MACINTYRE AND WILLIAMSON PARTNERSHIP v FONTERRA CO-OPERATIVE GROUP LIMITED

[2015] NZHC 3012 [01 December 2015]

IN THE HIGH COURT OF NEW ZEALAND

AUCKLAND REGISTRY

CIV-2014-404-877

[2015] NZHC 3012

BETWEEN

MACINTYRE AND WILLIAMSON

PARTNERSHIP

First Plaintiff

WAITAKI DAIRY LIMITED

Second Plaintiff

BURKE FARMING DEVELOPMENT

LIMITED

Third Plaintiff

Continued over page…

AND

FONTERRA CO-OPERATIVE GROUP

LIMITED

Defendant

Hearing:

7-11, 14-15 and 17-18 September 2015

Appearances:

D J Goddard QC and B M Russell for the Plaintiffs

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

Judgment:

01 December 2015

RESERVED JUDGMENT OF MUIR J

This judgment was delivered by me on Tuesday 1 December 2015 at 1.00 pm

pursuant to Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Date:…………………………. Counsel/Solicitors: D J Goddard QC, Barrister, Auckland B M Russell, Lane Neave, Christchurch J Hodder QC, Chapman Tripp, Wellington D T Street, Chapman Tripp, Auckland H K Wham, Chapman Tripp, Auckland

STRATHBURN FARMS LIMITED

Fourth Plaintiff

MORVEN FARMING PARTNERSHIP

Fifth Plaintiff

R G LAMB LIMITED

Sixth Plaintiff

WAITAKI PARTNERSHIP

Seventh Plaintiff

BLACK LINE DOWNS LIMITED

Eighth Plaintiff

WELLPARK DAIRYING LIMITED

Ninth Plaintiff

ST ANDREWS DAIRY LIMITED

Tenth Plaintiff

HOLME STATION DAIRIES LIMITED

Eleventh Plaintiff

CANDY DAIRY LIMITED

Twelfth Plaintiff

KAILEY DAIRIES LIMITED

Thirteenth Plaintiff

GRAY ROSENEATH FARMS LIMITED

Fourteenth Plaintiff

RICHARD PAUL WILLANS, KAREN

JEAN WILLANS, LEIGH JOSEPH

HORTON AS TRUSTEES OF THE R P

& K J WILLANS FAMILY TRUST

Fifteenth Plaintiff

BORST HOLDINGS LIMITED

Sixteenth Plaintiff

NORTH OTAGO FARM LIMITED

Seventeenth Plaintiff

QUEENS FLAT DAIRY FARM

LIMITED (Discontinued)

Eighteenth Plaintiff

ELLIS-LEA FARMS (2000) LIMITED

Nineteenth Plaintiff

WILLANS HOLDINGS LIMITED

Twentieth Plaintiff

Contents Paragraph Introduction 1 Background 4 The questions 45 Question 1 47

Statutory Framework 47

The plaintiffs’ arguments 57

Fonterra’s arguments 75

Analysis 95

Question 2 107 Question 3 117 Introduction 117

The first alleged representation – not legally possible to acquire shares 127

Meeting of 15 June 2012 128 Meeting of 20 June 2012 137

The second alleged representation – inability of other Fonterra shareholders to buy shares 155 Significance of legal representation 164 Entire agreement clause 165 Reliance and loss 166

Question 4 168 Question 5 170 Result 174 Costs 175

Introduction

[1] This case raises novel issues under the Dairy Industry Restructuring Act 2001

(DIRA) as a result of the failure of an independently owned South Canterbury

processing plant. The principal issue is whether Fonterra Co-operative Group Ltd

(Fonterra) was, in tandem with its acquisition of the plant from receivers, lawfully

able to offer former suppliers of the plant so called “Growth Contracts” on terms

inferior to those offered to its other suppliers. Its reasons for doing so stemmed from

a perceived need to assuage internal politics within its supplier base and included

also an element of “messaging” for the benefit of other farmers who might in the

future be persuaded to leave Fonterra and support an independent. Fonterra claims

that it was lawfully entitled to do so despite the provisions of s 106 of DIRA which

broadly require new entrants to be treated on the same terms as existing shareholder

suppliers.

[2] The case also includes claims under the Fair Trading Act 1986 (FTA) and

Contractual Remedies Act 1979 (CRA) arising out of statements allegedly made by

Fonterra representatives at various meetings prior to the plaintiffs’ entry into the

Growth Contracts.

[3] By consent all issues relating to reliance and loss have been held over for

later adjudication. Five questions were submitted for my determination which

effectively resolve all the preliminary issues.

Background

[4] The plaintiffs are dairy farmers in South Canterbury and North Otago. In the

2011/2012 dairy season they were all suppliers of raw milk to the New Zealand

Dairies Limited (NZDL) milk processing plant at Studholme in South Canterbury.

[5] The defendant, Fonterra, is New Zealand’s largest buyer of raw milk. It was

established under and is governed by DIRA.

[6] On 17 May 2012 NZDL was placed into receivership by VTB Capital, a

Russian bank. The receivers sought to sell the NZDL business, including the

Studholme plant, before the beginning of the 2012/2013 dairy season, which was due

to start on 1 June 2012. The receivers sought tenders for the sale of the business. A

number of bids were put forward. Fonterra was ultimately the successful bidder.

[7] On 18 May 2012 the receivers met with the suppliers to discuss NZDL’s

financial position and give an overview of the forthcoming sale process. The

suppliers elected seven persons to form the suppliers’ committee to represent the

suppliers’ views to the receivers and to potential future buyers. In a later meeting on

23 May the committee was reduced to five members and Mr Borst was elected as

Chair.

[8] The suppliers’ paramount concerns, as expressed at the 18 May meeting,

related to payment of the sums owed to them by NZDL as unsecured creditors and to

finding a buyer for their milk in the new season. The sums owed to the suppliers,

which are referred to as “retros” in this judgment, totalled approximately $20m.

[9] On 19 May 2012 the receivers confirmed that they would collect the

suppliers’ milk until 31 May 2012, the end of the season.

[10] In an internal memo dated 18 May 2012 Mr Murphy, Fonterra’s General

Manager of Milk Supply, and Mr Taylor, Director of New Zealand operations,

advised the Fonterra Management Team and the Fonterra Board that if NZDL

suppliers applied to Fonterra to supply their milk for the 2012/2013 dairy season,

Fonterra would have a discretion as to whether to accept the applications. The basis

for the discretion was that the applications would have been made outside the

relevant application period, which for the 2012/2013 season was between 13

December 2011 and 29 February 2012. The internal memo advised that any such

applications should be rejected on the basis that they could compromise Fonterra’s

ability to process all the milk from its then current shareholders. The memo

suggested an alternative however: “Fonterra may be in a position to accept this

supply if it were to come to some arrangement which allowed it access to the NZDL

plant to process that supply in the 2012/2013 seasons” and advised that an

assessment of the viability of purchasing the plant was underway.

[11] On 24 May 2012 the receivers wrote to Fonterra confirming the receipt of an

expression of interest and called for submission of tenders by 5 June.

[12] Between 25 May and 1 June 2012 Fonterra entered into direct

correspondence with the suppliers. Fonterra initially proceeded on the assumption

that the Studholme plant would not be acquired and sought to buy only one third of

NZDL’s peak supply (250,000 litres of milk), which reflected Fonterra’s available

capacity to process milk in its own plants. Fonterra’s offers to the suppliers were

based on a standard Growth Contract, on the same terms offered to all other milk

suppliers.

[13] The email correspondence shows that the suppliers wished to remain united

and did not want to engage with Fonterra separately. This was due to the fact that

the suppliers appreciated at the time that they had a greater chance of being paid

fully what they were owed by NZDL if they all supplied the new owner. Conversely,

dispersing their supply among various milk buyers would have significantly

undermined that prospect.

[14] On 28 May 2012 Fonterra’s management circulated a paper updating the

board on the process of the sale of the NZDL assets. The paper recorded that

management were not at that stage contemplating offering NZDL suppliers any

additional incentives beyond the standard Growth Contract, except for the exercise

of discretion to join the co-operative outside the application period.

[15] On 1 June 2012 Mr Lash, Milk Payments Manager at Fonterra, sent an email

to Mr O’Connor and Mr Sussock, General Manager and Senior Manager of Mergers

of Acquisitions respectively. In that email Mr Lash outlined two options for buying

milk from the NZDL suppliers. The first option was fully share-backed supply, and

the second the 2012 Growth Contract.

[16] A fully share-backed supply required a supplier to purchase one Fonterra

share for each kilogram of milk solids (kgMS) he/she supplied to Fonterra in a dairy

season. In return, a fully share backed supplier received the Fonterra Milk Price for

each kgMS supplied, and a dividend on each share held by the supplier, in the

amount declared by Fonterra. The share price for the 2012/2013 season was $4.52.

[17] A summary of the standard Growth Contract was set out by Mr Lash in the

email:

(a) A Growth Contract provides flexibility as it enables suppliers to

share up for new milk over six seasons. Suppliers are only required

to purchase 1,000 shares up front.

(b) For the 2012/13, 2013/14 and 2014/15 seasons suppliers are not

required to share up in relation to the quantity of Growth Milk that

they supply Fonterra in those seasons.

(c) The quantity of Growth Milk they supply in the 2014/15 season will

be their Contract Milk Quantity for the 2015/16 season.

(d) They will share up in respect of 1/3 of the 2015/16 season Contract

Milk Quantity at the start of the 2016/17 season, a further 1/3 at the

start of the 2017/18 season and the final 1/3 at the start of the

2018/19 season.

(e) Suppliers will receive the Fonterra Milk Prices less a Contract Fee

for Growth Milk. In the 2012/13 season the Contract Fee will be

5 cents per kgMS. They will not receive any dividend in relation to

milk supplied that is not backed by shares.

(f) The supplier is bound to supply Fonterra over the term of the

contract.

[18] The aim of the standard Growth Contract is to provide flexibility for new

suppliers by staging their capital requirements over a number of years. In so doing it

makes it easier for Fonterra to acquire new supply.

[19] The terms of the standard Growth Contract were then subject to a number of

discussions among Fonterra’s executives. These discussions concerned proposed

modifications to the terms of the contract to reflect certain aspects of the acquisition.

[20] On 4 June 2012 Mr Campbell, General Manager of Strategy, sent an email to

senior Fonterra executives proposing that Fonterra buy the Studholme plant with all

of the NZDL suppliers agreeing to supply to Fonterra at a discounted rate, and

without a fully share backed option:

After discussions with the receiver we are of the view that we should offer

approximately NZD50m for the plant if all the milk can be contracted with

approximately 100% of the current supply on a 3+3 basis at discount of

10c/kgMS for unshared milk. Note this would improve the model below

from an NPV of NZD69m to NZD72m – hence a NZD50m offer would have

a transaction NPV of NZD22m.

[21] On 5 June 2012 another paper was circulated among board members. The

paper reiterated Fonterra’s position that the offer to buy NZDL would be subject to

the majority of NZDL suppliers entering into Fonterra on Growth Contracts. The

paper noted that “these contracts will be on no better terms than the standard offer

and management will be seeking to negotiate a discount to the milk price payable

over the first three years.”

[22] On the same day Fonterra wrote to the receivers setting out the terms of their

offer of approximately $50 million. The offer was subject to approval by Fonterra’s

Board and by the Commerce Commission. Importantly, the offer was also subject to

100 per cent of the existing milk supply from NZDL suppliers continuing to the

Studholme plant.

