In a judgment handed down last week (R v Thames Water Utilities Ltd  EWCA Crim 960), the Court of Appeal has for the first time applied the new sentencing guidelines used to calculate fines for environmental offences committed by large companies.
As discussed in a previous e-bulletin, similar sentencing guidelines for health and safety offences and corporate manslaughter are expected to come into force later this year. We envisage this decision will be relevant to the application of those guidelines also (assuming they are implemented in their current form).
The guidelines for environmental offences (and the proposed guidelines for health and safety offences) create a structured process for calculating fines based on the size of the defendant company as well as the severity of the offence. Both sets of guidelines recognise a separate class of "very large organisations" which will be subject to higher fines.
In R v Thames Water, the Court indicated that in serious cases fines for very large organisations may be measured as a percentage of pre-tax profits (up to 100% in the most serious cases even if that leads to fines of over £100 million).
The judgment follows a line of similar cases in which the Court of Appeal has upheld very substantial fines against large companies for environmental and health and safety offences.
During a seven day period in August/September 2012, untreated sewage was discharged from a pumping station operated by Thames Water Utilities Ltd ("Thames Water") into a waterway flowing through a National Trust nature reserve. This followed the failure of two pumps which had become clogged with material discarded into the sewage system. The failure of the pumps triggered alarms to which Thames Water's staff did not respond for several days until a member of the public reported the ongoing discharge.
In July 2014, Thames Water pleaded guilty to an offence contrary to the Environmental Permitting (England and Wales) Regulations 2010 and was sentenced by a Recorder in the Reading Crown Court who ordered it to pay a fine of £250,000 together with minor sums for a victim surcharge and costs.
Thames Water appealed unsuccessfully against the level of the fine.
Fines for very large corporate offenders
The Sentencing Council's Definitive Guidelines for Environmental Offences require a step by step approach for calculating appropriate fines for corporate offenders based upon an assessment of (i) the harm caused by the offence; (ii) the offender's culpability; and (iii) the size of the offender by turnover. The guidelines provide starting points and ranges of fines for different combinations of harm and culpability where the offender is a "micro" business (turnover up to £2 million), "small" (turnover between £2 million and £10 million), "medium" (turnover between £10 million and £50 million) and "large" (turnover over £50 million). Fines calculated on this basis are then adjusted to take account of aggravating and mitigating factors and to ensure that the resulting fine "is proportionate to the means of the offender".
The guidelines also recognise a fifth category of "very large organisations", namely those whose "turnover…very greatly exceeds[£50 million]" for which "it may be necessary to move outside the suggested range to achieve a proportionate sentence". The guidelines do not specify exactly what level of turnover would be required to come within this category. Nor do they specify how much larger the appropriate fine for such an organisation would be than the equivalent fine for a "large organisation".
Thames Water had, at the relevant time, an annual turnover of £1.9 billion and profits of £346 million. There appears to have been no doubt at first instance or on appeal that it was, on this basis, a "very large" organisation.
It was effectively agreed that the level of harm caused by the offence fell at the top end of Category 3 ("minor, localised adverse effect [to]water quality") and that Thames Water was negligent. 'Negligence', for the purposes of the guidelines, is a level of culpability less serious than 'recklessness' or 'deliberate acts' which will be appropriate where there was a "failure by the organisation as a whole to take reasonable care to put in place and enforce proper systems for avoiding commission of the offence". In this case, the finding of negligence was based on Thames Water's failure to replace the pumps or to ensure that its staff responded to the alarms within the maximum periods prescribed by its own policies in circumstances where there had been numerous recent blockages and the location of the works put at risk a special nature site.
In an attempt to apply the guidelines to a "very large" company, the Recorder multiplied by five the starting point and range of fines that would have been applicable to a "large" company that committed the same offence in the same circumstances. This was on the basis that the incremental difference between the categories of company (measured by turnover) was a factor of five (i.e. the maximum size of a "medium" company is five times the maximum size of a "small" company). On this basis, she determined that the appropriate starting point for Thames Water's fine was £300,000 with a range of £175,000 - £750,000. It appears that the fine would have been £500,000 prior to reductions for mitigating factors and a prompt guilty plea that brought it down to £250,000.
The Court of Appeal upheld this fine but stated unequivocally that it "would have had no hesitation in upholding a very substantially higher fine". It did not, however, endorse the Recorder's mechanistic approach to applying the sentencing guidelines to a "very large" company. The Court of Appeal focussed instead on the principles involved in calculating fines (as set out in the relevant legislation and in R v Sellafield Ltd; R v Network Rail Infrastructure Ltd  EWCA Crim 49– see our e-bulletin on that case here). The Court was particularly concerned with the need to set fines that take into account the individual financial circumstances of the offender and that are sufficiently large to "bring home to the management and shareholders the need to protect the environment". The Court appears to have considered that this could not be achieved without maintaining the flexibility that is provided by the absence of fixed levels of fines for "very large" companies in the guidelines.
The Court went on to indicate that for the most serious environmental offences it would endorse levels of fines far above anything that has been imposed previously (and, indeed, far above anything envisaged by the guidelines in which the highest fine indicated for a "large" company is £3 million). In the most serious cases (where 'Category 1' harm has been caused deliberately) the Court considered that the need to punish, deter and remove any financial gain from the offence may result in fines equal to up to 100% of the offender's pre-tax profit for the relevant year "even if this results in fines in excess of £100 million". The Court noted that fines at this level are already imposed on companies for regulatory breaches in the financial services sector. The Court stated that "similar considerations will apply" where serious harm is caused 'recklessly' (rather than deliberately). Where less serious harm is caused (or where, as in the case of Thames Water, the offender's culpability is lower), the Court indicated that fines may be measured in millions of pounds.
As stated above, this was the first Court of Appeal ruling on the new environmental sentencing guidelines and it comes at a time when very similar guidelines for corporate manslaughter and health and safety offences are expected to come into force soon.
Both sets of guidelines adopt a mechanistic approach to the calculation of sentences whereby various factors (primarily harm, culpability and size) are applied to a matrix to determine an appropriate fine. It is a hallmark of this methodology that it should lead to much greater certainty for offenders (which will assist them in, for example, deciding how to plead in arguable cases). Unfortunately that has not been achieved in this judgment. As discussed above, the Recorder attempted to extend the guidelines' mechanistic approach to "very large" companies by multiplying by five the levels of fines set for "large" companies which would have created certainty. However, the Court of Appeal rejected this approach and instead endorsed a much more broad-brush principles-based approach that leaves the Courts far greater flexibility to set much higher fines in the most serious cases.
As a result, the position now is that companies with turnover of up to (and somewhat more than) £50 million will have a clear idea of likely levels of fines (including the maximum). For larger companies, however, there is no such certainty given the lack of clarity over which businesses will be considered "very large" and what level of fines such businesses can expect to receive.