Why size matters - Fining very large corporate environmental offenders - Peter Doyle QC

Recently Thames Water Utilities Ltd (Regina v Thames Water Utilities Ltd) sought to persuade the Court of Appeal Criminal Division to reduce a fine of £250,000 following its plea of guilty to environmental offences arising from the discharge of sewage that ended up flowing through National Trust owned land in the North Wessex Downs; an Area of Outstanding National Beauty. There had been pump failures on two different days that had triggered alarms but they had not triggered any corporate response.

Whatever their disappointment may have been in having their appeal dismissed it probably did not compare to their relief that they had escaped a far greater penalty. Even allowing for accepted significant mitigating factors the court in a reserved judgment took the view that the sentence had been lenient and they would have had no hesitation in upholding a very substantially higher fine. For the relevant financial year Thames Water’s turnover had been £1.9 billion and its profits £346 million.

The judgment of the Court has proved other commentators right that the most recent Sentencing Guideline in such cases was likely to lead to a step-change in approach in the case of very large commercial organisations operating for profit who negligently or with greater fault committed an environmental pollution offence; particularly where the company had similarly offended at least once before.

It is trite that when imposing a financial penalty the court is obliged to determine the appropriate level of fine in accordance with s.164 of the Criminal Justice Act 2003. The provision requires that the fine must reflect the seriousness of the offence and take into account the financial circumstances of the offender. The level of fine should reflect the extent to which the offender fell below the required standard and it should achieve the objectives of punishment, deterrence and the removal of gain derived through the commission of the offence. It should not be cheaper to offend than to take appropriate precautions to avoid offending in the first place.

The Thames case exposed a hitherto uncertainty (a) for those advising a very large corporate client as to the likely penalty and (b) for judges having to identify a sentence that was proportionate in all the circumstances.

The sentencing guideline proposes a step-by-step approach to the calculation of a fine on an offending organisation based upon the degree of culpability, the harm caused and the size of the organisation concerned.  Four size categories are identified; micro, small, medium or large. A large organisation is one having a turnover or equivalent of “£50 million and over”.

However, the Sentencing Council made it clear that the starting points and range of fines suggested did not apply to very large organisations. Consideration of Steps 4 and 6 of the guideline identified the fact that in a case where the turnover greatly exceeded the threshold for large companies it might be necessary to move outside the suggested range in order to achieve a proportionate sentence. However, unsurprisingly given that such cases will be fact specific, the guidance did not attempt to identify any range of proportionate sentences in the case of very large offenders. But the message was clear enough- size mattered.

The Court expressed the view that hitherto sentences imposed in a large number of cases had been inadequate and that a message had to be brought home both to directors and shareholders of organisations that had offended negligently once or more than once before that it would ordinarily be appropriate for there to be a substantial increase in the level of fines sufficient to have a material impact on the finances of the company as a whole. Such sentences might therefore result in fines measured in the millions of pounds.

What is to be the approach in such cases?

In a category 1 harm case where great harm had been caused by deliberate action or inaction the court would have to focus on the whole of the financial circumstances of the company. Where management had taken a decision not to expend sufficient resources in modernisation and improvement then a fine was likely to be imposed equating to a substantial percentage of the company’s pre-tax net profit for the year in question or an average if more than one year was involved. That percentage could in an appropriate case be 100%. This might well result in warranted fines in excess of £100 million.

Where a category 1 harm case involved recklessness, similar considerations would apply although the fine must reflect the fact that there had been a lower level of culpability. However, even in such cases a fine might still be proportionate even if measured in millions of pounds.

In cases where the harm caused fell outside category 1 the court would of course impose lesser penalties but it still had to have regard to the financial circumstances of the organisation.

The Court emphasised that in the above cases it was wrong to adopt a mechanistic extrapolation from the levels of fines suggested at step 4 of the guideline for large companies. Clearly this was because (a) by definition the turnover of a very large company very greatly exceeded the threshold for a large company and (b) step 6 of the guideline requires examination of the financial circumstances of the organisation in the round.

What about the case where no harm is caused and the offence had occurred without fault? The Court stated that it would be difficult to justify a significant difference in the level of fine imposed on two very large organisations merely because the infrastructure and turnover of one was twice as large as that of the other.

Thus it is clear, as the Court emphasised, size becomes much more important when some harm has been caused by negligence or greater fault. In such cases the fact that the company in question had a hitherto impeccable record did not avoid the need to impose a fine large enough to bring the appropriate message home to the directors and shareholders and to punish them. In the case of repeat offenders the fine should be far higher.

This case calls for the Boards of very large organisations to re-focus on the need to invest in practice and infrastructure designed to remove or limit the risk of such offending including robust measures to swiftly respond to pollution or pollution risk incidents. It will be foolhardy to think that making a moderate or even significant provision in accounts for incidental trading fines will be realistic.

Should a company elect not to dig deep into the coffers to maintain proper investment and good practice and things deliberately or negligently go wrong, they can expect the courts to dig deep in their place. It will not prove to be cheaper to offend.

Peter Doyle QC