Fonterra must pay France’s Danone $125 mln over botulism scare

WELLINGTON, New Zealand (UPDATED) – New Zealand dairy giant Fonterra was ordered to pay French rival Danone NZ$183 million ($125 million) in damages Friday, December 1, over a botulism scare that saw baby formula yanked from shelves around the world as a precaution.

The huge payout came after Danone sued over the 2013 issue, when fears about contamination in Fonterra-supplied ingredients forced global formula recalls, including Danone brands.

The French company look legal action in the New Zealand courts and at the Singapore International Arbitration Center, which administers UN trade rules.

The Singapore-based tribunal ordered the payout on Friday.

Danone has estimated the botulism scare cost it 300 million euros ($360 million) in operating profit and 370 million euros in sales.

It said the tribunal’s finding was necessary to hold Fonterra to account for the food safety failures that led to the crisis.

“Danone welcomes this arbitration decision as a guarantee that the lessons from the crisis will not be forgotten,” it said in a statement.

“Danone considers that this arbitration underscores the merit of its legal actions against Fonterra, including to champion the highest standards of food safety across the industry.”

Fonterra is a grouping of about 13,000 New Zealand farmers that accounts for approximately a 3rd of the world’s dairy exports.

The company said it was disappointed with the ruling, arguing it had limited liability under its supply agreement with Danone.

But it said the award would not affect its bottom line as provisions had already been made.

“Fonterra is in a strong financial position and is able to meet the recall costs,” chief executive Theo Spierings said.

Fonterra chairman John Wilson said there was limited scope to challenge the tribunal’s decision, making an appeal “highly unlikely”.

Danone said it was still evaluating its options regarding the separate legal action in New Zealand.

Dirty pipe

Fonterra announced in August 2013 that tests had found whey supplied by them was potentially contaminated with botulism, which can cause paralysis or death.

The suspect ingredient eventually turned out to be a non-toxic bacteria that was blamed on a dirty pipe at a North Island processing plant.

But it took more than 3 weeks to clarify the issue and in the meantime retailers had no choice but to pull potentially tainted formula from the shelves.

The scare dented New Zealand’s “clean, green” reputation, particularly in the lucrative Chinese market, where Kiwi dairy was widely regarded as the gold standard.

Fonterra was accused of mishandling the crisis by releasing information too slowly and then giving out incomplete data when it finally went public.

The then prime minister John Key ordered government officials to oversee Fonterra’s response and personally travelled to China to apologize for the scare.

Spierings admitted “mistakes were made”, but said Fonterra had always put customer safety first and had revamped its crisis management systems.

“While there was never any risk to the public, we have learned from this experience,” he said.

“As a result (we) have made improvements to our escalation, product traceability and recall processes, and incident management systems.”

Spierings said the cooperative believed its liability to Danone was capped at about NZ$11 million under their supply agreement.

Following the announcement, it cut its forecast dividend to 35-45 cents a share for the current financial year, down from 45-55 cents.

Fonterra in September announced an annual net profit of NZ$745 million ($509 million), down 11% on the previous year. – Rappler.com