Chapter 6
The critical issues
Intention and defences
6.130Civil pecuniary penalty provisions are drafted in very much the same manner as criminal offences. They set out the physical elements of the contravention (for example, failure to comply with a condition of a consent or exemption under the Overseas Investment Act 2005). Some also set out certain elements of intention or knowledge that must be established before liability can be imposed. As with criminal offences, the mental elements of civil pecuniary penalties can take different forms. Some are direct, requiring that the defendant knew, or ought reasonably to have known, of the conduct constituting the breach. Other provisions imply, by the terms used, that the defendant must act with a degree of awareness and intent. For example, under the Securities Markets Act 1988 “an information insider of a public issuer must not advise or encourage another person to trade or hold securities of the public issuer”. The use of active terms like “advise” and “encourage” may impute a requirement of awareness and intent, on behalf of the defendant, to carry out the prohibited conduct. The great majority, like many criminal offences, are silent as to fault. As a result it is assumed that they are to be treated as strict or absolute liability contraventions.
6.131All of this mirrors the way that criminal offences are drafted. However, whereas the interpretation and application of criminal offences are guided by well-established rules and presumptions, the civil pecuniary penalty is a relatively novel creation. There is a question whether the rules and presumptions that apply to intent for criminal offences apply equally to civil pecuniary penalties. We consider this in the following paragraphs.
6.132The rationale for requiring proof of mens rea for criminal offences is based on the inherently punitive nature of the criminal law, which punishes and condemns certain conduct and can inhibit personal liberty. Particular moral and social stigma accompanies a criminal conviction. Generally it is thought only just to impose such a sanction on persons who are morally responsible for their acts – persons whose subjective mental state, as well as their conduct, is blameworthy. The significance of mens rea is reflected in the stringent requirements for proving it. Importantly for our purposes, the courts also presume that Parliament intends all serious criminal offences to be imposed on the basis of mens rea, unless there is something sufficiently weighty to displace that presumption. The requirement of mens rea, then, is the rule.
6.133Strict and absolute liability offences are exceptions to the rule. The LAC Guidelines state that strict liability offences may be appropriate where:
- The offence involves the protection of the public from those undertaking risk-creating activities; and
- The threat of criminal liability supplies a motive for persons in those risk-generating activities to adopt precautions, which might otherwise not be taken, in order to ensure that mishaps and errors are eliminated; and
- The defendant is best placed to establish absence of fault because of matters peculiarly or primarily within the defendant's knowledge.
6.134Strict liability involves the prosecution having to prove only the physical elements of the contravention. The defendant can exonerate him or herself either through establishing a specific statutory defence or through the common law defence of total absence of fault, which the defendant must prove on the balance of probabilities.
6.135In the case of absolute liability offences, legal responsibility is imposed in the absence of any fault or moral blameworthiness. The prosecution is only required to prove the physical elements of the offence and, even if the defendant is completely free of fault, this will not constitute a defence. The LAC Guidelines state that there is very limited scope for the creation of new absolute liability offences in New Zealand. They go on:
Where an offence provision is ambiguous as to its fault requirements, the court will rarely hold that it imposes absolute liability and only where there is clear legislative indication of Parliamentary intent. The use of an absolute liability offence should be contemplated only if -
(a) there is an overwhelming national interest in using the criminal law as an incentive to prevent certain behaviour occurring, regardless of fault; and
(b) there is a cogent reason in the particular circumstances for precluding a defence of total absence of fault (this will be rare).
6.136A court will only find absolute liability where the statute imposes it in clear terms or by necessary implication.
6.137To what extent do these rules and presumptions apply to civil pecuniary penalties? On one hand, since they have been drafted in the same manner as criminal offences, it might be thought that the same rules have been borne in mind in their creation. However, civil pecuniary penalties are imposed through civil proceedings on the balance of probabilities and do not result in criminal conviction. To what extent might this have an impact on their interpretation when it comes to the extent or existence of a required mental element?
Civil pecuniary penalties requiring mens rea
6.138Should all intentional or knowing breaches of the law be punished by criminal conviction? Mens rea is a hallmark of the criminal law. It illustrates the criminal law’s subjective approach to fault and its focus on the defendant’s state of mind. Where parallel criminal and civil pecuniary penalty provisions exist, this is commonly the distinguishing factor: proof of mens rea is the threshold for criminal liability. Indeed it might be said that knowing or intentional breaches of a legal requirement are what defines criminal behaviour. If this is correct, might there be an argument that civil pecuniary penalties should not be used for knowing or intentional breaches?
