Gisborne Milk Co-Op Limited v Fonterra Co-operative Group Limited

[2012] NZHC 3439

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2010-404-7223 [2012] NZHC 3439

BETWEEN  GISBORNE MILK CO-OP LIMITED (IN LIQ)

First Plaintiff

ANDOPOITI LIMITED Representative Second Plaintiff

ANDFONTERRA CO-OPERATIVE GROUP LIMITED

Defendant

Hearing:         6-17 August 2012

Counsel:         J A MacGillivray and K Cornege for the Plaintiffs

J E Hodder SC and R A Rose for the Defendant

Judgment:      17 December 2012

RESERVED JUDGMENT OF ELLIS J

This judgment was delivered by me on 17December 2012 at 3 pm, pursuant to r 11.5 of the High Court Rules

Registrar/Deputy Registrar

Solicitors:      Tompkins Wake, PO Box 258, Hamilton 3240

Chapman Tripp, PO Box 2206, Auckland 1140

GISBORNE MILK CO-OP LTD (IN LIQ) V FONTERRA CO-OPERATIVE GROUP LTD HC AK CIV-2010-

404-7223 [17 December 2012]

[1]      These proceedings concern the historical relationship between Gisborne Milk Co-operative Ltd1 (Gisborne Milk) and Fonterra Co-operative Group Ltd (Fonterra). More particularly,  at  issue is  the nature and  quality of  any ongoing  rights  that Gisborne Milk may have had to remain as a shareholder of, and supply milk to, Fonterra following its (Fonterra’s) creation in 2001.  In essence, the plaintiffs allege that in late 2007 Fonterra unlawfully denied the existence of any such rights.  And

they say that, as a direct consequence of those denials, Gisborne Milk surrendered its shareholding and ceased supplying Fonterra with milk to the ultimate detriment of its (Gisborne Milk’s) shareholders.2

[2]      In general terms, Gisborne Milk alleges that Fonterra’s stance was in breach of the Dairy Industry Restructuring Act 2001 (DIRA) and its  own Constitution. Misleading conduct by Fonterra is relatedly pleaded.

[3]      For its part, Fonterra essentially says:

(a)       that the position it took in 2007 in relation to the issues of supply and shareholding was legally correct; but

(b)to the extent it was not, the expression of Fonterra’s position was of no legal consequence; and

(c)       any loss suffered by the plaintiffs were the result either of decisions freely made by them or the force of circumstance.

[4]      The precise nature of Gisborne Milk’s claims and Fonterra’s defences are set out in more detail at [118] to [124] below.

[5]      The background matrices of fact and of statute are inextricably entwined, and are of considerable importance in understanding the relationship between Gisborne

1 Now in liquidation.

2 One of Gisborne Milk’s shareholders, Opoiti Ltd is named as the second plaintiff in a representative capacity. By agreement Opoiti’s discrete claim against Fonterra under the Contractual Mistakes Act

1979 is not the subject of this judgment and nor is the issue of remedies, which are to be determined

at a separate trial, if required. This judgment therefore deals only with the issue of liability in relation to the claims brought by Gisborne Milk itself.

Milk and Fonterra and what occurred and 2007.  Due to the fact that some 60 years have passed since Gisborne Milk first came into existence, certain aspects of the legislative and factual history are also now somewhat opaque.   But, because of its importance to the claim, I attempt to set out that history below.

Gisborne Milk: a Cooperative Dairy company

[6]      Gisborne Milk began its life in 1945, under the name Gisborne Co-Operative

Milk Producers Association Limited.3    Since its inception, Gisborne Milk was:

(a)       a  company  registered  under  the  relevant  Companies  legislation

(namely the Companies Acts 1933, 1955 and 1993); and

(b)a cooperative dairy company under the relevant legislation at the time (namely Pt III of the Dairy Industry Act 1908, the Cooperative Dairy Companies Act 1949 and Pt 3 of the Cooperative Companies Act

1996).

[7]      To the extent there was any conflict between the two statutory regimes, the cooperative dairy company legislation prevailed.4

[8]      Initially, Gisborne Milk was a dedicated “town milk” supplier.  Like most of the myriad small players in the New Zealand dairy industry in the first half of the twentieth century, it was a company that was owned cooperatively by local farmers who were dedicated to the year-round supply of raw milk to Gisborne Milk, who would then process it for the town milk market.  Suppliers had quotas to fulfil that were set by the New Zealand Milk Board.

[9]      Between 1949 and 1996, the relationship between Gisborne Milk and its supplying  farmers  was  largely  defined  and  governed  by  the  Cooperative  Dairy

Companies Act 1949 (the CDCA).   In particular, farmers who supplied milk to

3 The name change occurred in 1992.

Gisborne   Milk   fell   within   the   principal   definition   of   the   term   “supplying shareholder” in s 2 of the CDCA.  Such a shareholder was:

... a shareholder of a co-operative dairy company who, at the date during the financial year of the company on which his status as a shareholder under this section is to be determined -

(a)     After making provision for his own domestic requirements (if any), is supplying to the company the whole or such portion as the company requires of the milk, cream, or butterfat obtained from cows owned by him or subject to his control, and depasturing on land conveniently served by the company and from which the company is permitted and willing to take supply; and

(b)     Has  so  supplied  the  company  continuously  from  the  time  he commenced to supply during that financial year; and

(c)     While so supplying has performed in relation to that supply all his obligations as a shareholder which the company has from time to time during that financial year lawfully required of him:

[10]     It was thus a prerequisite of this definition that:

(a)       the  supplying  shareholder  owned  or  controlled  the  relevant  milk- producing cows; and

(b)      those cows were depastured on land

(i)that  was  “conveniently served” by the relevant  cooperative dairy company (here, Gisborne Milk); and

(ii)from which that company (Gisborne Milk) was permitted and willing to take supply.

[11]     The  combined  statutory  effect  of  the  definition  of  “cooperative  dairy company” in s 2 of the CDCA and ss 2(2), 3 and 6 of that Act meant that any cooperative dairy company (such as Gisborne Milk) was required to adopt the core Model Articles of Association contained in the First Schedule to the Act in order to

maintain its status as such a company.5

5 The COCA did not require all the Model Articles to be adopted.

[12]     The Articles of Association of a cooperative dairy company did two separate things.  They not only created and defined the contractual relationship between the company and its shareholders in the usual way,6  but they also separately evidenced the terms upon which farmers (who happened to be shareholders) supplied milk to the company.

[13]     The fact that the terms of supply were “evidenced” by the Articles is reflected in reg 132 of the First Schedule to the CDCA, which provided that:7

All dairy produce supplied to the Company by any person shall, except as may otherwise be agreed upon in writing, be deemed to be supplied upon the terms set out in these Articles.

[14]     And reg 133 made the link between the act of supply and shareholding status clear.  It provided that:

... the supply by any person of dairy produce to the Company shall in itself be deemed to be an irrevocable application by that person to become a member of and to accept such shares in the Company as he shall be required to hold in accordance with these Articles, and it shall be lawful for the directors, without any other application therefor, to allot immediately such number of shares as they think will be required by him on their estimate of the probable quantity of his supply of dairy produce, or the directors may in their discretion defer the allotment of those shares until the quantity so supplied for the particular financial year is ascertained; and those persons shall be entitled to the allotment of shares accordingly: ...8

[15]     Nowithstanding that link, however, and while the same farmers might have been both suppliers and shareholders, supply and shareholding did not give rise to a single bundle of rights.  The farmers had a different relationship with the company depending on which “hat” they were wearing.  Thus, in Eltham Cooperative Dairy Factory Co Ltd v Johnson, the Chief Justice put it this way:9

It will be seen from Article 8(a) and Article 8(b) that the company recognizes and deals with a member of that company in two capacities – first qua shareholder, and, secondly, qua supplier.   As a shareholder, the dividend

6 The notion that a company’s articles of association had contractual force as between the company and its shareholders was also reflected in s 34 of the Companies Act 1955. The position is, however, now less clear under the Companies Act 1993.

7 The Model Articles are referred to in the Act as regulations.

8 There followed a proviso whereby supply of milk solids below a certain amount took a supplier outside the general irrevocable application provision.

9 Eltham Cooperative Dairy Factory Co Ltd v Johnson [1931] NZLR 216 (CA) at 244.

payable to him is limited by Article 8(a).  Article 8(a) and 10 show clearly, firstly, that a shareholder who produced milk or butterfat was in no way bound  to  supply  his  produce  to  the  company,  and,  secondly,  that  the company was in no way bound to purchase or receive his produce.   If, however, the shareholder did supply his produce to the company, then he was to be dealt with under Article 8(a) not qua shareholder, but qua supplier who had complied with the requirement of taking up a number of shares, in respect of which shares he would receive his dividend as a shareholder.

[16]     It can be observed at this point that, because there was a direct link between the quantity of milk supplied by a farmer and the number of shares allotted or required to be taken up by him, a supplier’s shareholding fluctuated over time.

[17]     In the early years, most of the milk received by Gisborne Milk from its supplying shareholders was processed in its factory in Gisborne and then sold as packaged milk and cream.  At that time, there was a relatively sharp demarcation between milk processors (such as Gisborne Milk) and manufacturers.

[18]     Almost by definition, there was a relatively constant, year round, demand for town milk in any given area.10     In Gisborne Milk’s case this had two relevant consequences:

(a)      Its supplying shareholders needed to be able to provide it with “winter milk”;11

(b)At  other,  more  productive,  times  of  the  year  (particularly  in  the “spring flush”) the cows owned by the company’s supplying shareholders produced more milk than was required for its town milk supply business.

[19]     The ability to dispose of milk that was, from time to time, surplus to local requirements was therefore important.  In Gisborne Milk’s case, it arranged to supply

its surplus to one of the other larger dairy marketing cooperatives operating in the

10 In order to ensure that Gisborne Milk had enough milk to meet town milk demands, each supplier had a quota and there was a penalty for failing to meet it. Any milk supplied that was over quota was paid for at the (lower) manufacturing milk price.

