Steel & Tube decision: Court of Appeal rules on sentencing and determining company's state of mind
18 May 2021
Steel & Tube, a major NZ steel producer, has pleaded guilty to 24 representative charges under the Fair Trading Act 1986 for false representations relating to seismic grade SE62 mesh.
In the District Court, the company was fined NZ$1,885,000.(1) After both the company and the prosecutor, the Commerce Commission, appealed to the High Court, the fine was increased to NZ$2,009,280.(2) Both parties were given leave to appeal the High Court decision to the Court of Appeal.(3)
A central issue on appeal was whether an individual employee's knowledge that the representations being made were false could be attributed to the company for the purposes of sentencing. The Court of Appeal's approach departed from that taken in both the District Court and the High Court.
Also at issue on appeal was the level of fine ordered. Although convictions under the Fair Trading Act are not uncommon, the Court of Appeal had not previously considered an appeal against a sentence imposed under said act.(4)
After the poor performance of certain types of building foundation in the 2011 Canterbury earthquake, the Department of Building and Housing required that steel mesh used in particular circumstances be of 'E' (earthquake) ductility class. In order to be designated as 500E, steel mesh must have particular characteristics and be sampled and tested in accordance with the relevant building standard.
Following this change, the company introduced E grade steel mesh products. The best seller in the range was SE62, which was sold as 500E grade mesh. Between 1 March 2012 and 5 April 2016, the company sold approximately 480,000 sheets of SE62 mesh at a premium over non-seismic mesh. However, the testing carried out by the company on the mesh failed to meet the building standards in four respects. As a result, it could not properly be classified as 500E grade.
Although the test results for the SE62 product had not met the 500E standard, the company represented that the product was 500E grade mesh on:
- test certificates;
- packing slips; and
- the company's website.
In some instances, the company also specifically represented that the mesh had been tested in accordance with the building standard. The company pleaded guilty to 12 charges relating to those representations.
A further 12 charges concerned representations that the mesh had been tested by an independent testing agency. A testing agency had tested the mesh in 2011 when the company had initially developed the product but had not tested the product subsequently sold by the company.
The company relied on a technical manager to develop the mesh and to ensure that it met the building standards. Although the manager held an NZ Certificate in Engineering, had spent 20 years in manufacturing and was a member of the committee which had developed the building standard, he was neither knowledgeable in metallurgy nor statistical analysis.
No one else in the company checked the manager's work and there were no internal or external audit systems to monitor compliance. The manager trained the staff who tested the mesh; those staff followed the processes that he prescribed but were not themselves familiar with the building standard. The manager adopted a testing process which differed from that prescribed in the building standards because he considered that certain requirements of the standards had negligible benefits, were unnecessary or provided less benefit than his preferred approach. Following the manager's retirement from the company in 2014, his practices were continued by his successor.
Attribution of state of mind
While some offences under the Fair Trading Act require mens rea, the offences for which the company was convicted were strict liability,(5) meaning that the state of mind of the company was not relevant to criminal liability. However, under the Sentencing Act 2002, a court must consider the applicable purposes, principles and factors of sentencing. An established principle of sentencing is that the sentence should reflect the "degree of culpability of the offender".(6) It is well established in New Zealand that the culpability of offenders under the Fair Trading Act is determined, in part, by the offender's state of mind, which is commonly categorised as either inadvertent, careless or wilful.(7)
On sentencing, the prosecutor submitted that the false representations were "deliberate knowing conduct by the company".(8) In making this submission, the prosecutor argued that, under Section 45 of the Fair Trading Act, the technical manager's state of mind should be attributed to the company.
Section 45(1) of the Fair Trading Act provides as follows:
Where, in proceedings under this Part in respect of any conduct engaged in by a body corporate, being conduct in relation to which any of the provisions of this Act applies, it is necessary to establish the state of mind of the body corporate, it is sufficient to show that a director, servant or agent of the body corporate, acting within the scope of that person's actual or apparent authority, had that state of mind. (Emphasis added.)
