Commerce Commission v Steel & Tube Holdings Ltd [2018] NZDC 21579

Published 30 October 2018

Sentencing — Australian/New Zealand industry standard for reinforcing steel — building industry — culpability — "E" ductility class steel mesh products — false representations — gross negligence — totality principle — Evidence Act 2006, s 14 — Fair Trading Act 1986, ss 40(2) & 45 — Sentencing Act 2002, ss 7–9 & 40 — New Zealand Building Code — Commerce Commission v Carter Holt Harvey, DC Auckland, Judge Bouchier, 12 October 2006, CRI 2005-004-18578 — Commerce Commission v Brilliance International Ltd [2018] NZDC 7359 — Commerce Commission v Budge Collection Ltd [2016] NZDC 15542 — Commerce Commission v LD Nathan Co & Ltd [1990] 2 NZLR 160 (HC) — Commerce Commission v Ticketek NZ Ltd [2007] DCR 910 — Commerce Commission v Timber King Ltd [2018] NZDC 510 — Pokai v R [2014] NZCA 356. Steel & Tube Holdings Ltd appeared for sentence having pleaded guilty to 24 representative charges relating to making false representations about whether their manufacture steel mesh, known as "SE62", complied with Australian and New Zealand standards for reinforcing steel; and whether the SE62 had been independently tested and certified as complying with the standards. The offending occurred over a 4 year period from 2012 to 2016 and involved an estimated 480,000 sheets of steel mesh sold. Steel mesh is used in concrete construction and in 2011, following the Canterbury Earthquake, the Building Code was amended to require that steel mesh of the ductility class E be used in the Canterbury Region. SE62 was developed by Steel & Tube to meet this requirement and it became their best-selling product in their "E" class range. To be designated in the grade 500E the steel mesh needed to meet certain chemical, physical and mechanical requirements and a particular sampling and a compliance testing procedure had to be followed. Steel & Tube failed to comply with the testing requirements by failing to: age test the product; test adequately for uniform elongation; follow a complying procedure for parallel retesting ; and carry out long-term quality evaluation. The Court noted the wide breadth of dissemination of the false representations. They included the distribution of SE62 that had attached batch certification documentation which falsely represented compliance with the testing standard, and further contained false representation that the product had been independently tested. There were also repeated representations as to compliance with the standards made on other documentation and on the company website. In terms of the impact of making the false representations, the court noted that it was bound by an agreement of fact that the non-compliant steel does not represent a life-safety risk. However in terms of amenity of non-compliant steel in the event of a significant seismic event, the court noted that although it was bound by the agreed statement of facts, inferences could be drawn. The court concluded that "the non‑compliant steel carries with it a greater but imprecise risk of loss of amenity in the event of a significant seismic event; and the relevant adverse impacts of installing steel mesh with ductility as low as 5 percent is more likely to be negligible." Subsequent testing by the Commission found that none of the samples taken and tested met the standards but that it was impossible to determine how much of all SE62 sold did not comply. Following the Commerce Commission's involvement, Steel & Tube removed the product from the market and provided an undertaking to put in place an external testing regime before recommencing sales of the SE range. The Court took into account Steel and Tube's explanations for its noncompliant testing regime, noting the reliance on the then-technical manager's expertise to ensure that its testing procedure complied with the Standard. The court also noted that the technical manager did not have statistical analysis and metallurgy knowledge, no review of testing procedures were carried out, and that the decision not to age the product in compliance with the standard was not notified to or signed off by senior management. Lack of knowledge by senior staff was canvassed in relation to the culpability of the company. The court noted that the charges were strict liability, and therefore it was not necessary to consider whether the knowledge of the technical manager could be sheeted back to the company under s 45 of the Fair Trading Act, and taken into consideration as an aggravating factor. The court summarised the relevant factors to be considered when imposing a penalty for breach of the Fair Trading Act, finding that: the company's conduct infringed on the core purpose of the Act to protect and promote the interests of consumers; consumers including those in the building industry had no choice but to rely on the representations made in regard to compliance, to Steel and Tube's commercial advantage; the overall level of culpability of Steel and Tube was grossly negligent and the prejudice to customers significant; although in light of remedial actions taken by the company there was some but not great weight on individual deterrence, the need for general deterrence carried significant weight; and the reasonableness of the fine in relation to the financial position of the company must be made in the context of the reputational harm and impact on share prices by the publicity of the prosecution. The court considered comparable cases in reaching the starting point for the fine for the standard-compliance misrepresentations. The court rejected the mathematical approach to determine what the penalty in "Carter Holt" would result in under the current regime, as was sought by the prosecution. The court agreed with the approach taken in "Budge", that "what is required is an overall evaluation of a defendant’s culpability bearing in mind the increase in the maximum penalty." The court noted that the cases "Timber King" and "Brilliance" were the most relevant to the task at hand, although the offending in both cases was on a much smaller scale. The misrepresentations relating to independent testing of the product called for a separate starting point fine. The Court canvassed comparable cases, identifying "Brilliance" and "Timber King" as providing most the relevant guidelines, although Steel and Tube's offending occurred on a much greater scale. The court found that s 40(2) of the FTA was not engaged as the offending involved a four year period and differing conduct. Therefore the court was not restricted by the rule that the aggregate amount of fines imposed must not exceed the amount of the maximum fine that could be imposed for a single offence. After consideration of the totality principal a global starting point for the fine was set at $2.9 million. A reduction of of 35% was applied for mitigating factors including an early guilty plea, remorse, co-operation with the Commission, significant remedial steps taken and lack of previous convictions, bringing the end fine to $1.885 million. Court costs of $130 per charge were imposed. Judgment Date: 23 October 2018.