OPEN COUNTRY CHEESE COMPANY V FONTERRA CO-OPERATIVE GROUP LIMITED HC AK CIV 2008-404-000727

OPEN COUNTRY CHEESE COMPANY V FONTERRA CO-OPERATIVE GROUP LIMITED HC AK CIV 2008-404-000727 26 February 2008IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY CIV 2008-404-000727BETWEEN OPEN COUNTRY CHEESE COMPANY LIMITED Plaintiff AND FONTERRA CO-OPERATIVE GROUP LIMITED Defendant Hearing: 26 February 2008 Counsel: J A MacGillivray for Plaintiff S E Fitzgerald and D C E Smith for Defendant Judgment: 26 February 2008 Reasons: 13 March 2008REASONS FOR JUDGMENT OF WILLIAMS JThis judgment was delivered by Justice Williams on13 March 2008 at 2:00pmpursuant to Rule 540(4) of the High Court Rules Registrar/Deputy Registrar Date:A An interlocutory injunction was made on 26 February 2008 in the terms appearing in paragraph [1] of this judgment.B This proceeding is to be listed for mention in the Duty Judge's list onMonday, 17 March 2008 to monitor compliance with the injunction and to make appropriate timetabling arrangements for the claim. C These Reasons for Judgment are to be delivered to counsel in unbowdlerized form for distribution to the parties, their solicitors and counsel (including in-house counsel). Within 3 working days from delivery, counsel are to advise what details of the judgment require to be deleted from the publicly- available copies to protect commercial confidentiality.____________________________________________________________________Judgment[1] At the conclusion of the hearing on 26 February 2008 of this application for an interim injunction, orders were made in the following terms: a) Fonterra Co-operative Group Limited, the defendant, is to supply the plaintiff, Open Country Cheese Company Limited, with raw milk at the regulated price under the Raw Milk Supply Contract between the parties throughout the month of March 2008 as if Open Country's forecast for March 2008 sent on 17 January 2008 was a valid forecast under clause 4.1 of the contract. b) That order was on the basis that, under the plaintiff's undertaking as to damages, the supply of milk by Fonterra to Open Country at the regulated price was to be without prejudice to the plaintiff's exposure to the possibility of being required to pay a higher price than $6.28 per kg of milk solids as a result of the final determination of the matter. c) The order was also made on the basis set out in para 4.5 of the submissions for Fonterra, namely that the defendant does not take theposition that if there were any over charge it could not be claimed back from Fonterra as a result of clause 12.1 of the contract. [2] Reasons for the making of those orders were to follow in due course. These are those reasons.Facts[3] As Ms Fitzgerald, leading counsel for Fonterra, said, this application for an interim injunction was about the price of milk to be supplied by Fonterra to Open Country during March 2008, milk that amounts to about 3.5% of Open Country's annual milk supply. [4] Fonterra was formed in 2001 through amalgamation of a number of large companies in the dairy industry, notably the New Zealand Dairy Board. The amalgamation was accomplished through the passage of the Dairy Industry Restructuring Act 2001 (the "Act"). The matters in issue in this claim also involve the Dairy Industry Restructuring (Raw Milk) Regulations 2001 (the "Regulations"). [5] Fonterra handles about 95% of New Zealand milk production, with its shareholder suppliers operating about the same percentage of all New Zealand dairy farms. It controls about one third of the world dairy trade. [6] Despite Fonterra's dominance in the New Zealand dairy market, a number of independent dairy operators compete with it. Open Country is one. From beginning production in 2004 of cheese, butter, oil, milk and whey powders for domestic and export sales, it now is processing about 170 million litres of raw milk annually with about 50 million litres – approximately 0.35% of Fonterra's annual raw milk intake – expected to be sourced from Fonterra in the current year. The balance Open Country obtains from over 100 local suppliers contracted to it. [7] Fonterra does not supply milk to competitors such as Open Country as an act of largesse. Section 115 of the Act gives the Governor-General power to make regulations requiring Fonterra to supply raw milk and other goods and services toindependent processors and permits it to require those processors to give it advance notice of their requirements in that respect. And in the Regulations, Reg 4(1) obliges Fonterra to supply raw milk to independent processors with R 5 giving Fonterra power to require such processors to "estimate the quantity of raw milk to be supplied". Regulation 8 gives the parties power to agree on the price of the raw milk and R 10 empowers Fonterra to require independent processors to contract to buy up to 80% of their estimated quantity and independent processors the power to require Fonterra to contract to sell up to 120% of that estimate. [8] Pursuant to those enabling provisions, Fonterra and Open Country entered into a raw milk supply contract from 1 September 2004 for the supply of raw milk at a regulated price, initially $3.41 per kg of milk solids for an estimated 50m litres. There may be a dispute between the parties as to the terms of the contract currently applying, but it was agreed the injunction application should be decided on the terms of the contract just mentioned. Most of the detail of that contract is irrelevant to the injunction application but cl 3 requires the parties to buy and sell that volume of raw milk and cl 4 relevantly provided:"4.1 Three Month Forecasts: On the first day of each month, the Purchaser must provide Fonterra with a separate forecast in relation to each Delivery Point of the Volume of Product it wishes to purchase no each day of the month that is the third month ahead of the current month. For example, on 1 August the purchaser must provide a Three Month Forecast for each day from 1 October to 31 October. 