Phillipson v Maritime New Zealand HC Nelson CRI 2010-442-29 [2011] NZHC 806 (5 July 2011)

Last Updated: 4 August 2011

IN THE HIGH COURT OF NEW ZEALAND NELSON REGISTRY

_{CRI 2010-442-29}

BETWEEN TONY PETER PHILLIPSON Appellant

AND MARITIME NEW ZEALAND Respondent

Hearing: 19 April 2011

Counsel: T Stallard for Appellant

I Murray for Respondent

Judgment: 5 July 2011

_{JUDGMENT OF MILLER J}

Introduction

[1] The Maritime Transport Act 1994 provides in s 409 that on convicting ―any person of an offence‖ under certain specified provisions of the Act the District Court may ―order that person to pay an amount not exceeding three times the value of any commercial gain resulting from the commission of that offence if the Court is satisfied that the offence was committed in the course of producing a commercial gain.‖ The value of any gain is ―assessed by the Court‖. The penalty is imposed ―in addition to any other penalty the Court may impose‖ under the Act; such other penalties include a fine.

The specified provisions create a variety of regulatory offences such as acting without necessary maritime or marine protection documents, failing to comply with

_{audit requests, discharging harmful substances, and causing danger.}1

1 _{Sections 64, 65, 68, 70, 237, 238, 263, 264, 277, 278 and 400.}

TONY PETER PHILLIPSON v MARITIME NEW ZEALAND HC NEL CRI 2010-442-29 5 July 2011

[2] This sentence appeal raises two issues: whether the District Court may impose a pecuniary penalty under s 409 on a person other than the entity which earned the commercial gain, and what commercial gain means. It seems that this Court has not previously considered these issues under the Maritime Transport Act, although the language of commercial gain is deployed to the same end elsewhere, notably in the Commerce Act 1986.

The narrative

[3] Alfred Fishing Ltd owns the vessel Miss Otago. The firm also holds a fishing permit and enjoys access to fishing quota. Mr Phillipson is its sole shareholder and director, and he works the vessel. The company customarily pays its entire annual profit to him as a salary.

[4] On 28 February 2009 the vessel’s safe ship management certificate expired. Mr Phillipson undertook two fishing voyages in April and May, having decided not to take the vessel from the water for the necessary survey until the tuna season ended. The vessel was then surveyed and a certificate duly issued.

[5] Mr Phillipson and the company were each charged under s 68(2), which provides that every person commits an offence who operates, maintains, services, or does any other act in respect of any ship knowing that a maritime document – which includes a safe ship management certificate – must be, but is not, held before that act may lawfully be done. They were convicted after a defended hearing.

[6] Mr Phillipson was further convicted under s 406(a) of making a false declaration to Maritime New Zealand. He had declared that Miss Otago had not operated commercially during the same period.

[7] Catch returns filed with the Ministry of Fisheries showed not only that the vessel had operated commercially during the two voyages but also that revenue of approximately $12,000 had been earned. That sum accrued to Alfred Fishing.

[8] The two defendants were sentenced on 30 November 2010. Alfred Fishing was fined $1200 in total. It has not appealed. Mr Phillipson was fined $6,000 for each of the two s 68(2) offences and ordered under s 409 to pay a further $4,000, representing part of the commercial gain. He was fined $800 for the s 406(a) offence, which does not attract an additional penalty under s 409. He appeals only the commercial gain penalty, and then only on two points of principle.

Whether commercial gain penalty may be imposed on director/shareholder who did not directly receive the gain

[9] Mr Stallard accepted that Mr Phillipson was properly convicted under s 68(2) but argued that the District Court lacked jurisdiction to impose a pecuniary penalty upon him, for the gain accrued to the company. Further, it was the company that held the fishing permit and quota and which completed returns under the Fisheries Act and held the safe ship management certificate. The Judge took Mr Phillipson to be the alter ego of the company, but he was relevantly an employee, paid a salary. He should not be regarded as ―that person‖ under s 409(1), which provides:

409 Additional penalty for offence involving commercial gain

(1) In addition to any other penalty the Court may impose under this Act, the Court may, on convicting any person of an offence against section 64 or section 65 or section 68 or section 70 or section 237 or section 238 or section 263 or section 264 or section 277 or section

278 or section 400 of this Act, order that person to pay an amount not exceeding 3 times the value of any commercial gain resulting

from the commission of that offence if the Court is satisfied that the

offence was committed in the course of producing a commercial gain.