[23] Between 6 and 8 June a number of emails were exchanged between Fonterra

executives discussing proposed amendments to the standard Growth Contract. On 7

June Mr Campbell suggested a 10 cent discount per each kgMS for three years. In

response, Mr Murphy expressed his view that the NZDL suppliers should be offered

a contract with a five cent discount per kgMS for three years, and a requirement to

share up over the following three years:

I am not sure where the -10c comes from, I assume the thinking here is a

special contract – ie 10c off the milk price and 3 years of supply. I would

prefer to go to the “new” suppliers with the existing -5cents off the milk

price 3 years of contract supply and then a requirement to share up over 3

years. This will be easier to sell among the existing supply base – the

message being we won’t be doing anything special for the NZDL suppliers.

… I am not sure that our existing suppliers in the SI will understand why we

would bail the NZDL suppliers out and pay the retro to a bunch of farmers

who they feel deserted the co-op.

[24] Mr Campbell responded stating that the “retro” payments will in fact be made

by the receivers, not by Fonterra. Mr Campbell then stated:

We will work on the messaging but we will be at 3+3 with a 10c differential

for this group (for unshared). We (we being Fonterra) will not make the

retro payments – the receiver will do this from the proceeds of the plant sale.

I agree we will need to carefully manage messaging around this both for

Fonterra current suppliers AND NZDL suppliers. I’m not keen on offering

them the standard terms – the small discount (additional 5 c) reflects this –

and I am hoping we can write this to profit (to be determined) – they had

their chance but if we’re purchasing the plant we need all the milk and we’ve

got to show a good return.

[25] Mr Muller replied stating that he “[understood] the rationale for the slightly

tougher terms and endorse”.

[26] In a different chain of emails, also sent on 7 June 2012, Mr Lash, Milk

Payments Manager, proposed that the NZDL suppliers should be paid 10 cents less

per kgMS for the first three years. His stated reason for supporting a lower price was

to reassure existing shareholders that the NZDL suppliers were not being treated

more favourably:

Suppliers are offered the 6 year Growth Contract which requires suppliers to

purchase 1,000 shares up front then purchase a third of the required shares at

the end of the 4th, 5

th and 6

th seasons. These suppliers would be paid the

Milk Price less $.10 per kgMS for the first three years of the contract.

Suppliers can fully share up sooner than the 6 year term to receive the full

Milk Price. The larger discount than the $0.05 per kgMS contract discount

is to reflect the unique circumstances. It shows Fonterra shareholders these

suppliers aren’t getting a special deal, and it can be justified to NZDL

suppliers that it is necessary to make the deal work.

[27] Mr Wickham agreed with Mr Lash’s proposal, and suggested an additional

condition that the NZDL suppliers be barred from sharing up for at least a year:

I am happy with the proposal with the exception that we give thought to not

allowing the ex NZDL shareholders to share up until end of first year or

maybe until end of third year – in other words strictly enforce the 3+3 with

no early share up. i.e. so there is a differential milk price penalty for at least

a year – they can’t just expect to waltz back in and get full milk price if they

share up.

[28] The amendments to the 2012 Growth Contract were settled and advised by

email to the CEO of Fonterra on 8 June 2012. The variations were explained as

follows:

The variations to 2012 Growth Contract for NZDL suppliers are:

Suppliers will incur a discount to the Contract Milk Price of $0.05 per

kgMS (i.e. because the Contract Milk Price is $0.05 per kgMS less than

Fonterra’s Milk Price for the 2012/13 season, suppliers who enter into

this contract will in effect get Fonterra’s Milk Price less $0.10 per

kgMS).

This additional $0.05 per kgMS discount will apply for the first three

years of the contract term.

Suppliers will have no entitlement to become Fonterra fully share

backed in the 2012/13 season under this contract. They can become

fully share backed in subsequent seasons (and receive the full Milk

Price), but will still be bound to supply Fonterra for the entire contract

term.

[29] The reaction of existing farmer shareholders to NZDL suppliers joining

Fonterra continued to be an important consideration for Fonterra. On 10 June 2012 a

memo entitled “NZDL Communications Approach” was sent to the Project Tarawera

Team (being the team charged with the acquisition). The memo discussed how

Fonterra should communicate with NZDL suppliers and receivers to promote the

purchase of NZDL by Fonterra as the best available option for all involved. The

memo then addressed how Fonterra should promote the deal to its existing farmer

shareholders:

At the same time, we need to emphasise to our own farmer shareholders that

we are not providing any special treatment or “favours” to these new

suppliers; that they will be signed up on the basis of a discount to the

standard growth contacts and will become Fonterra shareholders over time.

[30] On 13 June 2012 a Board paper was circulated seeking approval for the

purchase of the Studholme plant. The paper advised that the sale and purchase

agreement was conditional on 100 per cent of the volume of milk supplied to the

Studholme plant in the 2011/2012 season being secured through standard Fonterra

six year Growth Contracts. These contracts were to be subject to a number of

variations, including that NZDL suppliers would be prevented from sharing up

beyond the mandatory 1,000 shares until the beginning of the 2013/2014 season.

[31] The following day, on 14 June 2012, Fonterra and the receivers entered into

a sale and purchase agreement to purchase NZDL’s assets.

[32] On 15 June a meeting was held between the receivers, the suppliers and

Fonterra representatives. The notes from the meeting show that suppliers requested

a deal that would allow them to be paid the $20 million owed to them by NZDL.

The receivers confirmed that Fonterra’s offer was the only one that gave the

suppliers a full return; alternative offers promised returns of less than 45 per cent.

[33] Mr Murphy of Fonterra also explained that Fonterra’s offer was conditional

upon the agreement of all suppliers. The receiver, Mr Mayo-Smith, emphasised that

to get the benefit of the deal, the suppliers had to stick together.

[34] Mr Monoghan (a Board member) then explained the terms of Fonterra’s

offer, informing the suppliers that under the Growth Contract, Fonterra would pay

five cents less per kgMS than the contract milk price and that suppliers would not be

entitled to share up in the first year. The plaintiffs’ evidence is that Fonterra’s

representatives explained that the latter condition was due to the fact that the

suppliers were now outside the application period and could not share up until the

next application period was open. The various competing contentions of the parties

will be discussed in greater detail later in this judgment.

[35] On 15 June a question and answer sheet was emailed to Fonterra’s area

managers to assist them in responding to questions from existing shareholding

farmers and from NZDL suppliers. Of relevance are two sample questions and

answers:

Will you offer Growth Contracts to all NZDL suppliers?

We’re still talking to suppliers about the next steps. All Fonterra suppliers

need to comply with our Terms and Conditions of Supply. NZDL suppliers

who fit with Fonterra’s parameters of milk collection will be offered growth

contracts, which requires them to start sharing up after three years.

As contract suppliers, the NZDL suppliers will be offered Fonterra’s

Farmgate Milk Price subject to a 10c discount per kilogram of milksolids to

cover the cost of the interim arrangements and ensure the transaction

delivers value to Fonterra farmers.

…

Why can’t NZDL suppliers start to share up immediately?

We are outside the window for sharing up for the 2012/13 season.

NZDL suppliers can supply us on a contract basis, with the option to start

sharing up in the future. Securing the milk at an attractive price is important

to the overall deal attractiveness of the deal to Fonterra.

[36] Relevant also is Fonterra’s intended introduction of the Trading Among

Farmers (TAF) scheme in November 2012. The scheme allowed the creation of a

private market in which shareholding farmers could trade Fonterra shares among

themselves. It was generally anticipated that the introduction of the scheme would

result in an increase in Fonterra’s share price from the published $4.52 in the

2012/13 season. This expectation was borne out in reality when the scheme was

introduced.

[37] On 20 June 2012 another series of meetings was held between:

(a) the receivers, suppliers and the suppliers’ solicitors;

(b) the suppliers with their solicitors, subsequently joined by the

receivers; and

(c) the suppliers and Fonterra representatives (the suppliers’ solicitors

having at that stage returned to Christchurch as a result of the delay in

arrival of the Fonterra representatives).

At the meeting with the Fonterra representatives, the suppliers expressed their

concern that if they were not allowed to share up immediately, it would be harder for

them to do so the following year, because of anticipated increases in the share price

with the introduction of TAF. Fonterra’s representatives repeated that the suppliers

would not be able to share up in the first year. Again the specific detail of what was

said and by whom will be considered later in this judgment.

[38] Between 6 and 10 July 2012 each NZDL supplier completed an A01 Dry

Farm Conversion Form. The form is a standard application “to become a Supplying

Shareholder of Fonterra”. The forms were received within the timeframe required

by Fonterra.

[39] On 1 August 2012 Fonterra began collecting milk from the now former

NZDL suppliers and the current plaintiffs.

[40] On 7 September 2012 Fonterra informed the plaintiffs that the sale and

purchase agreement of NZDL’s assets had been approved by the Commerce

Commission. In the same letter Fonterra informed them that from 15 September

each plaintiff “will become a Fonterra contract supplier”. The letter also advised that

each plaintiff will receive an “amount owing” letter for $4,520 for the issue of 1,000

Fonterra shares. The amount was to be deducted from the October milk payment, or

could be paid voluntarily by the end of September 2012. The plaintiffs’ A01

applications were approved and 1,000 shares were issued to each applicant, pursuant

to the resolutions made by the Fonterra Board on 25 September.

[41] Following the settlement of the acquisition of NZDL and its assets on 14

September 2012, the plaintiffs became increasingly dissatisfied with what they

recalled they had been told about why they could not purchase more than 1,000

shares in the first year. Their concerns were magnified after they heard other

shareholder farmers had been permitted to fully share up after June 2012 but before

the introduction of TAF in November 2012.

[42] On 31 March 2013 the plaintiffs sent a jointly signed letter to Fonterra setting

out their concerns. In it they stated that the Fonterra Area Manager, Mr Munro, had

advised them that the reason the plaintiffs could not share up was “because there

would be no way of locking [the plaintiffs] in for six years”. The letter then stated

that Mr Griffiths of Fonterra informed the plaintiffs’ representative Mr Willans that

the moratorium was only on “dry” shares, not the “wet” shares (“wet” shares being

those that are backed by milk supply) that the plaintiffs wished to acquire. The letter

ended by stating that the plaintiffs considered themselves misled and misinformed by

Fonterra.

[43] On 19 April 2013 the Chairman of the Fonterra Board, Mr Wilson, responded

to the plaintiffs’ correspondence. He addressed the plaintiffs’ concern that Fonterra

sought to “lock them in” as long-term suppliers in the following way:

Fonterra as a condition of the purchase required 2011/2012 NZDL suppliers

to enter into slightly modified Fonterra six-year growth contracts. This was

the only way Fonterra could secure a long-term supply commitment. As the

NZDL sale was a competitive bidding process, Fonterra would have been

disadvantaged as a bidder if it had required immediate share-up of the

suppliers – who we understood from the receivers were under significant

financial pressure.

To ensure the plant would operate at full capacity, Fonterra also required that

some other farms who were interested in supplying the Studholme site

agreed to become Fonterra suppliers. These farms were required to become

fully shared up members of the Co-operative.

[44] During the course of discovery the plaintiffs ascertained from documents

provided by Fonterra that after the application period for the 2012/2013 season had

closed, Fonterra had processed and approved 26 applications from existing

shareholders to become fully share-backed suppliers.

The questions

[45] By consent order of Heath J dated 11 June 2015 the following five “questions

of liability” were identified as required to be determined by me:

Question 1 Were the plaintiffs “new entrants” for the purposes of s 106 of

DIRA? Or were they supplying milk to the defendant on a

basis other than as “new entrants”?

Question 2 If the plaintiffs were “new entrants” within s 106, did the

defendant breach s 106 in offering the plaintiffs the terms of

supply set out in the Milk Supply agreements signed by the

plaintiffs?

