England and Wales High Court (Administrative Court) Decisions

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
THE ADMINISTRATIVE COURT

		Royal Courts of Justice Strand London WC2A 2LL
		13th March 2007

1. MR JUSTICE MITTING: Royal Mail Plc applies under section 36 of the Postal Services Act 2000 to quash a penalty of £9.62 million imposed on it by notice issued by the Postal Services Commission on 24th August 2006 for breaches of conditions of the licence under which it was empowered to provide a universal postal service within the United Kingdom, granted on 21st March 2001.
2. The sole ground of appeal is that the imposition of the penalty was not within the powers of the Commission under section 30 of the Act. The penalty was imposed for an admitted failure by Royal Mail to comply with its own procedures for safeguarding mail against loss, theft and damage. The challenge is solely as to the amount of the penalty although, if Mr Beloff QC's submissions are correct, the consequence would be that I would have to quash the penalty imposed and would be unable to substitute lawfully a different and lesser penalty.
3. The statutory scheme is set out in the Act. Section 1 establishes the Commission. Section 3(1) requires the Commission to "exercise its functions in the manner which it considers is best calculated to ensure the provision of a universal postal service". Section 5(1) and (3) requires the Commission to exercise its functions "in the manner which it considers is best calculated to further the interests of users of postal services, wherever appropriate by promoting effective competition between postal operators" and "in the manner which it considers is best calculated to promote efficiency and economy on the part of postal operators". Section 6 prohibits any person from carrying a letter unless he has a licence granted by the Commission under section 11 to do so or is the employee of a licence holder, subject to an important exception determined by postage and weight in section 7. Section 13 empowers the Commission to require a licence to include such conditions as it considers appropriate. Section 30 provides:

"(1) If the Commission is satisfied that a licence holder--

(a) has contravened any condition of his licence, or

(b) is contravening any such condition,

the Commission may impose on the licence holder a penalty of such amount as is reasonable.

(2) No such penalty shall exceed 10 per cent of the turnover of the licence holder..."

Section 31 provides:

"(1) The Commission shall prepare and publish a statement of policy in relation to the imposition of penalties and the determination of their amount.

(2) In deciding whether to impose a penalty, and in determining the amount of any penalty, the Commission shall have regard to the statement of policy which was most recently published at the time when the contravention concerned occurred."

Section 32 contains procedures which must be fulfilled before a penalty can be imposed, including the giving of notice of a proposed penalty by the Commission. By section 32(2)(d) and (e):

"(2) The notice shall state ...

(d) the acts or omissions which the Commission considers constitute the contravention,

(e) any other facts which the Commission considers justify the imposition of a penalty and the amount of the proposed penalty."

Section 36 permits the licence holder to apply to the court if aggrieved as to imposition of a penalty or as to its amount. Subsection (5) provides:

"(5) On an application under this section, the court may--

(a) quash the penalty,

(b) substitute a penalty of such lesser amount as the court considers appropriate...

if it considers it appropriate to do so and is satisfied of one or more of the grounds mentioned in subsection (6)."

The single relevant ground under subsection 6 is:

"(a) that the imposition of the penalty was not within the powers of the Commission under section 30."

4. Condition 8 of Royal Mail's licence provided:

"1. The Licensee shall at all times maintain procedures, which shall be known as Licensee's 'mail protection procedures', for the purposes set out in paragraph 2.

2. The mail protection procedures shall be established and maintained for the purposes of-

(a) minimising the exposure of postal packets conveyed by the Licensee to the risk of loss, theft, damage or interference,

(b) minimising the risk of offences under section 83 and 84 of the Act [a reference to the Postal Services Act 2000, which deals with interference with mail] occurring in relation to postal packets and mailbags conveyed by the Licensee, and

(c) improving the performance of the Licensee in relation to the matters referred to in paragraphs (a) and (b).

