In a judgment handed down on 17 January (R v Sellafield Ltd; R v Network Rail Infrastructure Ltd [2014] EWCA Crim 49), the Court of Appeal upheld substantial fines imposed on two large corporate defendants for breaches of environmental and health and safety law. The Court reviewed the public policy considerations that a judge must take into account when setting the level of such fines and indicated that, in future, the courts will look much more closely at the defendant company's financial circumstances, corporate structure and director remuneration.

The ruling will be of interest to all businesses that may find themselves defending health and safety or environmental prosecutions but particularly to larger businesses (defined by the Court as those with annual turnover over £1 billion).

Background

Sellafield Ltd (which operates the Sellafield nuclear power station in Cumbria) was fined £700,000 after pleading guilty to seven breaches of the statutory regime under which it is licensed to carry out its operations. The breaches arose from failures in Sellafield's system for segregating radioactive and non-radioactive waste which resulted in it disposing of radioactive waste without the required safeguards for a period of 18 months. No one was harmed by these breaches and the Court accepted that the risk of any harm had been low.

Network Rail was prosecuted for breaching s. 3(1) of the Health and Safety at Work etc. Act 1974 following an accident in which a man and his grandson were injured when a train struck their car at a level crossing. Network Rail pleaded guilty on the basis that it had failed to carry out a proper risk assessment of the crossing and that if it had done so safety measures would have been introduced which may have averted the accident. A fine of £500,000 was imposed.

Both defendants appealed seeking to have the level of fine reduced.

Principles for setting fines

The Court of Appeal began by setting out the public policy goals that judges are required by law to consider when setting the level of fines for all types of defendants. These include the requirements that a fine should:

  • Punish and rehabilitate the offender and deter future offending
  • Have regard to the culpability of the offender
  • Have regard to the harm caused or which might foreseeably have been caused
  • Reflect the seriousness of the offence
  • Take into account the offender's financial circumstances

As discussed below, the Court of Appeal focussed in particular on the extent to which the defendant's financial circumstances should inform the level of the fine. It endorsed the principle set out in earlier case law that a fine should be "large enough to bring that message [the need for a safe work environment] home … not only to those who manage [the company] but also to its shareholders".

Application of the principles to Sellafield and Network Rail

Sellafield

In the case of Sellafield, both the sentencing judge and the Court of Appeal accepted that no one had in fact been harmed by its failures and that the risk of any actual harm had been relatively low. The Company was also given credit for cooperating fully with the authorities and pleading guilty at the first opportunity.

On the other hand, Sellafield was criticised for failing to properly install and monitor its equipment and for failing to improve its systems and controls despite previous prohibition notices and fines.

Sellafield argued that the level of fine imposed (which equated to a starting point of around £1 million before the reduction for an early guilty plea) would only have been justified in the case of a major public disaster and/or loss of life. This was rejected by the Court of Appeal which made clear that there was "no ceiling on the amount of a fine that can be imposed".

Network Rail

In the case of Network Rail, it was accepted that its breaches had caused minor injuries to the driver and very serious injuries to his grandson. The Court found that the risk of injuries (which could have been even more serious than in fact occurred) was easily foreseeable and had been obvious for many years. The Court took into account a range of mitigating factors including:

  • factors specific to the offence (e.g. the fact that Network Rail had pleaded guilty and cooperated with the investigation and the fact that it had acted promptly to improve the safety of the crossing after the accident); and
  • more general factors (e.g. the fact that Network Rail had, in recent years, improved safety at crossings in general and the fact that the failings had not arisen from an attempt to save money or place profit before safety).

The Court rejected Network Rail's argument that the level of fine imposed (£750,000 before the reduction for a guilty plea) was appropriate only in cases where there had been a fatality. The Court held that any such automatic cap on the level of fine available would prevent it from complying with the statutory requirement to take account of the defendant's financial means.

Financial circumstances of the defendants

As noted above, the Court of Appeal focussed to a significant extent on the financial circumstances of the defendants.

In comparing the two, the Court noted that Sellafield was "an ordinary company" in the sense that it was run for profit by a small number of corporate shareholders. Those shareholders would be directly affected by the fine and would be in a position to hold the directors to account. The Court made the point that if similar offences were committed in future that would indicate the fine had not been large enough to act as a sufficient deterrent and implied that future fines would therefore be higher.

Network Rail, by comparison, re-invests all of its profits into the rail network so that a fine would not directly impact on its shareholders (but would, in fact, harm the public in that any shortfall in the funds would result in inadequate maintenance of the rail infrastructure or a call upon public funds). The Court was satisfied, however, that the fine would be sufficient to 'send a message' to the Company's management at least in part because Network Rail had reduced the performance related bonuses paid to its executive directors as a result of the prosecution. Such reduction would, in the Court's view, "incentivise the executive directors…to pay the highest attention to protecting the lives of those who are at real risk from its activities" (albeit, in this case, the Court felt the reduction was "inadequate" and "plainly the bonuses should have been significantly reduced").

Discussion

This ruling follows a number of other cases in recent years where the courts have considered the appropriate level of fine for corporate defendants following health and safety and environmental offences (see, for example, our e-bulletin following the £400,000 fine imposed on New Look Retailers Limited in 2010 following a fire at its Oxford Street branch) Sellafield's £700,000 fine reinforces the point made in New Look (and in the £1 million fine imposed on Marks & Spencer PLC in 2011 for breaches of asbestos control regulations) that very substantial fines may be imposed even where the defendant's breaches do not cause any actual injury.

The most interesting feature of the Sellafield / Network Rail decision is the Court's apparently increasing level of interest in the defendant's financial circumstances. The courts have for many years examined the defendant's company accounts before passing sentence but their enquiries have generally been limited to identifying the annual turnover/profit so as to assess the ability to pay the fine and the proportion of turnover/profit being lost. In many cases (including New Look) the defendant has simply confirmed that it is able to pay any fine and that has been an end of the matter.

In Sellafield / Network Rail, the Court carried out a much more sophisticated investigation into the distribution of the defendants' profits and the performance based pay of their directors so as to satisfy itself that the fines imposed would directly affect the shareholders and/or directors. The Court also made clear that in future this same level of scrutiny will "always be necessary" where the defendant is a large company.