4.3 Weekly Estimate: The Purchaser will provide Fonterra with a separate forecast in relation to each Delivery Point ("Weekly Estimate") of the Product it anticipates it is likely to require on each of Sunday, Monday, Tuesday, Wednesday, Thursday, Friday and Saturday, by Thursday of the previous Week. 4.4 Limit on Weekly Estimate: A Weekly Estimate for a day must be within the range of 40% less to 40% more than: (a) (b) the Three Month Forecast given for that day in accordance with clause 4.1 in relation to the corresponding Delivery Point.To the extent that a Weekly Estimate is not within that range, Fonterra has no obligation to supply Product in relation to that Weekly Estimate. Where Fonterra chooses to supply Product, the Market Price will apply in accordance with clause 9.2(c). 4.2 Good faith and best forecasts: The Purchaser shall ensure that any forecast or estimate made in accordance with this agreement is made in good faith, on reasonable grounds with due care and consideration of all relevant factors at the time of forecasting or estimating and accurately states the Purchaser's anticipated requirements for Product from Fonterra."[9] Clause 9.1 says the price of the "regulated price" applies unless the "market price" applied under clause 9.2, a provision that applied to all raw milk supplied by Fonterra in certain specified situations. [10] In fact, the practice adopted by Open Country from the inception of the contract was to give Fonterra the three month forecast plus the weekly estimates specifying the required delivery and address for each day of the weekly forecast. That was habitually sent on the Thursday of each week.. Open Country's chief executive officer, Mr Walters, made the point the three month forecast could only ever be a "best endeavours" estimate and a rough guide. He made the point that even the weekly forecast may vary between 80% - 100% of the weekly estimate. By way of example, he said if Open Country's three month forecast was for 100 litres of raw milk on a particular day, it was entitled to specify 140 litres for that day in the weekly estimate and call for 168 litres with Fonterra being obliged to supply. Similarly, the same requirement in the three month forecast could be reduced to 60 litres in the weekly estimate followed by an order for only 48 litres and Fonterra had no right to complain. He therefore took the view that the three month forecasts were of limited utility for Fonterra's planning purposes. [11] Taking a much broader view however, Mr Rich, Fonterra's Business Manager – Liquids, said estimates by independent producers are critical for the defendant's planning, forecasting and operation. [12] Mr Rich detailed Fonterra's reliance on the three month forecasts and their importance to Fonterra for its planning and production processes. He made the point that Fonterra's business required it to have estimates as accurate as possible fromsuppliers and those whom it supplies to ensure maximum efficiency of production across its range of products ranging from quotidian detail such as which tanker should be directed to which farm to uplift which quantity of milk through to Fonterra's significant number of production facilities and products to its ability to produce and sell, both within New Zealand and overseas to its vast range of buyers. [13] Mr Rich supported the need for timeous forecasts by reference to a forecast Fonterra received from Open Country on 9 August 2004, eight days later than required by contract, in response to which he emailed his counterpart in Open Country saying:"Thanks for the forecast. I was starting to get worried that you had missed the deadline as this could have led to repercussions re: price that we charge (as no doubt you are aware). It is important for our planning that the forecasts are received in time. This is particularly so for customers such as Open Country, who take large volumes."[14] It is unnecessary to recount further detail as it is not difficult to accept that a large corporate such as Fonterra needs to run its business as efficiently as it can and relies, amongst other things, on a significant body of data, including supply estimates from competitors such as Open Country, to achieve that. [15] Mr Walters detailed Open Country's three monthly forecasts from 27 December 2006 onwards. Some of the estimates varied widely due to Open Country commissioning new plant. On Thursday 14 June 2007, Open Country overlooked providing Fonterra with a milk order form, that being sent on Monday 18 June after a Fonterra enquiry. It erroneously referred to the three monthly forecast as being for June 2007 instead of August. Fonterra took no issue with the errors or with other clerical errors or omissions during 2007. [16] The critical oversights which led to the injunction application arose from the following circumstances. [17] On 27 December 2007 Open Country sent Fonterra a milk order form dated 20 December 2007 referring to a three monthly forecast for "February 2007" (though listing 29 daily raw milk volumes). Fonterra neither commented on the clerical error or the absence of an estimate for March 2008.