On Thursday last week, the High Court in Auckland issued a stay of Danone’s proceedings against Fonterra to enable the dispute over tainted milk products to be  dealt with by arbitration.  The decision is a welcome exercise by the Court of its discretion in favour of arbitration.

Justice Venning’s decision can be downloaded here.

This dispute turns on the botulism contamination scare in late 2013.

As part of its testing, Fonterra discovered the presence (or likely presence) of clostridium botulinum in its whey protein concentrate provided to Danone and a number of other baby formula manufacturers, including Nutricia (which was also a plaintiff in the litigation).  Fonterra advised its customers of the possible contamination on 1 August 2013, and Danone (and the other claimants) issued a comprehensive recall of its potentially affected baby formula.

In the event, the Ministry for Primary Industries issued a full report on 31 August 2013, confirming that the tests were negative for clostridium botulinum but positive for the non-toxic form of clostridium sporogenes.  This may (or may not) have resulted in the product containing elevated levels of sulphite reducing clostridia, which was out of specification in any event.

The supply agreement between Fonterra Limited and the baby formula manufacturers contained an agreement to arbitrate (in accordance with the UNCITRAL Arbitration Rules, and thankfully without any questionable formatting in italics or “emphasis added”, or an invalid ability to appeal on questions of fact).  The seat of the arbitration was Singapore, with English law applying

The supply agreement also included a limitation of liability of AUD 10 million for any one claim or series of related claims, further limited in aggregate to AUD 30 million in any one year.  Any claims in tort or otherwise than for breach of contract by either party were also excluded.

On 8 January 2014, Danone issued a notice of arbitration, raising claims in contract and in tort.  The parties have appointed an arbitrator each in accordance with the UNCITRAL Model Law procedure; the third arbitrator has yet to be confirmed.

The notice of arbitration was immediately followed (on 9 January 2014) by an application by Danone (and others) to the High Court in Auckland against Fonterra Co-operative Group Limited, raising four causes of action – breaches of ss 9 & 13 of the Fair Trading Act, negligent misstatement, and product liability.  It is critical to note that Fonterra Limited (the party to the supply agreement, and with the benefit of the limitations and exclusions contained in it) is effectively a wholly owned subsidiary of Fonterra Co-operative Group Limited (all but one share, which is held by the NZ Dairy Board).   As there was no agreement to arbitrate in place between the parties to the court proceedings, Article 8(1) of the Arbitration Act 1996 (requiring a stay of proceedings) did not apply.

Fonterra argued that Danone’s application to the Court was a contrivance to embarrass Fonterra and to get around the limitations and exclusions of liability in the supply agreement.  Without the benefit of the stay provisions under the Arbitration Act, Fonterra was left to rely on policy grounds that included:

  • on pragmatic grounds, the same documents, witnesses and evidential enquiries would be involved in both the court and arbitral proceedings
  • it would be a significant and unnecessary strain on the parties to litigate the same matters simultaneously in two fora
  • without a stay, there was a risk of inconsistent factual and legal findings

In the event, Fonterra sought, and was granted, a stay of the proceedings at least until final determination of the arbitration which Danone had already commenced in Singapore.

Danone argued that the Court’s discretion should only be exercised in extreme circumstances, and that Fonterra Co-operative Group Limited had acted independently of Fonterra Limited, and had therefore triggered liability not covered by the supply agreement; the facts and causes of action were not co-existent.

In his consideration, Justice Venning accepted that the discretion should be exercised only in rare and compelling cases, and that the claims by Danone and the other Plaintiffs were derivative and subsidiary to the claims in contract against Fonterra Limited, and they relied on the success of the same issues of fact and law as the arbitral proceedings.

While there is an arguable case for the Danone plaintiffs against Fonterra Co-operative Group Limited, his Honour found that Danone’s claims could also be pursued as part of the Singapore arbitration, and therefore the interests of justice would not be served by the pursuit of parallel proceedings – his Honour deferred to the arbitration proceedings, on the basis that any issues not covered by the arbitration could be brought back to the Court (in that sense, the stay was temporary rather than permanent) and in the expectation that Fonterra did not delay the arbitration proceedings.

Justice Venning provided the following summary of the position (at para [96]):

In my view the arbitration should go first because the parties agreed the arbitration process was to apply to claims arising out of the supply of product by Fonterra to Danone AP. The central dispute in this matter lies between Fonterra and Danone AP. The parties negotiated the terms of the supply agreement and provided for the consequences flowing from breach to be determined by arbitration. This dispute is the direct result of alleged failures by Fonterra in quality control in breach of the supply agreement. The tortious and statutory claims may not be derivative in a technical sense from the supply agreement but I am of the opinion that they are sufficiently connected so that it would be unrealistic to divorce them and determine the issues in tandem without reference to each other. Whether or not the Singaporean arbitration ultimately determines all the issues between the Danone and Fonterra interests, it will at the very least clarify the landscape for the remaining issues not caught by issue estoppel.

It is reassuring to see the High Court re-affirm its commitment to supporting arbitration.