[10] This argument requires that the section be read down, for as a matter of construction the person convicted is liable to pay where commercial gain resulted from the commission of his offence. The section does not require that ―that person‖ receive the gain himself, although the drafter might easily have so provided. As this case illustrates, there need not be a single defendant who is liable under s 409, and

―any person‖ convicted is liable to the penalty. Other offences that attract an additional penalty also appear capable of commission by both a corporate maritime

document holder and a human agent who does a proscribed act, such as failing to perform inspections when required by the Director.2

[11] The object of s 409 is general and specific deterrence (a point to which I return below). That object allows that an agent also face an additional penalty, particularly where the agent also benefits financially from his offending. Of course the extent of any commercial gain to the agent must be an important consideration, as must the purpose for which the agent acted. Over-deterrence is possible where his economic interest in the regulated activity does not match the principal’s. But to say all of that is not to accept that the court lacks jurisdiction to penalise him where the qualifying commercial gain accrued to the principal. In many cases, including this one, the agent may also share more or less immediately in that gain.

Commercial gain

[12] The Judge found that:

The offending was clearly committed in the course of producing a commercial gain. On the face of it, I accept the informant’s submission that commercial gain can be said to mean the return, in money terms, from the product sold from that commercial operation.

But to impose a penalty equivalent to the gain would be excessive having regard to the financial position of the defendants. It was in the interests of the community and Mr Phillipson’s family and employees that he be able to continue fishing. The Judge accepted Mr Stallard’s rule of thumb that about one-third of the gross return is profit, with one-third going to the vessel’s costs and one-third to the crew, and set the penalty at $4,000.

[13] Mr Stallard argued before me that the Judge did not expressly address his submissions about the meaning of ―commercial gain‖. In particular, the court must deduct all costs associated with the fishing activity before fixing a penalty. In this case, no actual gain accrued to either the company or Mr Phillipson after paying the

_{latter’s salary.}

2 Sections 54(1) and 70.

[14] I begin with the language and purpose of s 409. The section requires that there be commercial gain, that it should result from the commission of the offence, and that the offence should have been committed while producing a commercial gain. It is not enough, in other words, that there should be commercial gain resulting from the offence; the activity that supplied the setting for the offence must have had commercial gain as its object.

[15] The term ―commercial gain‖ is not defined in the Maritime Transport Act or in numerous other statutes in which it informs a penalty, which suggests that the court enjoys flexibility in identifying what, if any, commercial gain has resulted from any given offence.3 In ordinary usage the term simply connotes a benefit of a commercial nature. Consistent with that, I observe that commercial gains from the offences to which s 409 relates may take the form of avoided costs rather than

increased revenue. For example, the commercial gain from dumping pollutants at sea presumably would comprise the avoided costs of lawfully disposing of them rather than the revenue from the commercial activity in which the vessel was engaged, assuming of course that the vessel could have continued to store the pollutants until the voyage ended.

[16] The gain of which the section speaks is gain ―resulting from‖ the unlawful activity. For the regulatory offence of operating a ship without a safe ship management certificate any causal connection to profits is likely to be indirect, and so it is in this case. It is not now disputed that the revenue from commercial fishing during the two voyages resulted from the unlawful activity, for the vessel would otherwise have been in port undergoing survey.

