Indian Supreme Court aligns with international arbitration law in enforcing foreign award
Out-Law Analysis | 16 Mar 2017 | 10:17 am | 11 min. read
In January 2016, Thames Water became the first company to receive a £1 million fine under the new regime; swiftly followed by Yorkshire Water and Powerday Plc, which both received fines of £1m or above. More recently, in December 2016, Southern Water was fined a record-breaking £2m. Thames Water was in court again in February 2017, and is expected to receive another record-breaking fine when sentenced in March.
In practice, the use of the guideline is driving increased focus on environmental compliance. It is certainly attracting boardroom attention due to the magnitude of the fines for large companies, even where there is comparatively low culpability and little or no environmental damage.
What is the sentencing guideline?
Published on 26 February 2014, the sentencing guideline was intended to promote a consistent approach to sentencing for environmental offences, and to address concerns that the fines imposed previously did not reflect the seriousness of environmental offences. When sentencing offenders, courts are obliged to follow the guideline unless they are satisfied that it would be contrary to the interests of justice to do so.
In summary, the guideline:
The guideline applies to a core of environmental offences, including:
What has changed since the guideline came into force?
Significantly higher fines
The guideline has delivered headline-grabbing fines.
Most recently, in December 2016, Southern Water was given a record high £2m fine following failures at its Margate wastewater treatment station which led to raw sewage being discharged on the Kent coastline. In January 2016, Thames Water was fined a then-record £1m plus costs following discharges into the Grand Union Canal. This was despite the fact that the offence category was ‘category 3’ negligence, or relatively low on the harm and culpability scales; and that Thames Water had spent £30,000 on improvement works.
Thames Water was in court again in February, and appears set to receive its biggest ever fine when sentenced next month for discharging raw sewage. The company admitted a number of charges of unlawful discharge and breaching ammonia levels over a two-year period from 2013. In terms of impact to the environment, both fish and birds were affected, as well as humans, due to four of Thames Water’s waste water treatment works expelling millions of litres of untreated water into rivers.
In April 2016, Yorkshire Water was fined £1m plus costs for illegally discharging sewage that polluted the River Ouse near York. In the same month, Powerday Plc was ordered to pay £1m in fines plus around £244,000 in costs for breaches of its environmental permits and other waste offences.
In November 2016, in its assessment of the impact of the guideline, the Sentencing Council concluded that: “For organisations, the guideline appears to have had the effect anticipated … as some organisations have received higher fines since the guideline came into force”. In addition to these eye-catching fines, the assessment also noted a significant rise in the mean fine in the Crown Court, from an average of £39,200 between January 2013 and June 2014 to £70,600 between July 2014 and December 2015.
Although the number of organisations sentenced for environmental offences has remained roughly stable over the past decade, the assessment showed that 95% of organisations sentenced for environmental offences in 2015 received a fine compared to an average of 91% between 2005 and 2015. The remaining 5% of cases were disposed of by way of absolute or conditional discharge, compensation or other disposal.
The trend is clear. What will be interesting is whether the fines will continue to increase as higher fines for environmental offences become the norm and the courts become more comfortable applying the guideline.
Potential for multi-million pound fines
The highest environmental fine under the guideline to date is £2m.
In the 2016 Thames Water case, the offence was classified as ‘category 3’ negligence. Similarly, while the 2016 Southern Water case was ‘category 1’ environmental harm, the court found Southern Water to have been negligent and not reckless or deliberate. These findings in respect of culpability have to date anchored fines at a lower level, but still at a level significantly higher than what they would have been pre-guideline.
In the Thames Water case, the court held that: “Size becomes much more important when some harm is caused by negligence or greater fault. Even in the case of a large organisation with a hitherto impeccable record, the fine must be large enough to bring the appropriate message home to the directors and shareholders and to punish them”.
The courts will therefore punish offenders with high fines for culpability of negligence or above, but it can be seen that significantly higher fines could arise if a future case involved a deliberate or reckless breach by a ‘very large’ organisation.