11 Other town milk suppliers chose to purchase milk from other, larger processors to meet its winter milk demand.

North  Island and, in particular (from  the 1970s through to 1998),  to Bay Milk Products12  (Bay Milk).   Bay Milk’s factory that was closest to Gisborne was at Edgecumbe.   But, because the factory at Edgecumbe closed down over the winter months, any surplus produced by Gisborne Milk during that season had to be sent further afield to Bay Milk’s factories at Mt Maunganui, Waitoa, Morrinsville or Hautapu.

Gisborne Milk: a Supplying Shareholder

[20]     The precise basis upon which Bay Milk (or its predecessor) first accepted Gisborne Milk’s surplus milk is not recorded.   Although reg 141 of sch 1 of the CDCA made it clear that Bay Milk had the option of purchasing dairy produce without requiring the supplier to take up shares, it is not in dispute that the shareholding model was adopted. Thus the operation of reg 133 (see [14] above) meant that Gisborne Milk’s supply of milk to Bay Milk was deemed to constitute an irrevocable application to become a shareholder of that company.   In any event it seems to be accepted that Bay Milk chose to accept that supply and to allocate shares

to Gisborne Milk under that Regulation.13

[21]     Because Gisborne Milk was fundamentally a milk processor and did not itself own a farm or milk cows, it did not fall within the principal CDCA definition of “supplying shareholder”.14   But the effect of the application of reg 133 in relation to companies such as Gisborne Milk was expressly and separately recognised in the fourth proviso to that definition, which stated that:

... where a co-operative dairy company registered under this Act ... holds shares in a co-operative dairy company registered under this Act, it shall be

12 Formerly named the Opotoki Dairy Association.

13 One of Fonterra’s witnesses, Mr O’Donnell, said that the cooperative shareholding model was merely the most convenient and fairest way for Gisborne Milk to be paid for its supply.  The implicit

suggestion appeared to be that this was done as some sort of favour to Gisborne Milk and that the company was not to be regarded as an “ordinary” shareholder. But it seems to me that, as soon as the decision to accept supply and issue shares was made, then the relevant provisions of the CDCA were directly engaged.

14 Set out at [7] above.

deemed for the purposes of this Act to be a supplying shareholder of the last- mentioned company:15

[22]     Accordingly, just as the CDCA Model Articles of Association would have formed  the  basis   of  the  relationship   between   Gisborne  Milk   and   its   own shareholders, they would also have formed the foundation of the supply relationship between that company and Bay Milk.   Whether or not there was ever any further written agreement between Gisborne Milk and Bay Milk elaborating upon or departing from the terms of the Model Articles is not now known.   But it is clear from the evidence that at some point or points an agreement was reached between Gisborne Milk and Bay Milk whereby:

(a)       Bay Milk would accept the supply by Gisborne Milk of its farmers’

surplus milk;

(b)Gisborne Milk used its own two tankers to deliver its farmers’ surplus milk to the relevant Bay Milk factory.

(c)       Bay Milk paid Gisborne Milk an extra amount (eventually three cents per litre) to compensate it for its transportation costs in doing so.

[23]     It is notable that neither of these terms was inconsistent with the Model (sch

1) Articles.    In  particular,  delivery by a  supplier  (rather  than  collection  by the processor) was expressly contemplated by reg 15416 and differential payments were

expressly permitted by reg 155(b).17   Accordingly, it seems to me unlikely that the

15 The fact that this proviso formed part of the definition from 1949 onwards suggests that arrangements such as that entered into between Gisborne Milk and Bay Milk were long-standing and well accepted.

16 Regulation 154 provided that:

All dairy produce for delivery to the Company shall be -

(a)       Made available by the person so supplying either at his milk shed, farm gate, roadside, or depot, or the receiving stage of the nearest factory of the Company manufacturing dairy produce of the type for delivery, or other convenient place, as the directors shall from time to time require, and either once daily or twice daily or at longer intervals as the directors shall from time to time require:

...

17  Regulation 155(b) provided that the directors may from time to time, in lieu of requiring delivery by suppliers of dairy produce as provided in the last preceding regulation, -

reg 132 requirement that terms and conditions involving a departure from the Model

Articles be in writing, was engaged.18

[24]     To the extent that Bay Milk’s Articles of Association or Constitution also contained a requirement that supplying shareholders were to supply 100 per cent of their milk, the supply of surplus milk only by Gisborne Milk would necessarily have been an agreed exception to that rule.19 The Model Articles themselves, however, did not contain such a requirement.20

[25]     It also seems relevant to note that under reg 152, it would have been open to the directors of Bay Milk to refuse to accept any dairy produce from Gisborne Milk from time to time if, inter alia, they formed the view that “It would not be in the interests of the Company to accept that dairy produce”.21

[26]     By the mid 1980s Gisborne Milk had between 21 and 22 of its own supplying shareholders.  Its factory in Gisborne packaged 30,000 to 40,000 litres a day.  During spring flush there could be surplus milk of up to 60,000 litres per day that was sent to the factory at Edgecumbe.  The evidence was that when, in 1988, Cyclone Bola put Gisborne Milk’s bottling plant out of action, nearly all (98 per cent) of the company’s milk was sent to Bay Milk for a time.  That lends some support for an inference that Gisborne Milk was able to supply as much milk as it wished to Bay

Milk and its shareholding just fluctuated accordingly.

...

(b) Make any payment or allowance to those suppliers or groups of suppliers as a consideration for delivery by them in any particular manner, time, or place, as the directors think fit.

18 In any event it seems to me unlikely that failure to comply with the writing requirement would

render the agreement unenforceable.

19 The existence of such a condition seems likely given that its continued existence later became the subject of some debate in the context of s 108 of the Dairy Industry Restructuring Act 2001 and the Fonterra Constitution (as to which see [66] and [67] below).

20 To the extent that there was a term of supply that involved a departure from the Model Articles in

the CDCA, reg 132 required that it be in writing. In Gisborne Milk’s case, any such “writing” appears

to have been lost in the mists of time. But even if the reg 132 requirement had been breached (and this is far from clear), it seems to me most unlikely that failure to comply with the writing requirement would render the agreement unenforceable: cite case

21 CDCA, sch 1, reg 152(1)(e).

[27]     Following  the  deregulation  of  the  town  milk  supply  during  the  1980s, Gisborne Milk’s processing operation came into competition with both Bay Milk and Auckland  Milk  Corporation.     In  response,  the  company  both  diversified  (by producing 30 to 40 new products) and innovated (for example by being the first company to introduce tetrapak packaging).   This expansion resulted in a five-fold increase in supply of surplus milk solids, which necessarily led to proportionate increase in shareholding in Bay Milk.

Cooperative Companies Act 1996

[28]     Prior to 1996, other cooperative companies had been subject to a different

(although closely aligned) statutory regime under the Cooperative Companies Act

1956 Act (and its predecessors).

[29]     However in 1996 a new Cooperative Companies Act (the CCA) was enacted. The CCA repealed and replaced not only the 1956 Act but also the CDCA.  Part 3 of the CCA (ss 34 to 46) contains specific provisions that apply only to cooperative dairy companies.  The general provisions in pts 1 and 2 of the CCA also apply to cooperative dairy companies, but only to the extent those provisions are not inconsistent with pt 3: s 46.

[30]     A  “cooperative  dairy  company”  is  defined  in  the  CCA  as  meaning  a cooperative company registered under the Act whose principal activities are stated to be:

(a)      The manufacture of butter, cheese, dried milk, or casein, or any other product derived from milk or milksolids supplied to the company by its shareholders; or

(b)      The sale to any person of the milk or milksolids so supplied; or

(c)       The collection, treatment, and distribution for human consumption of milk or cream so supplied.22

[31]     Section 39 of the CCA requires that the Constitution of a cooperative dairy company registered under the Act will continue to contain clauses akin to the former regs 133 and 141.23

[32]     The CDCA term “supplying shareholder” is adopted in the CCA, but only in relation to cooperative dairy companies.24    When the CCA was first enacted, that term was defined in s 34  as:

... a transacting shareholder who supplies the company, pursuant to the constitution of the company or an agreement with the company, with such quantity,  as  the  company  may  from  time  to  time  require,  of  milk  or milksolids produced on land of which the transacting shareholder is the occupier.

[33]     This definition, and the direct link between the production of milk on land occupied  by the  shareholder,  appeared  to  exclude  (inter  alia)  companies  in  the position of Gisborne Milk.  It also created other difficulties, in particular in relation to the status of sharemilkers (who did not necessarily occupy the land where their cows were depastured) and also in relation to the ownership by the large cooperative

dairy companies of the Dairy Board.25    These difficulties led to the retrospective

22 Sections 34 and 35. Gisborne Milk, Bay Milk and Fonterra all fall squarely within that definition.

23 It provides that:

39 Suppliers to be shareholders

(1) Subject to subsection (2) of this section, the constitution of a co-operative dairy

company must provide that the supply of dairy produce by a person to the company is an irrevocable application by that person to become a shareholder in the company. (2) Notwithstanding subsection (1) of this section, the constitution of the company may authorise the board of the company, in its discretion and whether or not at the request of a supplier, to accept the supply of dairy produce from that person without requiring that person to become a supplying shareholder.

24 The equivalent term used in relation to other types of cooperative company under the Act is “transacting shareholder”. Section 46 provides that references in pts 1 and 2 to “transacting shareholders” are to be read (in relation to cooperative dairy companies) as referring to “supplying shareholders”.

25  That was because the Dairy Board Act 1961 provided that the Board was owned by “qualifying

companies” as defined in the Act.  And “qualifying company” was defined in general terms to mean “a co-operative dairy company ... in which – (a) all the shares carrying voting rights in the company are held by supplying shareholders of the company;..” Because (for example) Gisborne Milk was a shareholder of New Zealand Dairy but did not occupy land on which cows were milked, New Zealand Dairy’s status as a qualifying company (and as an owner of the Dairy Board) was compromised.

amendment of the definition in 1998 so that it now defines a “supplying shareholder”

as:

... a transacting shareholder who supplies the company, pursuant to the constitution of the company or an agreement with the company, with such quantity  of  milk  or  milksolids  as  the  company  may  from  time  to  time require; and includes a sharemilker to whom shares have been transferred in accordance with section 44.

