Fonterra Co-Operative Group Ltd v McIntyre and Williamson Partnership and Others

JurisdictionNew Zealand
CourtSupreme Court
JudgeO'Regan,Ellen France JJ,Ellen France J,Elias CJ,Glazebrook J,William Young J
Judgment Date21 December 2017
Neutral Citation[2017] NZSC 197
Date21 December 2017
Docket NumberSC 150/2016

[2017] NZSC 197

IN THE SUPREME COURT OF NEW ZEALAND

Court:

Elias CJ, William Young, Glazebrook, O'Regan and Ellen France JJ

SC 150/2016

Between
Fonterra Co-Operative Group Limited
Appellant
and
McIntyre and Williamson Partnership and Others
Respondents
Counsel:

J E Hodder QC, D T Street and H K Wham for Appellant

D J Goddard QC, B M Russell and K M Kendrick for Respondents

Held: Section 106 applied as the respondents were obliged to become fully share-backed over the course of the agreements. Fonterra had exercised its discretion to accept the respondents' milk despite their late application. The scheme of the Act indicated that s 106 would apply in such situations.

The terms offered by Fonterra were impermissible as they were not offered “only to reflect the different circumstances” between the respondents and existing shareholding farmers, as required by s 106. Instead, they were offered for the principal reason of “optics”: that was, to address the potential concerns of existing shareholders about the transaction. It was significant that Fonterra had not paid an inflated price for the NZDL assets.

Appeal dismissed.

  • A The appeal is dismissed.

  • B The appellant is to pay the respondents costs of $30,000 and reasonable disbursements to be determined by the Registrar if necessary. We allow for second counsel.

JUDGMENT OF THE COURT

REASONS

Para No

O'Regan and Ellen France JJ

[1]

Elias CJ

[67]

Glazebrook J

[121]

William Young J

[125]

O'Regan AND Ellen France JJ

(Given by Ellen France J)

Table of Contents

Para No

The appeal

[1]

The organisation of the dairy industry

[8]

The facts

[13]

Fonterra's constitution

[17]

The key provisions in the Act

[20]

The statutory definitions

[20]

Subpart 5 of Part 2 of the Act: statement of purposes

[23]

Applications under s 73

[24]

Late applications

[28]

Section 106

[30]

The legislative history

[32]

The approach of Muir J

[35]

The Court of Appeal decision

[36]

Application of s 106 to the respondents

[37]

Respondents must become fully shared-up

[39]

Fonterra treated applications as made under s 74(3)

[47]

Was there a breach of s 106(1)?

[53]

Approach to s 106(1)

[57]

Result

[64]

The appeal
1

The appellant, Fonterra Co-operative Group Ltd, is a co-operative and a major processor of milk. Consistently with its status as a co-operative, it acquires milk from dairy farmers who own shares in Fonterra. The number of shares held corresponds to the volume of milk the farmer supplies, the ratio being one share per kilogram of milk solids (kgMS) supplied. Such supply is referred to as share-backed supply. Fonterra also acquires some milk on contract. Under its constitution, it is permitted to acquire milk on contract from suppliers who hold a stipulated minimum number of shares. At the relevant time, this was 1,000 shares. This number of shares would provide backing for supply of 1,000 kgMS. 1

2

The respondents are dairy farmers in South Canterbury and North Otago. In the 2011–2012 dairy season they were all suppliers of raw milk to New Zealand

Dairies Ltd (NZDL) which owned a plant at Studholme, South Canterbury. On 17 May 2012 NZDL went into receivership. This created two problems for the dairy farmers (including the respondents) who had been supplying NZDL: first, they were owed approximately $20 million for milk already supplied (money referred to as “retros”); and, second, they needed someone to process their milk for the new season which was to start on 1 June 2012
3

As it turned out, Fonterra acquired the Studholme plant at a price and pursuant to arrangements which ensured that the respondents were paid their retros. As well, Fonterra agreed to take the respondents' milk for the following and subsequent seasons but this was on terms now challenged by the respondents. In issue is: (a) a reduced contract price for the supply of milk compared to the standard contract; (b) the inability to share up in the first season; 2 and (c) Fonterra not purchasing the respondents' milk vats. 3

4

The respondents' challenge to these terms relies on s 106(1) of the Dairy Industry Restructuring Act 2001 (the Act). Section 106(1) provides: 4

106 No discrimination between suppliers

(1) [Fonterra] must ensure that the terms of supply that apply to a new entrant—

  • (a) are the same as the terms that apply to a shareholding farmer in the same circumstances; or

  • (b) differ from the terms that apply to a shareholding farmer in different circumstances only to reflect the different circumstances.

