Royal Mail Group Plc v The Postal Services Commission

This is an appeal from a decision of Mitting J given on 13 March 2007 whereby he declined to quash a penalty of £9.62 million imposed on Royal Mail Group Plc (“Royal Mail”) by the Postal Services Commission (“Postcomm”) on 24 August 2006. It is a second appeal, permission having been granted on a consideration of the papers.

Postcomm is a body corporate established by Section 1 of the Postal Services Act 2000 (“the 2000 Act”) as the regulator for postal services. The Postal Service Commissioners are appointed by the Secretary of State under Schedule 1 to the 2000 Act and I readily assume that persons with appropriate skills and experience have been appointed.

Royal Mail has been designated as the provider of a universal postal service in the United Kingdom and operates by virtue of a licence granted to it by Postcomm under the 2000 Act on 23 March 2001 and amended on 1 April 2003. The penalty was imposed for breaches by Royal Mail of conditions of the licence which required it to use all reasonable endeavours to apply its mail integrity procedures and to establish a process by which such procedures may be amended.

The appeal to the High Court was brought under Section 36(1) of the 2000 Act and was against the amount of the penalty. Royal Mail had argued that it was not in breach of the conditions of its licence but has not challenged in these proceedings Postcomm’s conclusions as to breach. The case turns on a short point but, to place it in context, it is necessary to describe the statutory scheme and the background facts.

Section 3(1) of the 2000 Act provides that “[Postcomm] shall exercise its functions in the manner in which it considers is best calculated to ensure the provision of a universal postal service”. Section 5(1) provides that “subject to section 3, [Postcomm] shall exercise its functions in the manner which it considers is best calculated to further the interests of users of Postal Services . . . .” Section 5(3) provides:

Postcomm is empowered to grant licences for postal services and to do so subject to conditions. Sections 22 to 29 of the 2000 Act empower Postcomm to make enforcement orders if satisfied that a licence holder is contravening any condition of his licence or is likely to contravene any such condition. Sections 30 to 35 empower Postcomm to impose a financial penalty on a licence holder for breach of condition and Section 36 confers on a licence holder a right to apply to the High Court to quash the penalty or substitute a penalty in a lesser amount. Amongst the permissible grounds of appeal are, under Section 36(6)(a): “that the imposition of the penalty was not within the powers of [Postcomm] under Section 30”.

Section 30(1) of the 2000 Act provides:

Under the heading “Statement of Policy in Relation to Penalties”, Section 31 provides, in so far as is material:

The relevant statement of policy provides, at paragraph 8:

Soundly based in fact,

Reached in a manner that is procedurally fair”

Under paragraph 10, Postcomm is required, in each case, to –

the facts that Postcomm is minded to rely on; and

the conclusion Postcomm is minded to reach as to the occurrence of a licence contravention.

give the licence holder the opportunity for a hearing of those issues before a decision is taken to propose a penalty”.

Paragraphs 12 and 13 set out the considerations which Postcomm must bear in mind in deciding whether it is appropriate to impose a penalty and paragraph 14 deals with the amount of such penalty:

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”.

Paragraph 18 provides, in so far as is material:

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

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”.

Condition 8 of Royal Mail’s licence, introduced in its relevant form with effect from 1 April 2003, is headed “Protecting the Integrity of Mail”. Under paragraph 1, the licensee is required at all times to maintain procedures to be known as “Mail Protection Procedures” for the purposes set out in paragraph 2, which include “minimising the exposure of postal packets conveyed by the licensee to the risk of loss, theft, damage or interference”. Paragraph 3 specifies the matters to be dealt with in the procedures. These include:

Paragraph 4 provides:

Between August 2004 and May 2005, Postcomm carried out a review of Royal Mail’s application of its mail integrity procedures and a draft report was sent to Royal Mail in November 2005. In its representations, Royal Mail strenuously resisted the allegation of breach of licence conditions. There was an oral hearing on 8 December 2005. Postcomm published a report in February 2006 stating that Royal Mail was in breach of licence on the ground that it had not used all reasonable endeavours to apply its mail integrity procedures (condition 8(4)). Initially, a financial penalty of £11.38 million was proposed. In further representations dated 9 March 2006, Royal Mail made submissions both on liability and on quantum. In a report published in June 2006, the penalty was varied from £11.38 million to £9.62 million. Further representations were made but, in its final report dated 24 August 2006, the penalty as varied to £9.62 million was maintained.

