£100m fines in our future?

For anyone who thought that the starting points for fines in the draft sentencing guidelines for food safety, health and safety, and corporate manslaughter were eye-wateringly high, the Court of Appeal has some bad news.

In considering the first case under the almost identically framed environmental guidelines, the Court of Appeal observed that when sentencing large companies in order to achieve the objectives of punishment, deterrence and removal of gain a very significant penalty must be imposed. Many might think that this was already the case, but the Court of Appeal has other ideas, it took the view 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”. We knew from the guidelines that the game had changed, but if this judgment is borne out in reality, this is not just change, it is an entirely different category of risk entirely.

DWF’s own enquiries suggest that the new health and safety and food safety sentencing guidelines could be in force as early as January 2016, with the finalised guidelines being published in November 2015. If so,  the majority of prosecutions commenced now are at risk of being sentenced under the new regime. Businesses need to be aware of the new framework in which it is likely to be operating. We have already made representations to the Sentencing Guidelines Council on behalf of our clients (see our previous article) but we welcome contact from any concerned parties who wish to consider what action can be taken.

The case details

This was the first case of its kind to have come before the Court of Appeal since the Sentencing Council’s guidelines for environmental offences came into effect in July last year. The Appellant Company had pleaded guilty at the first opportunity to an offence involving the discharge of untreated sewage into a waterway.

The Sentencing Council’s environmental offences guidelines, like the draft guidelines for health and safety and food safety offences, propose a step-by-step approach to the calculation of a fine. It is proposed that the calculation should be based on the degree of culpability of the offender and the harm caused by the offence and the size of the offending organisation, assessed by reference to its turnover. The guidelines do not suggest a prescriptive starting point or range of penalties for very large organisations. The guidelines state, with regards to very large organisations, that “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”. It also states that courts should check whether a proposed fine based on turnover is “proportionate to the means of the offender”.

Calculating the fine

The Appellant Company in this case fell into the very large category. The approach of the Recorder in the lower Court to calculating the fine in the absence of strict guidelines for very large companies was to multiply the starting point for a Negligent, Category 3 harm case - £60,000 for a large company – by 5, to £300,000 and the range of potential penalties - £35,000 to £150,000 – to £175,000, to £750,000. The Recorder extrapolated the incremental increases between micro, small, medium and large companies set out in the guidelines, and arrived at a figure of £250,000. Although the Court of Appeal stated that it was reasonable to assume that, but for the mitigating factors and prompt guilty plea, the fine imposed by the Recorder would not have been less than £500,000 the Court of Appeal would have supported a “very substantially higher fine”.

The Court of Appeal made clear that companies committing offences resulting in “great harm” due to deliberate action or inaction could see fines equalling up to 100% of their pre-tax net profit for the year in question (or an average if the offending persisted for more than one year), even if this results in fines in excess of £100 million. In the case of reckless offending, courts will recognise that this represents a lower level of culpability than deliberate action or inaction.

The Court of Appeal went on to add that even where harm is less significant, proportionate penalties will still be imposed, albeit that these are likely to be less than for deliberate offending. The Court explicitly stated that, in appropriate cases, “the fine imposed must be measured in millions of pounds”.

Alarmingly, the Court explicitly drew a comparison between the fines imposed in the financial services markets for breach of regulations and fines for regulatory offences for safety and environmental breaches. Fines in the millions of pounds are frequently imposed for financial offences and this suggests concern on the part of senior judiciary that fines for environmental, and by analogy, health and safety and food safety offences, are too low and lag behind other regulatory regimes.

Underlining the need to protect the environment

The sentencing rationale upheld by the Court was to ensure that the penalty imposed is not only proportionate and just, but to also bring home the message to management and shareholders the need to protect the environment – a rationale which is echoed for food safety and health and safety offences in the draft guidelines.

To drive home the message to directors and shareholders of organisations which have offended negligently once or more, the Court expressly commented that a substantial increase in the level of fines, sufficient to have a material impact on the finances of the company as a whole, will be imposed.

The Court of Appeal have now upheld a number of large six figure fines for organisations and each time they have indicated that they would have upheld substantially greater fines. Even in the absence of new guidelines it is clear that the trend in health and safety and food safety is likely to be towards increasing sentencing and organisations need to factor this into the resourcing and planning of their operations.

This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.

Dominic Watkins

Partner - Head of Food Group

I am Head of DWF’s internationally renowned food sector group as well as being Head of Regulatory in London.

Steffan Groch

Partner and Head of Regulatory - Head of Sectors

I head up DWF's national Regulatory team as well as leading the firm’s ‘go to market’ sector expertise. I am also Chair of the UK Health and Safety Lawyers Association.