5

Fonterra's position is that the respondents were not new entrants in terms of s 106(1). Rather, they were contract suppliers and their nominal shareholdings of 1,000 shares did not alter the position. Fonterra's case is thus that s 106 does not impose restrictions on the way in which Fonterra deals with contract suppliers.

6

The respondents maintain that they supplied milk to Fonterra in the 2012–2013 season as “new entrants” for the purposes of s 106 of the Act and that they are entitled to compensation for the less favourable terms of supply applicable to them than those which applied to shareholding farmers in the same circumstances. They were successful on liability 5 before Muir J in the High Court 6 and Fonterra's appeal against that judgment was dismissed by the Court of Appeal. 7 Fonterra now appeals with leave. 8

7

Although the High Court and Court of Appeal were required to deal with other areas of dispute between the parties, 9 the issues for us are whether the respondents are new entrants to whom s 106(1) applies and, if so, whether Fonterra was in breach of s 106(1).

The organisation of the dairy industry
8

Fonterra is the principal milk processor in New Zealand. It was formed in 2001 as a result of the merger of a number of entities including the New Zealand Co-operative Dairy Company Ltd, Kiwi Co-operative Dairies Ltd and the New Zealand Dairy Board. 10 This merger was sanctioned by the Act. Fonterra's market share and associated ownership of processing infrastructure means that it is effectively a monopsonist. One of the purposes of the Act is to regulate the terms upon which it deals with milk suppliers. 11

9

Under the Act, Fonterra is required to operate on an “open entry/open exit” basis. This means, amongst other things, that Fonterra must generally accept milk

supplied by dairy farmers willing to acquire or hold shares commensurate with the proposed supply and allow such farmers to leave Fonterra on terms which correspond to those on offer to farmers joining at the same time. What is material for this case are the statutory mechanisms which provide for open entry and open exit
10

A dairy season commences on 1 June. A farmer is entitled to commence or increase supply as a share-backed farmer for the next season by applying to do so between the immediately preceding 15 December and 28 February. 12 Fonterra may, but is not required, to accept late applications and, in practice, Fonterra has generally been willing to accept applications as late as September in the season in which supply is to commence or increase.

11

In May and June 2012, Fonterra's offer to the respondents was that it was prepared to accept contract supply only pursuant to its standard Growth Contract. In particular, a new supplier at the time was required to purchase 1,000 shares immediately so that the first 1,000 kgMS would be share-backed. The supplier was required to complete sharing up by the sixth season covered by the contract and was bound to supply Fonterra over the duration of the contract.

12

The evidence of Steve Murphy, previously the General Manager and subsequently Director of Milk Supply at Fonterra was that the “main purpose of the Growth Contract” was “to make it easier for new milk suppliers” to join the co-operative:

… by removing the need for those suppliers to meet the Share Standard on day one (i.e. to purchase Fonterra shares equivalent to the amount of milk solids supplied). This can be a significant financial cost. Instead, under the standard Growth Contract, suppliers can gradually acquire the shares necessary to meet the Share Standard.

The facts
13

As we have noted, NZDL went into receivership in May 2012. That was after the end of the 15 December–28 February application period. This meant it was too late for the respondents to exercise the rights under s 73 of the Act to share up in

respect of the milk they intended to supply for the 2012–2013 season. As we discuss, s 73 provides that Fonterra must accept applications to become a shareholding farmer made within the application period. 13
14

On the approach we take, the details of the subsequent negotiations between Fonterra, the receivers of NZDL and the respondents are of no moment. What matters is that:

  • (a) Fonterra purchased the Studholme plant on terms which enabled payment of all retros; and

  • (b) the respondents entered into Milk Supply Agreements on terms which differed from those offered to other suppliers in the following respects:

    • (i) under Fonterra's standard contract, the contract price for the milk to be supplied in the 2012–2013 was five cents per kgMS less than the standard Fonterra milk price (as paid for share-backed supply). In contradistinction, the contract price for that season offered to the respondents was ten cents per kgMS less than the standard price;

    • (ii) the respondents would not be entitled to share up for the 2012–2013 season; and

    • (iii) Fonterra would have no obligation to purchase the respondents' milk vats, contrary to its usual practice.

15

The other factor we should mention at this point is that Fonterra was at the relevant time preparing for the introduction of a Trading Among Farmers...

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