The issue in the District Court, High Court and Court of Appeal was whether Section 45(1) of the Fair Trading Act could be used to attribute the state of mind of the technical manager to the company for the purpose of sentencing. In essence, this turned on whether establishing the state of mind of the company was "necessary".
The District Court held that Section 45(1) was relevant only to sheeting home liability to a body corporate. Where, as in this case, the offences are strict liability, it will not be necessary to establish the company's state of mind and therefore Section 45(1) does not apply:
The whole purpose of s 45 is to ensure corporate offenders do not escape compliance with the FTA even in cases where the board or senior management has no direct knowledge of the offending conduct. It is not a mechanism that allows a prosecutor to avoid proper proof of an aggravating factor on sentence.(9)
The District Court went on to hold that the company's conduct was grossly negligent as senior management would have known of the non-compliance if the technical manager had been properly supervised.(10)
On appeal, the High Court considered that a trial (or entry of a conviction following a guilty plea) and sentencing are part of the same proceeding:
Accordingly, when a body corporate's state of mind is not a necessary element in relation to the first stage of a proceeding (proof of the offence) I find it hard to see why, in the absence of any specific reference in the FTA, this circumstance should change when it comes to the second stage of the proceeding (the sentencing).(11)
The High Court recognised that the state of mind of a company is "a necessary and relevant consideration" under the Sentencing Act but held that this "will not meet the necessity requirement of s 45(1) of the Act".(12) The High Court went on to categorise the state of mind of the company's board of directors and top-level management (attributable to the company) as "gross carelessness by omission" because it had failed to take any steps or put in place any procedures that may have revealed the false representations.
Court of Appeal
The Court of Appeal disagreed with the lower courts, holding that Section 45(1) of the Fair Trading Act applies for the purposes of sentencing. It concluded that it was necessary, within the meaning of Section 45(1), to establish the company's state of mind for sentencing purposes because Section 45(1) does not specify that attribution is limited to proving liability. Instead, it applies whenever it is necessary to determine a corporate's state of mind. When charges have been laid under the Fair Trading Act, a court must both determine liability and fix the appropriate penalty. When determining the appropriate penalty, the state of mind of the defendant is "an orthodox consideration" as it informs the court's assessment of the gravity and culpability of the offending. The Court of Appeal concluded that, if a company's state of mind "materially affects sentence, then it is a matter of necessity that the Court should establish it".(13)
The Court of Appeal then considered how far attribution should extend for sentencing purposes and concluded that, while Section 45(1) provides that it is "sufficient" to show that a relevant director, employee or agent had a given state of mind, a court may inquire further and should also consider the state of mind of others including, for example, the state of mind of senior management.(14)
Level of fine
In the District Court, after considering the sentences imposed in other cases, the judge adopted a global starting point of NZ$2.4 million for the charges relating to the representations about the mesh's compliance with standards and NZ$600,000 for the independent testing representations. The judge then made a totality adjustment, reducing the global starting point to NZ$2.9 million, and then applied a 35% reduction from that sum to reflect the company's remorse, cooperation, remedial action and guilty pleas, resulting in a total fine of NZ$1.885 million.
Offending under the Fair Trading Act is usually categorised as inadvertent, careless or wilful for the purposes of sentencing. In this case, the High Court proposed a new approach to sentencing under the act, suggesting that:
- inadvertent misrepresentations might attract sentences of up to one-third of the maximum fine;
- careless misrepresentations might attract sentences of between one-third and two-thirds of the maximum fine; and
- deliberate representations might attract sentences of between two-thirds or more of the maximum fine.