In summary, Royal Mail’s failure was held to be in the recruitment of staff through agencies not part of its approved panel of agencies with consequent absence of effective means of ensuring that agencies were following the appropriate pre-employment vetting procedures. Approximately two-thirds of Royal Mail’s expenditure on agency staff in 2004/05 was with agencies who were not part of its contract with a recruitment agency (paragraph 25 of February 2006 report). It was also held that the management arrangements for loss prevention were inadequate, that data collected on mail losses and crime incidents was not effectively used and that there was a general failure to have in place effective mechanisms for monitoring mail integrity procedures.

The investigation was of losses during the financial year 2004-2005. The contraventions were held to be serious and calling for the imposition of a financial penalty (February 2006 report paragraph 8.7).

The full methodology for assessment of penalty can be summarised because only one of its stages is challenged. The calculation of penalty relied on Royal Mail’s figure for total regulated mail volumes and lost volumes (0.073% of total). A notional value of £3.21 per item was applied to the lost volume of about 15 million items to give a figure in the region of £50 million. One half of the lost volumes was taken to be attributable to the breaches of licence giving a figure of about £25 million. Compensation paid to customers for losses, a sum approaching £15 million, was deducted, and mitigating and aggravating percentages were then applied to give the total penalty of £9.62 million. The reduction from the earlier figure of £11.38 million was achieved by reducing the notional figure per lost item from £3.60 to £3.21, a figure based on the figure per lost item paid under Royal Mail’s Compensation Payment Scheme. The penalty was based on the “burden” found to have been imposed on others as the value of mail lost because of the licence breach. Postcomm accepted that there no readily quantifiable gain to Royal Mail as a result of the breach. What is challenged in these proceedings is that part of the methodology by which 50% of the total losses of mail are attributed to breach of the licence.

On behalf of Royal Mail, Mr Beloff QC’s submission is directed to a single objective which is to demonstrate that Postcomm’s entire quantification of the penalty imposed is unsound by reason of the adoption of 50% as the percentage of lost items of mail attributable to the breach of licence proved. Section 31 of the 2000 Act requires Postcomm to adopt a statement of policy in relation to penalties. They have done so and have purported to apply it. Paragraph 8 of the statement requires decisions taken when assessing penalties to be “soundly based in fact”. The percentage of 50 was not “soundly based in fact” but was plucked out of the air by Postcomm, it is submitted. Other expressions used by Mr Beloff in his forceful submissions were that the figure was merely an assumption which lacked any evidential foundation whatsoever, that it was an arbitrary factual assumption, that a starting point for the penalty had not been rationally identified and that the assumption had no logical factual basis.

In the absence of such a basis, the assumption is arbitrary and a decision based on it unreasonable and unlawful as outside Postcomm’s powers under Section 30(1) of the 2000 Act, it is submitted. However legitimate the other parts of the methodology may be, the flaw is fatal to upholding the penalty. Without a sound starting point, there can be no terminus. Moreover, in the absence of a sound factual basis for assessment, it was not open to the court to substitute a different percentage and, by reason of the fatal flaw, the penalty must be quashed in its entirety. Postcomm had been warned, at an early stage, of the difficulty of assessing the extent of the burden imposed.