6.139Alternatively, should there be no bar on civil pecuniary penalty provisions containing a mens rea element? In the criminal law, mens rea provides procedural protection for defendants. It demands greater certainty as to the defendant’s liability and so reduces the likelihood that criminal punishment will be imposed on the morally blameless. The criminal law demands proof of mens rea because of the high stakes that are involved and because of the inequality of the parties involved. Where civil pecuniary penalties require the establishment of some element of knowledge or intention, such a requirement plays a similar role. Given that civil pecuniary penalties can result in very high monetary penalties, this may be desirable.
6.140Also, there is nothing unusual about requiring a degree of blame for the imposition of civil liability. A person cannot be sued successfully in tort unless s/he was negligent – that is, fell below a hypothetical standard based on the state of mind of a reasonable person confronted with the same set of circumstances – and a nexus exists between that negligence and the harm caused.
6.141Moreover, as discussed in chapter 4, in part the premise of civil pecuniary penalties is that, in a regulatory context, there may be breaches of the law that, for certain reasons do not warrant the imposition of a criminal penalty but still require some sanction. If this premise is accepted, it may be thought that there will inevitably be contraventions which are targeted by civil pecuniary penalties which involve a fault element. On this basis, we can see no reason why some civil pecuniary penalties should not be drafted to include an element of moral culpability.
Q20 Do you agree that there should be no prohibition on civil pecuniary penalties being used for contraventions which entail some degree of moral blameworthiness?
What issues are raised by imposing civil pecuniary penalties on the basis of strict or absolute liability?
6.142Most existing civil pecuniary penalty provisions are silent as to fault. In those circumstances, the enforcement body has to prove only the physical elements of the contravention on the balance of probabilities. In many cases the defendant can exonerate him or herself on the basis of a specific statutory defence. An example is s 124B of the HSNO Act which provides that the Court can order a pecuniary penalty if the regulator establishes the physical requirements of the contravention, for example, that a person imported a new organism in breach of the Act. But the Court must not make the order “if the person satisfies the court that the person did not know, and could not reasonably have known, of the breach”. The defendant has the burden of proving the lack of knowledge on the balance of probabilities. In contrast, some Acts are silent as to any defence.
6.143This raises a number of questions:
(a) Does silence as to any fault requirement mean that the provision is necessarily a strict or absolute liability one?
(b) How might the Court decide between strict and absolute liability?
(c) What are the available defences and, in particular, does the common law defence applicable to strict liability criminal offences – of total absence of fault – apply?
6.144Below we consider these questions. We determine that the answers to them are not entirely clear. This, we suggest, means that there is a need for civil pecuniary penalty provisions to be drafted in a manner as to be express about intention and defences.
(a) What does silence about fault in civil pecuniary penalty provisions mean?
6.145In the criminal field, where a provision is silent about fault, the starting point is that it is presumed that proof of mens rea is nonetheless required. In support of this presumption, New Zealand case law has drawn on Lord Reid’s statement in the House of Lords decision in Sweet v Parsley that:
It is a universal principle that if a penal provision is reasonably capable of two interpretations, that interpretation which is most favourable to the accused must be adopted.
6.146In deciding whether to override the presumption, the court will determine whether the provision is a “public welfare regulatory” one, rather than one that is “truly criminal”, and so whether it should apply strict liability. This is a question of statutory interpretation. It involves consideration of the wording of the provision, the nature of the offending in terms of the degree of moral condemnation elicited by the offence, the basis on which it has been outlawed (for example, whether it arises in the regulation of a specialist regime), the purpose and scheme of the legislation, and the severity of the punishment.
6.147Is it intended that the Court should undertake a similar process for civil pecuniary penalty provisions which are silent as to fault? That is, should there be a presumption that fault is required unless it is plain from the statute that the provision was intended to be one of strict or absolute liability? It could well be argued that Lord Reid’s statement in Sweet v Parsley applies equally to civil pecuniary penalties: that if a penal provision is capable to two interpretations, the more favourable should be preferred.
6.148On the other hand it may also be significant that many civil pecuniary penalty provisions already arise in a context of either regulatory or specifically “public welfare regulatory” breaches: those in the fields of dairy and telecommunications regulation, environmental law and the regulation of securities and financial markets clearly fall into these categories. This may favour a more straightforward assumption of strict liability. However, it might be less clear that the overseas investment regime, for example, meets these characteristics. What approach should or might the Court take under that statute?