Explaining why the court ordered Thames Water to pay £1m in the 2016 case, the judge stated that “the time has bow come for the courts to make clear that very large organisations such as [Thames Water] really must bring about the reforms and improvements for which they say they are striving because if they do not the sentences passed upon them for environmental offences will be sufficiently severe to have a significant impact on their finances”.
Indeed, the Court of Appeal has already envisaged vast fines. In 2015, in another case involving Thames Water, the court said that the guideline “may well result in a fine equal to a substantial percentage, up to 100%, of the company’s pre-tax profit for the year in question, even if this results in fines in excess of £100m … 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”.
The court continued to note that where the harm caused falls below category 1, there may still be cases where the financial circumstances of the organisation are such that “the fine imposed must be measured in millions of pounds”.
More recently, following its prosecution for water pollution offences in February 2017, Thames Water was told by a Crown Court judge that it should expect “the biggest fine Thames Water has ever faced” at its upcoming sentencing hearing. This shows that the courts are growing in confidence in their use of the guideline and are willing to be bold and give early indications of sentencing, even for ‘very large’ organisations.
The aim of such large fines is to meet the objectives of punishment, deterrence and removal of gain. With regards to organisations, the guideline states that fines should be “sufficiently substantial to have a real economic impact which will bring home to both management and shareholders the need to improve regulatory compliance”. This point has been regularly reiterated in the courts.
Repeat operational failures identified as ‘seriously aggravating’ factors
The guideline contains a non-exhaustive list of mitigating and aggravating circumstances, which may result in the upward or downward adjustment of the fine. These are not new, and follow previous case law. Aggravating factors include previous convictions, sensitive location of offence and deliberate concealment. Mitigating factors include voluntary compensation, self-reporting and cooperation and effective compliance programmes. The guideline also highlights that recent convictions and/or a history of non-compliance “are likely to result in a substantial upward adjustment”.
Similarly, the Court of Appeal has stated that “repeated operational failures – suggestive of a lack of appropriate management attention to environmental obligations” are “seriously aggravating features”. Further, the court indicated that they would like to understand the level of culpability in prior offences, the implication being that the courts will take a particularly dim view of repeat ‘deliberate’ or ‘reckless’ offences.
From a practical perspective, this means that companies need to have a significantly greater focus on environmental compliance after a prosecution, otherwise the financial and reputational consequences will be amplified if there is a future similar offence.
For very large potentially environmentally-impacting utilities, infrastructure and construction companies it will be essential to ensure the careful management of sub-contractors, undertake reviews of environmental management systems, provide incident response training and ensure appropriate notifications take place after incidents or near misses occur.
Water utilities are at particular risk of having fines uplifted as they often have an established history of offences, given their extensive aging assets and the high risk nature of their operations. That said, the courts have acknowledged when sentencing water companies that their previous convictions have to be considered in light of these factors.
Greater focus on director-level involvement
Both the guideline and the courts have stressed the need for senior management buy-in on environmental matters. The aim is to push environmental matters up the boardroom agenda, and this is certainly happening.
For example, in the 2015 Thames Water case, the Court of Appeal stated that “clear evidence from the chief executive or chairman of the main board that the main board was taking effective steps to secure substantial overall improvement in the company’s fulfilment of its environmental duties” would be a significant mitigating factor. The aim is to drive top-down compliance and draw the impacts of poor environmental performance to the attention of senior management.
This often results in companies now producing witness statements from their chief executives in mitigation to demonstrate how seriously the company takes the breach and to set out what it has done since to ensure that it cannot happen again. Further, when assessing the financial status of the organisation, the guideline encourages the court to focus on turnover but also to consider other financial metrics including directors’ remuneration.
Increased focus on risk of harm
The primary focus of most of the environmental offences which the Environment Agency (EA) prosecute is actual harm – that is, harm which has in fact occurred. However, the guideline also gives increased prominence to the risk of harm, in line with the sentencing of health and safety offences. This raises the possibility of organisations being severely fined even where little or no environmental damage has occurred.
Harm categories in the guideline are ranked from 1 to 4. Where an offence has caused risk of harm, the approach taken in the guideline is to move down a category. Accordingly, the risk of a category 1 offence, for example a risk of spill of hazardous chemicals causing a major adverse effect on the environment, would be classed as a category 2 offence.
