Fonterra within its rights

Fonterra has told around 1,000 of its suppliers that they will be paid "61 days following the end of the month within which the invoice is dated." Suppliers say this means, in some cases, they will have to wait 90 days from invoice to payment.

Suppliers usually define payment terms in their standard terms of trade.

The most common payment term used by suppliers is for payment to be due on the 20th of the month following the date of invoice. To put Fonterra’s proposed payment term in context, the average invoice payment time in New Zealand, according to credit information bureau Dun & Bradstreet, is currently 35.8 days.

Standard terms of trade that apply to consumers are subject to constraints imposed by the Fair Trading Act 1986, the Consumer Guarantees Act 1993, and the Credit Contracts and Consumer Finance Act 2003, among others. The Fair Trading Act, in particular, prohibits the enforcement of unfair contract terms in standard form consumer contracts.

Parties to commercial transactions are given less protection under those Acts, and have greater freedom to contract out of them. The policy behind the differences in protection is straightforward: in a commercial transaction the parties are more likely to understand the contracts they enter, and the parties are better able to negotiate terms of trade and payment terms between themselves.

Renegotiations of terms of trade between commercial parties are not uncommon; especially where the trading circumstances of the parties has changed.

In fact, reports about Fonterra’s proposed payment terms have included examples where suppliers were able to negotiate with Fonterra to remain on 30 day payment terms. If other suppliers decide not to trade with Fonterra as a result of the change, then that is their prerogative.

Provided that Fonterra’s terms of trade include a right for Fonterra to change those terms, Fonterra is not behaving unlawfully by “renegotiating” its payment terms.

The strongest criticism of Fonterra has been that, even if Fonterra’s actions are lawful, they are commercially unethical.

However, neither the Dairy Industry Restructuring Act 2001, which created Fonterra, nor Fonterra’s constitution, requires Fonterra to behave as a good corporate citizen or to offer favourable terms of trade to its suppliers.

First and foremost, Fonterra has a responsibility to its shareholders and to farmers to reduce its costs. Indeed, this reasoning was put forward by the company to justify the proposed payment terms. In the context of significant redundancies within Fonterra, a review of costs and payment structures is a logical and commercially sensible step for the company to take.

For Fonterra, the new payment terms make good business sense.

The content of this document is necessarily general and readers should seek specific advice on particular matters and not rely solely on this document. 

If you would like more information on any of the topics in this document, please contact your usual Auld Brewer Mazengarb & McEwen adviser. 

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Sean Maskill