MacIntyre and Williamson Partnership
[2015] NZHC 3012
•01 December 2015
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2014-404-877 [2015] NZHC 3012
BETWEEN MACINTYRE AND WILLIAMSON
PARTNERSHIP First Plaintiff
WAITAKI DAIRY LIMITED Second Plaintiff
BURKE FARMING DEVELOPMENT LIMITED
Third Plaintiff
Continued over page…
AND
FONTERRA CO-OPERATIVE GROUP LIMITED
Defendant
Hearing: 7-11, 14-15 and 17-18 September 2015 Appearances:
D J Goddard QC and B M Russell for the Plaintiffs
J E Hodder QC, D T Street and H K Wham for the DefendantJudgment:
01 December 2015
RESERVED JUDGMENT OF MUIR J
This judgment was delivered by me on Tuesday 1 December 2015 at 1.00 pm pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date:………………………….
Counsel/Solicitors:
D J Goddard QC, Barrister, Auckland
B M Russell, Lane Neave, ChristchurchJ Hodder QC, Chapman Tripp, Wellington
D T Street, Chapman Tripp, Auckland
H K Wham, Chapman Tripp, Auckland
MACINTYRE AND WILLIAMSON PARTNERSHIP v FONTERRA CO-OPERATIVE GROUP LIMITED [2015] NZHC 3012 [01 December 2015]
STRATHBURN FARMS LIMITED Fourth Plaintiff
MORVEN FARMING PARTNERSHIP Fifth Plaintiff
R G LAMB LIMITED Sixth Plaintiff
WAITAKI PARTNERSHIP Seventh Plaintiff
BLACK LINE DOWNS LIMITED Eighth Plaintiff
WELLPARK DAIRYING LIMITED Ninth Plaintiff
ST ANDREWS DAIRY LIMITED Tenth Plaintiff
HOLME STATION DAIRIES LIMITED Eleventh Plaintiff
CANDY DAIRY LIMITED Twelfth Plaintiff
KAILEY DAIRIES LIMITED Thirteenth Plaintiff
GRAY ROSENEATH FARMS LIMITED Fourteenth Plaintiff
RICHARD PAUL WILLANS, KAREN JEAN WILLANS, LEIGH JOSEPH HORTON AS TRUSTEES OF THE R P
& K J WILLANS FAMILY TRUST Fifteenth Plaintiff
BORST HOLDINGS LIMITED Sixteenth Plaintiff
NORTH OTAGO FARM LIMITED Seventeenth Plaintiff
QUEENS FLAT DAIRY FARM LIMITED (Discontinued) Eighteenth Plaintiff
ELLIS-LEA FARMS (2000) LIMITED Nineteenth Plaintiff
WILLANS HOLDINGS LIMITED Twentieth Plaintiff
Contents Paragraph
Introduction 1 Background 4 The questions 45 Question 1 47 Statutory Framework 47 The plaintiffs’ arguments 57 Fonterra’s arguments 75 Analysis 95 Question 2 107 Question 3 117 Introduction 117 The first alleged representation –
not legally possible to acquire shares 127 Meeting of 15 June 2012 128 Meeting of 20 June 2012 137 The second alleged representation – inability of other Fonterra shareholders to buy shares 155 Significance of legal representation 164 Entire agreement clause 165 Reliance and loss 166 Question 4 168 Question 5 170 Result 174 Costs 175
Introduction
[1] This case raises novel issues under the Dairy Industry Restructuring Act 2001 (DIRA) as a result of the failure of an independently owned South Canterbury processing plant. The principal issue is whether Fonterra Co-operative Group Ltd (Fonterra) was, in tandem with its acquisition of the plant from receivers, lawfully able to offer former suppliers of the plant so called “Growth Contracts” on terms inferior to those offered to its other suppliers. Its reasons for doing so stemmed from a perceived need to assuage internal politics within its supplier base and included also an element of “messaging” for the benefit of other farmers who might in the future be persuaded to leave Fonterra and support an independent. Fonterra claims that it was lawfully entitled to do so despite the provisions of s 106 of DIRA which broadly require new entrants to be treated on the same terms as existing shareholder suppliers.
[2] The case also includes claims under the Fair Trading Act 1986 (FTA) and Contractual Remedies Act 1979 (CRA) arising out of statements allegedly made by Fonterra representatives at various meetings prior to the plaintiffs’ entry into the Growth Contracts.
[3] By consent all issues relating to reliance and loss have been held over for later adjudication. Five questions were submitted for my determination which effectively resolve all the preliminary issues.
Background
[4] The plaintiffs are dairy farmers in South Canterbury and North Otago. In the
2011/2012 dairy season they were all suppliers of raw milk to the New Zealand
Dairies Limited (NZDL) milk processing plant at Studholme in South Canterbury.
[5] The defendant, Fonterra, is New Zealand’s largest buyer of raw milk. It was established under and is governed by DIRA.
[6] On 17 May 2012 NZDL was placed into receivership by VTB Capital, a
Russian bank. The receivers sought to sell the NZDL business, including the
Studholme plant, before the beginning of the 2012/2013 dairy season, which was due to start on 1 June 2012. The receivers sought tenders for the sale of the business. A number of bids were put forward. Fonterra was ultimately the successful bidder.
[7] On 18 May 2012 the receivers met with the suppliers to discuss NZDL’s financial position and give an overview of the forthcoming sale process. The suppliers elected seven persons to form the suppliers’ committee to represent the suppliers’ views to the receivers and to potential future buyers. In a later meeting on
23 May the committee was reduced to five members and Mr Borst was elected as
Chair.
[8] The suppliers’ paramount concerns, as expressed at the 18 May meeting, related to payment of the sums owed to them by NZDL as unsecured creditors and to finding a buyer for their milk in the new season. The sums owed to the suppliers, which are referred to as “retros” in this judgment, totalled approximately $20m.
[9] On 19 May 2012 the receivers confirmed that they would collect the
suppliers’ milk until 31 May 2012, the end of the season.
[10] In an internal memo dated 18 May 2012 Mr Murphy, Fonterra’s General Manager of Milk Supply, and Mr Taylor, Director of New Zealand operations, advised the Fonterra Management Team and the Fonterra Board that if NZDL suppliers applied to Fonterra to supply their milk for the 2012/2013 dairy season, Fonterra would have a discretion as to whether to accept the applications. The basis for the discretion was that the applications would have been made outside the relevant application period, which for the 2012/2013 season was between 13
December 2011 and 29 February 2012. The internal memo advised that any such applications should be rejected on the basis that they could compromise Fonterra’s ability to process all the milk from its then current shareholders. The memo suggested an alternative however: “Fonterra may be in a position to accept this supply if it were to come to some arrangement which allowed it access to the NZDL plant to process that supply in the 2012/2013 seasons” and advised that an assessment of the viability of purchasing the plant was underway.
[11] On 24 May 2012 the receivers wrote to Fonterra confirming the receipt of an expression of interest and called for submission of tenders by 5 June.
[12] Between 25 May and 1 June 2012 Fonterra entered into direct correspondence with the suppliers. Fonterra initially proceeded on the assumption that the Studholme plant would not be acquired and sought to buy only one third of NZDL’s peak supply (250,000 litres of milk), which reflected Fonterra’s available capacity to process milk in its own plants. Fonterra’s offers to the suppliers were based on a standard Growth Contract, on the same terms offered to all other milk suppliers.
[13] The email correspondence shows that the suppliers wished to remain united and did not want to engage with Fonterra separately. This was due to the fact that the suppliers appreciated at the time that they had a greater chance of being paid fully what they were owed by NZDL if they all supplied the new owner. Conversely, dispersing their supply among various milk buyers would have significantly undermined that prospect.
[14] On 28 May 2012 Fonterra’s management circulated a paper updating the board on the process of the sale of the NZDL assets. The paper recorded that management were not at that stage contemplating offering NZDL suppliers any additional incentives beyond the standard Growth Contract, except for the exercise of discretion to join the co-operative outside the application period.
[15] On 1 June 2012 Mr Lash, Milk Payments Manager at Fonterra, sent an email to Mr O’Connor and Mr Sussock, General Manager and Senior Manager of Mergers of Acquisitions respectively. In that email Mr Lash outlined two options for buying milk from the NZDL suppliers. The first option was fully share-backed supply, and the second the 2012 Growth Contract.
[16] A fully share-backed supply required a supplier to purchase one Fonterra share for each kilogram of milk solids (kgMS) he/she supplied to Fonterra in a dairy season. In return, a fully share backed supplier received the Fonterra Milk Price for
each kgMS supplied, and a dividend on each share held by the supplier, in the amount declared by Fonterra. The share price for the 2012/2013 season was $4.52.
[17] A summary of the standard Growth Contract was set out by Mr Lash in the email:
(a) A Growth Contract provides flexibility as it enables suppliers to share up for new milk over six seasons. Suppliers are only required to purchase 1,000 shares up front.
(b) For the 2012/13, 2013/14 and 2014/15 seasons suppliers are not required to share up in relation to the quantity of Growth Milk that they supply Fonterra in those seasons.
(c) The quantity of Growth Milk they supply in the 2014/15 season will be their Contract Milk Quantity for the 2015/16 season.
(d) They will share up in respect of 1/3 of the 2015/16 season Contract Milk Quantity at the start of the 2016/17 season, a further 1/3 at the start of the 2017/18 season and the final 1/3 at the start of the
2018/19 season.
(e) Suppliers will receive the Fonterra Milk Prices less a Contract Fee for Growth Milk. In the 2012/13 season the Contract Fee will be
5 cents per kgMS. They will not receive any dividend in relation to milk supplied that is not backed by shares.
(f) The supplier is bound to supply Fonterra over the term of the contract.
[18] The aim of the standard Growth Contract is to provide flexibility for new suppliers by staging their capital requirements over a number of years. In so doing it makes it easier for Fonterra to acquire new supply.
[19] The terms of the standard Growth Contract were then subject to a number of discussions among Fonterra’s executives. These discussions concerned proposed modifications to the terms of the contract to reflect certain aspects of the acquisition.
[20] On 4 June 2012 Mr Campbell, General Manager of Strategy, sent an email to senior Fonterra executives proposing that Fonterra buy the Studholme plant with all of the NZDL suppliers agreeing to supply to Fonterra at a discounted rate, and without a fully share backed option:
After discussions with the receiver we are of the view that we should offer approximately NZD50m for the plant if all the milk can be contracted with approximately 100% of the current supply on a 3+3 basis at discount of
10c/kgMS for unshared milk. Note this would improve the model below from an NPV of NZD69m to NZD72m – hence a NZD50m offer would have
a transaction NPV of NZD22m.
[21] On 5 June 2012 another paper was circulated among board members. The paper reiterated Fonterra’s position that the offer to buy NZDL would be subject to the majority of NZDL suppliers entering into Fonterra on Growth Contracts. The paper noted that “these contracts will be on no better terms than the standard offer and management will be seeking to negotiate a discount to the milk price payable over the first three years.”
[22] On the same day Fonterra wrote to the receivers setting out the terms of their offer of approximately $50 million. The offer was subject to approval by Fonterra’s Board and by the Commerce Commission. Importantly, the offer was also subject to
100 per cent of the existing milk supply from NZDL suppliers continuing to the
Studholme plant.
