Type: Client Alerts
“To bring the message home to the directors and shareholders of organisations which have offended negligently once or more than once before, a substantial increase in the level of fines, sufficient to have a material impact on the finances of the company as a whole, will ordinarily be appropriate. This may therefore result in fines measured in millions of pounds”
“[In the most severe cases] This may well result in a fine equal to a substantial percentage, up to 100%, of the company's pre-tax net profit for the year in question… even if this results in fines in excess of £100 million. Fines of such magnitude are imposed in the financial services market for breach of regulations. In a Category 1 harm case, the imposition of such a fine is a necessary and proper consequence of the importance to be attached to environmental protection.”
- English Court of Appeal, 2015
Introduction There is a widely held belief that environmental laws in the UK are toothless in practice because enforcement authorities are under resourced and typical levels of fines and penalties imposed are far too low.
This view is particularly prevalent among those with first-hand experience of jurisdictions where environmental enforcement has historically tended to be stricter (for example, the United States).
Although they ignore the significant reputational damage that can occur from environmental non-compliance, such views have considerable basis in historical fact in the UK. Often, environmental crime in the UK has been seen to pay. This has been a frequent source of complaint by the majority who strive, at considerable cost, to comply whilst seeing those who apparently ‘get away with it’ all too often.
However, such views need to be reappraised in light of recent new sentencing guidelines and senior judicial statements equating serious breaches of environmental law with financial services offences. A recent decision of a unanimous Court of Appeal that included the Lord Chief Justice presages a much tougher approach in the future.
This is particularly true in the case of environmental offences committed by large commercial organisations.
Environmental sentencing guidelines The Sentencing Council's so-called ‘definitive guideline’ for sentencing of environmental offences came into effect just over a year ago. Those guidelines apply among other things to unauthorised or harmful deposit, treatment or disposal of waste, illegal discharges to air, land and water and many other of the most common environmental offences.
The guidelines require a step-by-step approach to calculation of a fine based upon the degree of culpability of the offender, the harm caused by the offence and the finances of the offending organisation or individual.
Organisations are divided into four categories in the guidelines: micro, small, medium and large. Large organisations are identified as those with a turnover or equivalent of "£50 million and over". For such categories, the guidelines contemplate imposition of fines typically in the range of up to £3 million.
However, the Sentencing Council makes it clear in the guidelines that the starting points and range of fines suggested do not apply to “very large organisations”. In this regard, Step 4 of the guidance states:
"Very large organisations: Where a defendant company's turnover or equivalent very greatly exceeds the threshold for large companies, it may be necessary to move outside the suggested range to achieve a proportionate sentence."
This is consistent with step 6 of the guideline which states:
"Check whether the proposed fine based on turnover is proportionate to the means of the offender […] the combination of financial orders must be sufficiently substantial to have a real economic impact which will bring home to both management and shareholders the need to improve regulatory compliance. It will be necessary to examine the financial circumstances of the organisation in the round. If an organisation has a small profit margin in relation to its turnover, downward adjustment may be needed. If it has a large profit margin, upward adjustment may be needed."
Sentencing of very large companies The first case of its kind to come before a court since the guideline was issued concerned a company whose turnover was £1.9 billion and profit for the year ending 2014 was £346 million.
The company had admitted liability for unauthorised discharge of sewage to controlled waters. In sentencing the company, the Crown Court’s solution was to extrapolate from the incremental increases between micro, small, medium and large companies set out in the guidelines. Taking into account various mitigating factors and the company’s plea of guilty at first opportunity, the court arrived at a figure of £250,000. This sentence was appealed before the Court of Appeal1.
The Court of Appeal upheld the fine, but made it clear that it considered it very lenient. The comments of Mr Justice Mitting, speaking for a unanimous Court of Appeal that included the Lord Chief Justice, make very plain the future direction of travel in this area.
The court said it was of particular importance in the case of such very large commercial organisations to take into account the financial circumstances of the offender in order to “…ensure that the penalty imposed is not only proportionate and just, but will bring home to the management and shareholders the need to protect the environment”.
Further: “The court is not bound by, or even bound to start with, the ranges of fines suggested by the Sentencing Council in the cases of organisations which are merely ‘large’.”
Confirming that the past is by no means a guide to the future when it comes to sentencing of environmental offences, the Lord Justice went on to state that: “Sentences imposed hitherto in a large number of cases have not been adequate […] this Court has on two occasions [in 2014] observed that it would not have interfered with fines "very substantially greater" or "significantly greater" than six figure fines imposed for environmental offences”.
Commenting on the issue of repeat offending (and, notably, in the context of mere negligence, not necessarily reckless or deliberate breaches) the Lord Justice added that: “to bring the message home to the directors and shareholders of organisations which have offended negligently once or more than once before, a substantial increase in the level of fines, sufficient to have a material impact on the finances of the company as a whole, will ordinarily be appropriate. This may therefore result in fines measured in millions of pounds”.