[18] Similarly, on 3 and 10 January 2008, Open Country's milk order forms contained three monthly forecasts also said to be for "February 2007". Fonterra made no comment. [19] On 17 January 2008 Open Country personnel noticed the three monthly forecasts had not been updated to include March 2008 and forwarded the corrected milk order form that day. [20] That led to Fonterra writing to Open Country noting its three month forecast for March 2008 had only been received on 17 January 2008 with the prior weekly orders having omitted the March forecast. That had been due no later than 1 January 2008 and continuing:Therefore, as per clause 6(2)(a) of the Regulations and clause 4.1 of the Fonterra Raw Milk Supply Contract, Fonterra is not required to provide Raw Milk at the Regulated Price to Open Country Cheese during the month of March 2008. Should Open Country Cheese still wish to purchase Raw Milk from Fonterra during March 2008, this can be provided at the prevailing Market Price.[21] Open Country responded on 5 February 2008 objecting to Fonterra's change of stance appearing in the 24 January 2008 letter, asserting failure to supply by Fonterra other than at the regulated price would constitute a breach of contract and suggesting an amended future procedure to avoid such situations. [22] Mr Rich replied the same day restating that "Fonterra will not be supplying raw milk to Open Country Cheese during March 2008 at the regulated wholesale milk price" and that "raw milk is no longer available at the market price during this period". [23] Open Country responded on 8 February threatening an injunction for the damage to its reputation if Fonterra maintained its stance, making the point that Fonterra's action would lead to Open Country breaching its contracts as about half its March 2008 raw milk requirements would be denied it. [24] The impasse between the parties was not advanced in subsequent correspondence. These proceedings were commenced in consequence, claimingFonterra's action amounted to anticipatory breach of contract or breach of implied term, breach of its supply obligation to Open Country under the Regulations plus a cause of action based on an allegation of Fonterra taking advantage of its market power and in breach of s 36 of the Commerce Act 1986. [25] However, an important addition to that review of the correspondence is that late on 24 February 2008, the evening before the injunction hearing, Fonterra's solicitors wrote an open letter to Open Country's solicitors saying:"2. Fonterra has not yet determined a new "Market Price" for the quarter commencing 1 March 2008. Fonterra is still considering whether it will amend the Market Price for that quarter (in the context of clause 9.3 of the milk supply contract) and if so, what any such amended Market Price will be. 3. Fonterra has, however, instructed us to inform you of the price it will supply milk to OCC for the month of March 2008. That is a price of $8.50 per kilogram of milk solids. Fonterra is willing to supply at this price irrespective of the outcome of the hearing of your client's application for an injunction. This offer to supply is therefore made on an open basis and is "fixed", in that it is the price Fonterra will supply milk to your client even in the event your client does not succeed on its application for an injunction."[26] Most of the balance of the evidence consisted of affidavits supporting the importance to Fonterra of accuracy and timeliness in the independent producer estimates and the financial and other impact on Open Country of Fonterra refusing to supply any raw milk to Open Country during March 2008 or supplying such product at a price other than the regulated price. [27] Of that material only a brief review of the financial evidence is necessary. [28] Fonterra's supply of raw milk to Open Country in March 2008 would be about half the latter's milk purchases for the month. The total would be about 7% of its annual production. Of the approximately 1,700 tonnes of cheese and whey protein concentrate it intends to manufacture during the month, it already had confirmed orders for 1,071 tonnes grossing marginal profit of about $1.7m from that production. That gross profit, if lost, could significantly affect Open Country's annual profitability.