Question 3 Did the defendant advise the plaintiffs about the extent of the

plaintiffs’ ability to buy shares and to supply milk on a shared-

up basis in terms or to the effect pleaded in paragraph 31 of

the Amended Statement of Claim, or as pleaded in paragraph

31 of the Amended Statement of Defence?

Question 4 Was such advice misleading and deceptive conduct in trade in

breach of s 9 of the FTA? (For clarity, this issue excludes any

question of reliance by the plaintiffs on the alleged advice as

pleaded in paragraph 53 of the Amended Statement of Claim,

but all other factual – including contextual – issues raised in

the pleadings of relevance to liability will be traversed.)

Question 5 Did the defendant’s advice to the plaintiffs about the extent of

the plaintiffs’ ability to buy shares and supply milk on a

shared-up basis (as per Question 3, above) amount to a

misrepresentation in terms of s 6 of the CRA? (For clarity,

this issue excludes any question of reliance by the plaintiffs on

the alleged advice as pleaded in paragraph 56 of the Amended

Statement of Claim, but all other factual – including

contextual – issues raised in the pleadings of relevance to

liability will be traversed.)

[46] I address each of these in turn.

Question 1 Were the plaintiffs “new entrants” for the purposes of s 106 of

DIRA? Or were they supplying milk to the defendant on a basis

other than as “new entrants”?

Statutory framework

[47] At the heart of the plaintiffs’ case is s 106 of DIRA. This provides:

106 No discrimination between suppliers

(1) New co-op 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.

(2) New co-op must ensure that the terms and effect of securities offered

or issued in new co-op are the same for new entrants as for

shareholding farmers.

(3) In this section, securities has the same meaning as in section 2D of

the Securities Act 1978.

(4) New co-op must not treat a shareholding farmer who exercises an

entitlement under this subpart any less favourably than a

shareholding farmer who does not do so.

[48] “New entrant” is in turn defined as meaning:

A dairy farmer who is not a shareholding farmer, who applies to become a

shareholding farmer under s 73.

[49] “Shareholding farmer” means:

A dairy farmer who is registered as the holder of co-operative shares.

[50] “Co-operative share” means (insofar as relevant to this case):

A share in new co-op issued, or to be issued, —

…

(b) in relation to the supply of milk to new co-op by new entrants or

shareholding farmers.

[51] Section 73 is in terms:

73 New co-op must accept application

(1) New co-op must accept an application to become a shareholding

farmer that is made by a new entrant in an application period.

(2) New co-op must accept an application to increase the volume of

milk supplied as a shareholding farmer to new co-op that is made by

a shareholding farmer in an application period.

(3) New co-op must notify acceptance to the applicant within 15

working days of receipt of the application.

(4) Sections 136 to 139 specify—

(a) how an application may be given; and

(b) when an application is made.

[52] Section 74 in turn provides:

74 Commencement and terms of supply

(1) If an application referred to in section 73 is made to new co-op in an

application period, new co-op must accept the milk to which the

application relates from the beginning of the season following that

application period.

(2) Despite subsection (1), new co-op is not required to accept milk if

the shareholding farmer fails to satisfy the applicable terms of

supply.

(3) New co-op may, in its discretion, accept an application made outside

an application period from a dairy farmer, including a shareholding

farmer, to supply milk as a shareholding farmer.

[53] The application period I refer to in s 73 is, in turn, defined in s 75 which

provides:

75 Application periods

(1) New co-op must set an application period that is before the

commencement of each season in which new entrants may apply to

supply milk, and shareholding farmers may apply to increase the

volume of milk supplied, as shareholding farmers.

(2) As a minimum, an application period must span the dates 15

December in a year to 28 February in the next year.

[54] Relevant also are ss 82 and 83. Section 82 concerns co-operative shares

issued outside the application period:

82 Requirements applying to co-operative shares … for

applications outside application period

(1) The price of a co-operative share issued to a new entrant or a

shareholding farmer in response to an application to which section

74(3) applies is the June price in the first season for the supply of

milk to which the application relates.

(2) The co-operative share standard that applies to a new entrant or a

shareholding farmer who makes an application to which section

74(3) applies is the co-operative share standard published at the

beginning of the application period in the season immediately before

the first season for the supply of milk to which the application

relates.

(3) Repealed.

[55] Section 83 prohibits Fonterra from charging new entrants a premium for

accepting milk supply:

83 Restrictions on payments

New co-op must not require payment from a new entrant or a

shareholding farmer for accepting milk supply as a shareholding

farmer other than payment to purchase co-operative shares ….

[56] All these provisions occur within subpart 5 of Part 2 of DIRA, which is

relevantly headed “Regulation of dairy markets and obligations of new co-op”.

The plaintiffs’ arguments

[57] The plaintiffs start by emphasising what they say is the purpose of DIRA.

They refer to s 4 of the Act and in particular the stated purposes to:

(a) allow an amalgamation of various dairy companies including the two

largest players, New Zealand Co-operative Dairy Company Limited

[NZ Dairy] and Kiwi Co-operative Dairies Limited [Kiwi] by giving

authorisations under the Commerce Act 1986.

…

(f) promote the efficient operation of dairy markets in New Zealand by

regulating the activities of new co-op to ensure that New Zealand

markets for dairy goods and services are contestable.

[58] Mr Goddard QC describes the pre-Fonterra environment which he says was

characterised by two companies of broadly equivalent strength, thereby ensuring a

competitive market in milk supply throughout most of the country. He contrasts that

with the 82 per cent proportion of total South Island production attributed to Fonterra

in the Commerce Commission’s decision in relation to the NZDL purchase.

[59] Drawing on the explanatory note to what was then the Dairy Industry

Restructuring Bill 2001,1 Mr Goddard emphasises that the company which resulted

from the merger of NZ Dairy and Kiwi “will be dominant in a number of key New

Zealand dairy markets”2 and that the Bill “provides for a comprehensive regulatory

1 Dairy Industry Restructuring Bill 2001 (139).

2 Dairy Industry Restructuring Bill 2001 (139) (explanatory note).

package to mitigate the risks that would otherwise be present in this situation”.3

That regulatory package was, in turn, to “stay in place until there is a level of

competition in the market for processing raw milk in each of the North and South

Islands”.4

[60] He then refers to the public policy objectives identified in the explanatory

note to the Bill, including to:

facilitate the emergence of new competition and new strategies in the dairy

industry; and

limit the potential for dairy farmers, New Zealand consumers and other firms

or co-operatives in the dairy industry to be adversely affected by the use of

monopoly power by the newly formed company.

[61] Also emphasised was the following statement in the explanatory note of the

so-called “problem and need for action”:

If the merger is approved GDC [Fonterra] will have a virtual monopoly in

the market for the purchase of raw milk from New Zealand farmers, giving it

potential to use market power to the detriment of existing and potential dairy

farmers.

[62] That mirrors a later reference to one of the detriments of the merger in terms

that it created:

… a large monopoly that, without an effective regulatory regime may use its

dominant market position to reduce the overall level of contestability in both

the domestic consumer product and raw milk markets.

[63] The problem, Mr Goddard suggests, with any market dominant player is that,

if its activity is constrained in one area, it will simply exercise its dominance in

another. So, for example, if the obligation is to pay all suppliers in equivalent

circumstances the same rate per kilogram of milk solids, an unconstrained

monopsonist will simply apply a premium for entering into the contract in the first

place. It is for that reason, asserts Mr Goddard, that DIRA includes specific

3 Dairy Industry Restructuring Bill 2001 (139) (explanatory note).

4 Dairy Industry Restructuring Bill 2001 (139) (explanatory note).

provisions like ss 83 – 85 but also the general, what he termed, “anti-avoidance”

provision in s 106.

[64] The plaintiffs further say that the fact Fonterra was able to make a “take it or

leave it” offer and to structure that offer to include “optics”5 within its own

shareholder base is evidence of an uncompetitive market for milk supply. Mr

Goddard postulated what would have happened if, prior to the merger, Kiwi had for

example, offered supply terms designed to appease co-operative shareholders

dissatisfied with the fact that their members had earlier left to supply an independent.

In such circumstances he suggests, the competitive pressure of NZ Dairy would have

strongly militated against any such offer and the fact that Fonterra was able to

impose “penalties” on the plaintiffs for essentially internal political purposes when

such would not have been possible in a competitive market speaks to the mischief to

which DIRA was directed.

[65] He says further that the fact subpart 5 of Part 2 of the Act has not yet expired

under s 147 carries with it the necessary implication that the market for the supply of

new milk remains less than fully competitive.

[66] Although accepting that Fonterra’s offer for NZDL was appreciably better

than any of the alternatives and facilitated repayment of the plaintiffs’ “retros”, Mr

Goddard submits that the associated supply terms were simply a reflection of its

dominant market position. Whereas a circa $50 million purchase of another

processing plant was a modest exercise in the context of Fonterra’s capital base, for

any of its South Island competitors like Synlait or Westland (what he terms the

“minnows”) it represented a major acquisition with significant implications, and the

capacity, for example, to materially affect their debt to equity ratios.

[67] All of this, submits Mr Goddard, emphasises the very real competitive issues

resulting from the merger and the fact that comprehensive regulation was recognised

as the necessary price for that to occur.

5 A term used by Fonterra’s Mr Murphy in evidence to describe Fonterrra’s perceived need to

demonstrate to its existing shareholding farmers that former NZDL suppliers would not receive

favourable treatment.

[68] Although accepting that DIRA has no application to a dairy farmer who,

whether he/she approaches Fonterra within the application period or not, wants

simply to supply on contract as a non-shareholding farmer, the plaintiffs say Fonterra

cannot treat a late applicant as a new entrant for the purposes of some of its supply

but not the balance, as that would be inconsistent with both the text and purpose of

DIRA. They say it would mean late entrants had no effective protection because, for

example, Fonterra could dictate the ratios of share-backed supply and contract

supply and apply a price differential to the contract component, thereby driving

down its overall cost of supply – the very sort of monopsonist behaviour which the

plaintiffs say DIRA was designed to prevent. Or, say the plaintiffs, Fonterra could

impose a substantial application fee in relation to the component of contracted

supply thereby thwarting the purpose of s 83.

[69] The plaintiffs then develop their argument on two alternative bases.

[70] Firstly, they say that a new entrant, for the purposes of s 106, includes any

person who “applies” to supply Fonterra as a shareholding farmer, whether or not the

application is made in the application period. They say that each of the plaintiffs

completed an A01 Dry Farm Conversion form in which, among other things, they

applied “to become a Supplying Shareholder of Fonterra” and, as Fonterra’s Ms Burr

confirmed, no further application to become a shareholder was required either in

respect of the initial 1,000 shares issued to them in September 2012 or the additional

shares that they were required to take up over time under their Growth Contracts.

[71] Accordingly, the plaintiffs submit that at the point they completed the

standard application form and delivered it to Fonterra, as contemplated by s 73(4)

and s 74(3), they became “new entrants” and that their status as such did not depend

on any decision made by Fonterra.

[72] However, the plaintiffs argue that even if a late applicant is a “new entrant” if

and only if Fonterra accepts their application, they nevertheless meet that test. They

say that:

1. They applied to become supplying shareholders of Fonterra.

2. Fonterra accepted that application and issued each plaintiff 1,000

shares in September 2012.

3. Such shares were issued to them, adopting the words of the relevant

Board resolution, as “new shareholders” and “pursuant to ss 73 and

74 of DIRA”.

4. The shares that were issued were co-operative shares within the terms

of the s 5 definition. Each of the plaintiffs at that point became a

shareholding farmer.

