The first case decided under the Dairy Industry Code of Conduct (Code) provides important guidance to milk processors on the use of minimum volume requirements in “non-exclusive” milk supply agreements, and when processors can unilaterally terminate a milk supply agreement for material breach.
As mentioned in our previous paper ‘It’s no use crying over spilt milk as the ACCC raises the stakes for dairy processors’, the Australian Competition and Consumer Commission (ACCC) commenced proceedings against Lactalis Australia Pty Ltd (Lactalis) in July 2021, alleging its 2020/2021 milk supply agreements with farmers breached the Code.
In a win for the ACCC, the Federal Court found that Lactalis breached the Code by:
- failing to publish its milk supply agreements for 2020/21 on its website by the Code’s deadline of 1 June 2020. Lactalis had required farmers to complete and submit a form on its website, after which the agreements would be emailed to the farmer; and
- including provisions in the milk supply agreements that allowed Lactalis to terminate the agreements in circumstances that did not amount to a material breach. Namely, if the farmer engaged in any “public denigration of processors, key customers or other stakeholders”, as such a breach lacked the significance to be considered material.
However, the proceedings weren’t a complete success for the ACCC, as it failed to convince the Court that Lactalis had breached the single document rule. The Court also wasn’t convinced that Lactalis had breached its obligations under the Code to publish non-exclusive milk supply agreements, a decision which has flagged the opportunity for processors to take a more flexible approach to their non-exclusive agreements going forward.
Re-thinking your non-exclusive milk supply agreements
The ACCC argued that the non-exclusive milk supply agreements published by Lactalis were not truly non-exclusive by reason of those agreements requiring farmers to supply a minimum of 90% of their milk volume to Lactalis. The ACCC argued that the 90% minimum supply volume requirement had the practical effect of prohibiting farmers from supplying milk to another processer by making it commercially unviable to supply 10% or less of their milk volume to any other processor.
The Federal Court rejected the ACCC’s view of Lactalis’ non-exclusive agreements. Instead, the Federal Court adopted a strict and literal approach to the meaning of “non-exclusive”, finding that the Code requires consideration of the “legal effect” of a non-exclusive milk supply agreement and not its “practical effect” on farmers. That is, the Code requires consideration of whether a non-exclusive agreement is expressly exclusive, and not whether it is effectively exclusive.
The Court held that the 90% minimum volume requirement in Lactalis’ agreements did not have the legal effect of “prohibiting” a farmer from supplying milk to another processer. Additionally, whether a farmer would be practically prevented from supplying 10% of their milk volume to another processor was a matter that may depend upon that farmer’s own perceptions of the costs and benefits of doing so.
Whilst the outcome of the Court’s decision is somewhat surprising, it appears to present a potential opportunity for processors to offer a non-exclusive milk supply agreement that imposes a minimum volume requirement based on a percentage of the farmer’s total milk supply, thereby giving the processor certainty of securing a proportion of the farmer’s milk even though the agreement is non-exclusive. We imagine this opportunity will be welcomed with open arms by processors who are currently experiencing fierce competition for milk supply.
Material breaches must be important or significant
In coming to its decision on the material breach provisions of Lactalis’ milk supply agreements, the Federal Court found that a breach will be material where it is important or objectively significant or substantial to both parties in the context of their agreement.
One of the issues that arose in respect of Lactalis’ material breach provision was that it extended to any “public denigration” and consequently lacked qualification, potentially allowing Lactalis to terminate for varied severities of conduct, including conduct that would not constitute a material breach.
Accordingly, when drafting the unilateral termination provisions of milk supply agreements, processors need to consider the effect of the farmer’s breach and whether that effect would be significant.
Do’s and Don’ts for your milk supply agreements
The Federal Court is yet to decide on penalties and injunctive relief. In the meantime, the Federal Court’s decision still provides important lessons for milk processors.
- Regularly review the material breach provisions of your milk supply agreements to check whether the circumstances specified are relevant and current.
- Consider the effect that each “material breach” by a farmer would have and whether that effect would be significant.
- Make sure that all the terms and conditions of each milk supply agreement are contained in a “single” document. A single document may be comprised of multiple parts, such as handbooks or manuals that are incorporated by reference.
- Publish your milk supply agreements on your website by the Code’s publication deadline (2pm AEST on 1 June for the next financial year) and ensure that they are readily accessible.
- Define a material breach to include circumstances that aren’t important or significant to the parties in the context of the milk supply agreement.
- Unilaterally change provisions of milk supply agreements, including those documents incorporated by reference.
- Enter a non-exclusive agreement that prohibits the farmer for supplying milk to another supplier outright.
If you have specific questions about this decision, please contact the Addisons Competition, Consumer & Antitrust team.