Reputational risk in business supply contracts
But sometimes you can cut those ties and end a contract. For example, global footwear company Adidas recently severed ties with Ye (formerly Kanye West), after he made a number of bizarre and hurtful anti-Semitic statements.
Time will tell what the fallout will be from this decision, but today let’s look at an example closer to home, which shows that it’s not always easy to cut ties with companies in your supply chain.
Canaan Farming Dairy vs. Westland Dairy Company
Canaan Farming Dairy is (as the name suggests) a dairy farm on the west coast. Canaan is owned by a trust with ties to the Gloriavale Christian community.
In May 2022, parts of the Gloriavale community got into disputes with the labor court for employing underage workers, although Canaan was not part of the judgment.
The labor court judgment led Canaan’s main milk buyer, Westland Dairy Company, to refuse to collect milk under a long-standing milk supply agreement with Canaan without actually terminating the contract. This is where the trouble started.
The milk supply agreement was obviously a crucial contract for Canaan. Without a buyer for his milk, the farms would not have been viable and the cows would have been difficult to replace (they had been part of a breeding program for 25 years). So Canaan went to the High Court to seek an injunction to stop Westland refusing his milk.
Westland argued that Canaan violated legal requirements (on the employment of minors) by producing the milk. Westland claimed this was a breach of contract, allowing Westland to refuse to collect milk.
However, Canaan argued that she was in fact now complying with employment laws. She even provided a commitment to the labor court, and there is no evidence that she violated this commitment.
Westland tried to argue that he would lose contracts with other companies by being associated with Gloriavale and underage employment issues. However, there was little evidence of this, but plenty of evidence of the loss Canaan would suffer if the milk was not collected (including the need to lay off 14 adult employees and the creation of potential animal welfare issues ).
It was simply a request for an injunction, so the parties did not provide large amounts of evidence. The judge was only determining whether there was a “serious question to be tried” and not determining who was ultimately right or wrong. So, with this disclaimer in place, what can we learn from the case?
Lessons from the case
Westland’s exercise of contractual discretion was a key issue. The contract stipulated that Westland could refuse to collect milk at its discretion if (among other things) Canaan breached legal requirements by producing the milk.
However, the Court found that the discretion was not unlimited and that Westland could not do whatever he wanted. As a legal principle, even if a contract says someone can make a decision “in their sole discretion”, that person cannot do so “arbitrarily, capriciously or unreasonably”.
Westland tried to argue that its customers were going to terminate contracts with Westland due to supply chain issues. Again, the actual evidence for this was weak – in one case it was just an email from a client attaching a newspaper article, saying “FYI”.
Westland also highlighted various planned legislative changes that would require companies to work to eradicate modern slavery and worker exploitation in their supply chains. The judge concluded that these “anticipated” concerns were not relevant to the contract Westland freely entered into.
Of course, this case was specific to its facts, and I only briefly summarized some interesting points. For more details, please read the case (you can search: Canaan Farming Dairy Ltd v Westland Dairy Company Ltd  NZHC 2524). And keep an eye out for what Westland and Canaan decide to do next.
Lessons for business
What does this case mean to you if you’re considering terminating a contract (or taking strong action) because your business partner did something nasty?
The first step is to always read the contract. And preferably have a good lawyer read the contract to advise you on what you can and cannot do. Don’t assume that having discretion to do something means you can just decide what you want.
You may need to be able to demonstrate that it was a reasonable decision to exercise this discretion. A good reminder that the words in a contract don’t always mean exactly what you think they might mean.
If you are considering establishing a business relationship with someone, ask yourself if your contract is adequate. You may need to add specific contractual triggers to protect yourself if the potential reputational risks are material to your business. The devil is always in the details, so it’s important to get it right or risk being stuck in a business relationship with someone you’d rather not associate with.
– Wade Pearson is a partner in the commercial team at the Gallaway Cook Allan law firm in Dunedin. This article is general in nature, so it should not be used as a substitute for legal advice.