The judge erred, it is submitted, in holding that it did not matter whether the judgment as to the appropriate amount of the penalty was “categorised as assumption, assessment or estimate”. The judge erred in paragraph 24 of his judgment, it is submitted, in holding:

For Postcomm, Ms Rose QC refers to Postcomm’s status as an expert or specialist regulator created by statute. It is familiar with postal services and with the culture that goes with them. Its powers are broad and, in deciding the amount of any penalty, Postcomm must, amongst other things, have regard to “the incentive to continuing compliance provided by the possibility of a financial penalty . . .” (paragraph 14 of policy) and may have regard to the need to deter similar breaches of licence by other postal operators (paragraph 17 of policy). The breaches in this case were serious and the resulting losses to customers were likely to be substantial, it is submitted. Some, such as lost medical appointments, could not be quantified financially.

Reliance is placed on the presence of the expression “will endeavour to ensure” before the expression “soundly based in fact” in paragraph 8 of the statement of policy. Postcomm was, in the circumstances, entitled to adopt the 50% figure for losses due to the breaches of the conditions of the licence. Postcomm was entitled to place limited weight on the information obtained about postal losses in other countries and it had not been conceded before the judge that no such reliance could be placed.

To examine those submissions, it is necessary to consider Postcomm’s reports already mentioned. The reasons why, in the opinion of Postcomm, a financial penalty was required are set out at paragraph 8.7 of the report of February 2006:

In relation to the 50% factor, the reasoning of Postcomm was as follows:

Following Royal Mail’s challenge to the factor of 50%, Postcomm replied, in the June 2006 report:

enquiries of other international postal regulators revealed no common approach to the type of mail measured and measurement methodology that would provide a completely reliable benchmark . . .

benchmarking against other UK postal operators provides no independent data as their services are not directly comparable, they do not have a sufficient history to be able to establish a reliable data set or they use Royal Mail for final delivery so do not have independent figures,

benchmarking against parcels operations is not reliable as parcels are usually tracked and different operational procedures applied,

there is no other regulated industry where a direct comparison could be made, and

a discussion with consultants to attempt to identify a benchmark standard has revealed no known standard and established no methodology.

Following further challenge in a solicitor’s letter dated 30 June 2006, Postcomm stated, in the August 2006 report:

Some, but very limited, reliance continued to be placed on the comparative study with other countries. At paragraph 2.5 it was stated that the exercise “did illustrate that universal service operators in some other European Member States had achieved substantially lower levels of lost mail”. At paragraph 2.12 it was stated:

When referring to the aggravating percentage of 10% applied to the penalty, as already mentioned, Postcomm stated, in the February 2006 report:

reluctant to engage constructively,

dismissive of Postcomm’s role

willing to undermine the information gathering process, and

failing to exercise sufficient care regarding the accuracy of information supplied”.

Postcomm further commented on the review of the overall figure required by paragraph 18 of the policy statement. In the June 2006 report, it was stated, at paragraph 3.60:

The duties of Postcomm must be considered in the context of the statute which created it and the purposes of that statute. The expression “soundly based in fact” in paragraph 8 of Postcomm’s statement of policy, on which heavy reliance is placed by Royal Mail, must be seen in the overall context of the statutory scheme. A very broad discretion is conferred on Postcomm in performing its statutory duty “to further the interests of users of postal services” (section 5(1) of 2000 Act) and to “promote efficiency and economy on the part of postal operators” (section 5(3)). That discretion extends to the circumstances in which a financial penalty is imposed and the amount of that penalty. A decision must be taken with a view to ensuring, amongst other things, the incentive to continuing compliance provided by the possibility of a financial penalty (paragraph 14 of policy). Regard must be had to the need to deter similar breaches of licence by other postal operators (paragraph 17). The policy restates the requirement in Section 5(3) of the Act that Postcomm “shall exercise its functions in the manner which it considers is best calculated to promote efficiency and economy on the part of postal operators” (paragraph 11 of policy).