[23] Between 6 and 8 June a number of emails were exchanged between Fonterra executives discussing proposed amendments to the standard Growth Contract. On 7
June Mr Campbell suggested a 10 cent discount per each kgMS for three years. In response, Mr Murphy expressed his view that the NZDL suppliers should be offered a contract with a five cent discount per kgMS for three years, and a requirement to share up over the following three years:
I am not sure where the -10c comes from, I assume the thinking here is a special contract – ie 10c off the milk price and 3 years of supply. I would prefer to go to the “new” suppliers with the existing -5cents off the milk price 3 years of contract supply and then a requirement to share up over 3 years. This will be easier to sell among the existing supply base – the message being we won’t be doing anything special for the NZDL suppliers.
… I am not sure that our existing suppliers in the SI will understand why we
would bail the NZDL suppliers out and pay the retro to a bunch of farmers who they feel deserted the co-op.
[24] Mr Campbell responded stating that the “retro” payments will in fact be made
by the receivers, not by Fonterra. Mr Campbell then stated:
We will work on the messaging but we will be at 3+3 with a 10c differential for this group (for unshared). We (we being Fonterra) will not make the retro payments – the receiver will do this from the proceeds of the plant sale. I agree we will need to carefully manage messaging around this both for Fonterra current suppliers AND NZDL suppliers. I’m not keen on offering them the standard terms – the small discount (additional 5 c) reflects this – and I am hoping we can write this to profit (to be determined) – they had their chance but if we’re purchasing the plant we need all the milk and we’ve got to show a good return.
[25] Mr Muller replied stating that he “[understood] the rationale for the slightly tougher terms and endorse”.
[26] In a different chain of emails, also sent on 7 June 2012, Mr Lash, Milk Payments Manager, proposed that the NZDL suppliers should be paid 10 cents less per kgMS for the first three years. His stated reason for supporting a lower price was to reassure existing shareholders that the NZDL suppliers were not being treated more favourably:
Suppliers are offered the 6 year Growth Contract which requires suppliers to purchase 1,000 shares up front then purchase a third of the required shares at the end of the 4th, 5th and 6th seasons. These suppliers would be paid the Milk Price less $.10 per kgMS for the first three years of the contract. Suppliers can fully share up sooner than the 6 year term to receive the full Milk Price. The larger discount than the $0.05 per kgMS contract discount is to reflect the unique circumstances. It shows Fonterra shareholders these suppliers aren’t getting a special deal, and it can be justified to NZDL suppliers that it is necessary to make the deal work.
[27] Mr Wickham agreed with Mr Lash’s proposal, and suggested an additional
condition that the NZDL suppliers be barred from sharing up for at least a year:
I am happy with the proposal with the exception that we give thought to not allowing the ex NZDL shareholders to share up until end of first year or maybe until end of third year – in other words strictly enforce the 3+3 with no early share up. i.e. so there is a differential milk price penalty for at least a year – they can’t just expect to waltz back in and get full milk price if they share up.
[28] The amendments to the 2012 Growth Contract were settled and advised by email to the CEO of Fonterra on 8 June 2012. The variations were explained as follows:
The variations to 2012 Growth Contract for NZDL suppliers are:
· Suppliers will incur a discount to the Contract Milk Price of $0.05 per kgMS (i.e. because the Contract Milk Price is $0.05 per kgMS less than Fonterra’s Milk Price for the 2012/13 season, suppliers who enter into this contract will in effect get Fonterra’s Milk Price less $0.10 per kgMS).
· This additional $0.05 per kgMS discount will apply for the first three years of the contract term.
· Suppliers will have no entitlement to become Fonterra fully share backed in the 2012/13 season under this contract. They can become fully share backed in subsequent seasons (and receive the full Milk Price), but will still be bound to supply Fonterra for the entire contract term.
[29] The reaction of existing farmer shareholders to NZDL suppliers joining Fonterra continued to be an important consideration for Fonterra. On 10 June 2012 a memo entitled “NZDL Communications Approach” was sent to the Project Tarawera Team (being the team charged with the acquisition). The memo discussed how Fonterra should communicate with NZDL suppliers and receivers to promote the purchase of NZDL by Fonterra as the best available option for all involved. The memo then addressed how Fonterra should promote the deal to its existing farmer shareholders:
At the same time, we need to emphasise to our own farmer shareholders that we are not providing any special treatment or “favours” to these new suppliers; that they will be signed up on the basis of a discount to the standard growth contacts and will become Fonterra shareholders over time.
[30] On 13 June 2012 a Board paper was circulated seeking approval for the purchase of the Studholme plant. The paper advised that the sale and purchase agreement was conditional on 100 per cent of the volume of milk supplied to the Studholme plant in the 2011/2012 season being secured through standard Fonterra six year Growth Contracts. These contracts were to be subject to a number of variations, including that NZDL suppliers would be prevented from sharing up beyond the mandatory 1,000 shares until the beginning of the 2013/2014 season.
[31] The following day, on 14 June 2012, Fonterra and the receivers entered into a sale and purchase agreement to purchase NZDL’s assets.
[32] On 15 June a meeting was held between the receivers, the suppliers and Fonterra representatives. The notes from the meeting show that suppliers requested a deal that would allow them to be paid the $20 million owed to them by NZDL. The receivers confirmed that Fonterra’s offer was the only one that gave the suppliers a full return; alternative offers promised returns of less than 45 per cent.
[33] Mr Murphy of Fonterra also explained that Fonterra’s offer was conditional upon the agreement of all suppliers. The receiver, Mr Mayo-Smith, emphasised that to get the benefit of the deal, the suppliers had to stick together.
[34] Mr Monoghan (a Board member) then explained the terms of Fonterra’s offer, informing the suppliers that under the Growth Contract, Fonterra would pay five cents less per kgMS than the contract milk price and that suppliers would not be entitled to share up in the first year. The plaintiffs’ evidence is that Fonterra’s representatives explained that the latter condition was due to the fact that the suppliers were now outside the application period and could not share up until the next application period was open. The various competing contentions of the parties will be discussed in greater detail later in this judgment.
[35] On 15 June a question and answer sheet was emailed to Fonterra’s area managers to assist them in responding to questions from existing shareholding farmers and from NZDL suppliers. Of relevance are two sample questions and answers:
Will you offer Growth Contracts to all NZDL suppliers?
We’re still talking to suppliers about the next steps. All Fonterra suppliers need to comply with our Terms and Conditions of Supply. NZDL suppliers who fit with Fonterra’s parameters of milk collection will be offered growth contracts, which requires them to start sharing up after three years.
As contract suppliers, the NZDL suppliers will be offered Fonterra’s Farmgate Milk Price subject to a 10c discount per kilogram of milksolids to cover the cost of the interim arrangements and ensure the transaction delivers value to Fonterra farmers.
…
Why can’t NZDL suppliers start to share up immediately?
We are outside the window for sharing up for the 2012/13 season.
NZDL suppliers can supply us on a contract basis, with the option to start sharing up in the future. Securing the milk at an attractive price is important to the overall deal attractiveness of the deal to Fonterra.
[36] Relevant also is Fonterra’s intended introduction of the Trading Among Farmers (TAF) scheme in November 2012. The scheme allowed the creation of a private market in which shareholding farmers could trade Fonterra shares among themselves. It was generally anticipated that the introduction of the scheme would result in an increase in Fonterra’s share price from the published $4.52 in the
2012/13 season. This expectation was borne out in reality when the scheme was introduced.
[37] On 20 June 2012 another series of meetings was held between: (a) the receivers, suppliers and the suppliers’ solicitors;
(b)the suppliers with their solicitors, subsequently joined by the receivers; and
(c) the suppliers and Fonterra representatives (the suppliers’ solicitors having at that stage returned to Christchurch as a result of the delay in arrival of the Fonterra representatives).
At the meeting with the Fonterra representatives, the suppliers expressed their concern that if they were not allowed to share up immediately, it would be harder for them to do so the following year, because of anticipated increases in the share price with the introduction of TAF. Fonterra’s representatives repeated that the suppliers would not be able to share up in the first year. Again the specific detail of what was said and by whom will be considered later in this judgment.
[38] Between 6 and 10 July 2012 each NZDL supplier completed an A01 Dry Farm Conversion Form. The form is a standard application “to become a Supplying Shareholder of Fonterra”. The forms were received within the timeframe required by Fonterra.
[39] On 1 August 2012 Fonterra began collecting milk from the now former
NZDL suppliers and the current plaintiffs.
[40] On 7 September 2012 Fonterra informed the plaintiffs that the sale and purchase agreement of NZDL’s assets had been approved by the Commerce Commission. In the same letter Fonterra informed them that from 15 September each plaintiff “will become a Fonterra contract supplier”. The letter also advised that each plaintiff will receive an “amount owing” letter for $4,520 for the issue of 1,000
Fonterra shares. The amount was to be deducted from the October milk payment, or could be paid voluntarily by the end of September 2012. The plaintiffs’ A01 applications were approved and 1,000 shares were issued to each applicant, pursuant to the resolutions made by the Fonterra Board on 25 September.
[41] Following the settlement of the acquisition of NZDL and its assets on 14
September 2012, the plaintiffs became increasingly dissatisfied with what they recalled they had been told about why they could not purchase more than 1,000 shares in the first year. Their concerns were magnified after they heard other shareholder farmers had been permitted to fully share up after June 2012 but before the introduction of TAF in November 2012.
[42] On 31 March 2013 the plaintiffs sent a jointly signed letter to Fonterra setting out their concerns. In it they stated that the Fonterra Area Manager, Mr Munro, had advised them that the reason the plaintiffs could not share up was “because there would be no way of locking [the plaintiffs] in for six years”. The letter then stated that Mr Griffiths of Fonterra informed the plaintiffs’ representative Mr Willans that the moratorium was only on “dry” shares, not the “wet” shares (“wet” shares being those that are backed by milk supply) that the plaintiffs wished to acquire. The letter ended by stating that the plaintiffs considered themselves misled and misinformed by Fonterra.
[43] On 19 April 2013 the Chairman of the Fonterra Board, Mr Wilson, responded to the plaintiffs’ correspondence. He addressed the plaintiffs’ concern that Fonterra sought to “lock them in” as long-term suppliers in the following way:
Fonterra as a condition of the purchase required 2011/2012 NZDL suppliers to enter into slightly modified Fonterra six-year growth contracts. This was the only way Fonterra could secure a long-term supply commitment. As the NZDL sale was a competitive bidding process, Fonterra would have been disadvantaged as a bidder if it had required immediate share-up of the suppliers – who we understood from the receivers were under significant financial pressure.
To ensure the plant would operate at full capacity, Fonterra also required that some other farms who were interested in supplying the Studholme site agreed to become Fonterra suppliers. These farms were required to become fully shared up members of the Co-operative.
[44] During the course of discovery the plaintiffs ascertained from documents provided by Fonterra that after the application period for the 2012/2013 season had closed, Fonterra had processed and approved 26 applications from existing shareholders to become fully share-backed suppliers.
The questions
[45] By consent order of Heath J dated 11 June 2015 the following five “questions
of liability” were identified as required to be determined by me:
Question 1 Were the plaintiffs “new entrants” for the purposes of s 106 of DIRA? Or were they supplying milk to the defendant on a basis other than as “new entrants”?
Question 2 If the plaintiffs were “new entrants” within s 106, did the defendant breach s 106 in offering the plaintiffs the terms of supply set out in the Milk Supply agreements signed by the plaintiffs?