3. The licensee's mail protection procedures shall deal with the following matters-

(a) the selection, vetting, initial training, follow-up training, provision of incentives and disciplining of its staff, agents, sub-contractors, directors and officials,

(b) the security of its buildings and vehicles,

(c) avoiding, identifying and taking action in respect of offences under sections 83 and 84 of the Act in relation to postal packets and mailbags conveyed by the Licensee,

(d) ensuring that its agents and sub-contractors have and apply appropriate procedures in relation to their staff, buildings and vehicles, and

(e) the collection and analysis of statistics on the achievement of the purposes set out in paragraph 2.

4. The Licensee shall use all reasonable endeavours at all times to apply its mail protection procedures.

5. The Licensee may make modifications to its mail protection procedures at any time provided that...

(b) the Licensee has given not less that 3 months' notice in writing of the proposed modifications to Postcomm and to the Council..."

The penalty imposed by the Commission and this application relate primarily to breaches of conditions 8(3)(a), (b) and (e) and 5(b) of the Royal Mail's licence.

5. The Commission's statement of policy in relation to financial penalties was published in February 2002. It included the following, under the heading "Receipt of complaint, investigation and procedure":

"8. Postcomm will endeavour to ensure that any decisions it takes in relation to financial penalties are-

• soundly based in fact, and

• reached in a manner that is procedurally fair."

Paragraph 10 provides that the Commission will give to the licence holder an indication of "the facts that Postcomm is minded to rely on". Paragraph 11 repeats the statutory duties pursuant to which Postcomm will exercise its penalty setting power. Under the heading, "The amount of a penalty", paragraph 14 provides:

"14. In deciding the amount of a financial penalty, Postcomm will first consider the financial benefit obtained by the licence holder and the burden imposed on others as a result of the contravention of the licence condition. A consideration of these estimates will be Postcomm's starting point for deciding the amount of any penalty with a view to ensuring that-

• infringement of licence conditions confers no benefit on the infringing licence holder in terms either of profits made by it or of costs imposed on competitors, and

• the incentive to continuing compliance provided by the possibility of a financial penalty is realistic, reasonable and proportional in relation to the gains that may arise, directly or indirectly, from non-compliance."

6. This paragraph suggests that the focus of the Commission when drafting this paragraph of its policy was competition issues but no point is taken by Mr Beloff on the wider interpretation of "burden" in the first sentence of paragraph 14 on which the Commission has plainly relied to impose this penalty on Royal Mail. That concession is in my view rightly made because, had the policy sought to fetter the exercise of the power to impose a penalty by the Commission in a way narrower than was required to fulfil its duties, it would have been outwith its powers.
7. Paragraph 15 sets out examples of the factors which the Commission would take into account as aggravating features and paragraph 16 sets out examples of the factors which it would take into account as mitigating factors. Paragraph 17 provided:

"Postcomm may have regard to the need to deter similar breaches of licence by other postal operators."

Paragraph 18 provided:

"Postcomm then will-

• review the resulting figure generally with a view to considering whether it is reasonable and proportional in the circumstances of the case,

• ensure that the penalty is within the 10% turnover limit...

• reconsider whether its decision overall as to the imposition of a penalty and its amount and the manner of its payment will further its statutory duties."

8. Against that regulatory background, the Commission conducted a review of Royal Mail's performance between August 2004 and May 2005 with the assistance of consultants. Its concerns were prompted by a complaint from a single large user of Royal Mail's services and media reporting by undercover reporters in Royal Mail offices that the employment of unvetted casual staff was a significant cause of substantial loss and theft of mail packets.
9. It is not in dispute that Royal Mail was in serious, persistent and avoidable breach of the relevant paragraphs of condition 8 of its licence; and, though not formally conceded, it cannot sensibly be disputed that those breaches must have caused some burden on the users of postal services. Ms Rose QC for Postcomm concedes that there are no facts to which she can point to justify the estimate of loss resulting from breaches at 50 per cent of the total number of packets estimated to have been lost rather than, say, 40 or 60 per cent. Mr Beloff submits that, having regard to the Commission's policy, that concession was fatal to its assessment of the amount of the penalty. It is therefore necessary to turn to examine the history of the Commission's investigation and its reasoning.
10. Having conducted its review between August 2004 and May 2005, it prepared and submitted for consideration to Royal Mail a report on the outcome of its review. This report fulfilled the obligation assumed by the Commission in paragraph 14 of its policy to notify Royal Mail of the facts upon which it based its conclusions and the amount of the financial penalty which it was minded to impose. In so doing, it also fulfilled its statutory obligations under section 32 to like effect. Having so notified Royal Mail, its next step was to produce a report, dated February 2006, in which it notified its findings. There are summarised in paragraph 22:

