Royal Mail Group Plc v The Postal Services Commission [2008] EWCA Civ 33

[2008] EWCA Civ 33

Case No C1/2007/0702

IN THE SUPREME COURT OF JUDICATURE

COURT OF APPEAL (CIVIL DIVISION)

[2007] EWHC 635 (Admin)

ON APPEAL FROM QBD, Administrative Court

THE HONOURABLE MR JUSTICE MITTING

Venue Royal Courts of Justice, Strand, London, WC2A 2LL

Date 05/02/2008

Before

LORD JUSTICE PILL

LORD JUSTICE SEDLEY

LORD JUSTICE RIMER

Between

ROYAL MAIL GROUP PLCAppellant

THE POSTAL SERVICES COMMISSIONRespondent

Michael Beloff QC and Pushpinder Saini (instructed by Messrs Slaughter & May) for Appellant

Dinah Rose QC (instructed by Messrs Maclay, Murray & Spens) for Respondent

Hearing Hearing date : 22 November 2007

Judgment

Lord Justice Pill :

[1]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.

[2]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.

[3]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.

[4]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.

The Statutory and Policy Background

[5]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:

“(3) Subject to section 3 and subsection (1), [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.”

[6]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”.

[7]Section 30(1) of the 2000 Act provides: “If the Commission is satisfied that a licence holder:-(a) Has contravened any condition of his licence,

(b) Is contravening any such condition, the Commission may impose on the licence holder a penalty of such an amount as is reasonable”.

[8]Under the heading “Statement of Policy in Relation to Penalties”, Section 31 provides, in so far as is material: “(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. (3) The Commission may revise its statement of policy and, where it does so, it shall publish the revised statement ”.

[9]The relevant statement of policy provides, at paragraph 8:

“Postcomm will endeavour to ensure that any decisions it takes in relation to financial penalties are – • Soundly based in fact, • Reached in a manner that is procedurally fair”

Amongst the procedural requirements that Postcomm must follow “to achieve this aim”, is that in paragraph 9:

“Seek always properly to investigate allegations or suggestions before deciding whether it is appropriate to consider the imposition of financial penalties and in due course to impose them”. • Soundly based in fact, • Reached in a manner that is procedurally fair”

[10]Under paragraph 10, Postcomm is required, in each case, to – “Give the licence holder an indication of –• 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”.

• 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”.

[11]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:

“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”

. A list of aggravating and mitigating factors appears at paragraphs 15 and 16. Having regard to the point taken on this appeal, they need not be listed. • 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”.

[12]Paragraph 18 provides, in so far as is material:

“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 • 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”. • 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”

The Licence Conditions

[13]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: “(a) the selection, vetting, initial training, follow-up training, provision of incentives to and disciplining of its staff, agents, sub-contractors, directors and officials, (b) the security of its buildings and vehicles, (c) . . . . (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”.

[14]Paragraph 4 provides:

“The licensee shall use all reasonable endeavours at all times to apply its mail protection procedures”

. Under paragraph 8, the licensee is required to submit annual reports to Postcomm on the operation of its mail protection procedures. It is required to set out:

“Estimates of the number of postal packets during that year which were – (a) lost, (b) stolen, (c) damaged, (d) interfered with”

The Facts

[15]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.

[16]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.

[17]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).

[18]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.

Submissions

[19]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.

[20]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.

[21]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:

“It does not, as a matter of language, in any way prevent it [Postcomm] from making estimates, assessments or even assumptions about facts before arriving at the amount of a penalty to be imposed”

. The judge went on to reason, erroneously, it is submitted, in paragraph 26: “As I have already stated, [Postcomm] 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”.

[22]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.

[23]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.

Postcomm’s Reports

[24]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: “Senders and recipients of letters are entitled to expect that Royal Mail and its staff and contractors will treat the letters entrusted to them with care and that the risks of their letters and packets being lost, stolen, damaged or interfered with are minimised. It is also in the interests of operators that users should be confident that their mail is treated with care, because it is only if there is confidence in the medium of mail on the part of users that the mail market will continue to grow. In short, confidence that mail will be properly handled through observances of Condition 8 of Royal Mail’s licence is fundamental to the continuing health of the UK mail market. Any contravention of Condition 8(4) had the potential to be serious. 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. 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”.

[25]In relation to the 50% factor, the reasoning of Postcomm was as follows: “8.24 It would be unreasonable to expect that the use, by Royal Mail, of all reasonable endeavours to apply its Mail Integrity Procedures at all times would 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 the contraventions of Condition 8 by Royal Mail that Postcomm has identified to half the notional value of lost mail in 2004/05. This gives an initial starting point for the calculation of a penalty of £26.276 million”.