What remains unclear from the guideline?
While the guideline has brought a much-needed standardised approach to environmental sentencing, areas of difficulty remain for courts when applying it.
‘Very large organisations'
One of the defining features of the guideline is that fines correspond to a defendant organisation’s turnover. Four sizes of organisation are set out: micro, small, medium and large. A scale of starting points and ranges for fines are then set out for each offence category.
A fifth category of ‘very large organisations’ is envisaged. However, no quantitative definition of this is provided, and no starting points or ranges of fines are provided. Rather, the guideline states 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”.
This lack of clarity, both in terms of what is a “very large company” and how much the court should “move out of the suggested range” has the potential to cause inconsistencies in sentencing. This is particularly the case for major utilities, infrastructure and house-building companies, where the relevant organisation may have a turnover in the hundreds of millions or even over £1 billion.
In the 2015 Thames Water case, the Court of Appeal rejected a fixed threshold of £150m for very large companies, stating that it would be obvious in most cases and that doubtful cases should be resolved “as and when they arise”. Further, the court rejected a mechanistic application of a multiplier of the fines for ‘very large’ companies.
Prosecuting Miller Homes in May 2016, the judge confirmed that a turnover of £500m was considered to be that of a ‘very large’ company. The judge in this case commented that it appeared that the categories of size of a company went up approximately five fold, and therefore anything over £250m would be a very large organisation.
Piercing the corporate veil
The guideline makes it clear that the starting point for the financial assessment of the defendant organisation is its last three years of accounts. However, the guideline also states that the financial resources of a ‘linked organisation’ may be taken into account where it can be “demonstrated to the court that [those resources] are available and can properly be taken into account”.
Accordingly, while the starting point for the financial analysis is relatively clear, there is a risk that the EA or the court will seek to bring in the financial resources of a related organisation, such as a parent company with higher turnover, to increase the fine level if the turnover of the organisation itself is very low. This may particularly impact the infrastructure sector where a variety of corporate structures, such as joint ventures (JVs) and special purpose vehicles (SPVs) are used to manage corporate liability on a project-by-project basis.
The issue arose during the sentencing of Ineos Chlorvinyls Ltd following its conviction for discharging caustic soda into a canal at its Runcorn site. The sentencing judge in the Crown Court found that the fact that the company was loss making was “not significant in judging the fine since [it] was clearly able to obtain all necessary finance from the parent”. This position was upheld on appeal, and indicates a relatively flexible approach by the courts to where defendant organisations will be linked.
The outcome of this case should be of concern to larger companies with carefully structured subsidiaries or JVs. Where, historically, reference has only been made in court to the turnover of the subsidiary or JV in question, it can now be seen that the turnover of ‘linked organisations’ may also be relevant.
Distinguishing between ‘reckless’ and ‘negligent’
The guideline ranks culpability from ‘low/no culpability’ through to ‘negligent’, ‘reckless’ and ‘deliberate’.
While each end of this spectrum is more clear cut, the difference between the descriptions of ‘negligent’ and ‘reckless’ in the guideline are, understandably, closely related. In particular, both have a similar focus on the failure of the organisation to put in place and enforce proper systems to avoid the commission of the offence.
The categorisation of the offence can have a material impact on the level of fine. Given this, sentencing practice is beginning to evolve. Even on a guilty plea, the parties can become engaged in protracted correspondence pre-hearing and during mitigation at the hearing itself as to the correct categorisation of harm and culpability.
Such is the financial incentive for reducing the categorisations to as low as possible, ‘Newton’ hearings are becoming more common. This refers to a hearing conducted where a factual question, material only to sentence, has not been resolved by the verdict. Organisations should therefore be prepared to invest time and resources into ensuring that the harm and culpability categories reflect the offence and, where possible, reducing these to the lowest level.
Georgie Messent and James Nierinck are environmental law experts at Pinsent Masons, the law firm behind Out-Law.com.
Indian Supreme Court aligns with international arbitration law in enforcing foreign award