Manufacturers should be alert to the continued trend for increasingly high sentences in environmental cases which has been highlighted by a recent Court of Appeal judgment.
The judgment relates to an appeal brought by Thames Water against a fine of £250,000. This was imposed after Thames Water pleaded guilty to a breach of the Environmental Permitting (England and Wales) Regulations 2010. The offence related to the discharge of untreated sewage from a sewage pumping station into the Chase Brook, which flows through a nature reserve in an area of outstanding natural beauty. The discharge was caused by the failure of pumps which should have pumped the discharge to a downstream pumping station. An alarm system was in place to alert Thames Water to the failure of the pumps but Thames Water did not respond to these alarms and the pumps were not unblocked until the discharge was discovered by a member of the public. Newer pumps which were less likely to become blocked were installed soon after the incident.
The Court of Appeal dismissed the appeal and confirmed that it would not have hesitated to impose a substantially higher fine.
Thames Water was the first corporate defendant to be sentenced under the Environmental Offences Definitive Guideline (Guideline) which came into force in July 2014. The Guideline gives a step-by-step approach to calculating fines for environmental offences based on the degree of culpability, the harm caused by the offence and the size of the organisation by reference to its turnover. The Guideline provides tables of starting points and ranges for fines which vary depending on whether an organisation is micro, small, medium or large.
Under the Guideline, organisations are categorised as large if they have a turnover or equivalent of more than £50 million. However, the Guideline acknowledges that for very large organisations (such as Thames Water), it may be necessary to move outside the suggested range of fines to achieve a proportionate sentence. The Court of Appeal gave the following guidance:
- in the worst cases, where great harm has been caused by deliberate action or inaction (category 1 in the Guideline), the Court should focus on the whole of the financial circumstances of the organisation. This could lead to a fine of up to 100% of the company’s pre-tax net profit, even if this results in a fine of more than £100 million. The Court of Appeal makes an interesting comparison on this point to fines in the financial services market for breach of financial regulations;
- where a case involves the lower level of culpability of recklessness (rather than deliberate action/ inaction) similar considerations will apply;
- where the harm caused is less serious, lesser penalties should be imposed, but these should still have regard to the financial circumstances of the organisation and in some cases this will mean measuring the fine in the millions of pounds; and
- for very large organisations, there must not be a mechanistic approach to setting the fine.
Many businesses in the chemicals and manufacturing industry have a turnover which puts them in the category of very large organisations under the Guideline and can therefore expect both intense scrutiny of their financial circumstances and substantial fines for environmental offences, even if little or no harm has been caused.
This approach is expected to be extended to health and safety offences if, as anticipated, the Sentencing Council’s guidelines for health and safety offences, corporate manslaughter and food safety and hygiene offences come into force at the end of next year or beginning of next year. The draft guidelines are emphatic that sentences should be set at a level which is “sufficiently substantial to have a real economic impact, which will bring home to both management and shareholders the need to comply with legislation and achieve a safe environment for workers and members of the public”.
The most effective way for industry to meet this challenge is to ensure that robust and effective environmental and health and safety management systems are in place. The cost to putting any additional measures in place should be set against the potential consequences of failure to do so; both the Court of Appeal judgment and the Guideline are clear that it should not be cheaper to offend than to take appropriate precautions and preventative measures to prevent an offence from being committed.
The trend for increasing fines looks set to continue and organisations in the chemicals and manufacturing industry can best address this by ensuring the commitment to environmental, health and safety compliance is in place at the highest level of management and cascaded throughout the organisation.