[34]     Gisborne Milk squarely fell within that amended definition.

[35] Section 21 of the CCA specifically provides that a cooperative company (such as Bay Milk) can require a supplying shareholder (such as Gisborne Milk) to surrender its shares if it failed to comply in a material respect with requirements contained in any contract between them. There was, however, no suggestion in the evidence that any issue in that respect ever arose between Gisborne Milk and Bay Milk and, indeed, the enactment of the CCA does not appear to have wrought any change to the relationship. Notwithstanding the apparent absence of any written agreement setting out the terms and conditions governing Gisborne Milk’s supply, there is in my view a strong inference to be drawn that the previous terms and conditions (including those to which I have referred at [22] above) simply continued to apply.

[36]     In 1998 New Zealand Cooperative Dairy Company Ltd (New Zealand Dairy) acquired the assets of Bay Milk.  Gisborne Milk voted in favour of the merger on basis that shareholders of Bay Milk (such as Gisborne Milk) would become full shareholders in New Zealand Dairy.  That is in fact what occurred.  Consistent with the law applicable to amalgamations (discussed further below), there is no evidence to suggest that there was or was intended to be any real change in the basis upon which Gisborne Milk supplied its surplus milk.   Although, apparently there were discussions from time to time about price and aspects of delivery.

The Dairy Industry Restructuring Act and the creation of Fonterra

[37]      In 1999 discussion began about the possible formation of a “mega” dairy co- operative company that would replace, and expand the functions of, the Dairy Board.

In time,  the exiting shareholders of the Dairy Board (essentially the larger existing cooperative  dairy  companies,  including  New  Zealand  Dairy)  applied  to  the Commerce Commission for authorisation of a merger,  under which a  yet-to-be- formed “NewCo” would acquire all of the shares and assets of some or all of those companies.

[38]     But,  on  21  August  1999  the  Commerce  Commission  issued  a  draft determination indicating that it would be likely to decline to authorise the proposed acquisition/merger.

[39]     Further  amalgamations  and  consolidation  within  the  industry nonetheless continued to take place and discussion about a possible merger continued.26     In March  2001,  the  chairs  of  New  Zealand  Dairy  and  Kiwi  Co-operative  Dairies Limited (Kiwi), circulated to their shareholders (including Gisborne Milk) a set of documents including (inter alia) a “Merger Summary” which set out the proposed terms of the merger that would ultimately lead to the creation of Fonterra.  Under

those proposed terms, the supplying shareholders of the merging companies would become supplying shareholders of the new company, which was at that point known as Global Dairy Co (Global). The summary stated:

Global Dairy will adopt new standard terms and conditions of milk supply based on New Zealand Dairy’s and Kiwi’s previous terms and conditions of supply.   In addition Global Dairy will publish a supplying shareholder handbook setting out details of its day to day operational interaction with suppliers ...again based on New Zealand Dairy’s and Kiwi milk supply policies.  Both of these documents have been prepared on the basis of what is ‘best industry practice’ while trying to minimise the impact of any change.

Transitional supply arrangements

For some suppliers there will be a change to their terms and conditions of supply.  Global Dairy will work with suppliers to ensure a smooth transition. Where immediate compliance  with the new terms  and  conditions is not possible, or is impracticable, the company will fairly consider any requests by suppliers for time before being required to fully comply with the relevant provisions of the new terms and conditions of milk supply.

26 Original statute

[40]     A formal Merger Proposal was circulated in about May the same year.27   That document  reiterated  that  existing  shareholders  of  New  Zealand  Dairy  and  Kiwi would become shareholders in Global and stated that:

From the Merger Date all Global Diary Shareholders (including former New Zealand Dairy and Kiwi shareholders) will, in accordance with the Constitution, be deemed to have offered to supply to Global Dairy all available Milk produced by them, subject to the right to supply up to 20% of that Milk to a competitor in accordance with any applicable legislation.

From the Merger date all Milk to be supplied to Global Dairy by its Shareholders (including former New Zealand Dairy and Kiwi shareholders) will be supplied on the terms and conditions set out in Global Dairy’s terms and Conditions of Milk Supply and the Global Dairy supplying Shareholders Handbook as amended by the Board of Global dairy from time to time, unless special terms and conditions are agreed between a Shareholder and Global Dairy.

[41]     Gisborne Milk resolved to vote in favour of the merger on 7 June 2001.

[42]     Because Commerce Commission approval of the merger seemed unlikely to be forthcoming, authorisation for it was instead granted by statute, in the form of the Dairy Industry Restructuring Act 2001 (DIRA).28    The first purpose of that Act is stated to be to:29

[a]llow an amalgamation of The New Zealand Co-operative Dairy Company Limited, Kiwi Co-operative Dairies Limited, The Tatua Co-operative Dairy Company Limited, Westland Co-operative Dairy Co Limited, and Fonterra Co-operative Group Limited, and the resulting ownership by new co-op of all the shares in the New Zealand Dairy Board, by giving authorisations under the Commerce Act 1986.

[43]     Under s 7(1), authorisation was specifically granted for:

(a) the new co-op amalgamation30; and

(b) the acquisition by new co-op31 of all the shares in the Board; and

27 Clause 19 of this document states that it prevails over all former such documents.

28 The Dairy Industry Restructuring Bill was introduced into Parliament on 26 June 2001 and passed into law on 20 September 2001.

29 DIRA, s 4(1)(a).

30 “New co-op amalgamation” is defined to mean “the amalgamation that occurs if The New Zealand Co-operative Dairy Company Limited, Kiwi Co-operative Dairies Limited, and Fonterra Co-operative Group Limited amalgamate under Part 13 of the Companies Act 1993”.

31 “New co-op” is defined to mean “the amalgamated company under the new co-op amalgamation; and includes any company resulting from a further amalgamation involving new co-op”.

(c) the amalgamation of new co-op (or a wholly-owned subsidiary of new co-op) and The Tatua Co-operative Dairy Company Limited under Part 13 of the Companies Act 1993; and

(d) the amalgamation of new co-op (or a wholly-owned subsidiary of new co-op) and Westland Co-operative Dairy Co Limited under Part 13 of the Companies Act 1993.

[44]     Section 11(1) authorised the “New co-op” and its shareholders to adopt and give effect to clauses that are identical to those set out in sch 1 in New co-op’s Constitution.  Aspects of Fonterra’s Constitution will be considered in more detail between [59] and [72] below.

[45]     The  creation  of  Fonterra  was  to  result  in  a  single  entity  collecting approximately 96  per cent  of the  raw milk  produced  in  New  Zealand.    It  was therefore seen as important to implement measures to promote competition in the domestic dairy markets32 and, in particular, to provide for an open entry/exit regime. Those measures (some of which are central to Gisborne Milk’s claim) are contained in DIRA pt 2, subpt 5.

[46]     The purpose of pt 2 subpt 5 is stated in s 70 to be “...to promote the efficient operation of dairy markets in New Zealand”.  Section 71 says that it is the intention of subpt 5 to promote a number of principles, including that:

(a)       Independent processors must be able to obtain raw milk, and other dairy goods and services, necessary for them to compete in dairy markets;

(b)       New   co-op   must   accept   applications   by   new   entrants   and shareholding farmers to supply it with milk, as shareholding farmers;

(c)      New co-op must not discriminate between new entrants and shareholding farmers whose circumstances are the same;

...

[47]     The second and third of these principles are reflected in s 73, which provides:

32 DIRA, s 4(f)

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.33

(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.34

[48]     The rights conferred by s 73 belong to “new entrants” and “shareholding farmers” respectively. The relevant s 5 definitions are as follows:

new entrant means a dairy farmer who is not a shareholding farmer who applies to become a shareholding farmer under section 73

shareholding farmer means a dairy farmer who is registered as the holder of co-operative shares

[49]     The term “co-operative share” is defined for all purposes and means:

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

(a)       from the new co-op amalgamation; or

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

[50]     The  term  “dairy  farmer”  (which  is  used  both  in  the  definition  of  “new entrant” and “shareholding farmer”) is defined for the purposes of subpt 5 of pt 2.35

In that context, it:

(a)       means a person who produces milk, or intends to produce milk, in

New Zealand from dairy cows as a business; but

33 Section 75 provides that New co-op must set an application period that is before the commencement of each season but that at a minimum, such a period must span the dates 15

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

34 Those sections relevantly require

35 The term itself does not in fact appear in Part 2 subpart 5; the terms “new entrant” and

“shareholding farmer” are.

(b)       does not include a sharemilker.

[51]     Notwithstanding the  apparently mandatory wording of s  73,  ss  94 to 96 contain  discretionary  exceptions  to  the  obligations  to  accept  supply  from  new entrants and shareholding farmers.

[52]     The s 94 exception applies when the proposed supply of milk by a new entrant in a particular season will yield less than a certain quantity of milk solids. An exception of this nature has always existed but has never applied to Gisborne Milk.

[53]     Of more significance is the exception contained in s 95, which provides:

Transport costs: second exception

(1) New co-op may reject an application by a new entrant if the cost of transporting the milk of the new entrant exceeds the highest cost of transporting another shareholding farmer's milk.

(2) In subsection (1) and this subsection, -

cost of transporting the milk of the new entrant is the lowest cost practically available to new co-op for transporting 1 000 litres of that milk to a factory

highest cost of transporting another shareholding farmer's milk is the highest cost incurred by new co-op of transporting 1 000 litres of milk to the same factory from any of the shareholding farmers whose milk is routinely transported to that factory in the season in which the application is made.

[54]     The geographical parameters of Fonterra’s obligation to accept supply from a “new entrant” is thus determined by the location of existing shareholding farmers and the associated transportation costs.  An underlying legislative theme of equity and fairness amongst new entrants and shareholding farmers can further be seen in:

(a)      Section 96, which provides that:

(1) The Governor-General may, by Order in Council made on the recommendation of the Minister, declare that section 95 does not apply  to  a  geographical  area  specified  in  the  order  from a  date specified in the order.

(2) The Minister must not make a recommendation under subsection (1) unless the Minister is satisfied that new co-op pays shareholding farmers in the geographical area different amounts for milk based on the different costs of transporting that milk.