Question 3 Did the defendant advise the plaintiffs about the extent of the plaintiffs’ ability to buy shares and to supply milk on a shared- up basis in terms or to the effect pleaded in paragraph 31 of the Amended Statement of Claim, or as pleaded in paragraph
31 of the Amended Statement of Defence?
Question 4 Was such advice misleading and deceptive conduct in trade in breach of s 9 of the FTA? (For clarity, this issue excludes any question of reliance by the plaintiffs on the alleged advice as pleaded in paragraph 53 of the Amended Statement of Claim, but all other factual – including contextual – issues raised in the pleadings of relevance to liability will be traversed.)
Question 5 Did the defendant’s advice to the plaintiffs about the extent of the plaintiffs’ ability to buy shares and supply milk on a shared-up basis (as per Question 3, above) amount to a misrepresentation in terms of s 6 of the CRA? (For clarity, this issue excludes any question of reliance by the plaintiffs on the alleged advice as pleaded in paragraph 56 of the Amended Statement of Claim, but all other factual – including contextual – issues raised in the pleadings of relevance to liability will be traversed.)
[46] I address each of these in turn.
Question 1 Were the plaintiffs “new entrants” for the purposes of s 106 of DIRA? Or were they supplying milk to the defendant on a basis other than as “new entrants”?
Statutory framework
[47] At the heart of the plaintiffs’ case is s 106 of DIRA. This provides:
106 No discrimination between suppliers
(1) New co-op must ensure that the terms of supply that apply to a new entrant—
(a) are the same as the terms that apply to a shareholding farmer in the same circumstances; or
(b) differ from the terms that apply to a shareholding farmer in different circumstances only to reflect the different circumstances.
(2) New co-op must ensure that the terms and effect of securities offered or issued in new co-op are the same for new entrants as for shareholding farmers.
(3) In this section, securities has the same meaning as in section 2D of the Securities Act 1978.
(4) New co-op must not treat a shareholding farmer who exercises an entitlement under this subpart any less favourably than a shareholding farmer who does not do so.
[48] “New entrant” is in turn defined as meaning:
A dairy farmer who is not a shareholding farmer, who applies to become a shareholding farmer under s 73.
[49] “Shareholding farmer” means:
A dairy farmer who is registered as the holder of co-operative shares.
[50] “Co-operative share” means (insofar as relevant to this case):
A share in new co-op issued, or to be issued, —
…
(b) in relation to the supply of milk to new co-op by new entrants or shareholding farmers.
[51] Section 73 is in terms:
73 New co-op must accept application
(1) New co-op must accept an application to become a shareholding farmer that is made by a new entrant in an application period.
(2) New co-op must accept an application to increase the volume of milk supplied as a shareholding farmer to new co-op that is made by a shareholding farmer in an application period.
(3) New co-op must notify acceptance to the applicant within 15 working days of receipt of the application.
(4) Sections 136 to 139 specify—
(a) how an application may be given; and
(b) when an application is made.
[52] Section 74 in turn provides:
74 Commencement and terms of supply
(1) If an application referred to in section 73 is made to new co-op in an application period, new co-op must accept the milk to which the application relates from the beginning of the season following that application period.
(2) Despite subsection (1), new co-op is not required to accept milk if the shareholding farmer fails to satisfy the applicable terms of supply.
(3) New co-op may, in its discretion, accept an application made outside an application period from a dairy farmer, including a shareholding farmer, to supply milk as a shareholding farmer.
[53] The application period I refer to in s 73 is, in turn, defined in s 75 which provides:
75 Application periods
(1) New co-op must set an application period that is before the commencement of each season in which new entrants may apply to supply milk, and shareholding farmers may apply to increase the volume of milk supplied, as shareholding farmers.
(2) As a minimum, an application period must span the dates 15
December in a year to 28 February in the next year.
[54] Relevant also are ss 82 and 83. Section 82 concerns co-operative shares issued outside the application period:
82Requirements applying to co-operative shares … for applications outside application period
(1) The price of a co-operative share issued to a new entrant or a shareholding farmer in response to an application to which section
74(3) applies is the June price in the first season for the supply of
milk to which the application relates.
(2) The co-operative share standard that applies to a new entrant or a shareholding farmer who makes an application to which section
74(3) applies is the co-operative share standard published at the beginning of the application period in the season immediately before
the first season for the supply of milk to which the application relates.
(3) Repealed.
[55] Section 83 prohibits Fonterra from charging new entrants a premium for accepting milk supply:
83 Restrictions on payments
New co-op must not require payment from a new entrant or a shareholding farmer for accepting milk supply as a shareholding farmer other than payment to purchase co-operative shares ….
[56] All these provisions occur within subpart 5 of Part 2 of DIRA, which is
relevantly headed “Regulation of dairy markets and obligations of new co-op”.
The plaintiffs’ arguments
[57] The plaintiffs start by emphasising what they say is the purpose of DIRA. They refer to s 4 of the Act and in particular the stated purposes to:
(a) allow an amalgamation of various dairy companies including the two largest players, New Zealand Co-operative Dairy Company Limited [NZ Dairy] and Kiwi Co-operative Dairies Limited [Kiwi] by giving authorisations under the Commerce Act 1986.
…
(f) promote the efficient operation of dairy markets in New Zealand by regulating the activities of new co-op to ensure that New Zealand markets for dairy goods and services are contestable.
[58] Mr Goddard QC describes the pre-Fonterra environment which he says was characterised by two companies of broadly equivalent strength, thereby ensuring a competitive market in milk supply throughout most of the country. He contrasts that with the 82 per cent proportion of total South Island production attributed to Fonterra in the Commerce Commission’s decision in relation to the NZDL purchase.
[59] Drawing on the explanatory note to what was then the Dairy Industry Restructuring Bill 2001,1 Mr Goddard emphasises that the company which resulted from the merger of NZ Dairy and Kiwi “will be dominant in a number of key New
Zealand dairy markets”2 and that the Bill “provides for a comprehensive regulatory
1 Dairy Industry Restructuring Bill 2001 (139).
2 Dairy Industry Restructuring Bill 2001 (139) (explanatory note).
package to mitigate the risks that would otherwise be present in this situation”.3
That regulatory package was, in turn, to “stay in place until there is a level of competition in the market for processing raw milk in each of the North and South Islands”.4
[60] He then refers to the public policy objectives identified in the explanatory note to the Bill, including to:
·facilitate the emergence of new competition and new strategies in the dairy industry; and
·limit the potential for dairy farmers, New Zealand consumers and other firms or co-operatives in the dairy industry to be adversely affected by the use of monopoly power by the newly formed company.
[61] Also emphasised was the following statement in the explanatory note of the so-called “problem and need for action”:
If the merger is approved GDC [Fonterra] will have a virtual monopoly in the market for the purchase of raw milk from New Zealand farmers, giving it potential to use market power to the detriment of existing and potential dairy farmers.
[62] That mirrors a later reference to one of the detriments of the merger in terms that it created:
… a large monopoly that, without an effective regulatory regime may use its dominant market position to reduce the overall level of contestability in both the domestic consumer product and raw milk markets.
[63] The problem, Mr Goddard suggests, with any market dominant player is that, if its activity is constrained in one area, it will simply exercise its dominance in another. So, for example, if the obligation is to pay all suppliers in equivalent circumstances the same rate per kilogram of milk solids, an unconstrained monopsonist will simply apply a premium for entering into the contract in the first
place. It is for that reason, asserts Mr Goddard, that DIRA includes specific
3 Dairy Industry Restructuring Bill 2001 (139) (explanatory note).
4 Dairy Industry Restructuring Bill 2001 (139) (explanatory note).
provisions like ss 83 – 85 but also the general, what he termed, “anti-avoidance”
provision in s 106.
[64] The plaintiffs further say that the fact Fonterra was able to make a “take it or leave it” offer and to structure that offer to include “optics”5 within its own shareholder base is evidence of an uncompetitive market for milk supply. Mr Goddard postulated what would have happened if, prior to the merger, Kiwi had for example, offered supply terms designed to appease co-operative shareholders dissatisfied with the fact that their members had earlier left to supply an independent.
In such circumstances he suggests, the competitive pressure of NZ Dairy would have strongly militated against any such offer and the fact that Fonterra was able to impose “penalties” on the plaintiffs for essentially internal political purposes when such would not have been possible in a competitive market speaks to the mischief to which DIRA was directed.
[65] He says further that the fact subpart 5 of Part 2 of the Act has not yet expired under s 147 carries with it the necessary implication that the market for the supply of new milk remains less than fully competitive.
[66] Although accepting that Fonterra’s offer for NZDL was appreciably better than any of the alternatives and facilitated repayment of the plaintiffs’ “retros”, Mr Goddard submits that the associated supply terms were simply a reflection of its dominant market position. Whereas a circa $50 million purchase of another processing plant was a modest exercise in the context of Fonterra’s capital base, for any of its South Island competitors like Synlait or Westland (what he terms the “minnows”) it represented a major acquisition with significant implications, and the capacity, for example, to materially affect their debt to equity ratios.
[67] All of this, submits Mr Goddard, emphasises the very real competitive issues resulting from the merger and the fact that comprehensive regulation was recognised
as the necessary price for that to occur.
5 A term used by Fonterra’s Mr Murphy in evidence to describe Fonterrra’s perceived need to demonstrate to its existing shareholding farmers that former NZDL suppliers would not receive favourable treatment.
[68] Although accepting that DIRA has no application to a dairy farmer who, whether he/she approaches Fonterra within the application period or not, wants simply to supply on contract as a non-shareholding farmer, the plaintiffs say Fonterra cannot treat a late applicant as a new entrant for the purposes of some of its supply but not the balance, as that would be inconsistent with both the text and purpose of DIRA. They say it would mean late entrants had no effective protection because, for example, Fonterra could dictate the ratios of share-backed supply and contract supply and apply a price differential to the contract component, thereby driving down its overall cost of supply – the very sort of monopsonist behaviour which the plaintiffs say DIRA was designed to prevent. Or, say the plaintiffs, Fonterra could impose a substantial application fee in relation to the component of contracted supply thereby thwarting the purpose of s 83.
[69] The plaintiffs then develop their argument on two alternative bases.
[70] Firstly, they say that a new entrant, for the purposes of s 106, includes any person who “applies” to supply Fonterra as a shareholding farmer, whether or not the application is made in the application period. They say that each of the plaintiffs completed an A01 Dry Farm Conversion form in which, among other things, they applied “to become a Supplying Shareholder of Fonterra” and, as Fonterra’s Ms Burr confirmed, no further application to become a shareholder was required either in respect of the initial 1,000 shares issued to them in September 2012 or the additional shares that they were required to take up over time under their Growth Contracts.
[71] Accordingly, the plaintiffs submit that at the point they completed the standard application form and delivered it to Fonterra, as contemplated by s 73(4) and s 74(3), they became “new entrants” and that their status as such did not depend on any decision made by Fonterra.
[72] However, the plaintiffs argue that even if a late applicant is a “new entrant” if and only if Fonterra accepts their application, they nevertheless meet that test. They say that:
1. They applied to become supplying shareholders of Fonterra.
2.Fonterra accepted that application and issued each plaintiff 1,000 shares in September 2012.
3. Such shares were issued to them, adopting the words of the relevant
Board resolution, as “new shareholders” and “pursuant to ss 73 and
74 of DIRA”.