6.149There has been little judicial discussion of this issue in New Zealand. The matter has arisen in the context of alleged insider trading breaches, where the issue has been whether, under the Securities Markets Act 1988, breach of insider conduct rules requires mere possession of the information or whether the information had to be actually used in dealing. In Colonial Mutual Life Assurance Society Ltd v Wilson Neill Ltd (No 2) Heron J suggested that the provision may be one of strict liability (that is mere possession is enough), subject to the MacKenzie defence of total absence of fault although he did not finally decide the matter. Again without finally deciding the matter, the Court of Appeal disagreed, indicating that while absence of moral fault would be important to setting the size of a penalty, it had no bearing on liability. The Court considered that since the Act provided for exceptions from liability (for example in Chinese wall situations) there was no room for the principle applied in MacKenzie and Millar. Subsequently, in Haylock v Southern Petroleum NL the Court of Appeal determined that:
The logical approach begins with the statute. In the words and scheme of the provision imposing liability there is no requirement for proof of use of inside information linking its possession to the conduct giving rise to liability. On the contrary the indications are the other way.
6.150On its interpretation of the legislative scheme and the policy on which the provisions were founded, the Court considered that the scheme could “operate effectively on the basis of absolute liability” and that “the provisions as drafted are workable and avoid the complexities inherent in proof of motivation or influence”.
6.151In these cases the courts have approached the issue as one of statutory interpretation. There has been no discussion of whether the nature of civil pecuniary penalties has a bearing on the issue. The cases give no express support to any suggestion that there should be a presumption in favour of a requirement of moral culpability.
(b) How might courts decide between strict and absolute liability?
6.152Is it anticipated that civil pecuniary penalties that are silent as to fault should be imposed on strict or absolute liability? Examples arise in the overseas investment and anti-money laundering regimes which are silent as to whether any mental element is required for the imposition of a civil pecuniary penalty but also do not list any defences.
6.153In the criminal field, where courts have displaced the presumption of mens rea, their preference has been for strict rather than absolute liability, with a general defence of total absence of fault. What is the appropriate reasoning where civil pecuniary penalties are concerned? Drawing again on Lord Reid’s statement, there is a strong argument that strict liability should be favoured on the basis that civil pecuniary penalties are punitive in nature. However, thus far the case law does not expressly favour any suggestion that strict liability should be preferred to absolute liability.
(c) What defences are available?
6.154In Colonial Mutual Life, the Court of Appeal disagreed with Heron J in the High Court as to whether the civil pecuniary penalty provision at hand was “subject to the MacKenzie defences”. However, it did so on the basis of its interpretation of the statute rather than any express debate about there being a potential difference between criminal and civil strict liability. The Court of Appeal suggested that because the legislative scheme included other exceptions and defences, there was no room for a defence of total absence of fault. It may be inferred from this that courts will apply the total absence of fault defence in circumstances where they conclude that the relevant statute does not rule it out. However, again, the position is not clear.
Conclusion
6.155Two issues arise from the preceding discussion. First, we suggest that there is an even greater need for clarity and specification in the drafting of civil pecuniary penalties when it comes to the physical and mental (if any) elements of the breach and the available defences than for criminal offences. It is not clear whether and to what extent it has been anticipated by policy makers that the rules and presumptions of the criminal law should apply to civil pecuniary penalties. This may present problems of interpretation for the courts. The courts already have a difficult task in determining whether a criminal offence is a mens rea, strict or absolute liability one. Given the novelty of, and lack of discussion about, the nature of civil pecuniary penalties these problems may be exacerbated. We suggest, then, that civil pecuniary penalties should be drafted expressly to apply or exclude fault and should set out all the available defences.
6.156Secondly, what guidance should be in place for policy makers about the decision to opt for mens rea, strict or absolute liability civil pecuniary penalties? In particular, should the same restrictions that are suggested in the LAC Guidelines about absolute liability civil pecuniary penalties apply?
Q21 Should civil pecuniary penalty provisions be drafted to expressly require or exclude fault and to set out all the available defences?
Q22 What guidance should be in place for policy makers about the decision to opt for mens rea, strict or absolute liability civil pecuniary penalties? Specifically, should there be guidance that absolute liability civil pecuniary penalties should be contemplated only in rare circumstances when : (a) there is an overwhelming national interest in using them as an incentive to prevent certain behaviour occurring, regardless of fault; and
(b) there is a cogent reason in the particular circumstances for precluding a defence of total absence of fault?