5. Each supplier committed to becoming fully shared-up over time by

virtue of the provisions in their Growth Contract and Fonterra was

(pre-TAF) committed to issuing the required number of shares. The

plaintiffs again emphasise Ms Burr’s evidence that no further

application was required in respect of the shares necessary for any of

the plaintiffs to become fully shared-up. As the contract milk quantity

reduced in the last three seasons of the Growth Contract, the share

standard required an increasing number of shares to be held which

would be issued (and billed to the plaintiffs) without any further step

required on their part.

6. The Growth Contracts which were offered to the plaintiffs involved

Contract Supply as that term is defined in the Fonterra Constitution,

namely:

the supply of Milk to the Company by a shareholder

pursuant to cl 3.4 in a Season without the Milksolids

obtainable from that Milk being taken into account for the

purposes of the Share Standard for that season.

The plaintiffs refer to cl 3.4 of the Constitution which permits

Contract Supply by a Shareholder the terms of which Fonterra may:

…. require a Shareholder to hold a minimum number of Co-

operative Shares continuously throughout the term of any

arrangements for the supply of Milk to the Company by that

Shareholder on Contract Supply.

7. Each supplier was immediately subject to the share standard but, for

the purposes of applying that standard, the volume of milk supplied

on “Contract Supply” was excluded.

8. Each supplier did supply 1,000 kilograms of “milk solids obtainable

from milk supplied to the company”6 in the 2012-2013 season.

[73] None of the factual matters which the plaintiffs advance in this part of their

argument are contested by Fonterra. It acknowledges a requirement on the part of

the plaintiffs to hold a minimum number of shares as part of their Growth Contracts

and the fact that these were issued.

[74] The plaintiffs then say that, although Fonterra has a discretion to decline to

take milk under s 74(3) for practical, timing or capacity reasons, if it decided to take

it, the regulatory regime applied in full as if the application had been made in time,

subject to a small number of specific modifications. It takes no issue with Fonterra’s

ability to offer Growth Contracts to applicants who prefer supply on such terms. It

acknowledges that such preference is a relevant difference in circumstances for the

purposes of s 106(1), but it says Fonterra is not free to impose less favourable

contract terms on some new entrants merely because they apply outside the

application period.

Fonterra’s arguments

[75] Fonterra does not, in these proceedings, argue for a definition of “new

entrant” which excludes from that category dairy farmers whose applications to

supply milk as a shareholding farmer are accepted outside the application period in

exercise of the discretion contained in s 74(3).

[76] And so in this case Fonterra accepts that s 106 applies to that part of the

plaintiffs’ supply which was share-backed (the 1,000 kilograms of milk solids

backed by an equivalent number of co-operative shares).

6 Global Dairy Company Constitution, cl 3.2.

[77] Its position is, however, that the protections in the Act relate only to supply as

a shareholding farmer and that this means share-backed supply in accordance with

the share standard. In relation to the plaintiffs’ 2012 applications, it says that it was

no more precluded from offering special terms for contract supply than if it had

contracted such supply at any other time of the year. Its position is that DIRA is

simply not engaged in relation to that part of the supply.

[78] In terms of the legislative purpose of DIRA, Fonterra acknowledges that the

Act was in part a response to the the concern about its size in the New Zealand

market for raw milk and the fact that this had the potential to affect competition. It

says that the legislative reflex to that problem involved reinforcing the general

Commerce Act rules with specific but limited “open entry/open exit” mechanisms

for new milk suppliers.

[79] Like the plaintiffs, it draws on the explanatory note to the Bill and, in

particular, the following statement:

Perhaps the main cost to GDC of the Regulations will be the need to

adequately provide for open entry. Where it is an issue, it is likely to take

the form of bringing forward in time expansions in capacity and/or some

additional transportation costs. But it is open entry that is the key to

mitigating a co-operatives monopsony power.

[80] It refers also to the following observations of the Minister of Agriculture in

the second reading debate:7

Fonterra must post a share price, then accept all entry and exit, to and from

the co-operative, applied for at that price. To work properly, it is essential

that the only barrier to entry to the co-operative is the capital cost of entry.

This means that, aside from a small number of specific situations provided

for in the Bill, Fonterra must accept all new entrants – and their milk – if

they agree to pay the capital cost of entry.

[81] Fonterra says that an obvious feature of s 73 is that it relates to “an

application” made “in an application period”. It says, and I accept, that this is

designed to give Fonterra sufficient notice of new non-refusable supply to organise

the collection and processing of the milk for the next season – commencing on 1

June and with peak supply in October and November.

7 (18 September 2001) 595 NZPD 11780.

[82] Accordingly s 73 reflects, in Mr Hodder QC’s submission, a practical

balancing of two important factors:

(a) the availability of an “open entry” mechanism for a farmer to, as of

right, provide new milk supply to Fonterra in the capacity of, what he

calls, a “paradigm share-backed supplier”; but

(b) an annual time limit on the availability of that mechanism and right.

[83] Fonterra says that, whether the applicant is a farmer who has not previously

been a share-backed supplier to Fonterra or is an existing shareholder and farmer

applying to supply additional milk, the position is no different. In both cases DIRA

is concerned only with share-backed supply.

[84] Thus, under s 73(2), if an existing share-backed supplier wishes to expand

production, Fonterra says he or she has a choice of either:

(a) applying in the application period, as of right, to provide share-backed

supply and complying with the published share standard by

purchasing at the published co-operative prices (ss 77 – 82); or

(b) contracting with Fonterra for supply on other terms.

[85] That choice it says is for the farmer. It gives effect to the DIRA “open entry

policy” but also recognises a variety of circumstances that may make contractual

supply preferable. Fonterra says that when milk is so supplied on contractual terms

it is not “milk supplied as a shareholding farmer” and is not therefore within the

language of s 73(2) or 74(3).

[86] Fonterra submits there is no particular complexity about ss 73 and 74. Both

sections focus on milk to be supplied “as a shareholding farmer” and it says the

scope of “new entrants” (farmers seeking to supply as shareholding farmers) cannot

sensibly extend to those who agree to contractual supply. It says that this is so

irrespective of whether such agreement requires or permits them to acquire and hold

some Fonterra shares.

[87] It rejects the proposition that every time a farmer approaches Fonterra about

supply he or she is making an application as a “new entrant”. If the application is

“to supply milk as a shareholding farmer” and is outside the application period then

it says it has an explicit discretion whether to accept it or not. If it does so then the

application is to be treated as one under s 73. But in this case it says no such

application was invited or made. The supply contracts are, it says, entirely consistent

with cl 2.3 of the Constitution which empowers Fonterra to “accept the supply of

milk from any person … without requiring that person to become a shareholder in

respect of that supply”.

[88] Significantly, Fonterra relies on the discretion in s 74(3) to decline an

application to supply milk as a shareholding farmer. It says that this belies the

plaintiffs’ argument that s 106 must necessarily apply to farmers who apply outside

an application period if the purposes of the Act are to be satisfied. It makes the valid

point that there is no right on the part of such farmers to supply Fonterra instantly.

Rather, the legislation permits, in its submission, contractual arrangements to be

negotiated and, if mutually beneficial, agreed.

[89] Fonterra rejects the suggestion that a farmer who is providing partly share-

backed supply and partly contractual supply is a “shareholding farmer” for all

purposes. It says that the position is governed by the relevant contractual terms. So,

for example, in the event of a long term supply contract, DIRA cannot be invoked to

justify breach of that contract and supply of all or part of that volume as share-

backed. But, if the farmer seeks to bring in new supply, that volume will be subject

to any timely application under s 73. And supply could be either as a shareholding

farmer or a farmer seeking to be one (i.e. a new entrant).

[90] In Fonterra’s submission, there are two “gates” through which a dairy farmer

can pass en route to share-backed supply. In the event the application is made inside

the application period (and assuming ss 94 and 95 relating to minimum supply and

excessive transportation costs do not apply), the farmer passes through the s 73 gate.

This means that:

Fonterra must accept the application (s 73(1)).

Fonterra must notify acceptance (s 73(3)).

Fonterra must accept milk for the following season (s 74(1)) unless the

shareholding farmer fails to satisfy the applicable terms of supply.

The farmer receives the full milk price and dividends.

The s 78(3) peak note price provisions apply (although these are now of

historic interest only).

The farmer can elect a Fair Value Share Price (s 81).

The farmer is subject to the co-operative share standard (s 5, s 79, ss 81(3) –

89).

The protections afforded by ss 83 – 85 in terms of application fees, deposit

restrictions and payment of balance of purchase price apply.

The farmer may be affected by a Capacity Constraint Notice (s 87 – 93).

The non-discrimination rule applies (s 106).

The farmer must be offered a contract for milk supply for one season but may

be offered a longer term contract.

[91] The second gate which Fonterra says a farmer may pass through is that

opened on exercise of the Board’s discretion under s 74(3). It says that if the

discretion is exercised and the dairy farmer is allowed to supply as a “shareholding

farmer”, then he or she is treated as if they had passed through the s 73 gate but with

specific exceptions to recognise timing of the application and, in particular, the

potential restrictions in:

i. section 78(3) in relation to the peak note price; and

ii. section 82 relating to election of share price.

[92] But, says Fonterra, neither gate relevantly applies in this case. The

application was not made in the application period and in terms of s 74(3), Fonterra

never exercised its discretion to allow supply as a shareholding farmer. To the

contrary, it sought and obtained contracted supply which was not share-backed other

than to a nominal extent. It says it is unconstrained by s 106 in relation to the terms

on which it can contract non-share-backed supply.

[93] Expanding on the “gate” metaphor, it says that what went into the field

beyond the s 74(3) “gate” was not a farmer supplier as some indivisible entity. It

was a block of share-backed supply. It says that only to that extent was s 106

engaged, leaving Fonterra free to negotiate contractual supply on whatever terms it

saw fit for the balance, including the price differential and restrictions on sharing up

which it sought and obtained in the present case.

[94] It is in that context that Fonterra addresses s 106. It says that the term “new

entrant” in that section evokes the “open entry” policy and new share-backed milk

supply as a “shareholding farmer”. It says the section is not sensibly a prohibition

on contractual supply, nor some yardstick for judicial review of contractual supply.

All it does is reinforce the equal treatment of those providing share-backed supply to

Fonterra – in relation to and to the extent of that supply and not in relation to any

contractual supply.

Analysis

[95] I have difficulty with the plaintiffs’ first argument conferring “new entrant”

status automatically at the point of application.

[96] The concept of a new entrant being someone who, in the words of the s 5

definition, applies to become a “shareholding farmer” makes sense in the context of

s 73 (to which the definition refers). That is because Fonterra “must accept” an

application under s 73 (one by a new entrant that is made in an application period).

It has no discretion other than is provided before in ss 94 and 95. But to identify a

person as a new entrant from the time of his or her application, when such

application is outside the application period and where, therefore, Fonterra has a

discretion to accept it or not under s 74(3), would produce a very odd result. Such an

applicant cannot be considered an “entrant” on any normal construction of that word,

until the discretion is exercised in his/her favour. Until that point he/she is at most

an applicant without any right of entry.

[97] That interpretation is, in my view, supported by the s 74(3) reference to

applications “by a dairy farmer including a shareholding farmer”. The reference is

not to “new entrants or shareholding farmers” as it could easily have been if the

legislature’s intention had been to apply new entrant status to an applicant at the

point an application outside the period was made.

[98] Section 106 also supports that construction to the extent that it restricts the

“terms of supply that apply to a new entrant”. In the case of an applicant outside the

application period, nothing “applies” until such time as the s 74(3) discretion has

been exercised.

