On 19 August, the sentencing remarks of Mr Justice Johnson were published in relation to the recent £90 million fine issued to Southern Water for sewage pollution. The remarks provide a full breakdown and description of how this record fine was calculated, and provide comments and conclusions on a number of issues that are likely to be of relevance in other cases.
In his introductory remarks, Mr Justice Johnson provides initial indications on a number of points that are reflected in the sentencing principles, namely that the company had been fined for what were considered to be substantial amounts for similar offences between 2013 and 2016, but that there was “no evidence that the Defendant took any notice of the penalty imposed or the court’s remarks. Its offending simply continued”, and “history shows that fines of hundreds of thousands or low millions of pounds have not had any effect on the Defendant’s offending behaviour.” Accordingly, the Judge felt “It is necessary to set a fine which will bring home to the management of this and other companies the need to comply with laws that are designed to protect the environment.”, while expressing some sympathy for shareholders who “have no direct responsibility for the offending”. The Judge felt that if a substantial fine “results in large institutional investors taking a more active role in ensuring that the companies that they invest in comply with the law, then that is not inconsistent with the purposes of sentencing, which include the reduction of crime.”
Against that backdrop, Mr. Justice Johnson applied sentencing principles based on the Environmental Offences Definitive Guideline (rejecting the Environment Agency’s submission that the guideline was not applicable because of the scale and nature of these offences). The guideline process assesses the seriousness of the offence, first, based on the culpability of the Defendant and the level of harm (or risk of harm) caused, followed by consideration of the company turnover and then additional factors that increase or decrease the seriousness of the offending.
Below is a break down of the application by Mr Justice Johnson of the sentencing principles to the facts of this case:
|Issue||Outcome/Level of Fine|
|Culpability||The Judge assessed the culpability of the company by reference to the culpability of its Board of Directors. He acknowledged that the Board did not have direct operational responsibility for any of the sites, and would not have been aware of the detailed ways of working at each of the sites. He nonetheless concluded that 50 out of the 51 offences were in the deliberate category, because there was “an intentional breach of, or flagrant disregard for, the law by the Defendant’s Board of Directors, and/or a deliberate failure by the Board of Directors to put in place and enforce such systems as could reasonably be expected in all the circumstances to avoid the commission of the offences”.
The reasons for this conclusion included the sheer scale of the offending over a six year period at 17 sites, which, therefore, did not indicate a small number of rogue employees, but instead a top-down disregard for the law; the lack of action in response to employee reports of problems; the Board’s awareness of previous convictions not having led to remedial action; and an emphasis by the current Chairman in his evidence of a recent “complete culture change”.
The Judge felt sure that the Board of Directors knew that the systems in place were wholly inadequate to prevent unpermitted discharges of sewage, but deliberately failed to put in place and enforce to avoid the offences, and thereby “flagrantly disregarded the law”.
The Judge accepted that one offence fell into the negligent category because it was connected to a computer system failure.
|Harm||The Judge focused here on a representative offence and concluded that it caused category 1 harm, because it had a major adverse effect on, or damage to, water quality or amenity value.
Some of the offences were classed as category 2 harm because it could not be shown that category 1 harm was caused, but there was a risk of such harm.
|Turnover||A large company is one with a turnover above £50 million. The guideline for a deliberate category 1 harm offence by a large company provides a starting point of £1 million and a range of £450,000 to £3 million.
The company had a turnover of £0.88 billion – higher than £50 million by a factor of 17.6. Where turnover “very greatly exceeds” £50 million, the guideline indicates that it may be necessary to move outside the guideline ranges in order to achieve a proportionate sentence. In doing so, however, the Judge confirmed that “it is wrong to apply “extravagant multiples” so as to scale up the guidelines by way of “mechanistic extrapolation” in direct and linear proportion to the turnover.”
The Judge rejected the company’s arguments that its status as a regulated water utility merited a different approach to that indicated in the guideline.
He concluded that he did need to move outside the guideline in order to achieve a proportionate sentence, and that the range should be increased by a factor of 2.5.
That gave a starting point of £2.5 million and a range of up to £7.5 million for an individual offence.
|Factors increasing seriousness||These factors were the company’s previous convictions; the underreporting of environmental spills; the motivation for the offending (i.e. a focus on maximising income); and the serious obstruction of the Environment Agency’s investigation, including refusal to permit the Environment Agency officers to seize documents under statutory powers, attend sites and answer questions. The Judge concluded that each of these factors warranted a substantial upward adjustment and increased the starting point from £2.5 million to £7 million.|
|Factors reducing seriousness||Mitigation was advanced by the company relating to recent remedial steps and the Judge accepted that the remorse and the determination to put matters right amounted to substantial mitigation, as did the significant steps taken by the company following the offending and the resulting money expended, although the weight to be attached to this was impacted by the late nature of the action.
The Judge reduced the fine for the representative offence from £7 million to £6 million. He felt that the vast majority of the 51 offences would merit a fine of that level in their own right, and each of them would merit a fine of at least £3 million, but that it would be disproportionate in totality.
He concluded that the appropriate level of fine would be £6 million for each of the 16 treatment sites over the entire five year period, rather than £6 million per individual offence, together with a fine of £3 million for count 51 (the negligent offence mentioned above).
That amounted to £99 million in total.
|Removal of economic benefit||It was not possible to calculate precisely the economic benefit, but it could be estimated in different ways.
The Defendant’s benefit from the offending was estimated to be £36m, so that was added to the £99 million to reach a fine of £135 million.
|Proportionality to the Defendant’s means||The fine amounted to approximately 10% of the company’s net assets. The Judge was satisfied this was proportionate and did not adjust it further.|
|Additional factors||The Defendant raised a number of additional factors, including a substantial penalty already imposed by OFWAT, but the Judge did not accept that any further adjustment was necessary.|
|Reduction of guilty plea||Full credit was given for an early guilty plea and the fine was reduced by a third to the final figure of £90 million.|
Whether Southern Water will seek to appeal the Court’s ruling remains to be seen. However, in the meantime, these sentencing remarks provide some valuable insights into the building of an extremely large penalty:
- The comments about the culpability of the Board of Directors are important, particularly the reasons for the conclusion that the Board’s conduct was considered to be deliberate. If an organisation commits regular breaches of law, across a number of sites and over a long period, it may be that a Court will presume the Board knew or should have known and should ensure remedial action is taken. If they do not, then it may be considered deliberate. This should act as a warning to Directors to ensure they are effectively probing into whether their company’s environmental management systems are really working or whether there are issues to be addressed.
- The aggravating factors of profit before safety and obstruction are among the most serious offences under the Environmental Offences Definitive Guideline, and will, therefore, have played a significant part in the sentencing rationale.
- Obstruction of a regulator’s investigations will be taken very seriously by the Court – Boards should set the tone as to the approach to be taken in investigations, to avoid any later accusations of obstruction.
- The fine could potentially have been considerably higher, if the Judge had decided to pursue a slavish “per offence” fine of the £6 million starting point that he had reached (at that stage of the process, the fine level could have been much nearer £300 million, rather than £99 million).