Ancillary liability in civil penalty provisions
6.157Like criminal offences, some civil pecuniary penalties can be imposed not only on the person who produces the result which is prohibited by the penalty provision, but also on persons who are somehow involved: those who assist or encourage others (accessories); those who organise the contravention of the provision by others (conspiracy); and those who try to contravene the provision but fail (attempts). We use the global term “ancillary liability” to refer to this kind of liability. An example is found in s 83 of the Commerce Act 1986 (pecuniary penalties for breach of business acquisition prohibitions) which imposes liability on those who contravene s 47 and those who attempt to contravene; who conspire to contravene; and who aid, abet, counsel, procure, induce or attempt to induce, or are knowingly concerned in or party to a contravention.
6.158Ancillary liability can also occur in private civil claims (for example, inducing breach of contract) although it is more limited than in the criminal sphere.
6.159Without assessing in depth the policy justifications for ancillary liability in each civil penalty regime, we highlight two issues concerning statutory drafting and statutory interpretation which may deserve further consideration.
Ancillary liability in the criminal law
6.160The extension of liability to ancillary contraventions is an established feature of the criminal law. Howard’s Criminal Law states the rationale for the imposition of ancillary liability:
… the criminal law as an instrument of social regulation would be seriously defective if it confined itself to [primary contraventions]. Little reflection is needed to perceive that one who attempts a crime is hardly less a menace to society than one who achieves it and that an accomplice or conspirator, by reason of his organisational ability, often is considerably more of a menace than the principal offender.
6.161The Crimes Act 1961 contains a number of provisions addressing how and when ancillary liability arises for attempts, accessories, and conspiracy. Section 66(1) sets out the liability of accessories (or parties) to an offence:
66 Parties to offences (1) Every one is a party to and guilty of an offence who—
…
(b) does or omits an act for the purpose of aiding any person to commit the offence; or
(c) abets any person in the commission of the offence; or
(d) incites, counsels, or procures any person to commit the offence.
6.162The mens rea required under s 66(1) is intent. Not only must the accessory intend their own actions, they must also act with the intent thereby to aid, abet, incite, counsel or procure the conduct of the primary offender.
Ancillary liability for civil pecuniary penalties
6.163The Commerce Act 1986, the Unsolicited Electronic Messages Act 2008 (UEM Act) and the Financial Markets Conduct Bill all contain ancillary liability provisions. These vary in terms of whether they cover attempts; assisting or encouraging; and/or conspiring to contravene. For example, s 15 of the UEM Act covers assisting and conspiring, but not attempts. It states:
15 Third party breaches of Act A person must not—
(a) aid, abet, counsel, or procure a breach of any of sections 9 to 11 and 13; or
(b) induce, whether by threats or promises or otherwise, a breach of any of sections 9 to 11 and 13; or
(c) be in any way, directly or indirectly, knowingly concerned in, or party to, a breach of any of sections 9 to 11 and 13; or
(d) conspire with others to effect a breach of any of sections 9 to 11 and 13.
6.164It is not surprising that some civil pecuniary penalties provide for ancillary liability, and draw on statutory language and formulations used in the criminal law. Like criminal offences, civil pecuniary penalties are a State-sought regulatory instrument seeking to modify behaviour. Their effectiveness might be constrained if they were limited to the primary person in breach.
6.165We note in chapter 3 that “hybrid” forms of regulation such as civil pecuniary penalties need robust analysis and policy justification. Similarly robust analysis is required when determining whether to extend liability for these penalties to ancillary contraventions, and whether defences or immunities should be made available for third parties not intended to be caught under the regulatory regime.
6.166Space does not permit an in-depth critique of when and where this is appropriate, but the following points give an idea of why ancillary liability provisions might be used. For example, providing for accessory liability can be a method of making a body corporate a party to the breach of its individual officers, or to extend liability to professional advisers implicated in the breach. A conspiracy provision may assist in breaking down powerful groups in which some parties do not directly contravene the provision but provide opportunities to do so.
6.167We wish to draw attention to two issues concerning the comparison between ancillary liability in the criminal law and for civil pecuniary penalties. The first is the disparity between accessorial liability under s 66 of the Crimes Act and accessorial liability as provided for in the Commerce Act, the UEM Act and the Financial Markets Conduct Bill. The latter provisions capture those who are “in any way, directly or indirectly, in any way knowingly concerned” in the breach – which provides for a markedly broader extension of liability than in s 66, which would apply if a criminal offence were used. Given the lower standard of proof, there is a question whether it is appropriate for the boundaries of ancillary liability for a civil pecuniary penalty to extend beyond the orthodox Crimes Act formulation.
