's supply agreement was with Fonterra Limited, its liability is capped at A$30 million ($32.3 million) with the final settlement to be determined through a binding arbitration.

Problem is sources close to the arbitration believe it could stretch on for another year.

And with Danone reckoning its damages totalled $544.5 million from the product recalls and associated brand damage alone, it's easy to see why it has the Fonterra Cooperative Group -- and a potentially much larger damages award in its sights.

Fonterra's reputation will inevitably be on trial if Justice Geoffrey Venning allows the Danone action to proceed in open court rather than wait for the outcome of arbitration.

The dairy cooperative has already fronted up to its failings in the rigorous internal inquiry headed by Fonterra director Sir Ralph Norris. It has quietly settled claims with eight other customers who were affected when Fonterra publicly fronted up to the possibility that a batch of whey protein concentrate, known as WPC80, was affected by the botulinum bacteria.

But the Norris report was also "trimmed for trial", with any contentious findings that could have exacerbated a damages claim redacted from the final report.

Danone has brought four causes of action against Fonterra; two for breach of the Fair Trading Act and two for tortious conduct. Tortious conduct is a claim actioned when a civil wrong has occurred, resulting in damages against the plaintiff. The most common category is negligence, but the possibility of defamation could also fall under a tort claim.

That contract however is between Danone and Fonterra Ltd, a subsidiary company under the Fonterra Cooperative Group umbrella that owns the Hautapu plant where the suspect batch originated. Danone's action lists Fonterra Group as the defendant, skipping the web of subsidiaries and commercial agreements to seek reimbursement from the source.

Danone's attorneys however maintain that although their present claims arise from the botulism incident, they differ from what is covered under the supply agreement and they should be free to pursue their case before the High Court.

This week's skirmishes at the High Court tell the story.

Danone's counsel has alleged Fonterra Cooperative Group employees provided it with "incorrect and misleading information" in April last year. This included the fact that the WPC80 whey protein concentrate was clear of certain bacteria when testing was yet to be completed. Danone had been "lulled into a false sense of security" in April and continued to manufacture and distribute product. The crucial point is that Danone alleges that Fonterra knew there were uncertainties about the whey protein product.

It also has concerns that it had to issue a multi-country recall when it later turned out to be based on a false alarm.

This month Fonterra was fined $150,000 by the NZX Markets Disciplinary Tribunal for breaching continuous disclosure requirements to the stock exchange during the botulism scare.

That followed a $300,000 fine from the Ministry of Primary Industries after Fonterra admitted four charges.

Danone's action will be far more worrying to Fonterra and its farmers than the relative slaps on wrist they've endured thus far -- that's why the stakes are so high.

Fran O'Sullivan is a business columnist for the NZ Herald and Alexander Speirs is a business journalist for Herald Business Reports.