Danone to sue New Zealand's Fonterra over baby formula recall

PARIS (REUTERS) - French food group Danone said in a statement it will start legal action against New Zealand dairy exporter Fonterra following a false alert that sparked the recall of infant formula.

Danone said it is initiating proceedings in the New Zealand High Court, as well as arbitration proceedings in Singapore to obtain compensation for the harm it has suffered.

It is also terminating its existing supply contract with Fonterra and will make any further collaboration contingent on a commitment by its supplier to full transparency and compliance with Danone's food safety procedures.

In August, Fonterra said it had found a potentially fatal ingredient contained in a range of products sold by a number of multinational companies.

After recalls were issued across nine countries including China and Malaysia, the food safety scare turned out to be a false alarm because the ingredient was found to contain a less harmful bacteria.

Danone - the world's largest yoghurt maker - has said it is seeking full compensation for what it says were 350 million euros (S$605 million) in lost sales following the recall of its infant formula products in Asia and New Zealand.

The two sides started negotiations in October to try to resolve the dispute.

In October, Danone said it was taking longer than expected to recover from the recall of high-margin infant formula and cut its sales, profitability and free cash flow goals for 2013.

Baby food accounts for 20 per cent of Danone's revenue, second only to its dairy business, and Asia, notably China, is a key growth market for the group at a time of sluggish demand in Europe.