"... Postcomm has concluded that Royal Mail failed to use all reasonable endeavours to apply its Mail Integrity Procedures (MIP) in accordance with Condition 8(4) of its licence in the following four areas which are described more fully in paragraphs 25-32 below:

• The recruitment of non contract staff through agencies other than those on its approved panel...

• Loss prevention management in respect of the organisational frameworks in place to prevent the loss, theft or damage to mail...

• The lack of effective use of the date that has been collected on mail losses and crime incidents to facilitate Royal Mail's strategic security planning and deployment of security strategy ... and

• A general failure to have in place effective mechanisms for monitoring its application of the Procedures."

11. It also noted that Royal Mail had failed to follow the required process in changing its procedures as required by condition 8(5) of its license. Although that formed part of the findings of the Commission, it featured not at all in the argument addressed to me and I infer from that silence that it paid no significant part in the reasoning of the Commission thereafter.
12. Paragraph 25 summarised the most important failure identified by the Commission. It noted that Royal Mail, on its own admission, was heavily reliant on non-contract staff; that it had set up a contract with a recruitment agency for the provision of staff either by the agency or by a panel of sub contractors; that it had stated in one of its policy statements that the use of alternative recruitment arrangements would be "exceptional" whereas in fact over 60 per cent of casual staff recruited in the financial year 2004 to 2005 had been recruited from non-panel agencies which, in the majority of cases, Royal Mail were unable to name. Royal Mail conceded that it had no effective means of ensuring that all such agencies were following its pre-employment vetting procedures. In paragraph 6.30 of the body of the report, the Commission concluded that, far from being an exception, the recruitment of casual staff through non-panel and generally unnamed agencies was the norm.
13. In relation to loss prevention management, the Commission found that the board established to monitor loss prevention (the so called Loss Prevention Board) "clearly did not play such a role" and that no other body had been found which fulfilled it. The Commission also found that there were no effectively deployed systems to allow and verify the use of data concerning loss by Royal Mail. Its overall conclusion was:

"... in the three areas above is a common theme identified by Postcomm throughout the review, namely that Royal Mail would establish policies, processes and procedures through which it purported to apply its Procedures. However it did not have mechanisms in place to ensure that these policies, processes and procedures were being effectively implemented."

14. In discussing the need for a penalty, in paragraph 8.7 the Commission observed:

"In this case, the nature and duration of the shortcomings in the application of Royal Mail's Procedures are such that the opportunity to affect adversely the integrity of mail in transit has been significant. Even if only a small percentage of overall mail volumes carried were actually lost, stolen, damaged or interfered with in consequence of Royal Mail's failings, this still represents many millions of mail items and the effects will be felt by very many mail users. In Postcomm's view there is no doubt that these contraventions were serious and call for the imposition of a financial penalty."

15. It considered whether or not the imposition of a financial penalty would further its statutory duty. Its conclusion was:

"The fact that Royal Mail has been in contravention of Condition 8 and the manner of that contravention show that the inclusion of a condition in Royal Mail's licence, without more, is not enough to ensure that Royal Mail will comply with the condition. Postcomm believes that for Royal Mail to give compliance with Condition 8 and with the other conditions of its licence the priority and attention that are required on a continuing basis in the future, Royal Mail needs to experience a financial consequence from non compliance.

Imposition of a financial penalty will provide that experience and should contribute to future compliance by Royal Mail with Condition 8 and other conditions; it will, as a result, further Postcomm's duty in respect of users. A financial penalty will also contribute to an improvement in the quality of the universal postal service and make it clear to other license holders that compliance with the conditions of their licences (all of which are intended to further Postcomm's statutory duties) is of the utmost importance."

