Danone Asia Pacific Holdings Pte Ltd v Fonterra Co-Operative Group Ltd

• Jurisdiction: New Zealand
• Judge: Venning J
• Judgment Date: 17 July 2014
• Neutral Citation: [2014] NZHC 1681
• Docket Number: CIV-2014-404-000025
• Court: High Court
• Date: 17 July 2014

Between

Danone Asia Pacific Holdings Pte Ltd

First Plaintiff

Nutricia Limited

Second Plaintiff

Dumex Baby Foods Co Ltd

Third Plaintiff

Danone Dumex (Malaysia) SDN BHD

Fourth Plaintiff

Dumex Ltd

Fifth Plaintiff

Danone Vietnam Company Limited

Sixth Plaintiff

Danone Nutricia Early Life Nutrition (Hong Kong) Limited

Seventh Plaintiff

Nutricia Australia Pty Limited

Eighth Plaintiff

and

Fonterra Co-Operative Group Limited

Defendant

[2014] NZHC 1681

CIV-2014-404-000025

IN THE HIGH COURT OF NEW ZEALAND

AUCKLAND REGISTRY

Application for an order staying proceedings — first plaintiff manufactured and supplied baby formula — defendant supplied diary derived base products used in the baby formula — defendant's product tested positive for suspected botulism-causing bacteria — the first plaintiff recalled potentially affected product — supply agreement between first plaintiff and defendant contained an arbitration clause — first plaintiff's arbitration notice raised claims both in contract, for breach of material provisions of the supply agreement, and in tort — first plaintiff's current claims were based on breach of the Fair Trading Act 1986, negligent misstatement and product liability — defendant submitted claims should be heard in arbitration first — whether the current claims were based on the supply agreement governed by the arbitration clause — whether stay should be granted so as to avoid an abuse of process arising from a duplication of proceedings — whether issue estoppel would arise.

Appearances:

A R Galbraith QC and D R Kalderimis for Applicant/Defendant

D Goddard QC and J H Stevens for Respondent/Plaintiffs

JUDGMENT OF Venning J

Application

1 Fonterra Co-Operative Group Limited (FCGL) seeks an order staying this proceeding until further order of the Court, together with associated orders.

Factual background

2 The first plaintiff, Danone Asia Pacific Holdings Pte Ltd (Danone AP), manufactures and supplies baby nutritional products (baby formula). On 1 January 2011 Fonterra Limited (Fonterra) and Danone AP entered a supply agreement (supply agreement) pursuant to which Fonterra agreed to supply dairy derived nutritional base powder products (product) to Danone AP for use in its baby formula.

3 On 2 February 2012 a foreign matter contamination occurred at Fonterra's Hautapu plant during the manufacture of whey protein concentrate (80 per cent) (WPC80), a nutritional food product used in a variety of consumable end products, including baby formula.

4 On 20 February 2012 Hautapu sent a product disposal request relating to the WPC80 to the regulatory authority Asure Quality. Asure Quality declined the initial request. Hautapu then sent a revised request to Asure Quality. It sought approval to wet rework the WPC80 or, if required, to dispose of it as stock food. Asure Quality approved Hautapu's revised product disposal request on 11 April 2012. The rework plan did not address necessary cleaning procedures for the piping used in the process. Between 17 March 2012 and 22 May 2012 Hautapu reworked the product (the affected WPC80).

5 Hautapu sent 13.5 tonnes of the affected WPC80 to Altona, Victoria for use by Fonterra Australia Pty Ltd (Fonterra Australia) in the production of product for Fonterra to supply to Danone AP.

6 Between 1 March 2013 and 18 March 2013 Fonterra Australia manufactured product using the affected WPC80.

7 On 18 March 2013 testing carried out as part of the product manufacturing at Fonterra Australia showed elevated sulphite reducing clostridia (SRC) levels for some of the final product. Fonterra Australia began investigating the elevated SRC levels.

8 Between 27 March 2013 and 3 April 2013 the testing and trace back confirmed that the affected WPC80 was the likely cause of the elevated SRC levels. Between 11 and 15 April 2013 Fonterra Research and Development Centre (FRDC) tested the SRC levels in the affected WPC80 to establish whether or not the organisms were clostridium perfringens. Under the supply agreement Danone AP had a specification requirement that the product be tested for clostridium perfringens when high SRC levels were present. FRDC confirmed that the affected WPC80 contained clostridia sporogenes and bacillus licheniformis.

