Swingeing fines for large organisations: Can they be avoided?

The Court of Appeal decision in the Thames Water case

Safety, Health and Environment Matters


In early June, the Court of Appeal handed down judgment in an appeal against sentence brought by Thames Water Utilities Ltd.

The company had been fined £250,000 after pleading guilty to a breach of the Environmental Permitting Regulations resulting from the discharge of untreated sewage into a brook flowing into a nature reserve in an area of Outstanding Natural Beauty. The sewage had polluted a rare alder carr (waterlogged wooded land), and an artificial newt pond, killing invertebrates in watercourses for up to 600 metres.

There was evidence before the sentencing court that the discharge was due to the failure of pumps which had not been routinely maintained despite clear indications that pumps had been failing.

In view of the consequences of the discharge, it was perhaps not altogether surprising that the Court of Appeal upheld the sentence and dismissed the appeal. However, the case has a much wider significance. The Court of Appeal made it clear that, in its view, the sentence had been lenient, and that had the fine been considerably larger, it would still have been upheld.

Sentencing principles

The sentencing court, Reading Crown Court, was bound to follow the new Sentencing Council Definitive Guideline for environmental offences, which came into force in July last year, unless satisfied that it would be contrary to the interests of justice to do so. The Guideline applies both in the Crown Court, and in magistrates courts, which following the coming into force of the Legal Aid, Sentencing and Punishment of Offenders Act 2012 in March this year now are no longer subject to an absolute limit on the amount of the fines they can impose. The Guideline provides, in respect of different categories of offence ranked by culpability and consequences, separate starting points and ranges for fines imposed on companies with different bands of turnover. However those bands do not make specific provision for companies with very high turnovers, such as the appellant in this case, Thames Water.

Instead, the Guideline indicates that "Where a defendant company's turnover, or equivalent, very greatly exceeds the threshold for large companies, it may be necessary to move outside the suggested range to achieve a proportionate sentence"

The sentencing court had sought to achieve this by a limited extrapolation based on the increments in the bands which are set out in the Guideline. However, the Guideline also states that "The combination of financial orders must be sufficiently substantial to have a real economic impact which will bring home to both management and shareholders the need to improve regulatory compliance".

Even before the Guideline came into effect, the Court of Appeal had made it clear in the earlier case (in January 2014) of R v Southern Water Services Limited, that water companies and similar utilities need to take environmental compliance very seriously, and that where there was a previous record of non-compliance which had not been addressed, it would not interfere with fines very substantially greater than the £200,000 fine which had been imposed on the defendant in that case, for unauthorised discharges of untreated sewage into the sea.

Against that background, and given the terms of the new Guideline, it might be thought that the decision by Thames Water to appeal against sentence was a bold one, and that they were fortunate not to have the fine considerably increased.

It appears that the sentencing court had already given the company credit for a prompt guilty plea, without which the fine would have been significantly higher, and also took into account a witness statement setting out the action taken by the company to address the problem.

The Court of Appeal indicated that, in the absence of that evidence, the appropriate starting point for a fine for a company of that size would be significantly into seven figures. The Court also indicated that in the case of the worst cases of contravention by a very large organisation, ie involving deliberate action or inaction, or repeated negligence, the need to "bring home" the need to improve regulatory compliance "may well result in a fine equal to a substantial percentage, up to 100% of the company's pre-tax net profit from the year in question (or an average of there is more than one year involved), even if this results in fines in excess of £100 million".

Wider implications

Directors of very large companies will clearly need to pay heed to this warning. They will also need to bear in mind that the implications go wider than the area of environmental compliance.

This is because a very similar approach as regards turnover is taken in the sentencing guideline for Health and Safety Offences, Corporate Manslaughter, and Food Safety and Hygiene Offences which has just been issued. That Guideline indicates that where an offending organisation's turnover or equivalent very greatly exceeds the threshold for large organisations, it may be necessary to move outside the suggested range to advise a proportionate sentence. 

It is however, also important to realise that merely because a corporation has a large turnover, eye-watering fines are not inevitable if an incident results in prosecution.. It is clear from the Court of Appeal's judgment that considerable significance will be attached to the actual degree of culpability in the particular case. The Court recognised that in the case of a large statutory undertaker, such as Thames Water, no amount of management effort can ensure that no unauthorised discharge can ever occur. Because the whole purpose of the very high fines is to send a message to directors and shareholders on the importance to be attached to securing environmental and health and safety compliance, no purpose would be served by such fines if it was clear that the organisation did attach importance to such compliance. Accordingly, in cases of low or no culpability, it would be wrong to impose a higher level of fine in an organisation simply because of its higher turnover. Culpability on the other hand, would attach to repeated operational failures which might suggest a lack of appropriate management attention to environmental obligations. 

The case is entirely in line with previous case-law and guidance which attaches particular importance to whether or not there is evidence of systemic failings, or failings on the part of senior management.

What businesses can do

In order to avoid swingeing fines, large organisations will therefore need to make it clear that they are proactive in securing regulatory compliance, and that there is a clear culture of zero tolerance for failings in that regard. 

There is very significant potential benefit for organisations in taking steps to review, with the aid of appropriate specialist assistance, their environmental and health and safety compliance, policies methods and systems, and also the way in which these are documented communicated and implemented. Such reviews may well help to dispel any suggestion that the organisation was neglecting its obligations, and may indeed even prevent a relevant incident occurring.

External verification from professional advisers (including SWOT analysis and stress-testing) may also be beneficial, and we have been able to assist a large number of clients with compliance reviews in this way.

At the very least, clear and accepted evidence that the company's board was taking effective steps to secure substantial overall improvement in the company's fulfilment of its duties, was acknowledged by the Court of Appeal in the Thames Water case to represent substantial mitigation if a breach did occur.

What is 'turnover'?

An issue of importance raised by the case is the question of what should be taken into account as turnover for the purpose of assessing fines. Some companies operate high-turnover, but very low-margin businesses. It may also be argued that in many cases monies which pass through a company's accounts are being handled on behalf of customers and others, and should not therefore be treated as part of turnover for sentencing purposes. It may indeed be argued that the policy aims of the guidance would be better served by focusing on the profits out of which dividends and bonuses are paid, as referred to in the observations made in the Court of Appeal.

More than ever before, corporate defendants which find themselves in the dock will need to submit clear, reasoned and coherent financial information to the sentencing court.

That will help ensure that the financial reality of the organisation is considered, and not just a headline turnover figure, which may result in an inappropriate sentence being imposed.

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