It went on to conclude that Royal Mail's failings were as a result of negligence and were under its control.

16. In paragraph 8.17 and following it turned to the assessment of the penalty. It first addressed, in accordance with paragraph 14 of its policy, the financial benefit obtained by Royal Mail. It concluded that there was no readily quantifiable gain to Royal Mail from its failings, although, in reaching that conclusion, it did not decide that there was none. It concluded that benefit was not the most appropriate starting point. It therefore turned to burden. Its preliminary conclusion was:

"That loss and theft on mail and damage to and interference with mail causes a burden to users of mail services in terms of their losses is beyond doubt."

It noted that Royal Mail accepted that and had paid compensation for the financial year 2004/2005 of £13.6 million.

17. It then went on to consider the evaluation of losses of mail. It noted that Royal Mail's annual loss reports showed that the loss of mail was of the order of 0.07 per cent of the total volume of mail handled per year. For the year ended 2005, that meant that the loss to users in terms of postage costs alone equated to around £4.29 million (0.07 per cent multiplied by the price controlled revenue of £6.013 million). In addition, it was possible to quantify the number of items not arriving safely. Revenue had been earned in respect of 20.855 million items. A rate of loss of 0.07 per cent would mean that approximately 14.598 million items posted with Royal Mail in 2004/2005 did not arrive safely.
18. The Commission went on to state, however, that the value of the burden on customers from mail being lost could be considerably more than simply the value of the postage and therefore some assessment of the notional value of a typical item of lost mail should be made. It set out and considered the total value of claims paid by Royal Mail in respect of lost mail and divided it by the number of claims paid to produce an average value per claim ranging between £28.22 and £35.33. The Commission noted that those figures were skewed towards high value losses because they included compensation payments for special delivery items. Allowing for the skew by scaling down the claim per item by a factor of 10, produced a value of loss per item of approximately £3. The Commission noted that the benchmark adopted by Royal Mail in its Code of Practice issued in April 2005 was a compensation level equivalent to a book of 12 first class stamps (£3.60). Accordingly, the Commission proposed to set the notional value of an average undelivered item at that figure. On that basis, multiplying the number of items estimated to have been lost (14.598 million) by £3.60 each, the loss to customers, it concluded, could be valued at £52.553 million. In paragraph 8.24 it went on, plainly reasonably, to note that the full implementation of Royal Mail's mail integrity procedures would not completely eradicate all mail losses:

"However Postcomm would expect full compliance with the licence condition to result in a substantial improvement on this performance. In Postcomm's judgment it is reasonable to equate the burden imposed on consumers as a result [of] the contraventions of Condition 8 by Royal Mail that Postcomm has identified to half the notional value of lost mail in 2004/2005. This gives an initial starting point for the calculation of a penalty of £26.276 million."