[17] The penalty concerns commercial gain and commercial purpose, and it is found in legislation regulating economic activity. It plainly pursues general and

_{specific deterrence by eliminating economic incentives to offend, so ensuring that}

3 Notably, the Civil Aviation Act 1990, s 47; Fair Trading Act 1986, s 40A; Health Act 1956, s

69ZZW; Immigration Advisers Licensing Act 2007, s 72; Resource Management Act 1991, s

339B; Submarine Cables and Pipelines Protection Act 1996, s 15; Telecommunications Act

2001, s 156R; United Nations Convention on the Law of the Sea Act 1996, s 8; Waste Minimisation Act 2008, s 67. A more elaborate form is found in the Commerce Act 1986, the Hazardous Substances and New Organisms Act 1996, the Meat Board Act 2004, the Electricity Industry Act 2010, and the Telecommunications Act 2010.

regulatory fines do not become a mere licence fee. Reference to trebling the commercial gain further suggests an economic approach to deterrence. Deterrence is normally achieved when the gains resulting from the offending activity are eliminated, but if prospects of detection and enforcement are low the offender may find it profitable to continue so long as it must disgorge gains only on those occasions when it is caught and punished. In such circumstances the optimal penalty arguably is the gain from the offence multiplied by the probability of detection and

enforcement.4

[18] Nonetheless, the court need not fix the penalty as the commercial gain; rather, it assesses the gain so it can calculate the maximum penalty, which is set at three times commercial gain.

[19] Mr Stallard argued that, putting trebling to one side, a penalty equivalent to net gain suffices for deterrence. Mr Murray resisted this proposition, arguing that an offender should receive no credit for costs incurred in earning the commercial gain. He found support in the judgment of the Court of Appeal in R v Pedersen.5 That case concerned the Proceeds of Crime Act 1991, under which the court must value benefits derived from the commission of an offence and order the offender to pay a pecuniary penalty assessed by reference to such benefit. The offender purchased cannabis ―on tick‖ and removed a small quantity as his cut before on-selling it to an

undercover officer for the same price that he paid for the larger quantity. His profit was a modest proportion of the gross price. Cooke P, speaking for a majority, found that the whole price charged and received by the offender was a benefit derived from selling the cannabis. He added that:6

The Proceeds of Crime Act is not an income tax statute, nor is it one concerned with lawful commercial operations. There is no reason to suppose that it is limited to assessing net gains or trading profits: such an approach to the Act would, we think, be based on considerations foreign to its purview.

4 _{Richard Posner Economic Analysis of Law ( 8}th _{ed,Wolters Kluwer, Austin, 2010) at 277.}

5 _{R v Pedersen [1995] 2 NZLR 386 (CA).}

6 At 390.

[20] Further, ―to allow a deduction would not only water down the strength of the legislation but also involve inquiries into criminal deals on evidence likely often to be unreliable.‖ For good measure he added:7

Being a measure designed to deter serious crime by demonstrating emphatically that it does not pay, the Proceeds of Crime Act should be judicially administered in that spirit. In simple cases of serious drug selling the Courts should be slow to award less than the maximum penalties against sellers.

[21] I accept that over-deterrence may little concern the court where the offending behaviour possesses no social value. But commercial fishing benefits the community, as the Judge recognised in this case. The legislation proscribes not the underlying commercial activity but the breach of regulatory obligations that attach to it. Commercial gain penalties should ensure that those working in the maritime transport industry face incentives to comply with those obligations. It follows that, in some cases at least, the court must be sensitive to a risk of over-deterrence should it set the penalty at a higher level than necessary to eliminate the incentive to offend.

[22] However, it does not follow that the court must deduct costs of the offending commercial activity when setting a penalty under s 409. I have already observed that commercial gain is a concept of broad meaning.8 It has further been said of the assessment of a commercial gain penalty that it is as a matter of practical necessity a

―broad brush affair‖. That observation was offered by the Commerce Select Committee when reporting on the Commerce Amendment Bill 1999.9 The Committee rejected a submission that accounting profit should replace commercial gain as the appropriate measure. (In doing so the Committee noted similar provisions in other legislation, referencing statutes which use the same language that the Maritime Transport Act now does.) As already noted, the Court of Appeal also pointed in R v Pedersen to difficulties of proof as one reason for using gross gain as the measure of penalty.

[23] Consistent with that broad brush approach, s 409 neither refers to an onus and standard of proof for quantum nor imports Sentencing Act procedures. It is no doubt

7 _{At 391.}

8 _{At 390.}

9 Commerce Amendment Bill 1999 (2962) (explanatory note) at 23-24.

true that by analogy with sentencing practice the informant must establish the

―fundamental facts‖ on which the penalty rests, namely the commercial setting and the existence of some gain, and any aggravating factors.10 But the section simply provides that the court shall assess the commercial gain, without specifying that the penalty must be calculated as a function of that gain.

