Summary

  • New sentencing guidelines are likely to have a dramatic impact on the level of fines imposed on companies convicted of environmental, health and safety (EHS) offences. In a recent environmental case, the Court of Appeal said that a 'very large' company could be fined up to 100 per cent of its pre-tax annual profit even if such fine is in excess of £100 million.
  • Environmental guidelines came into effect on 1 July 2014. Draft guidelines for health and safety, corporate manslaughter and food safety are expected to be finalised and come into effect at the end of 2015 or the beginning of 2016. Once introduced, the guidelines apply regardless of the date the offence was committed.
  • The guidelines focus sentencing more closely on the financial means of the offender, with fines linked to turnover. Fines are required to be "sufficiently substantial to have a real economic impact which will bring home to both management and shareholders the need to improve regulatory compliance". Parallels are being drawn with the very substantial fines for financial services misfeasance.
  • For 'large' companies (those with an annual turnover in excess of £50 million), the norm for very serious EHS offences will be fines of millions, rather than thousands, of pounds. For 'very large' companies (those with an annual turnover significantly in excess of £50 million), fines will potentially be significantly higher.
  • Fines are additional to compensation costs, ancillary orders, and confiscation of any financial benefits under the Proceeds of Crime Act (POCA). The guidelines emphasise that any economic gain derived from the offence must be removed and require compensation and confiscation orders to be considered in all cases.
  • For individuals (including directors, officers and managers of companies) convicted of a health and safety offence, a custodial sentence is a real possibility, and not only in the most serious cases.
  • The ongoing changes to sentencing emphasise the importance of companies reviewing their existing EHS management and compliance systems, and having appropriate mechanisms to ensure compliance by their staff and contractors. It will be increasingly important to avoid prosecution rather than to defend, and to be able to plead mitigation if convicted of an offence. 

New sentencing guidelines: environmental 

In February 2014, the Sentencing Council published new guidelines for sentencing certain environmental offences in England and Wales (available here), which have recently been considered by the Court of Appeal for the first time (see below). The guidelines came into effect on 1 July 2014 and apply regardless of the date the offence was committed. Sentencing guidelines must be followed unless the judge or magistrate feels that it is not in the interests of justice to do so. Such occasions are likely to be rare.
 
The primary aim of the guidelines is to promote consistency in sentencing between courts, and to introduce more suitable penalties that are proportionate to the seriousness of the offence - something which has not happened historically. For the most serious offences, 'large' companies (those with an annual turnover of at least £50 million) could now face fines of up to £3 million. For 'very large' companies the fines could be significantly higher (see below).
 
The guidelines set out a step-by-step approach to establish the appropriate penalties for a given offence. The level of fine that company may be liable to pay will be calculated using a category system based on the:

  1. level of culpability for the offence;
  2. level of environmental harm caused; and
  3. size of the company (micro, small, medium, or large - based on annual turnover).

The levels of culpability (intentional, reckless, negligence, and low or no culpability) and harm (categories 1 (most harmful) to 4 (least harmful)) are determined by reference to factors set out in the guidelines. The guidelines set out suggested starting points and ranges of fines based on this category system. The starting points and ranges for large companies are available here.

Draft sentencing guidelines: health and safety, corporate manslaughter and food safety 
 
In November 2014, the Sentencing Council published for consultation draft guidelines for sentencing health and safety, corporate manslaughter and food safety and hygiene offences in England and Wales (availablehere). The consultation closed in February 2015 and finalised guidelines are expected to be introduced in late 2015 or early 2016. The guidelines will then apply regardless of the date the offence was committed.
 
The draft guidelines adopt a similar step-by-step approach to the environmental guidelines with the level of fine that the company may be liable to pay calculated using a category system based on culpability, level of harm and size of the company based on annual turnover. For corporate manslaughter, offences are categorised as A (more serious offences) or B (less serious offences). Under the draft guidelines, 'large' companies would face fines starting at £5 million and of up to £20 million for corporate manslaughter and up to £10 million for health and safety offences involving a fatality. The starting points and ranges for large companies are available here. As for environmental offences, 'very large' companies could face significantly higher fines (see below).
 