19. It then went on to reduce that figure, first by the amount of compensation that Royal Mail had paid out, £13.623 million, and then by mitigating factors which, in its view, which is not challenged, amounted to 20 per cent. It then proceeded to increase the figure by reason of aggravating factors, again in its unchallenged view, by 10 per cent. The result was a final penalty of £11.380 million. That is the figure which it concluded at that stage was proportionate.
20. Further representations were made by Royal Mail and, in the light of them, the Commission increased the amount of compensation which it allowed against its starting point to £14.62 million and reduced the notional value of each item of mail lost from £3.60 to £3.21. Neither of those adjustments are in dispute. As to its assessment of the starting point for the assessment of loss at 50 per cent of the items estimated to have been lost, it had undertaken certain limited further research. It noted, first of all, that neither Royal Mail nor Postwatch had put forward an alternative methodology or figure. It said it had made considerable efforts to obtain benchmark information to inform its judgment, both internationally and from within the United Kingdom. From within the United Kingdom, it achieved no comparable figures which in its opinion were of any value and I make no further reference to them. As far as international comparisons are concerned, it set out in tabular form in its report of June 2006 the information which it had gleaned from other postal regulators. The value of this information was rightly and heavily qualified because, as the Commission noted, different countries adopt different methodologies. In some instances, it was not clear whether the figures for total postal loss equated to registered items only. In some, the estimates had not been audited. The figures ranged from losses that were broadly comparable to those experienced by Royal Mail to instances where notable improvements on Royal Mail's performance were apparent. The single country which produced reliable figures for very much better performance was Denmark, where, over all streams of mail, the total losses for 2005 were only 0.0013 per cent. As the Commission was to observe in its final report in August 2006, that equated to a loss of 11 items of mail in a million, whereas Royal Mail's figures suggested a loss of 730 in a million.
21. Having conducted that brief benchmarking review and made the adjustments which I have recited for the notional value of each item lost and the amount of compensation paid, the Commission stuck by its judgment that the appropriate starting point was half of the total items estimated to have been lost but reduced the proposed penalty to £9.62 million.
22. In its final report on the imposition of the penalty, the Commission briefly returned to its reasoning in paragraphs 2.8 and 2.9. It considered that it was reasonable to infer that, had the failings identified not occurred, "a substantial volume of mail which was interfered with, lost damaged or stolen would have been safely delivered" but that "any attempt to quantify possible consequences of licence compliance must necessarily be an approximation". The Commission went on to note that its methodology had involved a number of assumptions which were favourable to Royal Mail (for example, the likelihood that its non-compliance persisted for well over a year; that is to say both before and after the financial year 2004/2005) and that it received some, albeit unquantifiable, benefit from its failings. £9.62 million, is the figure which the Commission finally notified to Royal Mail on 24th August 2006 as that which it was required to pay by way of penalty on 12th October 2006.
23. Mr Beloff's fundamental submission is that the assessment of the penalty in that sum is outwith the Commission's powers because it is not reasonable. It is not reasonable because it is not securely founded on facts, as he submits is required by its policy. He refers to the observations of Lord Wilberforce in Secretary of State for Education and Science v Tameside Metropolitan Borough Council [1977] AC 1014 at 1047D to E:

"If a judgment requires, before it can be made, the existence of some facts, then, although the evaluation of those facts is for the Secretary of State alone, the court must inquire whether those facts exist, and have been taken into account, whether the judgment has been made upon a proper self-direction as to those facts, whether the judgment has not been made upon other facts which ought not to have been taken into account. If these requirements are not met, then the exercise of judgment, however bona fide it may be, becomes capable of challenge."