(b)      Section 106(1), which provides:

(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

[55]     The upshot of these provisions appear to me to be that where the cost of transporting the milk of a prospective new entrant exceeds the highest cost of transporting an existing shareholding farmer’s milk then Fonterra can either:

(a)       Decline to accept the new entrant as a shareholding farmer under s 95;

or

(b)      Accept him as a shareholding farmer but apply a transport differential

(ie by paying a lower price for his milk).

[56]     If  the  latter  option  is  chosen,  then  a  s  96  Order  in  Council  could  be promulgated which would have the effect of removing the former option in future relation to other new entrants in the same geographical area.

[57]     The “exit” side of the open entry/exit regime is set out in ss 97 to 105, which enable a shareholding farmer to cease or reduce his supply by giving a notice of withdrawal (subject to the terms governing the relationship between him and Fonterra).  Fonterra is obliged (inter alia) to ensure that a shareholding farmer who ceases or reduces supply receives the surrender  value of their capital within 30 working days of the end of the season in which notice is given.

[58]     The  object  of  facilitating  competition  in  the  domestic  processing  market (s 71(a)) is reflected (inter alia) in s 108 which permits shareholding farmers to supply 20 per cent of their weekly production throughout a season to independent

processors.36    And such competition is further encouraged through regulations promulgated pursuant to s 115, under which Fonterra is required to supply raw milk to other independent processors at a regulated  price.37     Such milk is known as “default milk” and also assumes some importance in Gisborne Milk’s story.

Fonterra’s Constitution

[59]     As noted above, s 11(1) of DIRA authorised Fonterra to adopt clause in its Constitution that are (or were, in 2001) set out in sch 1 to the Act.   Aspects of Fonterra’s Constitution also recognise or reflect Fonterra’s registration as a cooperative dairy company under the CCA.  To the extent there are any interpretive issues arising from the interrelationship between the Constitution and either DIRA or the CCA, cl 48.2(e) of the Constitution provides that:

Words and expressions defined or explain in [DIRA] or the Cooperative Companies Act, as the case may require, have the same meaning in this Constitution

[60]     But cl 48.3 also provides that:

If there is any conflict between

(a)       a provision in this Constitution and a provision in [DIRA] or the Cooperative  Companies Act  which  is  expressly  permitted  to  be altered by the Constitution; or

(b)       a  word  or  expression  defined  or  explained  in  [DIRA]  or  the Cooperative Companies Act and a word or expression defined or explained in this Constitution,

the provision, word or expression in this Constitution prevails.

[61]     As far as the substance of Fonterra’s Constitution is concerned, cl 2.2 is in essentially the same terms as CDCA reg 133 and as subsequently envisioned by CCA s 39. Thus, cl 2.2 provides that:

... the supply by any person of Milk to the Company (Fonterra) is an irrevocable application by that person to become a Shareholder and to hold

36 This will be referred to as the 20 per cent rule in the remainder of this judgment.

37 SR 2001/326 Dairy Industry Restructuring (Raw Milk) Regulations 2001.

the number of Co-operatives Shares from time to time required by the Share

Standard ...38

[62]     Clause 2.3 provides that the Board may in its absolute discretion decide:

(a)       whether or not to accept an application by a person to become a Shareholder made in accordance with clause 2(2) or any application procedure which the Board may from time to time determine; and

(b)       whether or not to accept the supply of Milk from any person, on such terms and conditions as the Board thinks fit, without requiring that person to become a Shareholder in respect of that supply.

[63]     And cl 3.5 permits the Board:

“... at its discretion and on such terms as it sees fit, permit a Shareholder to supply Milk to the Company in a Season on Contract supply ...”

[64]    The mechanics of “sharing up” (subscribing for shares where supply is increased) and “sharing down” (surrendering shares where supply is decreased or ceased) in accordance with the “share standard” are contained in cls 3.1, 3.2 and 5.1. Clause 4 deals generally with how the fair value of cooperative shares for both entry (subscription) and exit (surrender) purposes is to be determined each year.  Key dates are 1 December (valuer’s estimate of fair value range for the next season), 15 May (valuer’s final determination as to fair value range for the next season), and 1 June Board’s determination of fair value (within fair value range) for the season commencing on that date.

[65]     Clause 5.4 governs Fonterra’s power to require a shareholder to surrender cooperative shares and provides:

Surrender of Co-operative Shares at option of Company

The  Company  may  require  a  Shareholder  to  surrender  any  or  all  Co- operative Shares held by that Shareholder or the Company may redeem any or all Peak Notes held by a Shareholder at any time, if

(a)       the Company becomes aware that that Shareholder is a person to whom the Board may not then issue Co-operative Shares in accordance with clause 2(4);

38 “Share Standard” is defined. Clause 2.2 also refers to the ability of the Board to permit, within certain parameters, a Shareholder to hold fewer shares than that specified in the Share Standard for a particular season.

(b)       that Shareholder has ceased to supply Milk to the Company; or

(c)       that Shareholder has failed to comply in any material respect with the Terms and Conditions on which that Shareholder supplies Milk to the Company;

and the Board may in its absolute discretion determine the time at which the surrender or redemption will take effect. ...

[66]     Clause 9 relates to terms and conditions of supply.   Clause 9.1 relevantly provides:

9.1 Shareholders to supply all Milk to the Company: Except as may otherwise expressly be agreed in writing between a Shareholder and the Company or required pursuant to and on conditions permitted or required by any enactment, and subject to this Constitution, each Shareholder is required to make available for supply to the Company, all Milk produced on each farm or farm dairy referred to in clause 2(5) and clause 2(6) except for:39

...

(c)       Milk from that farm or farm dairy which the Company and the Shareholder have expressly agreed in writing is not required for supply to the Company;

...

[67]     The  italicised  words  in  cl  9.1  were  added  after  the  first  draft  of  the Constitution was circulated in order to reflect the 20 percent rule contained in s 108 of DIRA.  I have already noted that it seems that the former large cooperative dairy companies, such as New Zealand Dair,y may have operated under the general rule

that (subject to any agreement to the contrary) 100 per cent supply was required.

39 Clauses 2.5 and 2.6 are as follows:

2.5 Separate designation for supplies from each farm dairy:

The supply of Milk to the Company from each farm dairy shall be treated as a supply from a separate Shareholder and the Company shall take appropriate steps to

ensure the Co-operative Shares relating to the supply from each such farm dairy are registered separately in  the  Share  Register and  other  applicable records of  the Company.

2.6 Requests for separate designation for supplies from same farm dairy:

A Shareholder may request the Company to treat the supply of Milk from the same

farm dairy as split between supply by each of two or more separate persons and, subject to clause 2(7), the Company shall take appropriate steps to ensure the Co- operative Shares relating to each such separate supply are registered separately in the Share Register and other applicable records of the Company.

[68]     Other relevant aspects of cl 9 are as follows:

9.3 Terms and Conditions of supply: The Board may fix from time to time such standard Terms and Conditions as it sees fit which shall apply to the supply of milk by Shareholders to the Company, in cases where special Terms and Conditions do not apply.

9.4 Special Terms and Conditions: The Board may fix from time to time special Terms and Conditions for the supply of Milk to the Company by specified Shareholders which reflect the costs and benefits to the Company of that Milk at different times, of different qualities and on different commercial terms from other Milk, and/or arrangements for the Contract Supply of Milk under clause 3.5

9.5 Terms and Conditions to be notified: The Company shall notify all Shareholders in  writing of the standard Terms  and Conditions and shall notify Shareholders concerned in writing of special Terms and Conditions fixed by the Board.

9.6 Terms and Conditions binding: The standard or special Terms and Conditions shall be binding on the Company and on each Shareholder to whom they apply.

9.7 Other Terms and Conditions: the Company may agree such terms for the supply of Milk by suppliers other than Shareholders as it thinks fit.

[69]     Clause 9.4 therefore recognises that the Board may agree to accept supply on special  terms  where the  circumstances  of the shareholders warrant  differenmtial treatment.

[70]     As will be apparent from some of the clauses set out above, the Constitution uses the word “shareholder” rather than the term “shareholding farmer”, which is used in DIRA itself.  And “shareholder” is defined in the Constitution simply as “a person whose name is entered in the Share Register as the holder for the time being of one or more Shares.”

[71]   It can also be noted, however, that in cl 9.1 there is a reference to a “shareholder” supplying milk produced on either a “farm” or a “farm dairy”.  Neither of those terms is defined in the Constitution, in DIRA or in the CCA.  Nor were they

words that were used or defined in the CDCA.40

40 As I understand it, however, “farm dairy” is something of a term of art in the Dairy industry.  It is

(for example) defined in the Animal Products Act 1999 as:

... a place where milking animals are milked on a permanent or temporary basis; and
- subject to paragraph (b), includes -

[72]     The “Milk payout” (being the payment to be made to suppliers for their milk each year) is governed by cl 10.

[73]     Lastly, cl 19.1 authorises any Director to apply for registration of new-co as a cooperative dairy company under the CCA.

Fonterra’s relationship with Gisborne Milk

[74]     At  the  time  the  “New  co-op”  amalgamation  occurred,  in  October  2001, Gisborne Milk received its initial allocation of cooperative shares in Fonterra based on its existing shareholding in New Zealand Dairy.

[75]     Like all Fonterra shareholders, Gisborne Milk at some point received a copy of Fonterra’s Supplying Shareholder Handbook, which contained Fonterra’s standard terms  and  conditions  of  supply.    There  were  necessarily  a  number  of  matters stipulated in the standard terms (such as collection of milk by Fonterra) with which Gisborne Milk did not comply.

[76]     In late 2001 or early 2002, Gisborne Milk also received from Fonterra an Annual Supply Notification Form, on which the company was to estimate its supply for the upcoming season.  The standard form provided at the end of 2001 by Fonterra for this purpose specifically sought information about the individual “farm” (under the heading “Farm Supply Information”) and required the supplier to provide, for example, “a legal description of the land you milk on” the “total land area” and the

“effective milking area”.