9 Fonterra and Danone AP had a conference call on 23 April to discuss the issue and a report Fonterra had prepared on 22 April. In that call and in other communications between then and 7 May, the parties sought to address the issues raised by the elevated SRC levels in the product. Fonterra sought Danone AP's agreement to accept product that did not meet the specification. Danone AP advised that, save for 12.6MT of product to be used for growing up milk powder, it would not accept out of specification product but would accept product within specification even if it contained elevated SRC levels.

10 On 7 May 2013 Fonterra Australia downgraded the out of specification product not accepted by Danone AP to stock food.

11 On 20 June 2013 the Waitoa plant owned and operated by Fonterra (Waitoa), which produced nutritional products for other customers (but not for Danone AP), was alerted to the possibility of elevated SRC levels in its product. Waitoa had also received deliveries of the affected WPC80. Testing of the Waitoa product confirmed elevated SRC levels.

12 On 19 July 2013 initial testing by AgResearch indicated that SRC levels within the affected WPC80 were more comparable with clostridium botulinium than with clostridium sporogenes. A mouse bioassay was required to confirm the absence or presence of clostridium botulinium.

13 On 26 July 2013 the product containing the affected WPC80 in Fonterra's control was put on hold. By 30 July 2013 AgResearch mouse bioassay testing showed some toxic effects but with results to be confirmed. On 31 July 2013 the AgResearch mouse bioassay testing showed a strongly positive result for toxin (a mouse died).

14 On 1 August 2013 Fonterra began contacting customers, including Danone AP, that it believed had been sent product containing the affected WPC80. At 9.53 am on 2 August 2013 Fonterra communicated with Danone AP. It provided written details of the affected product and requested a meeting to discuss. Shortly after that, at 11.29 am, a preliminary report from AgResearch confirmed that all samples were shown to be toxigenic with isolates likely to be clostridium botulinum. Between 2 August and 18 August Fonterra provided Danone AP with updated data for the product containing the affected WPC80.

15 In light of the information, Danone AP and the other plaintiffs pursued a comprehensive recall of potentially affected baby formula.

16 Finally, on 31 August 2013, the Ministry for Primary Industries released a report detailing the full diagnostic results of further testing conducted in both New Zealand and the United States concerning the affected WPC80. The results were all negative for clostridium botulinium. The organism was confirmed as clostridium sporogenes.

The supply agreement

17 The supply agreement between Fonterra and Danone AP contains an arbitration clause. The parties agreed to an arbitration in accordance with UNCITRAL Arbitration Rules. The number of arbitrators is to be one if agreed by the parties but, failing such agreement, three. The place of arbitration is Singapore. The arbitration is to be governed by the laws of England.

18 The supply agreement also included provisions dealing with general and specific limitations of liability:

14.3 Liability limited: Fonterra shall have no liability to Danone and Danone shall have no liability to Fonterra for anything, other than a breach by Fonterra or by Danone, as the case may be, of an express provision of this agreement (including but not limited to negligence on the part of Fonterra or Danone).

19 Clause 14.5(a) provided that Fonterra's liability to Danone AP was not to exceed the amount of AUD$10,000,000 per claim or series of related claims. Fonterra's total liability to Danone AP for claims under or in connection with the agreement in any one year was not to exceed AUD$30,000,000 per annum.

20 By notice of arbitration dated 8 January 2014 Danone AP, together with the second to eighth plaintiffs, gave notice of a dispute with Fonterra and Fonterra Australia. The notice raised claims both in contract, for breach of material provisions of the supply agreement, and in tort. 1

21 On 10 February 2014 Fonterra filed a response to the notice of arbitration. Inter alia, Fonterra noted that neither Fonterra Australia nor the second to eighth plaintiffs were parties to the supply agreement. It submitted that the arbitral tribunal lacked jurisdiction to determine any claim advanced against Fonterra Australia and by the second to eighth plaintiffs.

22 The parties have each appointed arbitrators. The third arbitrator has not been confirmed as the parties approached to date have not been able to accept appointment.

These proceedings

23 On 9 January 2014 Danone AP and the second to eighth plaintiffs (collectively the Danone AP plaintiffs) issued the claim in this Court against FCGL.

24 The Danone AP plaintiffs raise four causes of action:

• (a) breach of s 9 Fair Trading Act 1986 ( FTA);

• (b) breach of s 13 FTA;

• (c) negligent misstatement;

• (d) product liability in relation to the affected WPC80.

FCGL's case

25 As noted, FCGL seeks an order staying this proceeding until further order of the Court, at least until final determination of the arbitration commenced by the plaintiffs in Singapore.

26 FCGL argues the relationship at the heart of the dispute is that of supplier and customer which is provided for by the supply agreement between Fonterra and Danone AP. All dealings between Danone AP and Fonterra were...