4.The shares that were issued were co-operative shares within the terms of the s 5 definition. Each of the plaintiffs at that point became a shareholding farmer.
5.Each supplier committed to becoming fully shared-up over time by virtue of the provisions in their Growth Contract and Fonterra was (pre-TAF) committed to issuing the required number of shares. The plaintiffs again emphasise Ms Burr’s evidence that no further application was required in respect of the shares necessary for any of the plaintiffs to become fully shared-up. As the contract milk quantity reduced in the last three seasons of the Growth Contract, the share standard required an increasing number of shares to be held which would be issued (and billed to the plaintiffs) without any further step required on their part.
6.The Growth Contracts which were offered to the plaintiffs involved Contract Supply as that term is defined in the Fonterra Constitution, namely:
the supply of Milk to the Company by a shareholder pursuant to cl 3.4 in a Season without the Milksolids obtainable from that Milk being taken into account for the purposes of the Share Standard for that season.
The plaintiffs refer to cl 3.4 of the Constitution which permits
Contract Supply by a Shareholder the terms of which Fonterra may:
…. require a Shareholder to hold a minimum number of Co- operative Shares continuously throughout the term of any arrangements for the supply of Milk to the Company by that Shareholder on Contract Supply.
7.Each supplier was immediately subject to the share standard but, for the purposes of applying that standard, the volume of milk supplied on “Contract Supply” was excluded.
8. Each supplier did supply 1,000 kilograms of “milk solids obtainable
from milk supplied to the company”6 in the 2012-2013 season.
[73] None of the factual matters which the plaintiffs advance in this part of their argument are contested by Fonterra. It acknowledges a requirement on the part of the plaintiffs to hold a minimum number of shares as part of their Growth Contracts and the fact that these were issued.
[74] The plaintiffs then say that, although Fonterra has a discretion to decline to take milk under s 74(3) for practical, timing or capacity reasons, if it decided to take it, the regulatory regime applied in full as if the application had been made in time, subject to a small number of specific modifications. It takes no issue with Fonterra’s ability to offer Growth Contracts to applicants who prefer supply on such terms. It acknowledges that such preference is a relevant difference in circumstances for the purposes of s 106(1), but it says Fonterra is not free to impose less favourable contract terms on some new entrants merely because they apply outside the application period.
Fonterra’s arguments
[75] Fonterra does not, in these proceedings, argue for a definition of “new entrant” which excludes from that category dairy farmers whose applications to supply milk as a shareholding farmer are accepted outside the application period in exercise of the discretion contained in s 74(3).
[76] And so in this case Fonterra accepts that s 106 applies to that part of the
plaintiffs’ supply which was share-backed (the 1,000 kilograms of milk solids backed by an equivalent number of co-operative shares).
6 Global Dairy Company Constitution, cl 3.2.
[77] Its position is, however, that the protections in the Act relate only to supply as a shareholding farmer and that this means share-backed supply in accordance with the share standard. In relation to the plaintiffs’ 2012 applications, it says that it was no more precluded from offering special terms for contract supply than if it had contracted such supply at any other time of the year. Its position is that DIRA is simply not engaged in relation to that part of the supply.
[78] In terms of the legislative purpose of DIRA, Fonterra acknowledges that the Act was in part a response to the the concern about its size in the New Zealand market for raw milk and the fact that this had the potential to affect competition. It says that the legislative reflex to that problem involved reinforcing the general Commerce Act rules with specific but limited “open entry/open exit” mechanisms for new milk suppliers.
[79] Like the plaintiffs, it draws on the explanatory note to the Bill and, in particular, the following statement:
Perhaps the main cost to GDC of the Regulations will be the need to adequately provide for open entry. Where it is an issue, it is likely to take the form of bringing forward in time expansions in capacity and/or some additional transportation costs. But it is open entry that is the key to mitigating a co-operatives monopsony power.
[80] It refers also to the following observations of the Minister of Agriculture in the second reading debate:7
Fonterra must post a share price, then accept all entry and exit, to and from the co-operative, applied for at that price. To work properly, it is essential that the only barrier to entry to the co-operative is the capital cost of entry. This means that, aside from a small number of specific situations provided for in the Bill, Fonterra must accept all new entrants – and their milk – if they agree to pay the capital cost of entry.
[81] Fonterra says that an obvious feature of s 73 is that it relates to “an application” made “in an application period”. It says, and I accept, that this is designed to give Fonterra sufficient notice of new non-refusable supply to organise the collection and processing of the milk for the next season – commencing on 1
June and with peak supply in October and November.
7 (18 September 2001) 595 NZPD 11780.
[82] Accordingly s 73 reflects, in Mr Hodder QC’s submission, a practical balancing of two important factors:
(a) the availability of an “open entry” mechanism for a farmer to, as of right, provide new milk supply to Fonterra in the capacity of, what he calls, a “paradigm share-backed supplier”; but
(b) an annual time limit on the availability of that mechanism and right.
[83] Fonterra says that, whether the applicant is a farmer who has not previously been a share-backed supplier to Fonterra or is an existing shareholder and farmer applying to supply additional milk, the position is no different. In both cases DIRA is concerned only with share-backed supply.
[84] Thus, under s 73(2), if an existing share-backed supplier wishes to expand production, Fonterra says he or she has a choice of either:
(a) applying in the application period, as of right, to provide share-backed supply and complying with the published share standard by purchasing at the published co-operative prices (ss 77 – 82); or
(b) contracting with Fonterra for supply on other terms.
[85] That choice it says is for the farmer. It gives effect to the DIRA “open entry policy” but also recognises a variety of circumstances that may make contractual supply preferable. Fonterra says that when milk is so supplied on contractual terms it is not “milk supplied as a shareholding farmer” and is not therefore within the language of s 73(2) or 74(3).
[86] Fonterra submits there is no particular complexity about ss 73 and 74. Both sections focus on milk to be supplied “as a shareholding farmer” and it says the scope of “new entrants” (farmers seeking to supply as shareholding farmers) cannot sensibly extend to those who agree to contractual supply. It says that this is so irrespective of whether such agreement requires or permits them to acquire and hold some Fonterra shares.
[87] It rejects the proposition that every time a farmer approaches Fonterra about supply he or she is making an application as a “new entrant”. If the application is “to supply milk as a shareholding farmer” and is outside the application period then it says it has an explicit discretion whether to accept it or not. If it does so then the application is to be treated as one under s 73. But in this case it says no such application was invited or made. The supply contracts are, it says, entirely consistent with cl 2.3 of the Constitution which empowers Fonterra to “accept the supply of milk from any person … without requiring that person to become a shareholder in respect of that supply”.
[88] Significantly, Fonterra relies on the discretion in s 74(3) to decline an application to supply milk as a shareholding farmer. It says that this belies the plaintiffs’ argument that s 106 must necessarily apply to farmers who apply outside an application period if the purposes of the Act are to be satisfied. It makes the valid point that there is no right on the part of such farmers to supply Fonterra instantly. Rather, the legislation permits, in its submission, contractual arrangements to be negotiated and, if mutually beneficial, agreed.
[89] Fonterra rejects the suggestion that a farmer who is providing partly share- backed supply and partly contractual supply is a “shareholding farmer” for all purposes. It says that the position is governed by the relevant contractual terms. So, for example, in the event of a long term supply contract, DIRA cannot be invoked to justify breach of that contract and supply of all or part of that volume as share- backed. But, if the farmer seeks to bring in new supply, that volume will be subject to any timely application under s 73. And supply could be either as a shareholding farmer or a farmer seeking to be one (i.e. a new entrant).
[90] In Fonterra’s submission, there are two “gates” through which a dairy farmer can pass en route to share-backed supply. In the event the application is made inside the application period (and assuming ss 94 and 95 relating to minimum supply and excessive transportation costs do not apply), the farmer passes through the s 73 gate. This means that:
· Fonterra must accept the application (s 73(1)).
· Fonterra must notify acceptance (s 73(3)).
·Fonterra must accept milk for the following season (s 74(1)) unless the shareholding farmer fails to satisfy the applicable terms of supply.
· The farmer receives the full milk price and dividends.
·The s 78(3) peak note price provisions apply (although these are now of historic interest only).
· The farmer can elect a Fair Value Share Price (s 81).
· The farmer is subject to the co-operative share standard (s 5, s 79, ss 81(3) –
89).
·The protections afforded by ss 83 – 85 in terms of application fees, deposit restrictions and payment of balance of purchase price apply.
· The farmer may be affected by a Capacity Constraint Notice (s 87 – 93).
· The non-discrimination rule applies (s 106).
·The farmer must be offered a contract for milk supply for one season but may be offered a longer term contract.
[91] The second gate which Fonterra says a farmer may pass through is that opened on exercise of the Board’s discretion under s 74(3). It says that if the discretion is exercised and the dairy farmer is allowed to supply as a “shareholding farmer”, then he or she is treated as if they had passed through the s 73 gate but with specific exceptions to recognise timing of the application and, in particular, the potential restrictions in:
i. section 78(3) in relation to the peak note price; and ii. section 82 relating to election of share price.
[92] But, says Fonterra, neither gate relevantly applies in this case. The application was not made in the application period and in terms of s 74(3), Fonterra never exercised its discretion to allow supply as a shareholding farmer. To the contrary, it sought and obtained contracted supply which was not share-backed other than to a nominal extent. It says it is unconstrained by s 106 in relation to the terms on which it can contract non-share-backed supply.
[93] Expanding on the “gate” metaphor, it says that what went into the field beyond the s 74(3) “gate” was not a farmer supplier as some indivisible entity. It was a block of share-backed supply. It says that only to that extent was s 106 engaged, leaving Fonterra free to negotiate contractual supply on whatever terms it saw fit for the balance, including the price differential and restrictions on sharing up which it sought and obtained in the present case.
[94] It is in that context that Fonterra addresses s 106. It says that the term “new entrant” in that section evokes the “open entry” policy and new share-backed milk supply as a “shareholding farmer”. It says the section is not sensibly a prohibition on contractual supply, nor some yardstick for judicial review of contractual supply. All it does is reinforce the equal treatment of those providing share-backed supply to Fonterra – in relation to and to the extent of that supply and not in relation to any contractual supply.
Analysis
[95] I have difficulty with the plaintiffs’ first argument conferring “new entrant”
status automatically at the point of application.
[96] The concept of a new entrant being someone who, in the words of the s 5 definition, applies to become a “shareholding farmer” makes sense in the context of s 73 (to which the definition refers). That is because Fonterra “must accept” an application under s 73 (one by a new entrant that is made in an application period). It has no discretion other than is provided before in ss 94 and 95. But to identify a person as a new entrant from the time of his or her application, when such application is outside the application period and where, therefore, Fonterra has a discretion to accept it or not under s 74(3), would produce a very odd result. Such an
applicant cannot be considered an “entrant” on any normal construction of that word, until the discretion is exercised in his/her favour. Until that point he/she is at most an applicant without any right of entry.
[97] That interpretation is, in my view, supported by the s 74(3) reference to applications “by a dairy farmer including a shareholding farmer”. The reference is not to “new entrants or shareholding farmers” as it could easily have been if the legislature’s intention had been to apply new entrant status to an applicant at the point an application outside the period was made.
[98] Section 106 also supports that construction to the extent that it restricts the “terms of supply that apply to a new entrant”. In the case of an applicant outside the application period, nothing “applies” until such time as the s 74(3) discretion has been exercised.
