Increased penalties for regulatory offences led to a Court of Appeal review of sentencing rules for corporate offenders. Harshness of fines now hinge less on failures of managerial oversight and more on the direct actions of individual employees getting a business into legal trouble.
A two million dollar Fair Trading Act fine imposed on Steel and Tube Holdings Ltd was reduced on appeal to $1.56 million. A senior employee testing steel mesh to earthquake standards thought his testing protocols were as good as prescribed testing when they were not.
Holding a corporate liable for criminal activity faces philosophical problems; a corporate has no physical existence, it is an artificial legal construct. Courts get around the problem with a crude analogy; a corporate is like a human. Management are the brain; staff the hands. Determining penalties for regulatory offences, courts have usually looked at management’s role. Did management specify clear operating procedures; was implementation of these procedures checked? Wrong question, the Court of Appeal said. Look first at the employee’s state of mind when breaking the rules; second, look at the company’s systems and compliance culture.
The Commerce Commission took legal action against Steel and Tube over steel mesh sold between 2012 and 2016 labelled as SE62. The ‘E’ in SE62 signalled the mesh was better able to maintain strength when stretched during earthquakes. Steel and Tube admitted liability. The problem lay with a former senior technical staff member, it said. Unbeknown to management, the staff member utilised his own protocols for strength testing, sending only a few samples for independent testing and then attaching copies of an independent test label to all SE62 mesh sold.
The High Court said management was ‘grossly careless’ for not ensuring its prescribed testing process was audited. Culpability lay with management; reflected in a two million dollar fine.
Start first with the senior technical staff member’s state of mind, the Court of Appeal said. He believed the SE62 mesh tested using his protocols did comply with regulatory standards; there was no deliberate or wilful attempt to pass off non-seismic mesh as earthquake grade. But, the staff member did knowingly misrepresent SE62 as being independently tested where independent certification labels were attached to product not in fact tested independently.
Steel and Tube management could be excused if this was an isolated instance, the Court of Appeal said. But given the size of Steel and Tube’s operations and the fact mesh mislabelling continued for several years meant the level of fine should reflect management’s failure to properly audit testing procedures.
In reducing the fine, it was not a case where a business knowingly passed off its product as something else or deliberately duped consumers about their rights, the Court of Appeal said. Steel and Tube’s offending as a corporate was misguided, rather than deliberate.
Commerce Commission v. Steel & Tube Holdings Ltd – Court of Appeal (9.11.20)
20.172