[99] In the context of this case it is perhaps also worth emphasising that, having

regard to the timing of NZDL’s receivership, there was no objection on the part of

Fonterra to take on NZDL’s former suppliers, nor corresponding right on the part of

these suppliers to supply Fonterra. DIRA gave Fonterra unfettered discretion to

accept an application to supply as a shareholding farmer.

[100] I turn then to the second limb of the plaintiffs’ argument. This raises more

difficult issues.

[101] That ss 73 to 85 relate to applications by new entrants and shareholding

farmers to supply milk as shareholding farmers is a given and confirmed by the

“overview” provision of s 72(1). Moreover, Fonterra appropriately concedes that an

application by a dairy farmer to supply milk as a shareholding farmer which is made

outside the application period results, on the exercise of Fonterra’s discretion to

accept the application under s 74(3), in that applicant becoming a new entrant in

relation to the relevant “block” of share-backed supply.8 That the plaintiffs became

new entrants, in this limited sense, on issue to each of them of 1,000 shares on 25

8 In my view s 82(1) makes such concession inevitable by reference to a “new entrant” or a

“shareholding farmer” applying under s 74(3).

September 2012 is also a given. The essential question is, however, whether

Fonterra can treat a late applicant as a new entrant for the purposes of some of their

supply but not the balance. I do not believe it can. My reasons are as follows.

[102] Subpart 5 of Part 2 of DIRA was clearly intended to address concerns that the

merger resulting in the creation of Fonterra would reduce the level of contestability

in the domestic raw milk market. Its aim was to reinforce existing competition law

with a series of very specific prescriptions relevant to that particular market. In this

sense, DIRA, like the Commerce Act 1986, can be regarded as regulating market

participants, that is individuals and/or corporations, inter se.

[103] In the present case that relationship is between dairy farmers wishing to

become shareholding farmers and Fonterra. The concept that one party to that

relationship might be defined not as an individual but as a proxy for a block of

shares to which, and in respect only of which, obligations of equality apply, would in

my view be an unusual interpretation of legislation designed to ensure that individual

farmers are not disadvantaged by Fonterra’s dominance in the raw milk market. It

would, as Mr Goddard submits, effectively deprive late entrants of any real

protections, leaving them at the mercy of Fonterra’s monopsonist powers. Of course,

for valid reasons Fonterra retains a discretion in terms of whether it accepts such

entrants into the shareholding farmer “fold”, but why, having elected to do so, it

should be able to discriminate against the individuals concerned in a way not

possible in respect of timely applicants seems to me a proposition which struggles

for a basis in principle.

[104] I consider that conclusion reinforced by the following:

(a) A plain and ordinary reading of the s 5 definition defines a “new

entrant” as an individual dairy farmer who is not already a

shareholding farmer but who wishes to be one (either as of right under

s 72(1) or in Fonterra’s discretion under s 74(3)).

(b) From the point such a person becomes a shareholding farmer he/she

is, ex hypothesi, no longer a new entrant.

(c) Each of the plaintiff farmers will, as a result of performance of their

Growth Contracts, end up a fully subscribed shareholder farmer in

accordance with Fonterra’s share standard. At some point during the

performance of that contract and at only one such point they were

“new entrants”.

(d) I say only one such point because the s 5 definition precludes a

finding of sequential “new entries” with each tranche of shares

acquired under the Growth Contracts. That is because:

From the point at which the first tranche of shares is issued

each of the plaintiffs is “a shareholding farmer”, whereas the

new entrant definition requires that they be someone who is

not.

It was not necessary for the plaintiffs to make any further

application “to become a shareholding farmer” in respect of

the sequential tranches (a point I will return to subsequently).

(e) Once a farmer has become a “shareholding farmer” then, if he/she

subsequently wishes to increase supply, he/she is not regarded as a

new entrant to that extent – he/she is, in the words of s 73(2), a

shareholding farmer “applying to increase the volume of milk

supplied as a shareholding farmer”. So again the concept of “new

entrant” is detached from any specific block of shares and focused

rather on the identity of an individual satisfying the three

requirements of the “new entrant” definition.

(f) The definition of “shareholding farmer” which the “new entrant”

definition itself invokes, reinforces this approach. It simply refers to a

dairy farmer who is registered as the holder of co-operative shares.

That status is satisfied at the point a dairy farmer is issued with any

such shares. He or she is no more nor less a shareholding farmer for

the fact that they hold 1,000 or 100,000 shares. Likewise a person can

be a shareholding farmer and a contract supplier but is no less a

shareholding farmer for the fact that some of his or her supply is not

share backed.

[105] So the scheme of the Act logically envisages new entrant status applying to

an individual at a particular point in time – the point at which a dairy farmer

becomes a registered holder of co-operative shares. At that point individuals become

part of what Fonterra’s director Mr Monaghan referred to at the meeting on 15 June,

as the “Fonterra family”9 and the “terms of supply” came, in my view, to be

governed by s 106. If, in respect of a late applicant, that was not a consequence

acceptable to Fonterra it could negotiate for an exclusively contractual supply. In

relation to such an applicant there was no obligation to accept them as a

“shareholding farmer”. But I do not consider Fonterra was in a position to treat the

plaintiffs as shareholding farmers for some purposes but not for others. It had never

purported to do so in respect of any other farmers on Growth Contracts. It accepted

applications from the plaintiffs to become shareholding farmers. It issued shares to

them as “new shareholders … pursuant to ss 73 and 74”. Such shares were co-

operative shares within the “shareholding farmer” definition. Each supplier

committed to being fully shared up over time without the requirement for any further

application or step; each was immediately subject to the share standard, albeit the

volume supplied on contract was excluded. Fonterra took suppliers on as “new

entrants” but now wishes to create a subcategory within that definition of new

entrants with inferior rights. I cannot accept that this was in Parliament’s

contemplation. To the contrary, I accept the submissions of Mr Goddard set out in

[57] to [67] above.

[106] I therefore answer question 1 in the affirmative.

9 A “family” to which in his speaking notes and relevant minutes the farmers in attendance were

“welcomed”.

Question 2 If the plaintiffs were “new entrants” within s 106, did the

defendant breach s 106 in offering the plaintiffs the terms of

supply set out in the Milk Supply agreements signed by the

plaintiffs?

[107] Fonterra says that the unique terms of supply which it offered reflected both

the special circumstances of the ex-NZDL milk suppliers (including their urgent

need to have their milk collected in the production season scheduled to commence

on 1 August 2012 and the arrears they were owed and which were able to be paid

following settlement of Fonterra’s purchase) and the Board’s consideration of the

best interests of Fonterra and its existing shareholder suppliers (a consideration

which it is acknowledged was driven largely by the “optics”).10

[108] It says that the word “only” in s 106(1)(b) does not require mathematical

precision, merely that Fonterra cannot take into account extraneous considerations

or, in Mr Hodder’s words, “matters that are not rationally related to the decision

making”. But it says that it made an entirely rational decision in the special

circumstances of the case and that it was entitled to have regard to its own interests,

including concerns within its shareholder base about farmers who had previously left

the co-operative returning without any seeming cost associated with their decision.

[109] Fonterra also argues that the reference to the “terms of supply” in s 106 does

not include the milk price or any of the other special terms engaged in this case. It

says that the phrase should be given the same meaning as in s 74(2), which refers to

the “applicable terms of supply”, and that this is a reference to the practical matters

envisaged by clause 9.3 of the Fonterra Constitution (which says that the Board may

from time to time fix what is referred to as a “Standard Terms and Conditions as it

sees fit which shall apply to the supply of Milk by Shareholders”).

[110] I am unable to accept these arguments. In my view, the underlying purpose

of the section is to ensure that, in respect of new entrants, Fonterra cannot use the

market power invested in it as a result of the legislated merger to achieve outcomes

not available in a workably competitive market. To that end the “different

circumstances” recognised by the section must, in my view, be objective differences

10

See [45] of the Amended Statement of Defence.

in circumstances and of a nature that could be expected to result in different terms in

a workably competitive market. So, for example, differences in the quality of the

milk supplied or particular difficulties of access to a new entrant’s farm may justify a

difference in the terms of supply. But a workably competitive market would not

allow Fonterra the luxury of “sending messages to its shareholders”. Nor in my view

is it relevant that the differences in terms will benefit Fonterra or its shareholders or

were otherwise seen as desirable to Fonterra or its shareholders. If that were the case

then s 106 would be pointless. It is in my view intended to prevent discrimination

for precisely such reasons.

[111] In particular, it seems to me that a desire on the part of the Board to, as Mr

Goddard phrased it, “keep the shareholders sweet”, however attractive that may have

seemed to the Board, was not a valid difference in circumstances for the purposes of

s 106. Not only do I consider this implicit in the section, but s 106(4) explicitly

recognises that the imposition of sanctions for perceived disloyalty, for example, by

exercise of a farmer’s right to supply up to 20 per cent of his or her milk to a

competitor, is not a valid basis for differential terms of supply.

[112] Nor can I accept Fonterra’s narrow reading of the expression “terms of

supply”. I consider that argument inconsistent with the natural meaning of the

language used (reinforced by comments made by the Minister of Agriculture on the

second reading of the then Bill in terms that “it is also essential that Fonterra does

not discriminate between existing supplying shareholders and new entrants to the co-

operative”).11

More significantly however, it would mean that a key dimension in

respect of which market power would expect to be exercised, namely “price”, would

not be effectively regulated by Subpart 5. I cannot accept that this was intended.

[113] Focusing then on the reasons for the differences in the present case, the

plaintiffs say, in submissions which I accept, that:

11

(18 September 2001) 595 NZPD 11780.

(a) The main reason was to placate existing shareholders (and internal

stakeholders). It was, as Mr Murphy put it, about the “optics”.12

(b) The financial viability of the deal did not depend on these terms as

confirmed by Chapman Tripp’s letter of 26 August 2015, where it was

stated that:

Fonterra is not saying, on its pleadings or in its evidence, that

amendments to the Growth Contract (listed at [29](c)] of the Second

Amended Statement of Claim) were the difference between financial

viability and non viability of the overall transaction.

(c) The five cent per kilogram milk price discount was a small and

relatively arbitrary figure designed to be and perceived to be a

“penalty”13

for suppliers who had previously left the co-operative and

couldn’t therefore be expected to simply “waltz back in”. The

financial benefit to Fonterra was identified as being in the order of $3

million but this was not a material factor in the decision to impose the

penalty.14

(d) The prohibition on sharing up was to ensure that the five cent milk

price penalty would apply for at least one year to all suppliers. That

appears from Mr Wickham’s email of 7 June and was confirmed by

Mr Murphy on cross-examination.15

(e) The prohibition on sharing up was also intended to deprive the

suppliers of the expected gain in share price post-TAF as part of the

“optics”.16

12

NOE 365/34; 367/28; 373/23; 379/23-28; 381/5; 388/1-25; 389/21-26; 395/7, 22; 397/8-9;

398/10-20; 399/13-28; 402/34; 404/5; 406/28-30; 407/2-11; 492/9-18. 13

The word used by Fonterra’s Group Director Supplier and External Relations Mr Wickham in an

email dated 7 June 2012 to the Milk Payments Manager Mr Lash, the Managing Director Co-

operative Affairs Mr Muller, and the General Manager Milk Supply Mr Murphy. 14

Mr Murphy’s cross-examination NOE 365/6-23, 395/7-23. 15

NOE 358/ 5-20, 362/ 23-29, 365/ 6-23. 16

Mr Murphy’s cross-examination NOE 368/7-10; Mr Monaghan’s cross-examination NOE

469/11-14.