(i)        any   stockyard,   milking   yard,   feedyard,   silo   pad,   or   other construction  associated  with  or  involved  in  the  activity  of extracting milk from milking animals; and

(ii)       any place where milk from the milking animals is first collected, filtered, deposited, cooled, stored, or treated for transport or for further processing; but

(b)        does not include any place where any further processing takes place, or transport to that place.

Although I received no submissions on the issue, it seems to me arguable that that the definition would cover any part of Gisborne Milk’s operations that involved merely the collection, filtering, depositing, cooling, storage, or treatment of surplus raw milk prior to its transportation to other processors.

[77]     Because Gisborne Milk did not itself own a farm but instead represented a group of individual supplying farmers, it could not sensibly provide Fonterra much of the information required.   The company therefore resolved to write to Fonterra about the issue.   Its General Manager, Mr Johansen, did so on 15 February 2002. His letter stated:

We have received the Annual Supply Notification Form

We advise that for many years we have supplied surplus milk from our factory   to   NZ   Dairy   Group   (Edgecumbe)   under   the   same   supply arrangements as for other dairy farmers.

Payments for milk, Standard share and Peak Note obligations have been met on the same basis.

We understand that under the Fonterra constitution we may be required to enter into a special contract to supply milk as we are not a ‘farm’.

We are unclear as to how to seek a special contract but for the purposes of discussion we submit that the following arrangement would be appropriate.

1.    That  we  continue  to  supply  milk  on  an  ‘as  available’ basis.

Delivery on existing basis.

2.    Price paid on same basis as for other farm shareholders.  Except that the basis of calculation of penalties take into account that we do not necessarily supply every day.

3.    That we subscribe for Standard shares and Peak Notes as in the past.

We have valued the mutual benefits that have been enjoyed by ourselves and

NZ Dairy Group and antecedent companies.

Our company is a town milk provider, we do not manufacture for export.

In regards to supply and shareholding we are unable to reliably estimate that for 2002/2003 season.   Our shareholding at present is 395,642 Standard shares and 12,755 Peak Notes.  This was based upon our 2000/2001 year. We expect 2001/2002 supply will be less but we would like to retain our existing level of shareholding rather than redeem them under the normal terms of the constitution.

Our   objective   is   to   have   flexibility   to   continue   our   long   standing arrangement.

We would value a response that:

1.    Confirms that we have fulfilled our obligations to respond as per the Annual Supply Notification.

2.    Confirms or otherwise the acceptability of our proposal.

[78]     Gisborne Milk then completed and submitted the Annual Supply Notification

Form for the 2002/2003 season by cross-referring to this letter.

[79]     On 28 February 2002, Gisborne Milk received a reply from Fonterra that stated that  Fonterra was “currently reviewing  arrangements made by the legacy companies prior to the merger” and expected to be in a position to revert shortly.

[80]     In April 2002, a Fonterra representative confirmed that no decision had yet been made on the “legacy” issues raised by Gisborne Milk’s February letter but said that one of the issues for immediate resolution was the (3 cents per litre) cartage payments  received  by  Gisborne  Milk  for  making  deliveries  to  the  Edgecumbe factory.

[81]     Shortly  after  that,  Fonterra  made  a  unilateral  decision  to  drop  Gisborne Milk’s cartage rate to 1.4 cents per litre and then, in October 2002, the payments were reduced to nil.  After a protest by Gisborne Milk, however, the payment was reinstated at 3 cents per litre.

[82]     Meanwhile  it  seems  that  Fonterra  was  beginning  internally  to  formulate policies to deal with what it regarded as anomalies within the system it had inherited. For example, there was evidence that in May 2002 consideration was given to the development of a policy about:

(a)      Shareholders who did not supply at least 80 per cent of their milk to Fonterra, such as town milk companies and cheese factory operators; and

(b)      Shareholders who requested a variation to the 20 per cent rule.

[83]     In  the  context  of  the  first  issue,  attention  was  specifically drawn  to  the position of Gisborne Milk, in the following terms:

4.2Gisborne  Milk  has  asked  that  we  clarify  their  position,  as  they appreciate that they are not a “farm” and that under Fonterra, there may be a change to the arrangements set up many years ago under the legacy companies.

4.3As recommended above, we consider that Gisborne Milk, like all other shareholders who do not supply 100% of their milk (or 80% of their milk under the 20% rule), should become a contract supplier rather than a shareholder.

4.4We considered it necessary to form a consistent policy on this issue, so that the rule we apply to Gisborne Milk is carried out in respect of all existing shareholders who do not comply with the 100% supply requirement.

[84]     It does not appear that Gisborne Milk was aware at the time of this nascent policy and it continued to supply of its surplus milk and to share up and down as before.  Indeed, such was the silence from Fonterra that Mr Johansen was prompted to write a further letter in January 2004, again in relation to the Annual Supply Notification Form.  In it he asked:

(a)       Does Gisborne Milk require a special contract because it is not a farm supplying milk on a regular basis?

(b)What arrangements can be made for winter delivery of surplus in light of the fact that the Edgecumbe factory was closed during that season?

[85]     There was no substantive response to this letter, either, and business continue as usual.

[86]     It seems that in mid 2005 Gisborne Milk again flew onto Fonterra’s radar as a result of a recent large supply of skim milk, which burdened Fonterra with extra processing costs.  Questions were asked within Fonterra about what Gisborne Milk was being paid for the supply of such milk, and whether or not it had a contract with Fonterra at all. The response stated:

This one of those issues that has been around for a while now but never quite

nailed as it hasn’t had a definite owner to address it.

On [the] specific question re differing milk price to reflect the extra costs I’m sure this will come down to a legal issue of whether we can actually do it.

Probably the bigger issue to resolve once and for all is whether Gisborne Milk, and other companies around NZ that are similar such as Taumaruni Milk, Top Milk etc should actually be shareholders in Fonterra.  This started to get looked at ...  but can’t recall why it never was finally resolved.

[87]     Separately, but at about the same time, the issues surrounding dual supply (namely the 20 per cent rule) were again under consideration by Fonterra.   In an internal paper dated 8 July 2005 it was concluded that:

(a)      Clause 9.1 of the Constitution adequately sets out the requirement that supplying shareholders must supply Fonterra all their milk supplied from a farm dairy and that, subject to the 20 per cent rule set out in DIRA, that should be the Company’s policy;

(b)The policy should be communicated more widely to ensure suppliers understand that the Board generally will not exercise its discretion to allow dual supply; and

(c)       Fonterra should permit dual supply only in exceptional circumstances.

[88]     In October the same year a further paper was prepared that sought to clarify Fonterra’s position about whether Cooperative dairy companies (such as Gisborne Milk) could be shareholders and receive payouts for milk supplied.   That paper recommended the adoption of a policy whereby:

(a)       Fonterra’s  preference  was  for  milk  supply  to  be  supplied  under

Shareholding;

(b)Where the 20 per cent rule was not being met by a Supplier, special Terms and Conditions of supply should be negotiated that reflected the relevant costs and benefits.   The paper said “Effectively these dairy companies would be contract suppliers to Fonterra without shareholding”;

(c)      Notwithstanding  (b),  Fonterra  would  retain  a  discretion  to  permit dairy companies to be shareholders in exceptional circumstances;

(d)new commercial supply arrangements with such companies should be negotiated, effective from 1 June 2006.

[89]     Importantly, the discussion at that point was focused on compliance with the

20 per cent rule rather than any issue about whether or not companies such as

Gisborne Milk fell within the DIRA definition of “shareholding farmer”.

[90]     In April 2006, Fonterra wrote to Gisborne Milk asking it to provide supply forecasts on a monthly basis.  Previously, Gisborne Milk had simply rung Fonterra towards the end of each day and advised how much milk it would be would sending the next day.   Although it could provide ballpark seasonal estimates, estimating supply a month in advance was difficult.

[91]     In June 2006 there was a meeting between Gisborne Milk and Fonterra.  The need to formalise the relationship between Gisborne Milk and Fonterra, and the possibility of unshared supply, were discussed.

[92]     In  early  January  2007,  there  was  a  more  substantive  meeting  between Gisborne Milk and Kim Mashlan of Fonterra. Ms Mashlan made it clear at the meeting that because Gisborne Milk was not a consistent source of supply, Fonterra was not particularly concerned if it continued to receive milk from the company. She described Gisborne Milk as now being in a “unique” position because it was a Fonterra shareholder but did not supply milk “ex farm”.  In that respect she said it was  not  clear  whether  Gisborne  Milk  could  be  both  a  shareholder  and  an independent processor under the 20 per cent rule, and noted that other town milk companies in Gisborne Milk’s position (such as Taumaranui Milk) had simply been wound  up  with  their  former  shareholders  choosing  to  become  shareholders  in Fonterra directly.

[93]     The  possible  advantages  of  Gisborne  Milk  relinquishing  its  shareholding were raised.   Ms Mashlan advised that, insofar as the upcoming season was concerned, any decision about that would need to be made by 28 February 2007. The possibility of contract supply (both shared and unshared) was also discussed, with Ms Mashlan noting that Fonterra retained a discretion each season not to offer unshared supply.

[94]     In  early  February  Ms  Mashlan  indicated  that  further  discussions  were required to discuss how best Fonterra could continue to work with Gisborne Milk on a  mutually  beneficial  basis.    On  the  same  day,  Mr  Bailey  of  Fonterra  wrote separately  to  Gisborne  Milk  advising  that  Fonterra  had  agreed  to  increase  the delivery cost paid to Gisborne Milk to 3.8 cents per litre (the actual cost to Gisborne Milk had been estimated as being 5.5 cents per litre).

[95]     In an internal Fonterra paper prepared by Mr Bailey and Ms Mashlan in

March 200, they noted (inter alia):

(a)      the ad hoc relationship between Gisborne Milk and Fonterra that had developed over time and the unique position now occupied by Gisborne Milk;

(b)the lack of clarity around the application of the 20 per cent rule to independent processors like Gisborne Milk;

(c)      the existing, separate, arrangements that Fonterra had with Gisborne Milk for the production of milk under the “Pams” brand and for co- packing;

(d)various possibilities for a joint venture type of arrangement between Gisborne Milk and Fonterra “to grow milk supply” in the Gisborne region, including the possibility of Gisborne Milk transporting and even processing milk from new suppliers in the area.