The High Court held that:
in broad general terms a starting point for inadvertent misrepresentations might be up to 33.3 per cent of the maximum fine, careless misrepresentations might be between 33.3 per cent and 66.7 per cent of the maximum fine and deliberate misrepresentations from 66.7 per cent upwards. There may also be room for some overlap between these bands. For example, gross carelessness may fit somewhere between the second and third band. Recklessness may also fit in this area. Further adjustment of the chosen starting point will then be required to accommodate other aggravating and mitigating features of the offending.(15)
The High Court adopted a starting point of 42% of the maximum fine (which was the lowest starting point proposed by the commission and which the judge believed was available in the circumstances) rather than the 33% starting point adopted in the District Court. After including proportionately similar reductions as the District Court and a further reduction for totality, the resulting total fines were NZ$2,009,280.
Court of Appeal
The Court of Appeal observed that there are many factors that must be considered when sentencing under the Fair Trading Act, with state of mind being just one factor.(16) While noting that its own decision was "not a guideline judgment", the Court of Appeal indicated that the tariffs proposed in the High Court should not be used.(17) The court made its own assessment before considering whether the sentence substituted in the High Court was manifestly excessive or inadequate.(18)
Although the independent testing representations were highly misleading, the representations as to compliance with the appropriate standards, including the NZ Building Code – although intentional – were not wilful or deliberate in the sense that the manager had acted with the intent to mislead or deceive. In respect of the latter representations, the court drew a distinction with cases in which a trader knowingly passed its product off as something else or deliberately duped consumers about their rights. Here, the court held, the manager had believed that the mesh complied with required chemical, mechanical and dimensional specifications. The compliance failures were explained by his belief that his testing processes were equivalent or superior to those prescribed by the relevant standard. He had not acted for commercial gain or for the purpose of producing mesh of lower quality.
In respect of the independent testing representations, the Court of Appeal agreed with the District Court that they were knowing misrepresentations.(19) The court also considered:
- the (lack of) knowledge of the company's board and senior management of the offending;
- the impact on consumers and other readers;
- the extent of any commercial gain or benefit from the offending; and
- previous comparable cases.
After these considerations, the court adopted a global starting point of NZ$1.5 million for the compliance representations and NZ$900,000 for the independent testing representations. This produced an overall starting point of NZ$2.4 million, before consideration of all of the aggravating and mitigating features of the offending.(20) The court applied the 35% reduction made by the District Court judge, considering Steel & Tube's remedial action, cooperation with the commission and its entry of early guilty pleas. No reduction for totality was made. The court found that the sentence substituted in the High Court was manifestly excessive and imposed a total fine of NZ$1,560,000.(21)
The Court of Appeal's decision provides helpful guidance on sentencing under the Fair Trading Act as it is the first decision of its kind by said court. While the tariff approach to sentencing is used for some criminal offences, it has not previously been proposed or adopted in the fair trading context.
The Court of Appeal made clear that the decision was not a guideline judgment and declined to establish sentencing bands (although the court made it clear that those proposed by the High Court should not be used).
(1) Commerce Commission v Steel & Tube Holdings Ltd  NZDC 21579.
(2) Commerce Commission v Steel & Tube Holdings  NZHC 2098; Commerce Commission v Steel & Tube Holdings Ltd  NZHC 2209.
(3) Commerce Commission v Steel & Tube Holdings Ltd  NZCA 39.
(4) Commerce Commission v Steel & Tube Holdings Ltd  NZCA 549.
(5) Fair Trading Act 1986, Sections 10 and 13(e).
(6) Sentencing Act 2002, Section 8.
(7) Commerce Commission v Noel Leeming Ltd, HC Christchurch AP139/96, 21 August 1996.
(8) Commerce Commission v Steel & Tube Holdings Ltd  NZDC 21579 at .
(9) Id at .
(10) Id at  to .
(11) Id at .
(12) Id at .
(13) Id at .
(14) Id at .
(15) Commerce Commission v Steel & Tube Holdings, above Endnote 2, at .
(16) Commerce Commission v Steel & Tube Holdings Ltd  NZCA 549, at .
(17) Id at .
(19) Id at  to .
(20) Id at  to .
(21) Id at .