(f) The decision on the part of Fonterra not to buy the plaintiffs’ vats

immediately was also driven by “optics” rather than financial

considerations.17

[114] I accept the plaintiffs’ submission that none of these factors provided an

objective justification for a difference in terms. None would have affected the terms

offered in a workably competitive market.

[115] Other justifications advanced by Fonterra were in my view either not material

to Fonterra’s decision and/or designed to draw the focus away from its real reasons

and/or not relevant differences for s 106 purposes. These included:

(a) Recovery of its investment. The evidence was that Fonterra does not

seek to recover the cost of investment in any particular plant from

suppliers to that plant and did not as a fact impose different terms on

other suppliers to the Studholme plant. Nor was there evidence that

this was more costly capacity than any other plant operated by the

company. As indicated, the financial benefit arising from the terms

imposed was modest and not material in the context of the purchase.

Moreover, by imposition of the restriction on sharing-up in the first

year, Fonterra was foregoing capital it might otherwise have had.

(b) The moratorium on the issue of dry shares pre-TAF. This was

irrelevant as the plaintiffs wanted to purchase wet shares.

(c) Timing. Wet shares continued to be issued until 25 September 2012

and Ms Burr confirmed that late applications would always be

processed, at least up until the Board papers were finalised a few days

before each meeting. The expectation throughout was that the

Commerce Commission would conclude its deliberations prior to the

end of September and, in the event, it issued a clearance on 6

17

Mr Murphy’s cross-examination NOE 373/6-29.

September.18

Legal advice had been prior obtained indicating that the

prospects of approval were high.

(d) The ease of attracting supply or desire not to split the supply base.

Again I consider this reason unmeritorious. Mr Murphy agreed in

cross-examination that it would in fact have been easier to get the

NZDL suppliers across the line if they had been offered a choice

about whether to share-up immediately or on a deferred basis. It was

the inability to share-up which was the principal sticking point with

many of the suppliers. He also accepted that there was nothing

unduly complicated about offering suppliers a choice.19

And he

agreed that there were a number of good reasons why suppliers who

were in a position to share-up would want to do so.20

Mr Murphy’s

concessions were appropriate. As a matter of commonsense the

greater the choices offered, the easier it would have been to obtain the

support of the NZDL suppliers.

(e) Sharing-up would have placed the NZDL suppliers in a difficult

financial position. This was suggested by Mr Murphy in his brief of

evidence but under cross-examination he agreed that this was not a

material reason for refusing to give those suppliers the same choice

enjoyed by other suppliers.21

Mr Monaghan, in turn, acknowledged

that Fonterra did not have any detailed financial information about the

position of the NZDL suppliers.22

I accept also as implausible any

suggestion that Fonterra was seeking to protect the plaintiffs from the

risks associated with an investment that it was happy to see its

existing shareholders make at the time.

(f) It facilitated payment of the “retros”. These were, however, paid by

NZDL out of the purchase price. That could have occurred without

18

Mr Murphy’s cross-examination page 434/5 2 and 9. 19

NOE 344/27-32, 345/1-5, 346/12-17. 20

NOE 347/21-23. 21

NOE 369/25-34. 22

NOE 421/10-15.

the three unfavourable terms. Fonterra’s indicative bid of $50 million

on 5 June was given before any decision had been made to impose the

terms. And Mr Grace gave evidence that Fonterra had bid $50 million

for the same assets in a pre-receivership sale process.23

I am therefore

satisfied that the price paid by Fonterra and the resulting payment of

the NZDL suppliers’ retros did not depend on the imposition of the

three unfavourable terms.

[116] I therefore answer question 2 in the affirmative and find, as a result, that the

plaintiffs succeed on their first cause of action.

Question 3 Did the defendant advise the plaintiffs about the extent of the

plaintiffs’ ability to buy shares and to supply milk on a shared-up

basis in terms or to the effect pleaded in paragraph 31 of the

Amended Statement of Claim, or as pleaded in paragraph 31 of

the Amended Statement of Defence?

Introduction

[117] Paragraph 31 of the Amended Statement of Claim provides:

At the meetings [those of 15 and 20 June 2012] some of the suppliers asked

Fonterra representatives why they were not able to buy shares beyond the

minimum of 1000 in the first year. They were told by a Fonterra

representative that:

(a) this was not legally possible because the application period had

closed; and

(b) Fonterra was not permitting even its existing shareholders to

purchase additional shares at that time, subject to a limited exception

that enabled existing shareholders to purchase up to 20% more

shares than they currently held, to accommodate expected growth in

milk supply.

(the non-eligibility representations)

Particulars

(i) The statements referred to were made on 15 June 2012 by

Steve Murphy and/or John Monaghan.

(ii) The statements referred to were made on 20 June 2012 by

Steve Murphy and/or Christine Burr.

23

NOE 662.

[118] Paragraph 31 of the Amended Statement of Defence in turn provides:

31 In response to paragraph 31, it:

31.1 repeats paragraph 30, above;

31.2 says that the NZDL milk suppliers were told by its

representatives that the special contractual terms of supply

offered were those that had been signed off by the Board and

required all such suppliers to accept them if the Sale

Agreement were to be completed and they were to receive

their arrears in full;

31.3 says further, in relation to the allegation pleaded in

paragraph 31(a), that NZDL milk suppliers were told by its

representatives that, as the new supply arrangements being

offered would be entered into outside the published

application period, they had no entitlement to commence

supply in the 2012/13 season on a fully shared up basis;

31.4 says further, in relation to the allegation pleaded (for the first

time on 25 March 2015) in paragraph 31(b), that the Board

had previously decided that there would be (and Fonterra

sought to apply) a moratorium on the issue of additional

“dry” shares (as distinct from “wet” shares required and

applied for in relation to specific production increase

proposals) to existing shareholders until after the expected

commencement of the TAF scheme (referred to in paragraph

32, below) in late 2012, and that the NZDL milk suppliers

were told of this moratorium by Fonterra’s representatives at

the 20 June 2012 meeting; and

31.5 otherwise denies paragraph 31.

[119] The issue arises in the context of the plaintiffs’ claim under s 9 of the FTA.

That section is in familiar terms:

9 Misleading and deceptive conduct generally

No person shall, in trade, engage in conduct that is misleading or

deceptive or is likely to mislead or deceive.

[120] It was common ground between the parties that incorrect information about

legal rights and remedies can amount to a breach of s 9 of the FTA. Thus, for

example, incorrect advice about the scope of coverage provided by an insurance

policy has been held to be misleading and deceptive conduct under the Act.24

Likewise s 13(1) of the Act prohibits false or misleading representations concerning

24

Clifton-Mogg v National Bank of New Zealand (2001) 10 TCLR 213.

the existence, exclusion, or effect of any condition, warranty, guarantee, right or

remedy.

[121] There was agreement also that the relevant test is whether the alleged conduct

was capable of misleading and likely to mislead a reasonable person with the

plaintiffs’ characteristics in all the circumstances of the case.25

[122] The oral evidence in relation to the meetings of 15 and 20 June was provided

by:

(i) the plaintiffs or their representatives Mr Borst, Mr Tennent,

Mr Ellis, Mr Lowe, Mr Willans.

(ii) Mr Lodge, who was NZDL’s Quality and Compliance

Manager at the time, and

(iii) Fonterra representatives Mr Monaghan, Mr Murphy and Ms

Burr.

[123] Of these participants Messrs Borst, Lodge, Tennent, Ellis, Willans and

Murphy were present at both meetings. Messrs Lowe and Monaghan were present at

the first meeting only and Ms Burr at the second meeting only. A Mr Griffiths from

Fonterra was also present at both meetings but not called. Certain comments made

by him to others after the meeting were the subject of evidence to which I will return

subsequently.

[124] Contemporaneous notes of the meetings were taken by Mr Lodge and by Mr

Tennent’s wife. I found these valuable, especially given the period of time which

had elapsed since the events in question and the inevitability that, within the context

of any dispute, memory can be overlaid with perceptions, self-interest and elements

of reconstruction, irrespective of a witness’ commitment to his or her oath. The

25

See AMP Finance Ltd v Heaven (1998) 6 NZBLC 102, 414, (1997) 8 TCLR 144. The Supreme

Court’s simple test for proving a breach of s 9 in Red Eagle Corporation Ltd v Ellis [2010]

NZSC 20 is not in my view applicable given that the case is not one “where there is no doubt

about what was said or about its meaning” (at [26]).

decisions in Watson v Foxman,26

Julstar Pty Limited v Hart Trading Pty Limited27

and Onassis v Vergottis28

all emphasise the fact that what is actually remembered

may only be an impression from which plausible details are reconstructed, often

subconsciously, and that the very nature of litigation and the processes around

preparation for trial can distort memory. I accept therefore that contemporaneous

documents will always be of the utmost importance.29

But neither do I disregard the

evidence of any of the participants all of whom I regard as genuine in their attempted

recollections of what was said.

[125] I accept that the onus is on the plaintiffs to prove what are referred to in the

statement of claim as the “non-eligibility representations” and that the Court should

feel an actual persuasion of the words “occurrence”.30

However, as question 3 itself

recognises, I may look either to the “terms or to the effect” of what was said.

[126] Both parties agree that statements made by Fonterra’s representatives at the

two meetings must be taken into account and that what was said at one meeting can

shed light on what was said at the other. It is the overall impact of Fonterra’s

conduct that is relevant. Although I deal with the two “non-eligibility

representations” separately, I do so therefore live to the fact that each must be

considered in the context of the other. The plaintiffs’ case is that the overall message

was that they were not eligible to share-up both because they were out of time and

(with very limited exceptions relating to production increases), because no suppliers

were able to acquire shares at that time.

The first alleged representation – not legally possible to acquire shares

[127] A number of the plaintiffs recall being told by Fonterra representatives at one

of the two meetings that it was “legally impossible” to share-up.

26

Watson v Foxman (1995) 49 NSWLR 315 (CA) at 318-319. 27

Julstar Pty Limited v Hart Trading Pty Limited [2014] FCAFC 151 at [73]. 28

Onassis v Vergottis [1968] 2 Lloyds Rep 403 (HL) at 431. 29

Watson v Foxman, above n 26, at 319. 30

Julstar Pty Limited v Hart Trading Pty Limited, above n 27, at [74].

Meeting of 15 June 2012

[128] In relation to the meeting on 15 June, only Mr Willans recalls such

expression being used, which he attributes to Mr Monaghan, while recognising it

could have been Mr Murphy. By contrast, each of Mr Borst, Mr Tennent, Mr Ellis

and Mr Lowe had no such recollection. Rather, they recall Mr Murphy saying that

sharing up was not allowed because it was outside the application period.

[129] In terms of the independent witnesses, Mr Grace had no recollection of the

words “legally impossible” being used at the meeting of 15 June (or that of 20 June).

Although he was unable to make an attribution to one or other meeting, he did recall

the suppliers asking questions about why the Fonterra offer did not allow them to

share-up immediately and that Mr Murphy’s response was in terms that this was

outside the application period, that he was not allowed to offer different terms and he

could not go back to the Fonterra Board as it would not change its decision.

[130] The other independent witness, Mr Lodge, could not recall the words “legally

impossible” being used at the meeting of 15 June but says that “that’s how [he] took

it”.31

It was a matter of “impression”.32

Significantly, Mr Lodge took from that

meeting the strong message that Fonterra could not allow the suppliers to share-up,

not that it could, but chose not to do so:33

Q. Mr Lodge, you were asked a lot of questions about the 15 June

meeting and whether the message from the Fonterra representatives

was “can't” or “won’t”, you remember those questions?

A. Mhm.

Q. And your answer was that the message at that meeting was “can't”?

Sorry, you need to speak rather than just nod for the transcribers.