6.168The second issue concerns how the courts will apply orthodox criminal law understandings of ancillary liability in civil pecuniary penalty proceedings. An example of this is the discussion in Commerce Commission v NZ Bus Ltd of the level of awareness required to establish accessorial liability under s 83 of the Commerce Act (business acquisitions). In the High Court the vendors in a transaction that breached s 47 had been found liable as accessories. On appeal, Hammond J noted that the orthodox criminal law approach is taken to accessory liability for restrictive trade practices, that is, the accessory must know of the essential facts which make up the contravention, and intentionally participate in it. But he suggested this approach might not be appropriate for business acquisitions, because of the potential for “grey areas” around the facts that establish the substantial lessening of competition and the difficulty of stating what the alleged accessory had to know about them. He suggested instead a test of “dishonest participation”, in which the knowledge of the alleged accessory would be directly relevant but not determinative.
6.169Ultimately the Court of Appeal determined that the vendors should not have been found liable as accessories whichever of the tests was used. But the case illustrates that criminal law tests may not be appropriate for all civil pecuniary penalties, depending on the nature of the contravention and the regulatory area. In terms of s 83, the approach taken will have a direct bearing on the liability of professional advisers to merger transactions. As noted by the courts, an overly broad approach risks over-deterrence of professional advisers but too narrow an approach could negate the effectiveness of the section.
Q23 Should civil pecuniary penalty provisions be more explicit as to the degree and nature of knowledge required to establish ancillary liability?
Individual and corporate liability
6.170Notions of corporate liability are important as many civil pecuniary penalties may be imposed on a body corporate as well as one or several natural persons (such as its directors, officers or employees). At present the statutes take a range of approaches to determining when each person is liable for a breach, Common law tests of corporate responsibility may also apply.
6.171Corporate responsibility is a complex area of law which we cannot cover in detail. But two points particularly relevant to civil pecuniary penalties are worth making.
6.172First, it is possible under some civil pecuniary penalty regimes for both an individual and a body corporate to be principally liable for a breach. Section 90(2) of the Commerce Act provides that any conduct engaged in on behalf of a body corporate by a director, servant, or agent of the body corporate acting within the scope of his actual or apparent authority shall be deemed to have been engaged in also by that body corporate. In Giltrap City Ltd v Commerce Commission, the Court of Appeal held that by dint of section 90(2) there were two principal contraveners of s 27: the dealer principal of the car dealership company and the company itself. Similar provisions to section 90(2) appear in, for example, the HSNO Act and the Financial Markets Conduct Bill. Therefore, as in Giltrap, the Court will be in a position to impose penalties for two principal contraveners in respect of a single act.
6.173What is the correct approach to penalty quantum in this situation and should the legislation provide more guidance for the Court? Currently no civil pecuniary penalty statutes give guidance on how this should affect the discretion to impose a penalty and if so, how much. Since its amendment in 2001, the Commerce Act provides a greater focus on penalising individuals unless there is good reason not to. But determining penalty quantum is still a matter of court discretion. In previous Commerce Act penalty proceedings, concerns over double punishment have led the Court to share out a single penalty between the individual and the corporate, rather than imposing separate penalties on each. Is this appropriate? Should the legislation provide more explicit guidance on penalty quantum in these situations?
6.174The second issue is whether it would be useful to have guidance regarding the statutory mechanisms for imposing liability on a body corporate and its individual officers. Just one example is deemed liability: making individual directors of a company liable by virtue of their position, even if they were not themselves involved in the breach. Directors may also be liable as accessories to the company’s breach if the regime provides for accessory liability. Guidance might be considered useful if there are identifiable situations where a particular approach is preferable or desirable. For example, if a statute contains parallel criminal offences and civil pecuniary penalties, should corporate liability be imposed on the same basis for both? Are there policy arguments that justify taking different approaches towards corporate liability for criminal sanctions and civil pecuniary penalties within a single regulatory regime?
Q24 Should civil pecuniary penalty statutes provide guidance to courts determining penalty quantum in cases where both a company and an individual are principally liable for the same contravention?
Q25 Should there be guidance for policy makers about the methods of attributing or ascribing liability between a body corporate and its officers in a civil pecuniary penalty regime?