[99] In the context of this case it is perhaps also worth emphasising that, having regard to the timing of NZDL’s receivership, there was no objection on the part of Fonterra to take on NZDL’s former suppliers, nor corresponding right on the part of these suppliers to supply Fonterra. DIRA gave Fonterra unfettered discretion to accept an application to supply as a shareholding farmer.
[100] I turn then to the second limb of the plaintiffs’ argument. This raises more difficult issues.
[101] That ss 73 to 85 relate to applications by new entrants and shareholding farmers to supply milk as shareholding farmers is a given and confirmed by the “overview” provision of s 72(1). Moreover, Fonterra appropriately concedes that an application by a dairy farmer to supply milk as a shareholding farmer which is made outside the application period results, on the exercise of Fonterra’s discretion to accept the application under s 74(3), in that applicant becoming a new entrant in
relation to the relevant “block” of share-backed supply.8 That the plaintiffs became
new entrants, in this limited sense, on issue to each of them of 1,000 shares on 25
8 In my view s 82(1) makes such concession inevitable by reference to a “new entrant” or a
“shareholding farmer” applying under s 74(3).
September 2012 is also a given. The essential question is, however, whether Fonterra can treat a late applicant as a new entrant for the purposes of some of their supply but not the balance. I do not believe it can. My reasons are as follows.
[102] Subpart 5 of Part 2 of DIRA was clearly intended to address concerns that the merger resulting in the creation of Fonterra would reduce the level of contestability in the domestic raw milk market. Its aim was to reinforce existing competition law with a series of very specific prescriptions relevant to that particular market. In this sense, DIRA, like the Commerce Act 1986, can be regarded as regulating market participants, that is individuals and/or corporations, inter se.
[103] In the present case that relationship is between dairy farmers wishing to become shareholding farmers and Fonterra. The concept that one party to that relationship might be defined not as an individual but as a proxy for a block of shares to which, and in respect only of which, obligations of equality apply, would in my view be an unusual interpretation of legislation designed to ensure that individual farmers are not disadvantaged by Fonterra’s dominance in the raw milk market. It would, as Mr Goddard submits, effectively deprive late entrants of any real protections, leaving them at the mercy of Fonterra’s monopsonist powers. Of course, for valid reasons Fonterra retains a discretion in terms of whether it accepts such entrants into the shareholding farmer “fold”, but why, having elected to do so, it should be able to discriminate against the individuals concerned in a way not possible in respect of timely applicants seems to me a proposition which struggles for a basis in principle.
[104] I consider that conclusion reinforced by the following:
(a) A plain and ordinary reading of the s 5 definition defines a “new entrant” as an individual dairy farmer who is not already a shareholding farmer but who wishes to be one (either as of right under s 72(1) or in Fonterra’s discretion under s 74(3)).
(b)From the point such a person becomes a shareholding farmer he/she is, ex hypothesi, no longer a new entrant.
(c) Each of the plaintiff farmers will, as a result of performance of their Growth Contracts, end up a fully subscribed shareholder farmer in accordance with Fonterra’s share standard. At some point during the performance of that contract and at only one such point they were “new entrants”.
(d)I say only one such point because the s 5 definition precludes a finding of sequential “new entries” with each tranche of shares acquired under the Growth Contracts. That is because:
·From the point at which the first tranche of shares is issued each of the plaintiffs is “a shareholding farmer”, whereas the new entrant definition requires that they be someone who is not.
·It was not necessary for the plaintiffs to make any further application “to become a shareholding farmer” in respect of the sequential tranches (a point I will return to subsequently).
(e) Once a farmer has become a “shareholding farmer” then, if he/she subsequently wishes to increase supply, he/she is not regarded as a new entrant to that extent – he/she is, in the words of s 73(2), a shareholding farmer “applying to increase the volume of milk supplied as a shareholding farmer”. So again the concept of “new entrant” is detached from any specific block of shares and focused rather on the identity of an individual satisfying the three requirements of the “new entrant” definition.
(f) The definition of “shareholding farmer” which the “new entrant” definition itself invokes, reinforces this approach. It simply refers to a dairy farmer who is registered as the holder of co-operative shares. That status is satisfied at the point a dairy farmer is issued with any such shares. He or she is no more nor less a shareholding farmer for the fact that they hold 1,000 or 100,000 shares. Likewise a person can
be a shareholding farmer and a contract supplier but is no less a shareholding farmer for the fact that some of his or her supply is not share backed.
[105] So the scheme of the Act logically envisages new entrant status applying to an individual at a particular point in time – the point at which a dairy farmer becomes a registered holder of co-operative shares. At that point individuals become part of what Fonterra’s director Mr Monaghan referred to at the meeting on 15 June, as the “Fonterra family”9 and the “terms of supply” came, in my view, to be governed by s 106. If, in respect of a late applicant, that was not a consequence acceptable to Fonterra it could negotiate for an exclusively contractual supply. In
relation to such an applicant there was no obligation to accept them as a “shareholding farmer”. But I do not consider Fonterra was in a position to treat the plaintiffs as shareholding farmers for some purposes but not for others. It had never purported to do so in respect of any other farmers on Growth Contracts. It accepted applications from the plaintiffs to become shareholding farmers. It issued shares to them as “new shareholders … pursuant to ss 73 and 74”. Such shares were co- operative shares within the “shareholding farmer” definition. Each supplier committed to being fully shared up over time without the requirement for any further application or step; each was immediately subject to the share standard, albeit the volume supplied on contract was excluded. Fonterra took suppliers on as “new entrants” but now wishes to create a subcategory within that definition of new entrants with inferior rights. I cannot accept that this was in Parliament’s contemplation. To the contrary, I accept the submissions of Mr Goddard set out in [57] to [67] above.
[106] I therefore answer question 1 in the affirmative.
9 A “family” to which in his speaking notes and relevant minutes the farmers in attendance were
“welcomed”.
Question 2 If the plaintiffs were “new entrants” within s 106, did the defendant breach s 106 in offering the plaintiffs the terms of supply set out in the Milk Supply agreements signed by the plaintiffs?
[107] Fonterra says that the unique terms of supply which it offered reflected both the special circumstances of the ex-NZDL milk suppliers (including their urgent need to have their milk collected in the production season scheduled to commence on 1 August 2012 and the arrears they were owed and which were able to be paid following settlement of Fonterra’s purchase) and the Board’s consideration of the best interests of Fonterra and its existing shareholder suppliers (a consideration
which it is acknowledged was driven largely by the “optics”).10
[108] It says that the word “only” in s 106(1)(b) does not require mathematical precision, merely that Fonterra cannot take into account extraneous considerations or, in Mr Hodder’s words, “matters that are not rationally related to the decision making”. But it says that it made an entirely rational decision in the special circumstances of the case and that it was entitled to have regard to its own interests, including concerns within its shareholder base about farmers who had previously left the co-operative returning without any seeming cost associated with their decision.
[109] Fonterra also argues that the reference to the “terms of supply” in s 106 does not include the milk price or any of the other special terms engaged in this case. It says that the phrase should be given the same meaning as in s 74(2), which refers to the “applicable terms of supply”, and that this is a reference to the practical matters envisaged by clause 9.3 of the Fonterra Constitution (which says that the Board may from time to time fix what is referred to as a “Standard Terms and Conditions as it sees fit which shall apply to the supply of Milk by Shareholders”).
[110] I am unable to accept these arguments. In my view, the underlying purpose of the section is to ensure that, in respect of new entrants, Fonterra cannot use the market power invested in it as a result of the legislated merger to achieve outcomes not available in a workably competitive market. To that end the “different
circumstances” recognised by the section must, in my view, be objective differences
10 See [45] of the Amended Statement of Defence.
in circumstances and of a nature that could be expected to result in different terms in a workably competitive market. So, for example, differences in the quality of the milk supplied or particular difficulties of access to a new entrant’s farm may justify a difference in the terms of supply. But a workably competitive market would not allow Fonterra the luxury of “sending messages to its shareholders”. Nor in my view is it relevant that the differences in terms will benefit Fonterra or its shareholders or were otherwise seen as desirable to Fonterra or its shareholders. If that were the case then s 106 would be pointless. It is in my view intended to prevent discrimination for precisely such reasons.
[111] In particular, it seems to me that a desire on the part of the Board to, as Mr Goddard phrased it, “keep the shareholders sweet”, however attractive that may have seemed to the Board, was not a valid difference in circumstances for the purposes of s 106. Not only do I consider this implicit in the section, but s 106(4) explicitly recognises that the imposition of sanctions for perceived disloyalty, for example, by exercise of a farmer’s right to supply up to 20 per cent of his or her milk to a competitor, is not a valid basis for differential terms of supply.
[112] Nor can I accept Fonterra’s narrow reading of the expression “terms of supply”. I consider that argument inconsistent with the natural meaning of the language used (reinforced by comments made by the Minister of Agriculture on the second reading of the then Bill in terms that “it is also essential that Fonterra does not discriminate between existing supplying shareholders and new entrants to the co-
operative”).11 More significantly however, it would mean that a key dimension in
respect of which market power would expect to be exercised, namely “price”, would not be effectively regulated by Subpart 5. I cannot accept that this was intended.
[113] Focusing then on the reasons for the differences in the present case, the plaintiffs say, in submissions which I accept, that:
11 (18 September 2001) 595 NZPD 11780.
(a) The main reason was to placate existing shareholders (and internal stakeholders). It was, as Mr Murphy put it, about the “optics”.12
(b)The financial viability of the deal did not depend on these terms as confirmed by Chapman Tripp’s letter of 26 August 2015, where it was stated that:
Fonterra is not saying, on its pleadings or in its evidence, that amendments to the Growth Contract (listed at [29](c)] of the Second Amended Statement of Claim) were the difference between financial viability and non viability of the overall transaction.
(c) The five cent per kilogram milk price discount was a small and relatively arbitrary figure designed to be and perceived to be a “penalty”13 for suppliers who had previously left the co-operative and couldn’t therefore be expected to simply “waltz back in”. The financial benefit to Fonterra was identified as being in the order of $3 million but this was not a material factor in the decision to impose the penalty.14
(d)The prohibition on sharing up was to ensure that the five cent milk price penalty would apply for at least one year to all suppliers. That appears from Mr Wickham’s email of 7 June and was confirmed by Mr Murphy on cross-examination.15
(e) The prohibition on sharing up was also intended to deprive the suppliers of the expected gain in share price post-TAF as part of the
“optics”.16
12 NOE 365/34; 367/28; 373/23; 379/23-28; 381/5; 388/1-25; 389/21-26; 395/7, 22; 397/8-9;
398/10-20; 399/13-28; 402/34; 404/5; 406/28-30; 407/2-11; 492/9-18.
13 The word used by Fonterra’s Group Director Supplier and External Relations Mr Wickham in an email dated 7 June 2012 to the Milk Payments Manager Mr Lash, the Managing Director Co-
operative Affairs Mr Muller, and the General Manager Milk Supply Mr Murphy.
14 Mr Murphy’s cross-examination NOE 365/6-23, 395/7-23.
15 NOE 358/ 5-20, 362/ 23-29, 365/ 6-23.
16 Mr Murphy’s cross-examination NOE 368/7-10; Mr Monaghan’s cross-examination NOE
469/11-14.