[96]     The conclusion reached in the paper was that:

GMCL has given no indication that they wish to surrender shareholding and in fact have stressed their desire to remain as shareholders.

More importantly, though unique in their shareholding status, advantages remain in that as shareholders they are less likely to go or to become a direct competitor for our suppliers.  Commercial advantages ... are also present.

...

Our preferred position would be to recommend that Fonterra and GMCL enter  an  agreement  to  expand  milk  supply  in  the  Gisborne  area  and/or increase the amount of milk processed at their site. ...

...

Due diligence would need to be undertaken on the whole business ...

[97]     In early May 2007 there was a further meeting between the two companies. The problem posed for Gisborne Milk by Fonterra’s “default milk” regime was discussed.41     In essence, the difficulty was that the price at which Fonterra was selling default milk to other processors was less than the price Gisborne Milk paid its own shareholders for the raw milk that it used for its own processing operation. Thus the supply of default milk to other processors was adversely affecting Gisborne

Milk’s ability to compete with them and Gisborne Milk’s future processing viability was thus called into question.

[98]     As a result of the impact that default milk was having on the sustainability of Gisborne Milk’s processing business, discussions about closing the Gisborne factory and moving to alternative forms of supply began in earnest in late June/early July.  In July, for the first time, Fonterra indicated its view that it would treat any application by existing individual Gisborne Milk shareholders to supply milk separately and directly to Fonterra as an application by a “new entrant”.  Due to the transport costs associated with milk collection in the Gisborne and Wairoa region, Fonterra said it would not be obligated to collect milk from those farmers or to issue them with

shares.42

[99]     In early August 2007, an increase in the default milk cap from 400 million to

500 million litres (and later to 600 million litres) was announced.  As demand for default milk had previously exceeded supply, Gisborne Milk had hoped that it could continue to compete, notwithstanding the price of default milk.  The increase in the

cap was the final nail in the coffin of Gisborne Milk’s bottling operation.

41 See [56] above.

42 Transport costs and s 72 had not been an impediment to shareholders in other cooperative dairy companies such as Taumaranui Milk moving to individual shared supply contracts.

[100]   At  the  same  time,  Fonterra’s  thinking  about  its  future  relationship  with Gisborne Milk was also evolving.   It was proposed (internally) that existing arrangements could continue through until June 2008, with an increase in supply anticipated  over  that  period.    After  that  time  it  was  thought  that  Fonterra’s relationship would be with the former shareholders of Gisborne Milk individually, although on what basis had not been finally determined.   The transport cost issue continued to be regarded as problematic.

[101]   There was a meeting between Fonterra and Gisborne Milk on 17 August. Gisborne Milk’s take on the outcome of that meeting was that the company had a number of options.   The preferred  option was  for Gisborne Milk’s  suppliers to become Fonterra suppliers.  The least preferred was for Gisborne Milk itself to share up and continue to act as a conduit for the supply of all its shareholders’ milk to Fonterra.  The potential application of transport cost differentials was still at large, as was the nature and existence of any legal obligation on Fonterra to collect milk from individual farmers in the Gisborne/Wairoa regions.

[102]     Mr Gaddum, Gisborne Milk’s new General Manager, said at that meeting his aim was to enable Gisborne Milk shareholders individually to become shareholders in Fonterra on favourable terms.   He said, at that point, Fonterra accepted that Gisborne Milk could, if necessary, share up although it was not known whether Fonterra would accept winter milk.

[103]   In September Gisborne Milk’s bottling operation ceased and 30 staff were made redundant.  At that point Gisborne Milk’s most obvious raison d’etre had all but disappeared.   Equally, however, any difficulty it might previously have had in complying with the 20 per cent rule was also beginning to seem of historical interest only.

[104]   On 1 October 2007 Mr Leslie from Fonterra wrote to Gisborne Milk saying that Fonterra “may be in a position to decline” any application from Gisborne Milk suppliers to become individual shareholders in Fonterra on the grounds of DIRA s

95.   He said that Fonterra was able to offer suppliers from Gisborne three year contracts  only  and  that  those  contracts  would  take  into  account  the  costs  of

collection.   He advised that, if Gisborne Milk wished to cease making supplies, it would  need  to  complete  an  “application  to  cease”  form  during  the  relevant application period and that if it did so it would then receive the capital payout for its shareholding in mid July 2008.

[105]   In response, Mr Gaddum’s emailed Ms Mashlan on 17 October in which he said:

(a)      the   three   year   contract   proposed   created   a   risk   for   existing shareholders and their preference was for an agreement with a component of shared supply;

(b)      if that was “off the table” then “there is some argument” for Gisborne

Milk continuing to supply as a shareholder; and

(c)       once terms could be agreed with individual shareholders, Gisborne

Milk would most likely apply to cease supply.

[106]   After this email was sent, Ms Mashlan raised concerns about Gisborne Milk’s risk management programme in relation to its own collection of milk and whether it complied with the standards required by Fonterra.   Mr Gaddum responded immediately with information to allay her concerns and asking whether she required a further breakdown of that information.  No direct response was received.

[107]   On 8 November, Ms Mashlan and Mr Bailey met with Gisborne Milk. The minutes and other notes of the meeting record Ms Mashlan as saying that:

(a)       The existing arrangements with Gisborne Milk did not comply with

Fonterra’s Constitution and the 20 per cent rule;

(b)      The arrangement was a result of “legacy agreements” that should have

been terminated at the time Fonterra was created;

(c)       Fonterra  had  nonetheless  not   gone  down  the  “legal  path”  of

ascertaining whether or not processors could also be shareholders;

(d)Share-backed supply was not an option for Gisborne farmers because they were outside Fonterra’s current collection region and to whom a transport differential would therefore be applied;

(e)      A “one off” contract (whereby Fonterra collected the milk and applied a transport differential of between 4 and 7 cents per litre) was on offer, although that offer was at Fonterra’s discretion.

[108] In response to a question about whether Gisborne Milk could retain its current shareholding, Ms Mashlan is recorded as saying that this was Fonterra’s least preferred option. It seems that, in this context, she referred to the risk management issues mentioned at [106] above and indicated that there would likely be further costs associated with ensuring that Gisborne Milk met Fonterra’s new Risk Management Programme. She indicated that Fonterra wished to know before Christmas whether Gisborne Milk shareholders intended to take up the contract option.

[109]   On 13 December 2007 Mark Leslie of Fonterra wrote to Gisborne Milk.  He said that:

(a)      Only one of Gisborne Milk’s suppliers was within the collection area, and Fonterra was not required to accept applications from its other suppliers on the grounds of s 95 of the DIRA s 95;

(b)the  applicable  transport  differential  had  been  calculated  as  either being 70 or 75 cents per kg of milk solids (which equates to 5.6 to 6 cents per litre), depending on the location of the farmers concerned;

(c)      On that basis Fonterra was offering Gisborne Milk farmers six year contracts with the transport differential capped at these rates for three years.

[110]   Mr Leslie also said:

Fonterra is not agreeable to varying the terms and conditions of the current supply arrangement between Fonterra and GMCL such that GMCL supplies all its farmer suppliers’ milk throughout the season ... to Fonterra and shares up accordingly ... in the longer term we are not prepared to continue arrangement [sic] where GMCL: delivers milk given the risks associated with auditable risk management programme and a desire not to create wider issues in the shareholder base where we allow amalgamation of supply from multiple suppliers prior to delivery to Fonterra under a collective group, cooperatives within the cooperative.

[111]   The letter was discussed at Gisborne Milk’s next Board meeting and there was a resolution to obtain legal advice about Fonterra’s obligation to continue to accept supply from Gisborne Milk.  Mr Gaddum refers in later documents to having obtained advice to the effect that Fonterra’s position on that issue was wrong.

[112]   Mr Gaddum emailed Ms Mashlan on 17 December and advised that:

... there was a general willingness from our shareholders ... to accept the

Fonterra Proposal in principle.

[113]   He said that, for a number of reasons, the shareholders were less happy about the freight calculations, and also asked that the proposed three year term of the contracts have a three year right of renewal.   On 21 December Fonterra agreed to move the transport charge downwards and confirmed that the contracts would be for three plus three years. The letter also:

(a)       asked that any Gisborne Milk supplier wishing to accept the contract offer confirm that in writing by 7 January 2008;

(b)      advised that “in order to receive share surrender proceeds mid July

2008” those suppliers would be required to sign formal contracts and Gisborne Milk would need formally to apply to cease its shareholding within the statutory application period, ie before 29 February 2008

[114]   Gisborne Milk’s bulk milk processing ceased at about this time.

[115]   Mr  Gaddum  nonetheless  said,  and  I  accept,  that  given  the  impending Christmas break, Gisborne Milk’s other contractual obligations and the statutory application period within which Gisborne Milk had to surrender its shares and/or to

apply to make contract supplies, Gisborne Milk and its shareholders felt under some time pressure to make a final decision.

[116]   In late February 2008 there was an email exchange between Ms Mashlan and Mr Gaddum where Ms Mashlan confirmed that if Gisborne Milk wished to receive a payout for its shares at the end of the upcoming season there could be no extension to 29 February cut off date for completion of the application to cease supply. Nonetheless she said that Gisborne Milk would nonetheless have until 31 May to withdraw the application.  Ms Mashlan also advised that the payout anticipated by Fonterra at that stage was $7.01 per share.

[117]   Gisborne Milk completed the cease supply form accordingly and its suppliers signed  individual  contracts  with  Fonterra.     It  did  not  seek  to  withdraw  the application.  In June 2008, however, it became apparent that the end of season share adjustment meant that the price realised for Gisborne Milk’s shares would be over 20 per cent less ($5.57 per share) than the estimated price that had been advised by Fonterra in February.  Although Mr Gaddum then attempted to negotiate that price further with Fonterra, and eventually took a dispute on Gisborne Milk’s behalf to the Milk Commissioner, no further movement proved possible.