A. Sorry, yes, the message was definitely a “can't”.

Q. My learned friend Mr Hodder asked you earlier this morning at

around 10.15 am and I'm afraid I don’t have the pages of the

transcript yet, Your Honour, to provide a reference to Your Honour’s

notes, about edict from the edicts from the Board, do you remember

that question?

31

NOE 120/9. 32

NOE 120/28-32. 33

NOE 143/22-144/12.

A. Mhm, yes.

Q. Did you understand the reason for the “can't” to be a decision that

the Board had made or that there was some other reason why

Fonterra as a whole including the Board couldn't do this?

A I think at that time they hadn't mentioned the Board. I would have

assumed it was a “can't” because Fonterra large body couldn't do it.

Q. If we role (sic) forward now to – and when you say you “assumed it”

was that based on what was said at the meeting or on something

else?

A. Based on the message at the meeting that they can't do it. I didn't

think in that much detail.

[131] In terms of the Fonterra witnesses, Mr Monaghan’s evidence was that he did

not use the words “legally impossible” nor could he recall Mr Murphy doing so. He

says that the clear message he imparted was that sharing up was not an option that

the Board would entertain and that there would be no negotiation.

[132] Mr Murphy denied using the words “legally impossible” at the meeting.

[133] Turning to the two contemporaneous records, there is no reference to “legal

impossibility”, as I would have expected if that exact phrase had been used. In Mr

Lodge’s notes the only relevant exchange is between Mr Ellis and Mr Murphy in the

following terms:

Ellis: Unique situation, why not allow us to share-up straight

away?

Murphy: Can’t allow this as Fonterra has many other existing

suppliers on contract.

[134] Mrs Tennent’s notes in turn record:

Unique situation. Asked why can’t share-up straight away – NO

CONTRACT AS IS. Deal has to suit Fonterra and us. Hard nosed.

[135] Nor is there any reference to “legal impossibility” in the Fonterra speaking

notes which I would expect their representatives to have adhered to closely. Those

notes referred to the fact that:

In putting this offer together, we have had to take into account the need to be

fair to our shareholders so there are two exceptions to the normal contract

which I have explained below.

[136] I find therefore that at the meeting of 15 June neither Mr Monaghan nor Mr

Murphy stated that it was legally impossible for the suppliers to share-up but that the

suppliers were told that they could not share-up and/or that this was not “allowed”,

or words to that effect. I find also that Fonterra communicated its position in un-

negotiable terms.

Meeting of 20 June 2012

[137] In relation to this meeting, the plaintiffs had a consistent recollection of the

words “legally impossible” being used. Mr Borst’s evidence was that the phrase was

used in response to a question as to why suppliers could not share-up. He also

recalled as a reason which was advanced that there was “no mandate”. He variously

described his confidence that it was Mr Murphy who said these words in terms;

“pretty sure”,34

“specifically”,35

“certainly”36

and “definitely”.37

However, when he

was tested in cross-examination about the context in which Mr Murphy may have

said it he was uncertain:38

A Well it, it come up, ah, on more than one occasion and, I can’t recall

exactly what, um, cos it was, um there was certainly a fair amount of

discussion about the shares and, um, and I cannot recall about what

one but it was, certainly that was one of the terms used and I am

pretty sure used on more than one occasion that, um, that it was

legally impossible to share-up, to, to sell shares outside the

application period.

[138] Mr Tennent’s reference to the phrase “legally impossible” occurs only in his

reply evidence and is said to have been the result of his memory being jogged from

the briefing process. Like Mr Borst, he also recalled reference to there being “no

mandate” to allow sharing up outside the application period. When it was put to him

that all this meant was the Board would not tolerate any change to the conditions and

34

Mr Murphy’s Brief of Evidence. 35

NOE 11/27-30. 36

NOE 80/5-13 37

NOE 80/5-13. 38

NOE 82/14-19.

that the Fonterra representatives at the meeting simply had no mandate to offer

anything else, his response was, however, in terms:39

I don’t remember them talking about the Board saying that at all, they just

said that they could not – it wasn’t possible, they couldn’t do it and they

weren’t even keen on talking about it, they just would not do it.

[139] Mr Willans’ evidence was similar to that of Mr Tennent. He recalled the

words “legally impossible” but not who said them.

[140] Mr Ellis likewise recalled Mr Murphy saying it was legally impossible

because the applicants were outside the application period. However, he conceded

under cross-examination that reference to legal impossibility was in the context of

suppliers insisting on sharing up outside the application period:40

Q All right and what I am also putting to you is that if there was a

discussion about legally impossible, it would have related to the fact

it was legally impossible outside the application period for you or

any of the other suppliers to insist that Fonterra, as a matter of law,

had to provide you with share back.(sic)

A I would have to agree with that, yeah.

[141] In terms of the independent witnesses, Mr Lodge’s brief of evidence referred

to the fact that either Ms Burr or Mr Murphy told the suppliers:

They could not buy shares straight away because Fonterra was not legally

able to issue shares at that time as the application period had closed.

In cross-examination he said he could not recall which of Ms Burr or Mr Murphy

said those words because so much information had been conveyed at the meeting

and on re-examination he conceded that he could not be sure that the words “legally

impossible” were used. Having been referred to the extract from his brief of

evidence just cited, he was asked whether there was anything in that he would wish

to change. The following was then recorded:41

A That is still my recollection. Looking at my notes, I have not written

down the word “legally”, but then I have written down that they

39

NOE 172/17-19. 40

NOE 216/17-22. 41

NOE 145/12-19.

can’t do it, but that was the salient point as far as I was concerned:

the suppliers couldn’t do that.

Q Do you remember whether or not words like “legally impossible”

were used or is that something –

A I – it is a long time ago. I think they were but I couldn’t be sure that

they were, I am sorry.

[142] Mr Grace had no specific recollections apart from those already recorded.

[143] In terms of the Fonterra evidence, Mr Murphy said that he could not recall

anyone saying that it was illegal for Fonterra to allow the suppliers to share-up and

that the simple message he conveyed was that the Board had made up its mind and

was not going to change it. Importantly however, the following exchange occurred

under cross-examination:42

Q Now one thing that everyone does agree about in relation to these

meetings is that you referred to the application period and to the fact

that the suppliers were outside it?

A Yes.

Q Would you accept that in the moment trying to sell the suppliers on

this deal, you may have gone on to say something like, because you

are outside the application period you can’t share-up”? That is a real

possibility isn’t it?

A. Yes it is. Yes.

[144] Ms Burr’s evidence was that one of the reasons given by Mr Murphy for not

allowing the sharing up was that he had no mandate to do so. That is consistent with

Mr Borst and Mr Tennent’s evidence. She did not recall the words “legally

impossible” being used.

[145] In relation to the contemporaneous notes, again there is no reference to “legal

impossibility”. Mr Lodge’s notes record Mr Murphy saying:

No chance that we would offer you to share-up. We took it to Board. They

are adamant it is not allowed.

[146] Ms Tennent’s notes in turn record:

42

NOE 496/11 to 19.

Discussion on immediate sharing up – saying purchaser in July should have

advantage over person purchasing in September. Fonterra say have no

mandate for that.

WILL NOT ALLOW SHARING UP IN FIRST YEAR.

The deal keeps all suppliers on equal playing field.

[147] I have already identified that Fonterra’s Area Manager Mr Griffiths, who was

present at both meetings was not called. Subsequent to the events, he is recorded as

having made a number of statements which Mr Goddard submits are admissible

against Fonterra as made by one of its employees in the course of his employment

and against Fonterra’s interest.

[148] In his brief of evidence Mr Willans records a discussion with Mr Griffiths on

12 March 2013 in which he asked Mr Griffiths about the “whole thing”, to which Mr

Griffiths responded that:

… when they stood up and said that it was legally impossible to buy shares

that he almost stood up at the meeting and corrected them as it was not

actually quite right…. [but that he had] done that before at meetings and

[paid] the consequences for it. So he just sat there and thought no, I will

leave it for someone else to correct but no-one else did.

[149] That discussion is recorded in a contemporaneous diary note by Mr Williams

in terms:

Ray Phil Griffiths said he was going to stand up and say that was not quite

right but thought lawyer would.

[150] Mr Griffiths also attended a meeting at the plaintiffs’ solicitors on 15 April

2013 (at which Mr Monaghan and others were also present). Mr Alec Neil, a

consultant to Lane Neave, made a contemporaneous note which was admitted in

evidence. The following exchanges are recorded:

S/h Could we share-up – true or false.

A – it is a discretion of F

DIR [Mr Monaghan] – misunderstanding by Steve (Murphy) as to

interpretation.

Phil Carruthers (sic) – [the intended reference is to Griffiths] – I only heard it

once or twice and I wanted to point this out…

Richard – Steve Murphy didn’t understand but why buy other F not correct

him – why?

Phil – Clearer [or clever] to be bright in hindsight. If I knew then what I

know now may have taken different view. I did note the point …

DIR – we were never going to exercise discretion for this group.

DIR – been a miscommunication.

[151] I consider this an appropriate case from which to draw the inference that Mr

Griffiths’ evidence would not have assisted Fonterra and it was for that reason he

was not called. Fonterra says that his evidence would merely have been duplicative

of other Fonterra witnesses present at the meetings and that I should be reluctant

therefore to draw such inference. But that does not realistically address the

significance of his potential evidence in the context described.

[152] I also find that there was no explicit reference to the Board having any

discretion in respect of an application outside the application period, or to the Board

having chosen not to exercise it in favour of the suppliers. Mr Monaghan accepted

that any such explanation would have provoked questions about why the discretion

was not being exercised in the suppliers’ favour and that no such questions occurred.

Mr Murphy also acknowledged as “absolutely, it’s a possibility”43

no mention of the

discretion had occurred. None of that is surprising. As Mr Monaghan stated,44

to

have told the suppliers that Fonterra had a discretion which it was specifically

exercising against them would not have been a very “up-beat” message in the

context of a presentation designed to sell the deal.

[153] My overall conclusion in relation to the 20 June meeting is that the “legally

impossible” allegation represents an extrapolation from, rather than a precise record

of, what was said. Again, had those exact words been used I would expect them to

have featured in one or other of the contemporaneous notes. However, that is not an

answer in itself. Question 3 invites me to find whether there was advice “in the

terms or to the effect” pleaded in paragraph 31 of the Amended Statement of Claim.

Consistent with the admissions made by Mr Griffiths and the evidence of Mr Lodge,

I consider that the overriding “message” or impression left by the Fonterra

43

NOE 486/9. 44

NOE 454/1-11.

representatives was that the suppliers could not share-up because they were outside

the application period and/or the fact that because they were outside such period it

could not be “allowed”. Taken in combination with Fonterra’s further

representations relating to the inability of existing shareholders to buy shares (which

I will next address), and the absence of any reference to Fonterra’s discretion, that, in

my view, resulted in a breach of s 9 to the extent that it was both capable of

misleading and likely to mislead a reasonable person with the plaintiffs’

characteristics into believing that the fact that they were out of time was necessarily

fatal.

[154] I consider my conclusion to be consistent with the approach taken by Whata J

in Hamid v England.45

In that case a real estate agent selling his own property made

a number of statements in response to questions about the weathertightness of the

property. Justice Whata approached the statements in context of all relevant

circumstances and not as isolated events. His Honour concluded that a combination

of surrounding circumstances and statements made by the defendant left the

plaintiffs with an erroneous impression as to the true state of the property.

The second alleged representation – inability of other Fonterra shareholders to buy

shares.