(f) The decision on the part of Fonterra not to buy the plaintiffs’ vats immediately was also driven by “optics” rather than financial considerations.17
[114] I accept the plaintiffs’ submission that none of these factors provided an objective justification for a difference in terms. None would have affected the terms offered in a workably competitive market.
[115] Other justifications advanced by Fonterra were in my view either not material to Fonterra’s decision and/or designed to draw the focus away from its real reasons and/or not relevant differences for s 106 purposes. These included:
(a) Recovery of its investment. The evidence was that Fonterra does not seek to recover the cost of investment in any particular plant from suppliers to that plant and did not as a fact impose different terms on other suppliers to the Studholme plant. Nor was there evidence that this was more costly capacity than any other plant operated by the company. As indicated, the financial benefit arising from the terms imposed was modest and not material in the context of the purchase. Moreover, by imposition of the restriction on sharing-up in the first year, Fonterra was foregoing capital it might otherwise have had.
(b)The moratorium on the issue of dry shares pre-TAF. This was irrelevant as the plaintiffs wanted to purchase wet shares.
(c) Timing. Wet shares continued to be issued until 25 September 2012 and Ms Burr confirmed that late applications would always be processed, at least up until the Board papers were finalised a few days before each meeting. The expectation throughout was that the Commerce Commission would conclude its deliberations prior to the
end of September and, in the event, it issued a clearance on 6
17 Mr Murphy’s cross-examination NOE 373/6-29.
September.18 Legal advice had been prior obtained indicating that the prospects of approval were high.
(d) The ease of attracting supply or desire not to split the supply base.
Again I consider this reason unmeritorious. Mr Murphy agreed in cross-examination that it would in fact have been easier to get the NZDL suppliers across the line if they had been offered a choice about whether to share-up immediately or on a deferred basis. It was the inability to share-up which was the principal sticking point with many of the suppliers. He also accepted that there was nothing
unduly complicated about offering suppliers a choice.19 And he
agreed that there were a number of good reasons why suppliers who were in a position to share-up would want to do so.20 Mr Murphy’s concessions were appropriate. As a matter of commonsense the greater the choices offered, the easier it would have been to obtain the support of the NZDL suppliers.
(e) Sharing-up would have placed the NZDL suppliers in a difficult financial position. This was suggested by Mr Murphy in his brief of evidence but under cross-examination he agreed that this was not a material reason for refusing to give those suppliers the same choice
enjoyed by other suppliers.21 Mr Monaghan, in turn, acknowledged
that Fonterra did not have any detailed financial information about the position of the NZDL suppliers.22 I accept also as implausible any suggestion that Fonterra was seeking to protect the plaintiffs from the risks associated with an investment that it was happy to see its existing shareholders make at the time.
(f) It facilitated payment of the “retros”. These were, however, paid by
NZDL out of the purchase price. That could have occurred without
18 Mr Murphy’s cross-examination page 434/5 2 and 9.
19 NOE 344/27-32, 345/1-5, 346/12-17.
20 NOE 347/21-23.
21 NOE 369/25-34.
22 NOE 421/10-15.
the three unfavourable terms. Fonterra’s indicative bid of $50 million on 5 June was given before any decision had been made to impose the terms. And Mr Grace gave evidence that Fonterra had bid $50 million for the same assets in a pre-receivership sale process.23 I am therefore satisfied that the price paid by Fonterra and the resulting payment of the NZDL suppliers’ retros did not depend on the imposition of the
three unfavourable terms.
[116] I therefore answer question 2 in the affirmative and find, as a result, that the plaintiffs succeed on their first cause of action.
Question 3 Did the defendant advise the plaintiffs about the extent of the plaintiffs’ ability to buy shares and to supply milk on a shared-up basis in terms or to the effect pleaded in paragraph 31 of the Amended Statement of Claim, or as pleaded in paragraph 31 of the Amended Statement of Defence?
Introduction
[117] Paragraph 31 of the Amended Statement of Claim provides:
At the meetings [those of 15 and 20 June 2012] some of the suppliers asked Fonterra representatives why they were not able to buy shares beyond the minimum of 1000 in the first year. They were told by a Fonterra representative that:
(a) this was not legally possible because the application period had closed; and
(b) Fonterra was not permitting even its existing shareholders to purchase additional shares at that time, subject to a limited exception that enabled existing shareholders to purchase up to 20% more shares than they currently held, to accommodate expected growth in milk supply.
(the non-eligibility representations)
Particulars
(i) The statements referred to were made on 15 June 2012 by
Steve Murphy and/or John Monaghan.
(ii) The statements referred to were made on 20 June 2012 by
Steve Murphy and/or Christine Burr.
23 NOE 662.
[118] Paragraph 31 of the Amended Statement of Defence in turn provides:
31 In response to paragraph 31, it:
31.1 repeats paragraph 30, above;
31.2says that the NZDL milk suppliers were told by its representatives that the special contractual terms of supply offered were those that had been signed off by the Board and required all such suppliers to accept them if the Sale Agreement were to be completed and they were to receive their arrears in full;
31.3says further, in relation to the allegation pleaded in paragraph 31(a), that NZDL milk suppliers were told by its representatives that, as the new supply arrangements being offered would be entered into outside the published application period, they had no entitlement to commence supply in the 2012/13 season on a fully shared up basis;
31.4says further, in relation to the allegation pleaded (for the first time on 25 March 2015) in paragraph 31(b), that the Board had previously decided that there would be (and Fonterra sought to apply) a moratorium on the issue of additional “dry” shares (as distinct from “wet” shares required and applied for in relation to specific production increase proposals) to existing shareholders until after the expected commencement of the TAF scheme (referred to in paragraph
32, below) in late 2012, and that the NZDL milk suppliers
were told of this moratorium by Fonterra’s representatives at
the 20 June 2012 meeting; and
31.5 otherwise denies paragraph 31.
[119] The issue arises in the context of the plaintiffs’ claim under s 9 of the FTA. That section is in familiar terms:
9 Misleading and deceptive conduct generally
No person shall, in trade, engage in conduct that is misleading or deceptive or is likely to mislead or deceive.
[120] It was common ground between the parties that incorrect information about legal rights and remedies can amount to a breach of s 9 of the FTA. Thus, for example, incorrect advice about the scope of coverage provided by an insurance policy has been held to be misleading and deceptive conduct under the Act.24
Likewise s 13(1) of the Act prohibits false or misleading representations concerning
24 Clifton-Mogg v National Bank of New Zealand (2001) 10 TCLR 213.
the existence, exclusion, or effect of any condition, warranty, guarantee, right or remedy.
[121] There was agreement also that the relevant test is whether the alleged conduct was capable of misleading and likely to mislead a reasonable person with the plaintiffs’ characteristics in all the circumstances of the case.25
[122] The oral evidence in relation to the meetings of 15 and 20 June was provided by:
(i)the plaintiffs or their representatives Mr Borst, Mr Tennent, Mr Ellis, Mr Lowe, Mr Willans.
(ii) Mr Lodge, who was NZDL’s Quality and Compliance
Manager at the time, and
(iii) Fonterra representatives Mr Monaghan, Mr Murphy and Ms
Burr.
[123] Of these participants Messrs Borst, Lodge, Tennent, Ellis, Willans and Murphy were present at both meetings. Messrs Lowe and Monaghan were present at the first meeting only and Ms Burr at the second meeting only. A Mr Griffiths from Fonterra was also present at both meetings but not called. Certain comments made by him to others after the meeting were the subject of evidence to which I will return subsequently.
[124] Contemporaneous notes of the meetings were taken by Mr Lodge and by Mr Tennent’s wife. I found these valuable, especially given the period of time which had elapsed since the events in question and the inevitability that, within the context of any dispute, memory can be overlaid with perceptions, self-interest and elements
of reconstruction, irrespective of a witness’ commitment to his or her oath. The
25 See AMP Finance Ltd v Heaven (1998) 6 NZBLC 102, 414, (1997) 8 TCLR 144. The Supreme Court’s simple test for proving a breach of s 9 in Red Eagle Corporation Ltd v Ellis [2010] NZSC 20 is not in my view applicable given that the case is not one “where there is no doubt about what was said or about its meaning” (at [26]).
decisions in Watson v Foxman,26 Julstar Pty Limited v Hart Trading Pty Limited27 and Onassis v Vergottis28 all emphasise the fact that what is actually remembered may only be an impression from which plausible details are reconstructed, often subconsciously, and that the very nature of litigation and the processes around
preparation for trial can distort memory. I accept therefore that contemporaneous documents will always be of the utmost importance.29 But neither do I disregard the evidence of any of the participants all of whom I regard as genuine in their attempted recollections of what was said.
[125] I accept that the onus is on the plaintiffs to prove what are referred to in the statement of claim as the “non-eligibility representations” and that the Court should feel an actual persuasion of the words “occurrence”.30 However, as question 3 itself recognises, I may look either to the “terms or to the effect” of what was said.
[126] Both parties agree that statements made by Fonterra’s representatives at the two meetings must be taken into account and that what was said at one meeting can shed light on what was said at the other. It is the overall impact of Fonterra’s conduct that is relevant. Although I deal with the two “non-eligibility representations” separately, I do so therefore live to the fact that each must be considered in the context of the other. The plaintiffs’ case is that the overall message was that they were not eligible to share-up both because they were out of time and (with very limited exceptions relating to production increases), because no suppliers were able to acquire shares at that time.
The first alleged representation – not legally possible to acquire shares
[127] A number of the plaintiffs recall being told by Fonterra representatives at one of the two meetings that it was “legally impossible” to share-up.
26 Watson v Foxman (1995) 49 NSWLR 315 (CA) at 318-319.
27 Julstar Pty Limited v Hart Trading Pty Limited [2014] FCAFC 151 at [73].
28 Onassis v Vergottis [1968] 2 Lloyds Rep 403 (HL) at 431.
29 Watson v Foxman, above n 26, at 319.
30 Julstar Pty Limited v Hart Trading Pty Limited, above n 27, at [74].
Meeting of 15 June 2012
[128] In relation to the meeting on 15 June, only Mr Willans recalls such expression being used, which he attributes to Mr Monaghan, while recognising it could have been Mr Murphy. By contrast, each of Mr Borst, Mr Tennent, Mr Ellis and Mr Lowe had no such recollection. Rather, they recall Mr Murphy saying that sharing up was not allowed because it was outside the application period.
[129] In terms of the independent witnesses, Mr Grace had no recollection of the words “legally impossible” being used at the meeting of 15 June (or that of 20 June). Although he was unable to make an attribution to one or other meeting, he did recall the suppliers asking questions about why the Fonterra offer did not allow them to share-up immediately and that Mr Murphy’s response was in terms that this was outside the application period, that he was not allowed to offer different terms and he could not go back to the Fonterra Board as it would not change its decision.
[130] The other independent witness, Mr Lodge, could not recall the words “legally impossible” being used at the meeting of 15 June but says that “that’s how [he] took it”.31 It was a matter of “impression”.32 Significantly, Mr Lodge took from that meeting the strong message that Fonterra could not allow the suppliers to share-up, not that it could, but chose not to do so:33
Q. Mr Lodge, you were asked a lot of questions about the 15 June meeting and whether the message from the Fonterra representatives was “can't” or “won’t”, you remember those questions?
A. Mhm.
Q. And your answer was that the message at that meeting was “can't”?
Sorry, you need to speak rather than just nod for the transcribers.