[29] Supply to Open Country by Fonterra at market price would have been significantly more expensive. The market price from 1 December 2007 to 29 February 2008 was $10.28 per kilogram of milk solids, $4.00 per kg higher than the regulated price. Had Open Country been forced to buy raw milk from Fonterra at the market price, the difference based on the market price to 29 February 2008, would be about $2.56m. Accepting the raw milk price proposed in the open letter - pitched at about the mid point between the former regulated price and the market price – would have a significant impact on Open Country's financial position. [30] Mr Walters contended that, given Fonterra's size, requiring it to supply Open Country during March 2008 at the regulated price as opposed to the open letter or market price would have little overall impact on the defendant. [31] Mr Rich and other Fonterra witnesses suggested Open Country's evidence overstated the fiscal impact on the plaintiff of being required to buy the stipulated amount of raw milk from Fonterra at the open letter or market price. They suggested Open Country could obtain its raw milk requirements from other suppliers. They pointed to public statements by Open Country representative that the plaintiff was no longer dependent on "default milk". They said Fonterra has taken the stance it took in relation to Open Country with several other customers – and those customers have agreed to pay market price. [32] Fonterra supported its employees' views about the suggested overstatement by Open Country of the impact on its financial position of Fonterra's stance with an affidavit from an experienced accountant, a Mr Wylie, who said Open Country should be able to portray, to the market or others, any decline in its financial circumstances as a "one off" event.Submissions[33] For Open Country, Mr MacGillivray submitted there was a serious question to be tried as to whether the late provision of Open Country's 17 January 2008 three month forecast entitled Fonterra to decline to supply or decline to supply other than at market price. The defendant's position could, he submitted, be protected by theplaintiff's undertaking as to damages but the consequences for Open Country, were an injunction not granted, were significant, certainly greater than the impact on Fonterra. [34] Mr MacGillivray submitted the contract did not entitle Fonterra to take the stance it has, no contractual provision made time of supply of the three month forecasts of the essence of the contract, there was no statement to that effect in any of the Fonterra correspondence and in any event, s 90 of the Judicature Act 1908 told against time being regarded as the essence of the contractual arrangements between the parties. [35] In his review of the facts, Mr MacGillivray pointed to the contractual variability built into the forecasts and contrasted the daily and weekly forecasts with the necessarily more imprecise three monthly estimates. At the worst for his client, Mr MacGillivray submitted Fonterra was obliged to supply Open Country with its raw milk requirements from 17 March 2008, three months after the 17 January estimate was forwarded. Thus the dispute related only to supply by Fonterra to Open Country of raw milk for a 17 day period. [36] He also pointed to Fonterra's obligation to supply independent producers under the regulations. [37] Mr MacGillivray made submissions on the implied term and Commerce Act causes of action – but accepted they had little weight in an interim injunction application. [38] Naturally, Mr MacGillivray submitted the status quo between these parties was the supply contract which it had operated, largely without difficulty, for a significant period and submitted the overall justice of the case favoured the making of an interim injunction given imbalance of financial impacts on the parties should such an injunction not be made. The case, he submitted, arose from a simple administrative error over the Christmas-New Year vacation period against the background of years of largely trouble-free daily and weekly supply.[39] Ms Fitzgerald argued that the terms of the contract between the parties and the supporting evidence showed that the timeous provision of forecasts was intended to be of its essence. [40] She emphasised the court's greater reluctance to make positive mandatory interim injunctions as opposed to injunctions preventing conduct. Courts need to have a "high degree of assurance" that, at the end of the case, a positive injunction would be shown to have been properly made before such should be granted (Locabail International Finance Limited v Agreoexport (the "Seahawk") [1986] 1 All ER 901, 906 citing Shepherd Homes Limited v Sandham [1971] Ch 340, 351). [41] In reliance on her submissions as to time being of the essence of the contract, Ms Fitzgerald submitted there was no serious question to be tried or "high degree of assurance" in this case. Alternatively, the course of conduct between these parties, particularly the 9 August 2004 email earlier cited, should have showed Open Country that timeous provisions of its forecast was of the essence of the contract. [42] The case, she said, was primarily about the price at which Fonterra would, or should be required, to supply raw milk to Open Country. She, of course, relied on the open letter and said that, if Fonterra were held to have supplied at more than was justified by the contract, it would agree that a claim for any such overcharge would not be denied by cl 12.1 of which reads:"12.1 Exclusion of Fonterra's liability: In no event will the measure of damages against Fonterra for any breach of this agreement include, nor will Fonterra be liable for, any indirect loss, consequential loss, loss of business, economic loss or loss of profits suffered by the Purchaser."[43] In reliance on the evidence, she, too, submitted Open Country had exaggerated the possible effect on its financial circumstances and banking arrangements of being required to purchase its raw milk requirements from Fonterra at greater than the regulated price.