[155] It is undisputed that at both the meetings of 15 and 20 June comments were

made by Fonterra representatives about the inability of other Fonterra shareholders

to buy shares in the company at the relevant time. Mr Lodge’s minutes of the

meeting of 15 June record the exchange previously identified in terms:

Dave Ellis Unique situation, why not allow us to share-up straight away.

Steve Murphy Can’t allow this as Fonterra has many other existing suppliers

on contract.

[156] His minutes of the 20 June meeting in turn record:

Robert Tennent What disadvantage to Fonterra if we don’t have to share-

up.46

45

Hamid v England (2011) 12 NZCPR 844 (HC), (2011) 13 TCLR 376. 46

It was agreed by the parties that the question should correctly have been recorded in terms of,

“What disadvantage to Fonterra if we were allowed to share-up.”

Steve Murphy we have many others who can’t buy shares at moment.

Christine Burr we don’t issue shares after the end of September. There is no

market mechanism to change for value share after that.

TAF on table – we going through “end of season”. Not allowing existing

shareholders to buy additional shares.

[157] Fonterra says that Ms Burr’s reference to the moratorium was to “Additional

Shares”, a technical term which was used by Ms Burr to mean and understood by her

audience to mean the moratorium which Fonterra had, on 22 May 2012, imposed on

acquisition of dry shares as part of the lead up to TAF. Fonterra says that Ms Burr’s

reference to the moratorium was simply by way of “general update on wider

Fonterra events” or an example of other restrictions which Fonterra was imposing,

but it was not advanced as a reason why the suppliers were not able to purchase

more supply-backed (i.e. wet) shares.

[158] In evidence, Ms Burr accepted that at the 20 June meeting she did refer to the

fact that Fonterra was not issuing any additional shares to suppliers in the lead up to

TAF:47

Q Can I suggest to you that it is quite possible that among the things

that you said at the meeting was that Fonterra, because of the lead up

to TAF was not issuing additional shares to any supplier?

A Correct.

Q And you would have had in your head additional shares with

capitals?

A Correct.

Q But of course it is very hard to hear capitals isn’t it?

A Correct.

Q So would you accept that a farmer who had for at least some time

not been supplying Fonterra and dealing with your paperwork on a

day to day basis when they heard that Fonterra was not issuing

additional shares to any supplier could understand that no suppliers

were getting any shares at all? That is a natural understanding of

that phrase isn’t it?

A It is hard to take away the knowledge of what additional shares

means.

47

NOE 585/9-14.

[159] She also made an important acknowledgement in the following exchange:48

Q Someone who heard you say “no additional shares” and who read

this paragraph could easily understand that people on growth

contracts weren’t being allowed to share-up in respect of their

existing supply?

A Maybe, yes that could be.

Q And that would be wrong?

A Yes.

[160] I have no doubt that when Ms Burr talked about additional shares she was,

given her own intimate knowledge of the workings of Fonterra and its share register,

meaning dry shares. However, her audience was not equally versed in Fonterra’s

specialist internal terminology. Nor in fact was that terminology consistently used

by Fonterra. For example, the phrase “Additional Shares” in Fonterra’s 2012

Growth Contract Booklet appears to refer (and Mr Murphy agreed) to wet shares

(additional shares over and above Fonterra’s minimum 1,000 requirement which

might be purchased in the first three years of a Growth Contract with a

commensurate reduction in the volume of contract milk supplied).

[161] At all times suppliers under Growth Contracts could buy more shares as long

as they were happy for those to be treated as production-backed shares that reduced

their contract quantity.49

It was precisely this that some of the suppliers at the

meetings of 15 and 20 June wanted to do. The restrictions on the acquisition of dry

shares were simply irrelevant in that context and, in my view, capable of misleading

and likely to mislead. The following passage in Ms Burr’s cross-examination is

relevant:50

Q. So the restrictions on acquiring dry shares that applied to other

shareholders were not restrictions that there (sic) relevant to the

desire of these shareholders to acquire wet shares, agree with that?

A. Yes.

Q. So answering their questions about why they couldn’t acquire shares

by reference to the moratorium was at best confusing wasn’t it?

48

NOE 587/33 – 588/3. 49

NOE 596/12-15. 50

NOE 598/19-25.

A. To them, yes maybe, I don’t know.

[162] Mr Murphy also accepted that he discussed the moratorium pre-TAF and this

was possibly confusing. The following extracts from the evidence are instructive:51

Q. You also, and again I think this is common ground, referred to the

moratorium pre TAF.

A. Yes.

Q. Now, as I think we have discussed, that was only a moratorium on

the issue of dry shares?

A. Yes.

Q. But would you accept that you may have given the impression that

this was another reason why the NZDL suppliers couldn’t share-up?

A. Given, having gone through some of the evidence in brief, it would

appear so, yes.

Q. If we turn back to the notes of the 15 June meeting…

A. Yes.

Q. About a third of the way down the page the notes record Mr Ellis

asking “why not allow us to share-up straight away”?...

Q. And you certainly remember that question being asked?

A. Yes I do.

Q. The answer you are recorded as giving is, “can’t allow this as

Fonterra has many other existing suppliers on contract”. Do you

remember saying something like that?

A. Yes I think it was in the context of we were offering a contract and a

contract doesn’t allow that to happen.

Q. Well you refer to many other existing suppliers on contract?

A. Yes.

Q. Do you think you said something like that?

A. It is recorded here so yes.

Q. That would be a reference to suppliers on the growth contract

wouldn’t it?

A. Yes.

51

NOE 496/20-498/13.

Q. Suppliers on the growth contract were all free to share-up pre TAF to

the extent of their milk supply weren’t they?

A. Yes they were.

Q. Because they were wet shares not dry shares?

A. Correct.

Q. So what it looks like you are saying here is that we cannot allow this

because Fonterra has many other existing suppliers on contract and

they are not able to share up, is that the message you were intending

to give?

A. No I think what I was trying to say was that we are offering a

contract that doesn’t allow this to happen.

Q. Well what is the relevance of there being other existing suppliers on

contract. It looks like a comparison doesn’t it?

A. I am not sure sorry.

Q. You would agree with me that the fact that there were other suppliers

on growth contracts is not a reason to refuse to let these suppliers

share-up?

A. Yes I would agree with you.

Q. So if you said this it is at best confused?

A. Mhm.

Q. And potentially confusing?

A. Possibly although I would stress this is one line out of several

conversations around this topic and so hopefully any confusion was

cleared up later on perhaps even at the meeting on the 20th.

[163] I do not consider the confusion “cleared up” at the meeting on 20 June 2012.

Indeed, I consider that meeting compounded the problem in a way which, albeit

unintentionally, mislead or deceived within the terms of s 9. The overall message

was that the suppliers were not being treated differently from other Growth Contract

suppliers in relation to sharing up when in fact they were.

Significance of legal representation

[164] Fonterra argues that the plaintiffs’ ability to seek legal advice after the two

meetings on 20 June 2012 is relevant in terms of the FTA allegations. I reject that

argument. If the conduct was misleading when it occurred, the possibility that it

might be corrected had appropriate questions been asked of legal advisors at a later

time, cannot deprive it of its misleading character. In the event, the plaintiffs say

they did not raise the question of whether they were legally precluded from sharing

up with their solicitors because of their assumption that the information they

received from Fonterra was accurate. In my assessment, the ability to seek legal

advice is relevant, if at all, only in the context of s 43 of the FTA, and then only if it

deprives the misleading conduct of causative affect.52

Those are not issues I am

required to address at this stage of the proceedings.

Entire agreement clause

[165] Nor do I consider the entire agreement clause in the Milk Supply Agreement

signed by the plaintiffs relevant to the question of a breach of s 9. I accept the

plaintiffs’ submissions that, at most, such a clause is relevant as a factor going to

causation or the remedial discretion under s 43. That is how such a clause was

treated in PAE (New Zealand) Ltd v Brosnahan.53

Reliance and loss

[166] All issues of reliance and loss have been deferred for subsequent hearing.

The plaintiffs say that they were misled by what was said and that, in reliance on

Fonterra’s statements, they signed the supply agreements which were offered and did

not apply for any more than the 1,000 shares they were required to hold under the

Growth Contracts. They say that they lost the opportunity to have the Fonterra

Board consider their application and that, given Fonterra’s agreement with the

receivers to grant an automatic one week extension date if supplier acceptance was

not achieved by 22 June 2012, there was adequate opportunity to renegotiate the

deal. These allegations raise a number of interesting assumptions and significant

issues in terms of valuing the missed opportunity. However, that is an argument for

another day.

52

Poplawski v Pryde [2013] NZCA 229, (2013) TCLR 565 at [40], [48]-[49], [62]. 53

PAE (New Zealand) Ltd v Brosnahan [2009] NZCA 611, (2009) 12 TCLR 626 at [43]-[46].

[167] In answer to question 3 I therefore find that the defendant’s advice was to the

effect pleaded in paragraph 31 of the statement of claim.

Question 4 Was such advice misleading and deceptive conduct in trade in

breach of s 9 of the FTA? (For clarity, this issue excludes any

question of reliance by the plaintiffs on the alleged advice as

pleaded in paragraph 53 of the Amended Statement of Claim, but

all other factual – including contextual – issues raised in the

pleadings of relevance to liability will be traversed.)

[168] It is accepted that Fonterra was at all relevant times acting in trade and that

the relevant test for misleading or deceptive conduct in terms of s 9 of the FTA is

that specified in [121].

[169] Based on my previous conclusions I find that Fonterra breached s 9 of the

Act.

Question 5 Did the defendant’s advice to the plaintiffs about the extent of the

plaintiffs’ ability to buy shares and supply milk on a shared-up

basis (as per question 3, above) amount to a misrepresentation in

terms of s 6 of the CRA? (For clarity, this issue excludes any

question of reliance by the plaintiffs on the alleged advice as

pleaded in paragraph 56 of the Amended Statement of Claim, but

all other factual – including contextual – issues raised in the

pleadings of relevance to liability will be traversed.)

[170] Section 6 of the CRA provides that where a party has been induced to enter

into a contract by misrepresentation, the innocent party is entitled to damages on the

same basis as if the misrepresentation were a term of the contract that had been

broken. What constitutes a misrepresentation is derived from the common law, as

the term is undefined in the CRA.54

The essential elements of a cause of action

under s 6 of the CRA and s 9 of the FTA are the same or similar. There must be a

misstatement, whether a misrepresentation under the CRA or misleading and

deceptive conduct under the FTA. The CRA however also requires the plaintiffs to

show that the defendant intended to induce the plaintiffs to enter into the contract on

the basis of the misrepresentation.55

54

Ware v Johnson [1984] 2 NZLR 518 at 537, at 538 per Prichard J. 55

Savill v NZI Finance Ltd [1990] 3 NZLR 135 (CA) at 145.

[171] The parties are agreed that the principal issue for determination by the Court

in relation to the CRA cause of action is the same question of fact that arises in the

context of the FTA cause of action – what statements were made by Fonterra

representatives at the 15 and 20 June 2012 meetings and (as I approach the task)

what was the overall “message” conveyed to the plaintiffs.

[172] As with the FTA claims, all questions of reliance, inducement and loss have

been deferred for a subsequent hearing.

[173] For the reasons previously set out I answer question 5 in the affirmative.

Result

[174] I answer the five questions posed in the following terms:

Question 1 Yes.

Question 2 Yes.

Question 3 The defendant’s advice was to the effect pleaded in paragraph 31 of

the statement of claim.

Question 4 Yes.

Question 5 Yes.

Costs

[175] These are reserved to be addressed at the conclusion of the next phase of trial

or otherwise on application of either party. In the event earlier determination of

costs is required leave is reserved to seek a telephone conference at which an

appropriate timetable can be set for submissions.

__________________________

Muir J