It would be wholly unrealistic to infer that the serious and persistent breaches of licence found to be proved had not imposed a burden on others as a result of the contravention of the licence condition. In making any decision on financial penalties, Postcomm must “endeavour to ensure” that the decision is “soundly based in fact”. Best endeavours have undoubtedly been used but these have not made possible, nor could they have made possible on the evidence, a precise calculation of how many of the 15 million lost items were lost because of the breaches of condition as distinct from other causes. What Postcomm has done, as an expert tribunal familiar with postal services and their problems, is to consider the nature, seriousness and length of the breaches of condition and to assess their likely consequences in a situation in which the possibility of losses from other causes, some the fault of Royal Mail and others beyond their control, must be kept in mind. In making its assessment, Postcomm has not had the benefit of full co-operation by Royal Mail, as stated in the February 2006 report paragraphs 8.36 and 8.37, notwithstanding the requirement in its licence to collect and analyse statistics to achieve the purpose of minimising loss (condition 8(3)(e)).

Royal Mail has not produced evidence that other failures of its own, unconnected with the breaches of licence, or matters beyond its control, have led to the loss of a major part of the 15 million items. The statutory scheme and purpose does not permit Royal Mail to opt out of the investigatory process or, in a situation in which it has not produced evidence of other causes of loss, to rely on Postcomm’s inability to produce evidence which identifies precisely a percentage of 50 as resulting from the breaches of licence. Postcomm has made the best assessment it can in the circumstances and on the evidence it has unearthed with less than full co-operation from Royal Mail.

Royal Mail appears to take the approach traditional in criminal cases in which a defendant could do nothing and see whether the prosecution can prove its case, an approach now much qualified even in criminal cases. A decision that a financial penalty was required for the serious breaches proved was undoubtedly soundly based having regard to the statutory duties of Postcomm. It has, in my judgment, used its best endeavours to ensure that the decision as to the amount of that penalty was soundly based in fact. The assessment made was a lawful assessment. The reasoning at paragraph 3.37 and 3.39 (with its limited reliance on the comparative study) of the June 2006 report is legitimate as is that in paragraphs 2.8, 2.11 and 2.13 of the August 2006 report. The test of reasonableness and proportionality in paragraph 18 of the statement of policy is also met. It has not in itself been subject to challenge.

While I agree with submission on behalf of Royal Mail that the presence of a general power, by way of review, to decide whether the proposed figure for a penalty is “reasonable and proportional in the case” (paragraph 18 of policy) could not in itself justify an otherwise arbitrary assessment, the existence of that power does further demonstrate the broad discretion available to Postcomm in assessing the amount of the penalty.

Royal Mail’s submission that in the absence of proof of a precise percentage of loss resulting from the breach of licence, no penalty at all can be imposed, demonstrates the fallacy of the stance it has taken, in my view. Postcomm is required to exercise its functions in the manner it considers best calculated to further the interests of users of postal services (Section 5(1) of the 2000 Act). It must provide an incentive to continuing compliance and have regard to the need to deter similar breaches. The statutory purpose would be defeated if Postcomm could impose no penalty at all unless it proved a precise percentage of loss resulting from breach of licence, in circumstances in which it is the licence holder, as operator of the postal services, which either has the relevant information or, if not, at least the best opportunity to obtain it.

Having received this judgment in draft in the usual way, Royal Mail submits that the court has found a breach, not alleged against them, of the requirement in the licence to collect and analyse statistics to achieve the purpose of minimising loss (set out in paragraph 13 of this judgment), and that the finding has influenced the conclusion of the court. I am content to acknowledge that no such breach of licence has been alleged or found but the court cannot and should not ignore those paragraphs in the Postcomm’s reports (June 2006, paragraph 3.36, paragraph 26 above, August 2006 paragraph 2.13, paragraph 27 above) which refer to Royal Mail’s failure to put forward an alternative figure or methodology for assessing the proportion of loss due to breach of condition. Moreover, Postcomm considered (paragraph 8.40 of February 2006 report, paragraph 29 above) that the conduct of Royal Mail personnel needed to be taken into account in assessing the level of financial penalty proposed, an approach it was entitled to adopt.

No error of law by Postcomm has been established. The penalty imposed was within the power of Postcomm under Section 30 of the 2000 Act. In short, the presence of the expression “soundly based in fact” in paragraph 8 of the statement of policy does not render unlawful the imposing of the penalty or its amount.

I would dismiss this appeal.

I agree.

I also agree.