The claim/issues

[118] The statement of claim relevantly pleads four causes of action (COAs), all centred in Mr Leslie’s letter of 13 December 2007 and in patricular the passage quoted at [110] above. The claims are that the letter:

(a)      constituted (or contained) a refusal by Fonterra to contemplate or permit  Gisborne Milk  to “share up”  that  was  in breach  of  DIRA s 73(2): COA 1;

(b)constituted or contained a demand by Fonterra that Gisborne Milk surrender its cooperative shares in Fonterra and that was in breach of its Constitution: COA 2;

(c)      contained statements (namely the refusal and the demand referred to on  (a)  and  (b)  above)  that  constituted  misleading  and  deceptive conduct under the Fair Trading Act 1986 (the FTA): COA 3 and 4.

[119]   The pleading of the second COA, in particular, is rather convoluted.  That is because Gisborne Milk’s analysis was predicated on a contention that it supplied milk to Fonterra based on Fonterra’s standard terms and conditions, subject to certain “specified departures” pertaining to the 20 per cent rule, delivery and a transport differential.   Gisborne Milk then alleges that Fonterra was by its conduct (namely accepting supply from Gisborne Milk for 5 years on the basis of the “specified departures”) estopped from relying on cl 5.4(c) of its Constitution, which permitted it to require a shareholder to surrender its shares for non-compliance with Fonterra’s (standard) terms and conditions of supply.  As I have tried to make clear from my analysis of the statutory background above (and is will be discussed further below) I do not consider that analysis to be entirely correct.

[120]   In terms of relief, Gisborne Milk seeks a declaration of illegality (COA 1), an order requiring Fonterra to return its shares (COA 2 and 3) and an inquiry into damages (COAs 1 – 4).

[121]   As I have said, it was agreed that I am not presently required to determine a further COA by the second (representative) plaintiff, Opoiti Ltd, to the effect that Mr Leslie’s letter caused it to enter into an individual contract with Fonterra in circumstances giving rise to an entitlement to relief under the Contractual Mistakes Act 1977 (the CMA).

[122]   Fonterra’s defence to the claims is fundamentally that:

(a)      it does not accept that the 13 December letter contained any relevant or actionable representations (either express or implied);

(b)if  (contrary  to  (a))  such  representations  were  made,  they  were nonetheless correct because:

(i)Gisborne Milk had no right to share up under s 73 because it did not fall within the DIRA definition of “shareholding farmer”; it was not a “dairy farmer” (namely a person who produces milk, or intends to produce milk, in New Zealand from dairy cows as a business);

(ii)Fonterra was entitled to require Gisborne Milk to surrender its cooperative shares under cl 5.4(c) of the Constitution because Gisborne   Milk   did   not,   and   had   never,   complied   with Fonterra’s standard terms and conditions of supply and had never agreed any special terms and conditions with Fonterra (which would have been required by cl 9.1 and 9.5 of the Constitution to be in writing).

[123]   The position recorded at [122](b)(ii) was predicated on a contention that the supply of milk by Gisborne Milk to Fonterra between 2002 and 2007 was governed by  an  “arrangement”  which  (as  the  deliberate  use  of  the  term  suggests)  was something of less legal consequence than a contract.  Again, as will be evident from my analysis above, and subsequent discussion below, I do not agree with that contention.   But as I understood it, in the course of the hearing before me, Mr Hodder SC agreed that the relationship must have been contractual.

[124]   Other aspects of Fonterra’s defence focus on the more technical aspects of the

COAs pleaded and will be discussed as necessary below.

Discussion

[125]   Before turning specifically to the merits of each of Gisborne Milk’s claims and of Fonterra’s defences, it seems useful to begin by making three general observations.

[126]  First, it was DIRA’s most basic (and first stated) purpose to “allow an amalgamation” of the companies named in s 4(1)(a), including most relevantly New Zealand  Dairy  and  Fonterra.    It  might  fairly  be  supposed,  therefore,  that  the

principles governing company amalgamations therefore in my view could usefully inform the interpretation of that statute.43

[127]   On that  basis,  the relevant  starting point  would  be  that  Gisborne Milk’s supply of milk to New Zealand Dairy (prior to the amalgamation) was made on the basis of a contract to which New Zealand Dairy had itself succeeded upon its earlier amalgamation with Bay Milk.  And as explained above, it seems to me that contract was originally “evidenced” by the Model Articles of Association contained in the CDCA.   As I have also said, its terms and conditions were undoubtedly further amplified or detailed by way of specific agreement between the parties.

[128]   In my view, the evidence suggested that the Bay Milk/New Zealand Dairy agreement contained following terms and conditions:

(a)      Bay Milk/New Zealand Dairy would accept supply from Gisborne Milk of raw milk produced by Gisborne Milk’s own suppliers that was surplus to Gisborne Milk’s own processing requirements;

(b)Gisborne Milk was not therefore subject to any general requirement to supply all of its supplying farmers’ milk to Bay Milk;

(c)      Gisborne Milk would use its own tankers to collect and transport its farmers’ surplus milk to the nearest Bay Milk/New Zealand Dairy factory;

(d)Gisborne Milk would comply with any applicable risk management requirements  in  terms  of  storage,  collection  and  delivery  of  the surplus milk;

(e)      Gisborne  Milk’s  shareholding  would  fluctuate  according  to  the quantity  of  milk  it  supplied  each  season  (just  as  every  other

shareholder’s did);

43 Namely the principles and rules that are set out in ss 219 and 226 of the Companies At 1993 and the relevant case-law.

(f)      Gisborne Milk would receive payment for its milk on the same basis as every other shareholder except that Bay Milk/New Zealand Dairy would pay Gisborne Milk extra (eventually 3 cents per litre) to meet (or partially to meet) its transportation costs; and

(g)Subject to Gisborne Milk’s compliance with those (and any other) terms and conditions, Gisborne Milk was entitled to share up and down on the basis of the supplies it made.

[129]   As I have noted above, none of these terms and conditions is inconsistent with (or required departure from) the CDCA or the Model Articles of Association. They would arguably not, therefore, have been required by reg 132 to be in writing.44

[130]   A   further   application   of   the   rules   usually   applying   to   company amalgamations would mean that the terms and conditions upon which Gisborne Milk supplied milk to Bay Milk and then New Zealand Dairy remain unaffected by the amalgamation of New Zealand Dairy and Kiwi.  Like New Zealand Dairy before it, Fonterra would simply succeed to the pre-existing agreement.

[131]   The second proposition is that, as a supplying shareholder of New Zealand Dairy, Gisborne Milk was indisputably entitled to, and did, become the holder of cooperative shares in Fonterra, upon its creation.  Gisborne Milk therefore was, from the outset, and continued until 2008 to be:

(a)       a “supplying shareholder” of Fonterra under the CCA; and

(b)      a “shareholder” as defined in Fonterra’s Constitution.45

44 To the extent that writing was required (because the terms and conditions departed from Bay Milk/s/New Zealand Dairy’s standard terms and conditions) its absence would be unlikely to render its contract with Bay Milk unenforceable or otherwise void: Cite case

45 The issue of whether Gisborne Milk was also a “shareholding farmer” under DIRA is discussed later.

[132]   The  prospect  of  a  finding  that  Gisborne  Milk  was  not  a  “shareholding farmer” under DIRA, notwithstanding that it was one of Fonterra’s “supplying shareholders” under the CCA is, at the least, anomalous.

[133]   Thirdly, it seems relevant that there is no suggestion (other than whatever may be read into the chosen definition of “shareholding farmer”) that Parliament, in enacting DIRA, intended to leave Gisborne Milk (and other similar companies) with fewer rights than all other former shareholders in New Zealand Dairy/Kiwi.

[134]   Although I am prepared to accept that it was anticipated and intended that the shareholders of Fonterra would (generally) be “farmers”, such an intention did not in my view involve any departure from the previous position, which (as the legislative history above shows) had always been concerned with a relationship between cooperative dairy company shareholding and the land or cows.   In any event, that longstanding approach had equally always subject to exceptions, such as Gisborne Milk.   It can be noted in passing that there has never been anything in any of the relevant definitions (including the DIRA definitions) that prevented a cooperative dairy company shareholder or a “farmer” having corporate form (as many, indeed, do).

[135]   An associated point  is  that  there was  no  evidence that  a draft  of DIRA containing the critical definition of “shareholding farmer” was circulated before the resolution by existing New Zealand Dairy/Kiwi shareholders (including Gisborne Milk) to vote in favour of the amalgamation.46    Fonterra’s Constitution (a draft of which was circulated prior to the vote) does not use the term “shareholding farmer” and (as I have also noted) Gisborne Milk fell squarely within the Constitution’s definition of “shareholder”.  Although the merger documents I have referred to at [39] and [40] above did signal that suppliers such as Gisborne Milk might have to move onto Fonterra’s standard terms and conditions of supply they also made it clear

that such suppliers would be given time to make the transition and that supply on

special terms and conditions could still be possible.   Of course, the subsequent

46 The Bill was not introduced into Parliament until after the vote.

reality in Gisborne Milk’s case was that Fonterra took no substantive steps for five years to deal with the issue.

[136]   In my view, a combination of these general points provides a compelling basis for concluding that there was, as a matter of fact, no legislative purpose or intent to exclude Gisborne Milk from the DIRA definition of “shareholding farmer” or to deprive Gisborne Milk of the rights associated with that status.  But the sticking point is the literal meaning of the words used to define a “dairy farmer”: “a person who produces milk from dairy cows as a business”.   In that respect, I necessarily accept Mr Hodder’s submission that the notion of “producing” milk from cows connotes the physical act of milking a cow, which Gisborne Milk has never done.  I also record his submission that to attribute the “producing” (ie milking) done by Gisborne Milk’s shareholders to Gisborne Milk itself would be impermissibly to pierce the corporate veil.

[137]   I have carefully considered whether it is possible to say that the definition is ambiguous and can be given a meaning that appropriately reflects what I consider to be the wider context that I have discussed above.  But to interpret the definition as including Gisborne Milk it is not simply a matter of giving the existing words a

strained meaning.47   The words used in the definition as drafted are, in my view, not

capable of bearing any meaning that would include Gisborne Milk within it.