24. If the Commission was required by the statutory framework or its own policy to assess the size of any penalty only by reference to facts found by it, that submission would be unanswerable but its powers are not so constrained. Its duties under sections 3 and 5 are set out in clear and wide terms. It has power under section 30 to impose a penalty of such amount as is reasonable, subject only to the requirement that the amount must not exceed ten per cent of turnover. The policy which it propounded, pursuant to section 31, does not limit it to facts found by it in the assessment of the amount of any penalty. The extracts from paragraph 8 which I have cited relate to the investigation and procedure to be adopted before it determines the imposition and size of any penalty. The fact that it will endeavour to ensure that any decision that it takes in relation to a financial penalty is soundly based in fact does not require it only to impose such a penalty as is based upon facts found by it. It does not, as a matter of language, in any way prevent it from making estimates, assessments or even assumptions about facts before arriving at the amount of a penalty to be imposed. Its policy in relation to the assessment of the amount of the penalty is set out in the opening sentences of paragraph 14. In deciding the amount of the financial penalty, it will first consider financial benefit obtained by the licence holder -- in this instance not the primary factor -- and the burden imposed on others as a result of the contravention of licence condition. Once it is conceded, as rightly it is by Mr Beloff, that the burden on others can include the burden of users of the postal service and not just competitors of Royal Mail, then the Commission is entitled by its policy to start at a point which reflects the burden imposed on users as result of breaches of conditions of its licence by Royal Mail. Nothing in the remainder of paragraph 14 or of paragraphs 15 to 18 limit it in terms to imposing only a penalty of such amount as can be justified by findings of fact made by it. Accordingly, there is in my view no statutory fetter upon the Commission, making a judgment as to the appropriate amount of the penalty, based on the starting point of its judgment as to the burden imposed on the users of postal services resulting from Royal Mail's failings. Whether that judgment is categorised as assumption, assessment or estimate does not seem to me to matter. It is just that, a judgment.
25. Mr Beloff's accompanying submission is that the Commission in fact purported to base its conclusion as to the amount of the penalty on facts which it did not adequately find; but even a superficial analysis of its reasoning process shows that that is not so. It plainly made assumptions and accepted estimates. It was inevitable that it would do so. In such a large business as that conducted by Royal Mail, with such a huge volume of individual items carried, estimates were inevitable. Specifically the estimates, assumptions or judgments which it made were fivefold. First, it limited itself to the financial year 2004/2005, even though, in its not unreasonable view, the losses were likely to have occurred both before and after that date. Ms Rose accepts that the Commission could not now impose any further penalty upon Royal Mail in relation to losses occurring before or after the start of that financial year, at least up until 1st January 2006, when the licence conditions were changed. The second assumption is as to the number of letters lost, ultimately either slightly fewer or slightly more than 50 million in the year. That was an estimate based upon Royal Mail's own estimate but it was an estimate nonetheless. The third estimate or assumption was as to the notional value of an item of mail. As I have set out in the explanation as to how that sum was arrived at, it included a large number of estimates and the figure produced was notional, not founded in fact. Indeed, it appears to have been founded solely upon Royal Mail's own estimate of the amount per-item which it would be willing to pay by way of compensation, namely 12 times the average cost of posting an item of mail. The fourth assumption was as to the benefit to Royal Mail: that it had benefitted but it was not possible to quantity the benefit. The fifth assumption -- that under attack in these proceedings -- is that the starting point should be taken as 50 per cent of the estimated number of mail items lost.
26. As I have already stated, Ms Rose could not justify by reference to facts 50 per cent rather than 40 per cent or 60 per cent, but clearly the Commission, if it was to impose any penalty, as it plainly was right to do, had to arrive at a figure somehow. It seems to me that the method which it adopted to arrive at the ultimate penalty imposed was a reasonable one. That it included matters of judgment is plain: it had to. The burden is on Royal Mail to show that the figure at which it arrived was not reasonable. In my judgment, it has failed to do so.
27. I deal finally, because the issue was canvassed, with one discrete question of law. Mr Beloff submitted that, if I were to conclude that the penalty imposed was unreasonable and so outwith the Commission's powers, then all that I could do is quash it. Ms Rose submitted that I could in fact substitute a figure which I considered "appropriate" pursuant to the express powers to that effect in section 36. She submitted that even if, contrary to her primary submissions, Postcomm's estimate was invalidated by its policy, then I would not be bound by that policy and would be empowered to impose a figure which I considered appropriate. In my view, her submission is right.
28. For those reasons this application is rejected.
29. MS ROSE: My Lord, we apply for our costs and would ask that they should be summarily assessed. There is -- I hope your Lordship has a copy of our schedule of costs.
30. MR JUSTICE MITTING: Yes, I do.
31. MS ROSE: And that your Lordship also has a copy of the appellant's schedule.
32. MR JUSTICE MITTING: I have not seen the appellant's schedule. I only have yours.
33. MR SAINI: I received this schedule late last night. I have not had the chance to take instructions from my instructing solicitors. I anticipate that we may be able to agree most of this. What I was going to suggest was that, if there is any disagreement, then we can raise the matter with my Lord in writing and my Lord can resolve that disagreement. My assumption is that there would not be disagreement and we should be able to agree those costs. But I do not have that instruction from my solicitors.
34. MR JUSTICE MITTING: Ms Rose, that seems a sensible procedure.
35. MS ROSE: My Lord, we will be content with that.
36. MR JUSTICE MITTING: What I propose then is that -- what I order is that the applicant or appellant will pay the respondent's costs; that if those costs cannot be agreed, within 14 days each side will make written submissions to me for me to determine the amount which should be paid on the papers.
37. Any other matters? Thank you both for an interesting argument.