The guidelines also cover sentencing of individuals (including directors, officers and managers of companies) who are convicted of a health and safety or food safety offence. Imprisonment (for a period of up to two years) is a real possibility and not only for the most serious offences. The draft guidelines suggest that imprisonment might be appropriate for individuals who are merely negligent, if that negligence has resulted in a fatality or risk of serious harm.
 
Very large companies
 
Both sets of guidelines state that where turnover "significantly exceeds the threshold for large organisations, it may be necessary to move outside the suggested range to achieve a proportionate sentence". In June 2015, the Court of Appeal, in an environmental case, gave important guidance on what this means in practice (R v Thames Water Utilities Ltd [2015] EWCA Crim 960).
 
Thames Water had been convicted for offences relating to unauthorised discharges of untreated sewage. The Crown Court applied the new guidelines and imposed a fine of £250,000.  Rejecting an appeal by Thames Water against the fine, the Court of Appeal emphasised the need for fines imposed on very large companies to reflect their financial circumstances and to:

"bring home the appropriate message to the directors and shareholders of the company" and that "hitherto in a large number of cases [the sentences imposed] have not been adequate to achieve that object".

In cases of the worst environmental harm caused by deliberate action or inaction (which had not occurred here), the Court stressed that an appropriate fine may equal up to 100% of a company's pre-tax net profit even where this results in fines in excess of £100 million. It was noted that this level of fine is already being imposed for financial services offences. The Court confirmed that previous convictions will be relevant aggravating factors as will repeated operational failures indicative of a lack of appropriate management attention to environmental and safety obligations.

The Court declined to provide a more precise definition of a 'very large' company and said:

"In the case of most organisations, it will be obvious that it either is or is not very large. Doubtful cases must be resolved as and when they arise."

Group companies
 
Although the guidelines refer to the turnover of individual companies, in practice sentencing courts frequently look beyond the defendant to the financial means of the wider corporate group. In R v Brintons Ltd(CA, 22 June 1999), for example, the Court of Appeal convicted a company of asbestos related offences and in sentencing took into account the annual turnover of the wider corporate group.
 
Unlimited fines in magistrates' courts 
 
Magistrates’ courts also have new powers to impose unlimited fines for offences committed on or after 12 March 2015. Many offences, particularly environmental offences, would previously have attracted a fine capped at £5,000. The rationale for the change is to enable more proportionate fines to be imposed on “wealthy or corporate offenders or organisations” and to reduce the number of referrals to the Crown Court for sentencing, which can be time consuming and costly.
 
Fines in the magistrates' courts will inevitably increase as a result of this change, especially for companies with large turnovers. The change will affect the strategy adopted by defendants and remove the main reason for committing cases to the Crown Court for sentencing. The parties may still elect to do so in complex prosecution which may be better handled by a Crown Court judge. In the past, decisions to plead guilty in the magistrates' court were often taken in the hope that the magistrates could be persuaded that they had sufficient sentencing powers resulting in a small fine being imposed. Defendants will now need to consider more carefully how to plead and proceed now that the certainty of limited fines has been removed.
 
Corporate EHS risk management
 
The prospect of significantly higher penalties means that it will be increasingly important for companies (and directors, officers and managers) to avoid committing offences which may lead to prosecution. Likewise, being able to demonstrate competence and mitigation factors if convicted of an offence will take on even greater importance.  
 
Companies must be able to demonstrate strong and active leadership from the board on EHS matters. In the Thames Water case, the Court of Appeal noted that evidence from the chief executive or chairman of the board that the company was taking effective steps to secure substantial or overall performance would be a "significant mitigating factor".
 
Companies should review their existing EHS policies to ensure that they set a clear direction for the company, and that the management structure and arrangements are in place to deliver those policies. A planned and systematic approach to EHS risk management must be adopted through effective management and compliance systems. Companies must have evidence of proper assessment and review of all policies, arrangements and systems that are in place to ensure that they remain effective and up to date, both in terms of process and implementation.
 
EHS performance must be measured against agreed standards to identify any improvements required, and audited and reviewed to ensure that the company learns from relevant experience. In the Thames Water case, the Court of Appeal warned that "repeated operational failures – suggestive of a lack of appropriate management attention to environmental obligations" would be considered a serious aggravating factor.