The Court of Appeal recommended that in sentencing very large organisations, a court should in the worst cases, when great harm has been caused by deliberate action or inaction, focus on the whole of the financial circumstances of the company – starting with turnover, but having regard to all the financial circumstances, including profitability. In such a case, the court said, the objectives of punishment, deterrence and the removal of gain (for example by the decision of the management not to expend sufficient resources in modernisation and improvement) must be achieved by the level of penalty imposed.
The court accepted that: “This may well result in a fine equal to a substantial percentage, up to 100%, of the company's pre-tax net profit for the year in question (or an average if there is more than one year involved), even if this results in fines in excess of £100 million. Fines of such magnitude are imposed in the financial services market for breach of regulations. In a Category 1 harm case, the imposition of such a fine is a necessary and proper consequence of the importance to be attached to environmental protection”.
This continues a recent trend. As noted by the Court of Appeal in the quotes above, last year saw two other cases in which a differently constituted Court of Appeal indicated that it regarded environmental sentences imposed by lower courts as too lenient.
In the first of those, a utility company was fined £200,000 for discharging raw sewage into the sea. The court was also influenced by the defendant’s failure to notify the incident to the EA promptly, to use sufficient resources to remedy the problem more quickly and a record of previous offences. The case is noteworthy because it was accepted that there was no evidence of any actual harm having been caused.
However, the lower court stressed the importance of looking at the potential for harm, and the perception of pollution and the impact that perception might have on the local economy. The Court of Appeal said “this court would not have interfered with a fine very substantially greater than that imposed upon this company in the circumstances of this case.”
In the second of the cases referred to by the Court of Appeal, a wealthy individual was found guilty of offences under the Wildlife & Countryside Act for his role in the felling of 43 trees and the creation of a track through a Site of Special Scientific Interest (protected woodland). The defendant had not pleaded guilty at the first opportunity and adopted a very obstructive approach generally. It was accepted that the area affected in the SSSI was relatively small and the vegetation would regenerate naturally, although the felling of the trees had caused permanent visual damage to the area. The defendant was held to have acted with gross negligence, rather than deliberately. Nonetheless, the court said that “account had to be taken of the growing public concern for the preservation of the countryside”. At first instance, he was fined £450,000 plus £450,000 in costs. On appeal, the Court of Appeal said “a fine significantly greater than that imposed by the judge would have been amply justified [and that] a fine in seven figures should not [have been] be regarded as inappropriate…”.
The Court of Appeal’s judgment also contained a list of factors that will be taken into account in reducing the sentence that might otherwise be imposed. These may seem obvious, but are very often over-looked. In environmental pollution cases these will include:
- Prompt and effective measures to rectify the harm caused by the offence and to prevent its recurrence
- Frankness and co-operation with the authorities
- The prompt payment of full compensation to those harmed by the offence
- A prompt plea of guilty
It was noteworthy that the Court of Appeal accepted that this was a case in which the level of culpability was only negligence, not higher, and that negligence had only caused localised harm. Indeed, if there is a surprising feature here, it is that the incident itself was not in fact particularly serious either. This will raise concern that the pendulum is about to swing too far the other way and see relatively minor offences punished in a punitive way.
Although, as a very large organisation with extensive country-wide operations, the appellant had been convicted of environmental offences on numerous occasions over the previous 25 years or so, most of those had resulted in little or no harm and occurred without fault on the part of the appellant. The court concluded that this record did not suggest routine disregard of environmental obligations, but it did leave room for substantial improvement.
Against that backdrop it is also indicative that the court said, “…but for [the mitigatory measures the company had already taken], a combination of the facts of the offence and what can be extracted from the appellant's record would, in our view, have required the Court to take a starting point for a fine significantly into seven figures”.
Counsel for the respondent suggested that the fine actually imposed by the Crown Court was lenient and the Court of Appeal agreed that it was, even taking into account the significant mitigation stating, “We would have had no hesitation in upholding a very substantially higher fine”.
The Court of Appeal's guidance is binding on lower courts. Given in particular the fact that the Lord Chief Justice chose to hear this case, and contributed to the writing of the judgement, it must be assumed that the Court of Appeal’s approach will be obediently followed and that paves the way for much more significant fines to be imposed in the future on very large companies that have committed environmental offences.
Robust environmental compliance policies and procedures should of course serve to insulate companies from the situations described above in most cases. Whilst, inevitably, even in the most well-run organisations unintended environmental incidents may still occur from time to time, penalties of the level discussed above should generally be reserved only for serial offenders and/or the most serious breaches involving aggravating factors of the kind that occurred in the cases discussed above.
- R v Thames Water Utilities Ltd  EWCA Crim 960.
Client Alert 2015-284