[24] However, I accept Mr Stallard’s argument in part. A penalty adequately deters if it eliminates the incentive to offend. As a general proposition, and putting those cases in which trebling arises to one side, the incentive is eliminated if the offender must disgorge its net gain from the offending behaviour. Consistent with the statutory purpose, then, the court may allow for costs directly caused by the commercial activity that resulted in the commercial gain, where it can estimate such costs.

[25] It does not follow that the net gain must reflect the offender’s total costs of business, in which Mr Stallard included costs such as salaries and vessel financing and insurance. I would characterise these for purposes of penalty as fixed costs, in the sense that the offender would have incurred them anyway. To allow a deduction for them would be inconsistent with the causal relationship that the legislation requires between the offending and the gain. The incentive to offend would survive the penalty.

[26] The costs that might properly have been deducted in this case were accordingly confined to the running costs of the vessel directly and exclusively caused by the two voyages, such as fuel.

Relationship between fines and pecuniary penalties

[27] The Act provides in s 68 for a fine and an additional pecuniary penalty:

(3) Every person who commits an offence against subsection (1) or subsection (2) of this section is liable,—

(a) in the case of an individual, to imprisonment for a term not exceeding 12 months or a fine not exceeding $10,000:

10 Commerce Commission v Taylor Preston Ltd (1998) NZBLC 102, 598 (HC).

(b) in the case of a body corporate, to a fine not exceeding

$100,000:

(c) in any case, to an additional penalty under section 409 of this Act.

[28] The court normally fixes the penalty with the fine during the sentencing process. The two are connected, the section apparently envisaging that the fine will be fixed first, but the relationship between them is not made clear.

[29] In ordinary usage, a fine is synonymous with a pecuniary penalty. Indeed, the Court of Appeal has defined a fine as a pecuniary penalty imposed by and payable to the state.11 There nonetheless exists a distinction between the two in law. A fine is a criminal penalty the fixing of which is governed by the Sentencing Act, while the court fixes a pecuniary penalty under the specific legislation that authorised it.

[30] When fixing pecuniary penalties in other settings courts sometimes adopt sentencing methodology. However, pecuniary penalties normally focus squarely on deterrence, which is but one of the objects of sentencing.12 Other sentencing considerations - which often mitigate penalty - may assume less relevance in such settings. So this Court has emphasised, in a competition law context, that sentencing is a more nuanced exercise and the analogy between sentencing and pecuniary penalties can only be taken so far.13 In the present setting the legislation notably envisages that the court may impose an additional penalty for deterrence, without being constrained by the maximum fine.

[31] This analysis suggests that, having set the fine, the court ought to approach a penalty under s 409 by estimating commercial gain from the offence and inquiring, by reference to that gain, what further monetary penalty, if any, is needed for specific and general deterrence. When answering that question, the court should recognise that the legislation assumes deterrence may require that the offender disgorge its

_{commercial gain from the offending, and more than that sum in appropriate cases.}

11 _{R v Donaldson CA227/06 2 October 2006.}

12 _{Sentencing Act 2002, s 7(1)(f).}

13 For example, Commerce Commission v EGL Inc HC Auckland CIV-2010-404-5474, 16

December 2010 at [13]–[14]; Commerce Commission v Geologistics International (Bermuda) Ltd HC Auckland CIV-2010-404-5490, 22 December 2010 at [19].

The penalty in this case

[32] The Judge did take the totality of the monetary penalties into account when fixing the additional penalty under s 409. It was open to him to treat Mr Phillipson as the principal offender in substance. Mr Stallard did not challenge the aggregate penalty, which substantially exceeded the commercial gain, presumably reasoning that it reflected the calculated nature of the offending and Mr Phillipson’s attempt to evade detection. The Judge may have underestimated commercial gain by allowing costs that were not causally related to the offending, but no criticism can be made of him for that, for the argument was not developed in the same way in the District Court.

Decision

[33] The appeal is dismissed.

Miller J

Solicitors:

Stallard Law, Nelson for Appellant

Crown Solicitor’s Office, Wellington for Respondent