Environmental compliance in the spotlight

August 2015 | EXPERT BRIEFING | COMPANY LAW

financierworldwide.com

Environmental compliance is under the spotlight following a recent Court of Appeal judgment which confirms the trend of increasingly high sentences for environmental offences in the UK.

Thames Water Utilities appealed a fine of £250,000 which was imposed on 29 August 2014 after the company pleaded guilty to a breach of the Environmental Permitting (England and Wales) Regulations 2010 relating to the discharge of untreated sewage in August and September 2012. This was caused by a failure of pumps, resulting in untreated sewage being discharged directly into a brook which flows through a nature reserve in an area of outstanding beauty.

Thames Water had failed to respond to an alarm system which was in place to alert the company to failure of the pumps, and the pumps were only unblocked after the discharge was discovered by a member of the public walking in the brook. The pumps were later replaced by newer models which were less likely to become blocked. A central issue in the appeal was whether the Recorder at Reading Crown Court was entitled to find that the company was negligent on the basis that it had received a number of warnings that the pumps were breaking down and that it should have replaced the pipes earlier.

Thames Water was the first corporate defendant to be sentenced under the Environmental Offences Definitive Guideline, which came into force on 7 July 2014. As part of the 12-step approach to calculating the fine, the Guideline specifies a range of sentences depending on whether the level of culpability of an offence is deliberate, reckless, negligent or low/no culpability.

The environmental harm or risk of harm caused by the offence is then categorised from 1 to 4, with Category 1 harm the most serious and Category 4 the least serious. Once the category has been assessed, the Guideline provides four tables of starting points and ranges for fines, depending on whether an organisation is micro, small, medium or large. Organisations with a turnover of more than £50m are categorised as large, but the Guideline states that where a company’s turnover or equivalent greatly exceeds the threshold for large companies, it may be necessary to move outside the suggested range to achieve a proportionate sentence.

In this case, for the year ending 2014, Thames Water had a turnover of £1.9bn and profit of £36m. The Recorder adopted the approach of multiplying by five both the starting point and the range for a negligent Category 3 case for a large company based on the incremental increases between micro, small, medium and large companies set out in the Guideline. She then arrived at a figure of £250,000 after taking into account the mitigating factors and Thames Water’s early guilty plea. The Court of Appeal disagreed with this approach, but upheld the fine and clarified the approach which should be taken in future cases of sentencing of very large corporate defendants.

The Court of Appeal indicated that in the worst cases involving deliberate action or inaction causing great harm (Category 1 in the Guideline), the Court should focus on the whole of the financial circumstances of an organisation.

The Court of Appeal acknowledged that this may well result in a fine of up to 100 percent of a company’s annual pre-tax profit, even if this leads to a fine of over £100m, and compared this with the level of fines imposed in the financial services market for breach of regulations. The Court of Appeal affirmed that similar considerations will apply for Category 1 cases resulting from recklessness. For cases where the harm caused falls below Category 1, for example a Category 3 case of minor, localised adverse effect or damage, the Court of Appeal clarified that penalties would be lower but would still have regard to the financial circumstances of the organisation, which could mean measuring the fine in millions of pounds. The Court of Appeal also made clear that, in the case of Thames Water, it would not have hesitated to uphold a substantially larger fine.

This is the first Court of Appeal decision on the application of the Guideline and demonstrates that other organisations found guilty of an environmental offence can expect their financial circumstances to be scrutinised, irrespective of the degree of culpability and level of harm caused by the offence. This will involve consideration of turnover, profit before tax, directors’ remuneration, loan accounts, pension provision and assets on the balance sheet. The Court of Appeal did comment that the size of an organisation is much more important when harm is caused by negligence or greater fault, but it is clear that the Court of Appeal will have no hesitation in upholding substantial fines for environmental offences. This is in line with the approach the Court of Appeal was taking before the introduction of the Guideline, which saw substantial fines upheld against Sellafield and Southern Water Services despite there being no evidence of actual environmental harm in either case.

The Court of Appeal judgment further confirms that organisations need to have in place robust and effective environmental management systems. This means properly assessing work activities and processes and their inherent environmental risks so that effective controls and measures to minimise those risks eventuating can be put in place. It is also critical to have in place regular and thorough supervision of employees and monitoring of contractors to ensure controls and systems are being complied with. This commitment needs to be at board level and enforced from board level down. Both the Court of Appeal judgment and the Guideline make it abundantly clear that it should not be cheaper to offend than to take the appropriate precautions and preventative measures.

The Court of Appeal has left no doubt that large organisations in particular are expected to take their environmental obligations seriously, and that failure to do so will lead to fines which have a significant financial impact. The increasing financial consequences of regulatory non-compliance by corporate defendants will be further demonstrated in the Sentencing Council’s sentencing guidelines for health and safety offences, corporate manslaughter and food safety and hygiene offences expected to come into force at the end of this year or January 2016.

Jon Cooper is a partner, Stephen Panton is a managing associate and Francesca Hodgson is a solicitor at Bond Dickinson. Mr Cooper can be contacted on +44 (0)1752 67 7802 or by email: jon.cooper@bonddickinson.com. Mr Panton can be contacted on +44 (0)1752 67 7813 or by email: stephen.panton@bonddickinson.com. Ms Hodgson can be contacted on +44 (0)191 279 9253 or by email: francesca.hodgson@bonddickinson.com.

Jon Cooper, Stephen Panton and Francesca Hodgson

Bond Dickinson