A. Sorry, yes, the message was definitely a “can't”.
Q. My learned friend Mr Hodder asked you earlier this morning at around 10.15 am and I'm afraid I don’t have the pages of the transcript yet, Your Honour, to provide a reference to Your Honour’s notes, about edict from the edicts from the Board, do you remember that question?
31 NOE 120/9.
32 NOE 120/28-32.
33 NOE 143/22-144/12.
A. Mhm, yes.
Q. Did you understand the reason for the “can't” to be a decision that the Board had made or that there was some other reason why Fonterra as a whole including the Board couldn't do this?
A I think at that time they hadn't mentioned the Board. I would have
assumed it was a “can't” because Fonterra large body couldn't do it.
Q. If we role (sic) forward now to – and when you say you “assumed it” was that based on what was said at the meeting or on something else?
A. Based on the message at the meeting that they can't do it. I didn't think in that much detail.
[131] In terms of the Fonterra witnesses, Mr Monaghan’s evidence was that he did not use the words “legally impossible” nor could he recall Mr Murphy doing so. He says that the clear message he imparted was that sharing up was not an option that the Board would entertain and that there would be no negotiation.
[132] Mr Murphy denied using the words “legally impossible” at the meeting.
[133] Turning to the two contemporaneous records, there is no reference to “legal impossibility”, as I would have expected if that exact phrase had been used. In Mr Lodge’s notes the only relevant exchange is between Mr Ellis and Mr Murphy in the following terms:
Ellis: Unique situation, why not allow us to share-up straight away?
Murphy: Can’t allow this as Fonterra has many other existing
suppliers on contract.
[134] Mrs Tennent’s notes in turn record:
Unique situation. Asked why can’t share-up straight away – NO CONTRACT AS IS. Deal has to suit Fonterra and us. Hard nosed.
[135] Nor is there any reference to “legal impossibility” in the Fonterra speaking notes which I would expect their representatives to have adhered to closely. Those notes referred to the fact that:
In putting this offer together, we have had to take into account the need to be fair to our shareholders so there are two exceptions to the normal contract which I have explained below.
[136] I find therefore that at the meeting of 15 June neither Mr Monaghan nor Mr Murphy stated that it was legally impossible for the suppliers to share-up but that the suppliers were told that they could not share-up and/or that this was not “allowed”, or words to that effect. I find also that Fonterra communicated its position in un- negotiable terms.
Meeting of 20 June 2012
[137] In relation to this meeting, the plaintiffs had a consistent recollection of the words “legally impossible” being used. Mr Borst’s evidence was that the phrase was used in response to a question as to why suppliers could not share-up. He also recalled as a reason which was advanced that there was “no mandate”. He variously described his confidence that it was Mr Murphy who said these words in terms;
“pretty sure”,34 “specifically”,35 “certainly”36 and “definitely”.37 However, when he
was tested in cross-examination about the context in which Mr Murphy may have said it he was uncertain:38
AWell it, it come up, ah, on more than one occasion and, I can’t recall exactly what, um, cos it was, um there was certainly a fair amount of discussion about the shares and, um, and I cannot recall about what one but it was, certainly that was one of the terms used and I am pretty sure used on more than one occasion that, um, that it was legally impossible to share-up, to, to sell shares outside the application period.
[138] Mr Tennent’s reference to the phrase “legally impossible” occurs only in his reply evidence and is said to have been the result of his memory being jogged from the briefing process. Like Mr Borst, he also recalled reference to there being “no mandate” to allow sharing up outside the application period. When it was put to him
that all this meant was the Board would not tolerate any change to the conditions and
34 Mr Murphy’s Brief of Evidence.
35 NOE 11/27-30.
36 NOE 80/5-13
37 NOE 80/5-13.
38 NOE 82/14-19.
that the Fonterra representatives at the meeting simply had no mandate to offer anything else, his response was, however, in terms:39
I don’t remember them talking about the Board saying that at all, they just said that they could not – it wasn’t possible, they couldn’t do it and they weren’t even keen on talking about it, they just would not do it.
[139] Mr Willans’ evidence was similar to that of Mr Tennent. He recalled the words “legally impossible” but not who said them.
[140] Mr Ellis likewise recalled Mr Murphy saying it was legally impossible because the applicants were outside the application period. However, he conceded under cross-examination that reference to legal impossibility was in the context of suppliers insisting on sharing up outside the application period:40
QAll right and what I am also putting to you is that if there was a discussion about legally impossible, it would have related to the fact it was legally impossible outside the application period for you or any of the other suppliers to insist that Fonterra, as a matter of law, had to provide you with share back.(sic)
A I would have to agree with that, yeah.
[141] In terms of the independent witnesses, Mr Lodge’s brief of evidence referred
to the fact that either Ms Burr or Mr Murphy told the suppliers:
They could not buy shares straight away because Fonterra was not legally able to issue shares at that time as the application period had closed.
In cross-examination he said he could not recall which of Ms Burr or Mr Murphy said those words because so much information had been conveyed at the meeting and on re-examination he conceded that he could not be sure that the words “legally impossible” were used. Having been referred to the extract from his brief of evidence just cited, he was asked whether there was anything in that he would wish to change. The following was then recorded:41
A That is still my recollection. Looking at my notes, I have not written
down the word “legally”, but then I have written down that they
39 NOE 172/17-19.
40 NOE 216/17-22.
41 NOE 145/12-19.
can’t do it, but that was the salient point as far as I was concerned:
the suppliers couldn’t do that.
Q Do you remember whether or not words like “legally impossible”
were used or is that something –
A I – it is a long time ago. I think they were but I couldn’t be sure that
they were, I am sorry.
[142] Mr Grace had no specific recollections apart from those already recorded.
[143] In terms of the Fonterra evidence, Mr Murphy said that he could not recall anyone saying that it was illegal for Fonterra to allow the suppliers to share-up and that the simple message he conveyed was that the Board had made up its mind and was not going to change it. Importantly however, the following exchange occurred under cross-examination:42
QNow one thing that everyone does agree about in relation to these meetings is that you referred to the application period and to the fact that the suppliers were outside it?
A Yes.
QWould you accept that in the moment trying to sell the suppliers on this deal, you may have gone on to say something like, because you are outside the application period you can’t share-up”? That is a real possibility isn’t it?
A. Yes it is. Yes.
[144] Ms Burr’s evidence was that one of the reasons given by Mr Murphy for not allowing the sharing up was that he had no mandate to do so. That is consistent with Mr Borst and Mr Tennent’s evidence. She did not recall the words “legally impossible” being used.
[145] In relation to the contemporaneous notes, again there is no reference to “legal impossibility”. Mr Lodge’s notes record Mr Murphy saying:
No chance that we would offer you to share-up. We took it to Board. They are adamant it is not allowed.
[146] Ms Tennent’s notes in turn record:
42 NOE 496/11 to 19.
Discussion on immediate sharing up – saying purchaser in July should have advantage over person purchasing in September. Fonterra say have no mandate for that.
WILL NOT ALLOW SHARING UP IN FIRST YEAR. The deal keeps all suppliers on equal playing field.
[147] I have already identified that Fonterra’s Area Manager Mr Griffiths, who was present at both meetings was not called. Subsequent to the events, he is recorded as having made a number of statements which Mr Goddard submits are admissible against Fonterra as made by one of its employees in the course of his employment and against Fonterra’s interest.
[148] In his brief of evidence Mr Willans records a discussion with Mr Griffiths on
12 March 2013 in which he asked Mr Griffiths about the “whole thing”, to which Mr
Griffiths responded that:
… when they stood up and said that it was legally impossible to buy shares that he almost stood up at the meeting and corrected them as it was not actually quite right…. [but that he had] done that before at meetings and [paid] the consequences for it. So he just sat there and thought no, I will leave it for someone else to correct but no-one else did.
[149] That discussion is recorded in a contemporaneous diary note by Mr Williams in terms:
Ray Phil Griffiths said he was going to stand up and say that was not quite right but thought lawyer would.
[150] Mr Griffiths also attended a meeting at the plaintiffs’ solicitors on 15 April
2013 (at which Mr Monaghan and others were also present). Mr Alec Neil, a consultant to Lane Neave, made a contemporaneous note which was admitted in evidence. The following exchanges are recorded:
S/h Could we share-up – true or false. A – it is a discretion of F
DIR [Mr Monaghan] – misunderstanding by Steve (Murphy) as to interpretation.
Phil Carruthers (sic) – [the intended reference is to Griffiths] – I only heard it
once or twice and I wanted to point this out…
Richard – Steve Murphy didn’t understand but why buy other F not correct him – why?
Phil – Clearer [or clever] to be bright in hindsight. If I knew then what I
know now may have taken different view. I did note the point …
DIR – we were never going to exercise discretion for this group. DIR – been a miscommunication.
[151] I consider this an appropriate case from which to draw the inference that Mr Griffiths’ evidence would not have assisted Fonterra and it was for that reason he was not called. Fonterra says that his evidence would merely have been duplicative of other Fonterra witnesses present at the meetings and that I should be reluctant therefore to draw such inference. But that does not realistically address the significance of his potential evidence in the context described.
[152] I also find that there was no explicit reference to the Board having any discretion in respect of an application outside the application period, or to the Board having chosen not to exercise it in favour of the suppliers. Mr Monaghan accepted that any such explanation would have provoked questions about why the discretion was not being exercised in the suppliers’ favour and that no such questions occurred. Mr Murphy also acknowledged as “absolutely, it’s a possibility”43 no mention of the
discretion had occurred. None of that is surprising. As Mr Monaghan stated,44 to
have told the suppliers that Fonterra had a discretion which it was specifically exercising against them would not have been a very “up-beat” message in the context of a presentation designed to sell the deal.
[153] My overall conclusion in relation to the 20 June meeting is that the “legally impossible” allegation represents an extrapolation from, rather than a precise record of, what was said. Again, had those exact words been used I would expect them to have featured in one or other of the contemporaneous notes. However, that is not an answer in itself. Question 3 invites me to find whether there was advice “in the terms or to the effect” pleaded in paragraph 31 of the Amended Statement of Claim. Consistent with the admissions made by Mr Griffiths and the evidence of Mr Lodge,
I consider that the overriding “message” or impression left by the Fonterra
43 NOE 486/9.
44 NOE 454/1-11.
representatives was that the suppliers could not share-up because they were outside the application period and/or the fact that because they were outside such period it could not be “allowed”. Taken in combination with Fonterra’s further representations relating to the inability of existing shareholders to buy shares (which I will next address), and the absence of any reference to Fonterra’s discretion, that, in my view, resulted in a breach of s 9 to the extent that it was both capable of misleading and likely to mislead a reasonable person with the plaintiffs’ characteristics into believing that the fact that they were out of time was necessarily fatal.
[154] I consider my conclusion to be consistent with the approach taken by Whata J in Hamid v England.45 In that case a real estate agent selling his own property made a number of statements in response to questions about the weathertightness of the property. Justice Whata approached the statements in context of all relevant circumstances and not as isolated events. His Honour concluded that a combination of surrounding circumstances and statements made by the defendant left the plaintiffs with an erroneous impression as to the true state of the property.
The second alleged representation – inability of other Fonterra shareholders to buy shares.
