French food giant Danone has cancelled its supply contract with Fonterra and is launching legal action against the New Zealand dairy co-operative.
The moves follow a scare last August that saw Fonterra issue a milk powder contamination warning that later tests found was a false alert.
"This affair illustrates serious failings on Fonterra's part in applying the quality standards required in the food industry," Danone said.
Any further collaboration with Fonterra would be "contingent on a commitment by [Fonterra] to full transparency and compliance with the cutting-edge food-safety procedures", it said.
Danone was starting proceedings in the New Zealand High Court as well as arbitration proceedings in Singapore "to bring all facts to light and to obtain compensation for the harm it has suffered".
Danone said it made food safety an "absolute priority" and was committed to working only with suppliers that shared and respected the same "demanding professional standards".
Danone said in October that the $326 million it wanted Fonterra to pay was just part of the compensation it was seeking from New Zealand's biggest company over the botulism contamination scare.
A Danone spokeswoman said then that the money represented an estimation of "the immediate costs" to Danone when it had to recall baby-formula product in eight of its markets after Fonterra's botulism alarm in August.
"Those €200 million (NZ$328.6m) are part of what Danone is asking Fonterra as a compensation," she said.
During Fonterra's Shareholders Fund meeting last month, Fonterra chief executive Theo Spierings said a court battle with Danone was possible after attempts to settle compensation claims out of court had failed.
In October, Danone estimated that overall damage to its 2013 baby-food sales from the botulism alarm was $564m.
Fonterra, in its 2013 financial statements, said it had made provision for $14m in contingent liabilities on the contamination issue. Whether it has insurance to cover a successful claim by Danone could not be established.
An industry source said product-recall insurance could be bought, but because of the cost was usually carried sparingly and with limitations.
During the December meeting, Spierings said Fonterra had already dealt with most of the companies adversely affected by the product recall.
Fonterra had worked "very, very hard for months" to reach a deal with Danone, he said.
"It appears to be a route that's not working out. There's only two ways you solve it – commercially or you go legal," he said.
Spierings said that legally, Fonterra did not have any liability if the dispute went to court.
"But that could take time if it goes the legal route," he said, adding that Fonterra had not yet dipped into the $14m contingent liability.
The company was "very close" to reaching a deal with another nutritional company affected by the scare, he said at the December meeting.
The deal would include extending a contract with the unidentified company from 2 years to 10 years, he said.
- Fairfax Media
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