[138]   Accordingly, I would instead need to find that the standard qualifying words that precede all definitions in s 5 (“unless the context otherwise requires”) enable the wider legislative and factual context to displace or modify the definition of “dairy farmer”.   The Court of Appeal has held that the “context” of a statute, for the purposes of an interpretation section, can include the policy of the Act, the history of the legislation, the consequences of a given interpretation, as well as the surrounding

text.48

47 The purposive approach is not, in any event, regarded as authorising anything more than a “fair”

interpretation of the word or words concerned.

48 Police v Thompson [1966] NZLR 813 (CA) at 820-1. See also Kirk v Electoral Commission [2008]

3 NZLR 125 (HC) at [16].

[139]   On balance, and the circumstances (or “context”) I have set out above, I

would be prepared to hold that the words “dairy farmer”:

... means a person who produces milk, or intends to produce milk, in New Zealand from dairy cows as a business and includes a cooperative dairy company whose shareholding suppliers are dairy farmers as so defined.

[140]   It is on this basis that I turn now to consider the specific merits of Gisborne

Milk’s claims.

COA 1: a breach of s 72(3)?

[141] As I have said, Mr Leslie’s letter forms the factual centrepiece of each of Gisborne Milk’s claims. The critical passage has been set out at [110] above. It can be observed at the outset that it does not expressly convey a statement by Fonterra as to the relevant legal position. While it is necessarily implicit in the passage that Fonterra has formed a view as to the relevant law, I agree with Mr Hodder’s submission that it would be drawing a long bow to view the letter as either representing Fonterra’s concluded opinion on the matter or as Fonterra’s advice as to

the correct legal position.49

[142]   Rather, it seems to me that statements made regarding what Fonterra was or was not “agreeable” to,  indicate that the letter was written in the course of an ongoing negotiation between Gisborne Milk and Fonterra about their future commercial  relationship.    I would  therefore  have  considerable  hesitation  before construing such statements in a more definitive or legally consequential way.

[143]   Even if I am wrong in that,  I also accept Mr Hodder’s submission that, whatever view is taken of the “shareholding farmer” issue, the statements in Mr Leslie’s letter did not breach s 73(2) because no application to share up was, as a matter of fact, made by Gisborne Milk.  Although Gisborne Milk had expressed a preference for that option in the course of negotiations (once it had become apparent

that its own shareholders would not be accepted by Fonterra as “new entrants”),

49 Indeed, as Mr Hodder pointed out, Mr Gaddum was able subsequently to persuade Fonterra to change its position in relation to some of the matters covered by the letter (in particular the transport differential).

ss 136 to 139 of DIRA require an application to share up (or down) to be made formally, and in writing.  Those sections also speak of such notices being “delivered, posted, or sent by facsimile or electronically”. Given that s 73(3) also imposes time limits on Fonterra for notifying acceptance of such applications, the requirement for writing is not an idle or meaningless one.

[144]   Moreover, not only was the formal notice requirement not met by Gisborne Milk here, but its earlier indication that its preference was to share up (supply Fonterra with all its milk) was contradicted by its subsequent completion and submission to Fonterra of a “cease supply” form.

COA 2: breach of Constitution/estoppel

[145] It follows from my analysis above that I consider that Fonterra was not legally able to require Gisborne Milk to surrender its shares for breach of cl 5.4. In my view the proper course would have been as set out in the merger summary quoted at [39] above. In other words, if Fonterra wished to change the terms of the contract it had inherited from New Zealand Dairy it should have:

(a)       notified Gisborne Milk that it would in future be required to comply with its standard terms and conditions of supply;

(b)made  a  decision  about  whether  a  transport  differential  would  be imposed; and

(c)       (c) given Gisborne Milk a reasonable time to changes its operations accordingly.

There was, of course, no guarantee that Gisborne Milk would have been able or willing to do so.

[146]   Whether or not that view could give rise to the operation of some kind of estoppel claim, however, does not in the end arise.  That is because there are other

considerations that seem to me to apply to defeat Gisborne Milk’s second cause of

action.

[147]   First, for the reasons already given in relation to COA 1 I do not consider that Mr Leslie’s 13 December letter can fairly be construed as a demand by Fonterra that Gisborne Milk surrender its shares.   Secondly, the evidence from Gisborne Milk’s own witnesses leads to the conclusion that a decision was taken by Gisborne Milk voluntarily to surrender its shares, for a number of perfectly sound reasons.  While one factor in that decision may well have been the view that Fonterra might subsequently and formally assert a cl 5.4 right, matters had yet reached that stage.

COA 3 and 4: s 9 FTA

[148]   It also follows from my conclusions above that as far as COA 3 and 4 are concerned, the statements contained or implicit in Fonterra’s letter of 13 December

2007 cannot constitute misrepresentations/misleading conduct under the FTA, even if they were incorrect.

[149]   Even putting to one side the context of an “ongoing negotiation”, I consider that the most that can be said about the statements made in the letter is that Fonterra was  expressing  an  opinion  as  to  the  correct  legal  position.    I  accept  that  an expression of opinion can constitute an statement of fact, namely the fact that the opinion is held.  As such, it can constitute misleading conduct.  But, as the Court of Appeal has said, it is “difficult to see” why an honestly held, reasonably based opinion should be actionable under s 9 simply because it was not borne out by

subsequent events.50

[150]   Further, on the evidence here I have no doubt that the position taken by Fonterra  reflected  its  genuinely  held  view.    And  notwithstanding  that  I  have ultimately disagreed with that view, I do not doubt that it was reasonably based.  The difficulties surrounding the definition of “dairy farmer” discussed suffice to establish

that.

50 Premium Real Estate v Stevens [2009] 1 NZLR 148 (CA) at [54] and [55].

[151]   Counsel were not agreed about whether or not it was appropriate at this (“liability”)  stage  to  consider  the  issue  of  whether  Gisborne  Milk  was  actually misled by the contents of the letter.  I do not propose to resolve that difference here. Rather,  I  merely  record  my  view  that  the  evidence  before  me  did  not  support Gisborne Milk’s position in this respect.  In particular:

(a)       Mr Doran said that:

(i)Although he considered that Fonterra’s position was wrong, that was not his focus at the time;

(ii)The decision to surrender Gisborne Milk’s shares was made because the directors felt under time pressure and were aware that Gisborne Milk’s suppliers needed to take steps to ensure that they could continue to supply Fonterra in the upcoming season;

(b)Similarly, Mr Gaddum’s evidence was that Gisborne Milk “elected” to sell after receiving advice from Fonterra regarding the forecast share price.

[152]   And lastly, the evidence that Gisborne Milk had in fact received advice at the time that Fonterra’s position was wrong (as to which see [111] above) necessarily calls into question the issue of whether any reliance that was placed by Gisborne Milk on the alleged representations would, in the circumstances, be regarded as reasonable.

Conclusion

[153]   In summary, I find that:

(a)       At  the  time  of  Fonterra’s  creation,  it  succeeded  to  New  Zealand

Dairy’s contract with Gisborne Milk;

(b)New  Zealand  Dairy had  itself  succeeded  to  that  contract  when  it amalgamated with Bay Milk;

(c)      That contract included terms and conditions that were different from the standard terms and conditions which governed the direct supply of milk by farmers to those companies and included terms that:

(i)Bay Milk/New Zealand Dairy/Fonterra would accept supply from Gisborne Milk of milk that was surplus to its own processing requirements;

(ii)Any  general  requirement  that  suppliers  were  required  to supply all (or 80 per cent of) their milk to Bay Milk/New Zealand Dairy/Fonterra did not therefore apply to Gisborne Milk;

(iii)Gisborne Milk was required to transport its surplus milk to the nearest Bay Milk/New Zealand Dairy/Fonterra processing factory and would receive an additional payment for so doing;

(d)Those terms of supply were not inconsistent with the model Articles of Association that applied to cooperative dairy companies and which were contained in sch 1 of the CDCA;

(e)      Because of that consistency, the terms of supply and were not required to be in writing;

(f)       Such terms of supply were not prohibited by DIRA or by Fonterra’s

Constitution;

(g)To the extent Fonterra wished to change terminate the special terms and conditions of Gisborne Milk’s supply, it was required to give Gisborne Milk a reasonable opportunity to comply with its standard terms and conditions and, in that context, to consider whether it would

apply a transport differential that reflected the extra cost of collecting milk from the Gisborne region;

(h)      Unless and until:

(i)Fonterra notified Gisborne Milk that it required Gisborne Milk in future to comply with its standard terms and conditions of supply and to pay any transport differential imposed by Fonterra;

(ii)      Gisborne Milk did not, within a reasonable time, comply -

Gisborne Milk was, and could remain, a “shareholding farmer” in Fonterra for the purposes of DIRA pt 2, subpt 5 and was entitled to share up under s 73(2) of that Act;

(i)Gisborne Milk’s claim that Fonterra breached s 73(2) of DIRA nonetheless fails because Gisborne Milk did not, as a matter of fact, apply to share up;

(j)Gisborne Milk’s claim that Fonterra breached its Constitution by requiring it to surrender its shares nonetheless fails because Gisborne Milk’s decision to surrender its shares was a voluntary one, taken for valid commercial reasons;

(k)Gisborne  Milk’s  claim  that  statements  made  by  Fonterra  about Gisborne Milk’s ability to share up and its surrender of shares constituted misleading conduct that breached the FTA fails because:

(i)the statements were statements of opinion that were made in the context of an ongoing commercial negotiation and which were genuinely and reasonably held;

(ii)in  circumstances  where  it  appears  that  Gisborne  Milk  had taken its own legal advice (which disagreed with Fonterra’s

view),  any  reliance  by  Gisborne  Milk  on  those  statements would not have been reasonable.

[154]   In the end, it is difficult not to think of the shareholders Gisborne Milk as sailors caught in a perfect storm.  It is impossible not to have considerable sympathy for them.  But none of their claims can succeed.

[155]   Fonterra is therefore entitled to 2B costs in the usual way.   I certify for second counsel.  Memoranda may be filed if agreement cannot be reached.

Rebecca Ellis J