Fonterra to "vigorously defend" $492m damages claim

French food giant Danone has cancelled its supply contract with Fonterra and is launching legal action against the New Zealand dairy co-operative in a bid to win more than $492m in compensation.

The moves follow a scare last August that saw Fonterra issue a milk powder contamination warning that later tests found was a false alert.

Danone spokeswoman Eliza Newton said the company was seeking an initial €300m (NZ$492.9m) from Fonterra in anticipated business losses for the 2013 financial year.

The losses were incurred when Danone had to recall baby-formula product in eight of its markets after Fonterra's botulism alarm in August last year.

However, Danone would also be seeking further compensation for brand and reputational damages, Newton said.

The final figure would be quantified at the time of the trial, she said.

Danone experienced a ''significant drop off'' in public trust for its brand directly following the botulism contamination scare last year.

This reputational damage was what had led to the decision to launch proceedings against Fonterra at the High Court at Auckland today, she said.

Newton said the company was working on rebuilding trust in its products but it was a slow journey.

Newton said she was not sure how long the court proceedings in the High Court at Auckland would take but the nature of the case meant it was unlikely to be a quick one.

"This affair illustrates serious failings on Fonterra's part in applying the quality standards required in the food industry," Danone said in a statement.

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 also starting 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".

Newton said she was not immediately able to disclose the value of the terminated supply contract and Danone was in the process of negotiating a new contract with another company.

The termination of the contract with Fonterra would not cause any supply issues as Danone had a network of suppliers, including other New Zealand dairy companies, she said.

Fonterra said it would "vigorously defend" the legal proceedings brought by Danone.

Fonterra said it would now work through the detail of Danone's claims.The company said it was "disappointed" that ongoing commercial discussions with Danone had resulted in legal action.

The kiwi dairy giant said it stood by its track record of having world-class food safety and quality standards, quality systems, and robust testing regimes across all its manufacturing facilities.

Minister for Primary Industries Nathan Guy said news of court action was unfortunate."Obviously I'm disappointed in what I've read and seen today, that this particular issue couldn't be sorted out.

"But it looks like it's heading to court so it would be unwise for me as Minister for the Government to comment on what basically is a commercial issue between Fonterra and Danone."

Guy said he had not seen anything to suggest Danone had not been "squeaky clean" in it's dealings with Fonterra - "that's something Fonterra needs to work through with Danone".

He said the Government had already carried out extensive work to minimise the damage done to New Zealand's reputation as a food exporter.

"It was a scare, and of course the Government's reacted. There was a Ministerial inquiry that was released last month. There were 29 recommendations, which the Government has adopted."

He said the Ministerial inquiry confirmed New Zealand was leading in our food safety systems but needed to continue to look at the processes to maintain that reputations.

Guy said he had not spoken to anyone from Fonterra about the court action, and said it was Fonterra's decision whether or not to publicly front on the matter.

Fonterra chief executive Theo Spierings revealed at Fonterra's Shareholders Fund meeting last month that 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.

Fonterra Shareholders' Fund's unit price recently traded down 2.1 per cent to $5.74.




Fairfax Media