[44] The overall justice, she submitted, lay with Fonterra. No injunction should be granted.Discussion and decision[45] In view of the granting of the interim injunction at the conclusion of the hearing and having regard to the relatively narrow focus of the dispute between these parties, no extended discussion of the matter is now required. [46] Reduced to its essence, this is a case where, after a lengthy and relatively trouble-free business relationship between the parties - albeit a business relationship, statutorily imposed on Fonterra and conducted in accordance with the Regulations – Fonterra chose to take advantage of Open Country's error in its late provision of its raw milk requirements for one month, March 2008. Having initially refused all supply during that month, it was then prepared to supply at a price greater by nearly one third from that which had previously obtained. Either refusal of all supply or supply at the greater price would have had a proportionately much greater financial impact on Open Country than on Fonterra. That is particularly the case as Fonterra's dominance in the market was likely to have made it difficult if not impossible for Open Country to source its raw milk requirements for March 2008 elsewhere, whereas it may well be the case that, had Fonterra maintained its original stance, it would have been able to process profitably the raw milk it would otherwise have had to supply to Open Country or, if the open letter had been accepted, would have been able to sell that milk to Open Country more profitably than formerly. [47] Those matters have significant weight in considering the criteria against which interim injunction applications are commonly assessed. [48] It is also noteworthy that previous administrative errors or oversights on Open Country's part were resolved between the parties in a pragmatic and commercially sensible fashion, not provoking the response to Open Country's administrative errors in late January 2007–early January 2008.[49] Thought it is not difficult to accept that estimates of purchases by independent producers which are accurate as can be achieved is important to Fonterra's forward planning and its efficient deployment and utilisation of its raw material, factories, staff and fulfilment of its sales contracts, it is plain that the longer before the event such forecasts and requirements are furnished, the more imprecise they must necessarily be. [50] Against that, Fonterra has argued that timeous provision of the three month forecast by independent producers such as Open Country is of the essence of the contract between them. But it needs to surmount both s 90 of the Judicature Act 1908 which provides that stipulations as to time in contracts are not generally of the essence of performance and the fact its contract with Open Country contains no provision on which it could argue that time of provision of the three month forecasts by Open Country was of the essence of the contract. Similarly, there is nothing in the Act or the Regulations which bears on that question. Even the daily and weekly requirements, as opposed to the three monthly forecasts, have significant built-in variations and the email of 9 August 2004, which Fonterra strongly emphasised, whilst emphasising the importance of the timeous provision of the three monthly forecast, nowhere suggested that Fonterra would be relieved from its obligations under the contract, either generally or for any month, where the forecast was late. Indeed, while Fonterra initially took the view it was entitled to refuse supply for March 2008 (or for the period 1-16 March 2008), there was no suggestion Open Country's error entitled Fonterra to end the supply contract in its entirety. [51] In all those circumstances, the court concluded that there was a serious question to be tried between the parties – principally arising out of the financial impact of refusal of supply or supply at a greater than regulated price – the balance of convenience favoured Open Country – principally for much the same reason – and there was every reason as part of the assessment of the overall justice of the case to require the status quo to continue, namely for Fonterra to continue to supply raw milk to Open Country for March 2008 at the regulated price, leaving the parties to recourse to the plaintiff's undertaking as to damages or Fonterra's financial strength should, ultimately, such be required.Result[52] The terms of the interim injunction granted on 25 February 2008 are therefore confirmed. [53] This proceeding should now be listed for mention in the duty judge's list onWednesday, 19 March 2008, to monitor compliance with the injunction and to make appropriate timetabling arrangements for the claim. [54] These reasons for judgment are to be delivered to counsel in unbowdlerized form for distribution to the parties, their solicitors and counsel (including in-house counsel). Within three working days of delivery, counsel are to advise what details of the judgment require to be deleted by Williams J from the publicly-available copies to protect commercial confidentiality. ..WILLIAMS J.Solicitors: Tompkins Wake, P O Box 258, Hamilton Russell McVeagh, P O Box 10 214, WellingtonCopy for:Case Officer: Mel Libre, High Court Auckland