For the first time ever, the Federal Court has found a large dairy processor to be in breach of the Dairy Code of Conduct. This article details the Australian Competition and Consumer Commission’s allegations and which allegations were upheld by the Federal Court. This case should serve as a timely reminder for dairy processors to review their compliance with the Code.
What is the Dairy Code of Conduct?
The Dairy Code (the Competition and Consumer (Industry Codes—Dairy) Regulations 2019 (the Code) commenced on the 1st of January 2020 and aims to regulate both the conduct of dairy farmers and that of dairy processors and businesses who buy raw milk from those farmers. The Code seeks to minimise the power imbalance which currently exists between dairy farmers and large processors and the main mechanism it uses to do so is to regulate the milk supply.
In short, the Code provides that:
- Processors and farmers must deal with each other in good faith
- Processors must only purchase milk under milk supply agreements which are in writing and meet the key requirements, including:
- Specifying a minimum price paid for the milk
- Ban retrospective cuts to milk price
- Are contained within a single document
- Specifying the quality and quantity requirements (including testing procedures)
- Outlining circumstances whereby the processor can unilaterally terminate the milk supply agreement (this can only be done where there is a ‘material breach’ by the farmer)
- For every exclusive milk supply agreement published by the processors, they are also required to offer a non-exclusive supply option to farmers
- Large processors (i.e. those who have an annual aggregated turnover greater than $10 million in the previous financial year) are required to publish on their website standard forms of milk supply agreements on or before 2pm on 1 June each year
- Farmers and processors are required to keep written records of milk supply agreements (including any agreement variations/terminations) and other specified records for 6 years.
So what happened in this case?
In this case, the Australian Competition and Consumer Commission (ACCC) pursued Lactalis Australia Pty Ltd (owner of well-known dairy brands such as Pauls, Oak, Vaalia and Ice Break) for a number of alleged breaches of the Code. However, the ACCC was not successful in every one of its allegations.
Justice Derrington held that Lactalis had breached the Code through:
- Failing to publish their milk supply agreements on their website by the 1 June 2020 deadline. The agreements were available via a web portal that required farmers to ‘sign-up’; however, this was found to be insufficient.
- More importantly, Lactalis published and entered into agreements that allowed Lactalis to terminate such agreements for non-material breaches. Under such agreements, any ‘public denigration’ by farmers of processors/clients (which would be unlikely to be material breaches of the agreement) could result in termination. This is not permitted by the Code.
However, Justice Derrington did not agree with the ACCC allegation that the non-exclusive supply provisions were breached by requiring 90% supply of the farmers’ monthly milk production. Lactalis was also found to have not breached the requirement to have its milk supply agreement in one single document.
Penalties have yet to be determined but this case demonstrates the lengths the ACCC is prepared to go to in order to enforce both technical requirements of the Code (such as publishing requirements) as well as the more important elements, such as termination rights.
Takeaways for Businesses
- The successful enforcement action serves as a timely reminder for all dairy processors that they must comply with the Code when purchasing milk from dairy farmers, or else they may be liable for significant financial penalties.
- Despite the Code’s relative infancy, the ACCC has shown a preparedness to pursue and seek punishment for non-compliance; having also taken action against other companies for breaches of the Code, resulting in infringement notices.
- It is now clear the Federal Court is also prepared to punish breaches of the Code by large dairy companies.
- To avoid liability for financial penalties and potential enforcement action, it is strongly recommended that dairy processers review their milk supply agreements prior to upcoming milk seasons to align with Code requirements, as well as ensuring that publishing deadlines are met.
If you would like an agreement reviewed for compliance with the Dairy Code of Conduct, please feel free to contact KHQ Lawyers through food@khq.com.au.
This article was written by Matthew Hamblin (Lawyer) and Charles Fisher (Principal Solicitor).