[155] It is undisputed that at both the meetings of 15 and 20 June comments were made by Fonterra representatives about the inability of other Fonterra shareholders to buy shares in the company at the relevant time. Mr Lodge’s minutes of the meeting of 15 June record the exchange previously identified in terms:
Dave Ellis Unique situation, why not allow us to share-up straight away. Steve Murphy Can’t allow this as Fonterra has many other existing suppliers
on contract.
[156] His minutes of the 20 June meeting in turn record:
Robert Tennent What disadvantage to Fonterra if we don’t have to share- up.46
45 Hamid v England (2011) 12 NZCPR 844 (HC), (2011) 13 TCLR 376.
46 It was agreed by the parties that the question should correctly have been recorded in terms of,
“What disadvantage to Fonterra if we were allowed to share-up.”
Steve Murphy we have many others who can’t buy shares at moment.
Christine Burr we don’t issue shares after the end of September. There is no
market mechanism to change for value share after that.
TAF on table – we going through “end of season”. Not allowing existing shareholders to buy additional shares.
[157] Fonterra says that Ms Burr’s reference to the moratorium was to “Additional Shares”, a technical term which was used by Ms Burr to mean and understood by her audience to mean the moratorium which Fonterra had, on 22 May 2012, imposed on acquisition of dry shares as part of the lead up to TAF. Fonterra says that Ms Burr’s reference to the moratorium was simply by way of “general update on wider Fonterra events” or an example of other restrictions which Fonterra was imposing, but it was not advanced as a reason why the suppliers were not able to purchase more supply-backed (i.e. wet) shares.
[158] In evidence, Ms Burr accepted that at the 20 June meeting she did refer to the fact that Fonterra was not issuing any additional shares to suppliers in the lead up to TAF:47
QCan I suggest to you that it is quite possible that among the things that you said at the meeting was that Fonterra, because of the lead up to TAF was not issuing additional shares to any supplier?
A Correct.
QAnd you would have had in your head additional shares with capitals?
A Correct.
Q But of course it is very hard to hear capitals isn’t it?
A Correct.
QSo would you accept that a farmer who had for at least some time not been supplying Fonterra and dealing with your paperwork on a day to day basis when they heard that Fonterra was not issuing additional shares to any supplier could understand that no suppliers were getting any shares at all? That is a natural understanding of that phrase isn’t it?
AIt is hard to take away the knowledge of what additional shares means.
47 NOE 585/9-14.
[159] She also made an important acknowledgement in the following exchange:48
QSomeone who heard you say “no additional shares” and who read this paragraph could easily understand that people on growth contracts weren’t being allowed to share-up in respect of their existing supply?
A Maybe, yes that could be. Q And that would be wrong? A Yes.
[160] I have no doubt that when Ms Burr talked about additional shares she was, given her own intimate knowledge of the workings of Fonterra and its share register, meaning dry shares. However, her audience was not equally versed in Fonterra’s specialist internal terminology. Nor in fact was that terminology consistently used by Fonterra. For example, the phrase “Additional Shares” in Fonterra’s 2012
Growth Contract Booklet appears to refer (and Mr Murphy agreed) to wet shares (additional shares over and above Fonterra’s minimum 1,000 requirement which might be purchased in the first three years of a Growth Contract with a commensurate reduction in the volume of contract milk supplied).
[161] At all times suppliers under Growth Contracts could buy more shares as long as they were happy for those to be treated as production-backed shares that reduced their contract quantity.49 It was precisely this that some of the suppliers at the meetings of 15 and 20 June wanted to do. The restrictions on the acquisition of dry shares were simply irrelevant in that context and, in my view, capable of misleading and likely to mislead. The following passage in Ms Burr’s cross-examination is relevant:50
Q. So the restrictions on acquiring dry shares that applied to other shareholders were not restrictions that there (sic) relevant to the desire of these shareholders to acquire wet shares, agree with that?
A. Yes.
Q. So answering their questions about why they couldn’t acquire shares by reference to the moratorium was at best confusing wasn’t it?
48 NOE 587/33 – 588/3.
49 NOE 596/12-15.
50 NOE 598/19-25.
A. To them, yes maybe, I don’t know.
[162] Mr Murphy also accepted that he discussed the moratorium pre-TAF and this was possibly confusing. The following extracts from the evidence are instructive:51
Q. You also, and again I think this is common ground, referred to the moratorium pre TAF.
A. Yes.
Q. Now, as I think we have discussed, that was only a moratorium on the issue of dry shares?
A. Yes.
Q. But would you accept that you may have given the impression that
this was another reason why the NZDL suppliers couldn’t share-up?
A. Given, having gone through some of the evidence in brief, it would appear so, yes.
Q. If we turn back to the notes of the 15 June meeting…
A. Yes.
Q. About a third of the way down the page the notes record Mr Ellis
asking “why not allow us to share-up straight away”?... Q. And you certainly remember that question being asked? A. Yes I do.
Q. The answer you are recorded as giving is, “can’t allow this as Fonterra has many other existing suppliers on contract”. Do you remember saying something like that?
A. Yes I think it was in the context of we were offering a contract and a contract doesn’t allow that to happen.
Q. Well you refer to many other existing suppliers on contract? A. Yes.
Q. Do you think you said something like that? A. It is recorded here so yes.
Q. That would be a reference to suppliers on the growth contract
wouldn’t it?
A. Yes.
51 NOE 496/20-498/13.
Q. Suppliers on the growth contract were all free to share-up pre TAF to
the extent of their milk supply weren’t they?
A. Yes they were.
Q. Because they were wet shares not dry shares? A. Correct.
Q. So what it looks like you are saying here is that we cannot allow this because Fonterra has many other existing suppliers on contract and they are not able to share up, is that the message you were intending to give?
A. No I think what I was trying to say was that we are offering a contract that doesn’t allow this to happen.
Q. Well what is the relevance of there being other existing suppliers on
contract. It looks like a comparison doesn’t it?
A. I am not sure sorry.
Q. You would agree with me that the fact that there were other suppliers on growth contracts is not a reason to refuse to let these suppliers share-up?
A. Yes I would agree with you.
Q. So if you said this it is at best confused? A. Mhm.
Q. And potentially confusing?
A. Possibly although I would stress this is one line out of several conversations around this topic and so hopefully any confusion was cleared up later on perhaps even at the meeting on the 20th.
[163] I do not consider the confusion “cleared up” at the meeting on 20 June 2012. Indeed, I consider that meeting compounded the problem in a way which, albeit unintentionally, mislead or deceived within the terms of s 9. The overall message was that the suppliers were not being treated differently from other Growth Contract suppliers in relation to sharing up when in fact they were.
Significance of legal representation
[164] Fonterra argues that the plaintiffs’ ability to seek legal advice after the two meetings on 20 June 2012 is relevant in terms of the FTA allegations. I reject that argument. If the conduct was misleading when it occurred, the possibility that it
might be corrected had appropriate questions been asked of legal advisors at a later time, cannot deprive it of its misleading character. In the event, the plaintiffs say they did not raise the question of whether they were legally precluded from sharing up with their solicitors because of their assumption that the information they received from Fonterra was accurate. In my assessment, the ability to seek legal advice is relevant, if at all, only in the context of s 43 of the FTA, and then only if it
deprives the misleading conduct of causative affect.52 Those are not issues I am
required to address at this stage of the proceedings.
Entire agreement clause
[165] Nor do I consider the entire agreement clause in the Milk Supply Agreement signed by the plaintiffs relevant to the question of a breach of s 9. I accept the plaintiffs’ submissions that, at most, such a clause is relevant as a factor going to causation or the remedial discretion under s 43. That is how such a clause was treated in PAE (New Zealand) Ltd v Brosnahan.53
Reliance and loss
[166] All issues of reliance and loss have been deferred for subsequent hearing. The plaintiffs say that they were misled by what was said and that, in reliance on Fonterra’s statements, they signed the supply agreements which were offered and did not apply for any more than the 1,000 shares they were required to hold under the Growth Contracts. They say that they lost the opportunity to have the Fonterra Board consider their application and that, given Fonterra’s agreement with the receivers to grant an automatic one week extension date if supplier acceptance was not achieved by 22 June 2012, there was adequate opportunity to renegotiate the deal. These allegations raise a number of interesting assumptions and significant issues in terms of valuing the missed opportunity. However, that is an argument for
another day.
52 Poplawski v Pryde [2013] NZCA 229, (2013) TCLR 565 at [40], [48]-[49], [62].
53 PAE (New Zealand) Ltd v Brosnahan [2009] NZCA 611, (2009) 12 TCLR 626 at [43]-[46].
[167] In answer to question 3 I therefore find that the defendant’s advice was to the
effect pleaded in paragraph 31 of the statement of claim.
Question 4 Was such advice misleading and deceptive conduct in trade in breach of s 9 of the FTA? (For clarity, this issue excludes any question of reliance by the plaintiffs on the alleged advice as pleaded in paragraph 53 of the Amended Statement of Claim, but all other factual – including contextual – issues raised in the pleadings of relevance to liability will be traversed.)
[168] It is accepted that Fonterra was at all relevant times acting in trade and that the relevant test for misleading or deceptive conduct in terms of s 9 of the FTA is that specified in [121].
[169] Based on my previous conclusions I find that Fonterra breached s 9 of the
Act.
Question 5 Did the defendant’s advice to the plaintiffs about the extent of the plaintiffs’ ability to buy shares and supply milk on a shared-up basis (as per question 3, above) amount to a misrepresentation in terms of s 6 of the CRA? (For clarity, this issue excludes any question of reliance by the plaintiffs on the alleged advice as pleaded in paragraph 56 of the Amended Statement of Claim, but all other factual – including contextual – issues raised in the pleadings of relevance to liability will be traversed.)
[170] Section 6 of the CRA provides that where a party has been induced to enter into a contract by misrepresentation, the innocent party is entitled to damages on the same basis as if the misrepresentation were a term of the contract that had been broken. What constitutes a misrepresentation is derived from the common law, as
the term is undefined in the CRA.54 The essential elements of a cause of action
under s 6 of the CRA and s 9 of the FTA are the same or similar. There must be a misstatement, whether a misrepresentation under the CRA or misleading and deceptive conduct under the FTA. The CRA however also requires the plaintiffs to show that the defendant intended to induce the plaintiffs to enter into the contract on
the basis of the misrepresentation.55
54 Ware v Johnson [1984] 2 NZLR 518 at 537, at 538 per Prichard J.
55 Savill v NZI Finance Ltd [1990] 3 NZLR 135 (CA) at 145.
[171] The parties are agreed that the principal issue for determination by the Court in relation to the CRA cause of action is the same question of fact that arises in the context of the FTA cause of action – what statements were made by Fonterra representatives at the 15 and 20 June 2012 meetings and (as I approach the task) what was the overall “message” conveyed to the plaintiffs.
[172] As with the FTA claims, all questions of reliance, inducement and loss have been deferred for a subsequent hearing.
[173] For the reasons previously set out I answer question 5 in the affirmative.
Result
[174] I answer the five questions posed in the following terms:
Question 1 Yes.
Question 2 Yes.
Question 3 The defendant’s advice was to the effect pleaded in paragraph 31 of
the statement of claim.
Question 4 Yes.
Question 5 Yes.
Costs
[175] These are reserved to be addressed at the conclusion of the next phase of trial or otherwise on application of either party. In the event earlier determination of costs is required leave is reserved to seek a telephone conference at which an
appropriate timetable can be set for submissions.
Muir J
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