[26]Following Royal Mail’s challenge to the factor of 50%, Postcomm replied, in the June 2006 report: “3.36 Postcomm assessed that compliance with Condition 8(4) could have reduced the number of items lost, damaged, stolen or interfered with by 50%. This means that 50% of the lost mail volumes are acknowledged solely for the purposes of this penalty calculation. Royal Mail questions whether the reduction should be set as high as 50%. Postwatch is concerned that there is an assumption that the application of all reasonable endeavours at all times would not reduce the figure by more than 50%. Postcomm stresses that neither Royal Mail nor Postwatch has put forward an alternative figure or a methodology for assessing one. 3.37 Postcomm recognises that the licence condition does not place an obligation on Royal Mail to reduce losses to zero. Postcomm does not consider such an obligation would be reasonable, but its judgment is that the use of all reasonable endeavours at all times to apply its Procedures could realistically be expected to reduce losses. Postcomm is not asserting that any level of losses is acceptable but has reached a judgment on the level which might reasonably have been attained by compliance with Condition 8(4) at the time of the Review. 3.38 Postcomm has made considerable efforts to obtain benchmark information to inform its judgment, both internationally and from within the UK, as follows:• 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. 3.39 In conclusion, although Postcomm recognises that the information above may be of limited value in producing a completely accurate figure, it does suggest that a substantial improvement in the level of loss, through compliance with Condition 8(4) is achievable and it is Postcomm’s assessment that a figure of 50% is reasonable and proportionate, having regard to all the circumstances”.

• 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 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.

[27]Following further challenge in a solicitor’s letter dated 30 June 2006, Postcomm stated, in the August 2006 report: “2.8 Postcomm concluded that it would be unreasonable to assume that compliance with Condition 8(4) at the relevant time would have enabled Royal Mail to ensure that no mail was interfered with, lost, damaged or stolen. Equally, given the seriousness of Royal Mail’s failings, Postcomm considered that it was reasonable to infer that, had those failings not occurred, a substantial volume of mail which was interfered with, lost, damaged or stolen, would have been safely delivered. Any attempt to quantify possible consequences of licence compliance must, necessarily, be an approximation. 2.11 Postcomm is content that it has given adequate reasons in support of the exercise of its judgment and further asserts that the explanation as to the limitations of the data about other operators and its subsequent exercise of judgment, as set out in the June report, remains appropriate. 2.13 Having considered Royal Mail’s representations, Postcomm remains of the view that the figure of 50% is reasonable. It represents a substantial burden imposed on mail users by Royal Mail’s failings, whilst recognising that some mail losses are inevitable even if all reasonable endeavours are used at all times. Royal Mail’s representations regarding the penalty calculation methodology do not undermine Postcomm’s conclusion as to the amount of the penalty set out in the June report. Postcomm noted that Royal Mail has been unable to put forward an alternative penalty calculation methodology which it believes will more accurately lead to the assessment of a penalty that is reasonable and proportionate”.

[28]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:

“Postcomm has treated these figures with caution since there are different definitions and measures of “loss” in each country”

. Had other European countries experienced higher levels of loss than the United Kingdom, it would have been more difficult, as Miss Rose accepts, to attribute United Kingdom losses to the breaches of condition proved.

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

“8.36 Throughout the review period Postcomm and the consultants experienced substantial problems with Royal Mail’s attitude to the review and in its facilitation of it. 8.37 During the course of the review Postcomm found some Royal Mail staff to be: • 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”

. Having given limited particulars, the report continued, at paragraph 8.40: “8.40 Postcomm has expressed its concern to Royal Mail at Board level about the conduct of some Royal Mail personnel during the review. The Board have reacted positively to these expressions and, as a result, Postcomm hopes that the dialogue entered into since then means that it will not be faced with a similar situation in any future investigations into Royal Mail’s compliance with its licence obligations. However Postcomm does consider that the conduct of Royal Mail personnel during this review needs to be taken into account in assessing the level of financial penalty now proposed”. • 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”.

[30]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:

“Postcomm now proposes a reduced penalty to £9.62 million. Postcomm has concluded that £9.62 million is a proportionate level of penalty having regard to the seriousness of the breaches and the need to incentivise compliance with mail integrity obligations both now and in the future”

. In paragraph 3.6 of the August 2006 report, it was stated:

“Therefore, Postcomm has determined that £9.62 million is a reasonable and proportionate level of penalty having regard to the seriousness of the breaches and the need to incentivise continuing compliance by Royal Mail with its mail integrity obligations”. “Therefore, Postcomm has determined that £9.62 million is a reasonable and proportionate level of penalty having regard to the seriousness of the breaches and the need to incentivise continuing compliance by Royal Mail with its mail integrity obligations”

Conclusions

[31]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).

[32]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)).

[33]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.

[34]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.

[35]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.

[36]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.

[37]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.

[38]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.

[39]I would dismiss this appeal.

Lord Justice Sedley:

[40]I agree.

Lord Justice Rimer:

[41]I also agree.