Fonterra has lost its bid to overturn a High Court ruling against inferior terms offered to the suppliers of the failed New Zealand Dairies Ltd business in South Canterbury.
The Court of Appeal bench, comprising Justices Tony Randerson, Helen Winkelmann and Brendan Brown, have rejected Fonterra's application to throw out a ruling that it breached the Dairy Industry Restructuring Act by imposing less favourable terms on farmers who had previously supplied NZDL.
Fonterra bought the independent processor's plant out of receivership in 2012 and took on the farmers, who supplied milk from farms in North Otago and South Canterbury.
The co-operative made a deal with the farmers, agreeing to buy their milk under a "growth contract", rather than a fully share-backed supply, where farmers buy one Fonterra share for every kilogram of milk solids they supply in a season and are paid the farmgate milk price plus a dividend on each share.
Under the growth contract, the farmers were entitled to 5c less per kilogram of milk solids than the contract milk price and bought 1000 Fonterra shares but couldn't "share up" - become fully share-backed - in their first year of supplying Fonterra.
According to DIRA, under the legislation enabling the merger of the Dairy Board with the New Zealand Dairy Group and Kiwi Cooperative Dairies, Fonterra is not able to give new entrants different terms from its existing shareholding farmers. The High Court ruled the farmers qualified to become fully-fledged shareholders and Fonterra misled them about their ability to buy more shares.
The appeal court upheld that decision, rejecting Fonterra's assertion that the agreements were supply contracts without share backing and that they should have been covered by DIRA.
"We agree with the Judge that the main reason for imposing the less favourable terms was to placate existing shareholders who might have harboured concerns that the respondents were being allowed to 'waltz back in'," the judgment says. "It is difficult to escape the Judge's conclusion that they were imposed as a penalty for the respondents' perceived disloyalty."
The case was split by consent in the High Court, with questions about reliance and loss delayed for later adjudication, so the lower court did not award costs.
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