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16 Feb 2018

Whirlpool appeal – two years on but ‘very large’ fines remain restrained

This month marks the second anniversary of the publication of the Sentencing Council’s Health and Safety Offences, Corporate Manslaughter and Food Safety and Hygiene Offences Definitive Guideline (the Guideline). Similar to equivalent guidelines published for environmental offences (July 2014) and fraud and bribery (October 2014), the Guideline created a new and more prescriptive approach to sentencing corporate offenders for health and safety offences.

The recent Court of Appeal judgment in Whirlpool[1], which reduced a significant first-instance fine following a fatal accident, suggests that, despite early indications that the Guideline could result in very large penalties for major corporate offenders, there is judicial caution towards imposing the kind of ‘blockbuster’ fines which some had expected.

In applying the Guideline, a sentencing court must first establish the ‘harm category’ of an offence by assessing the defendant’s culpability and the harm or risk of harm involved. This ‘harm category’ is then applied to a matrix of sentence ranges and starting points determined according to the defendant’s size. These are prescribed solely by reference to the defendant’s turnover and divided into four sections ranging from ‘Micro’ (up to £2m) to ‘Large’ (in excess of £50m). For larger organisations, the Guideline (and its environmental equivalent) provides that where an offending organisation’s turnover ‘very greatly exceeds the threshold for large companies, it may be necessary to move outside the suggested range to achieve a proportionate sentence.

Although no further guidance is provided as to the meaning of ‘very greatly exceeds’, or the proportion by which fines should be increased as a result, a turnover (not profit) of £50m is not exceptional for a company in the UK. As such, the potential effect of this aspect of the Guideline was a significant cause for concern, particularly for high turnover, low profit margin industries which faced being disproportionately punished.

Such fears seemed well-founded after the 2015 judgment in Thames Water[2], in which the Court of Appeal approved a first-instance decision to multiply the starting point and category range for a ‘large company’ by five in order to properly reflect the defendant’s turnover of £1.9bn. In doing so, the Court observed that it saw no reason that the most serious cases should not attract fines of up to 100% of a company’s annual pre-tax profit, even if this resulted in penalties of £100 million or more.

However, at least for health and safety offences, more recent sentences suggest that courts are not yet minded deliver the blockbuster fines which Thames Water heralded. In considering this, it should be remembered that the Guideline does not oblige courts to exceed sentence ranges for very large companies, nor does it bind the court to apply any particular arithmetical formula if it decides to do so. Furthermore, the Guideline, having prescribed the formula to reach sentence range and starting point, then instructs the court to ‘step back’ and ensure that the fine reflects the seriousness of the offence, to include the overall financial circumstances of the offender, as required by s164 Criminal Justice Act 2003.

Although the Guideline begins the ‘stepping back’ stage by encouraging the court to ensure that the fine is ‘sufficiently substantial to have a real economic impact which will bring home to both management and shareholders the need to comply with health and safety legislation’, it also permits consideration of financial circumstances beyond turnover, including profitability and the likelihood of the offender going out of business. A further step gives the court discretion to reduce a fine in light of the likely impact on innocent third parties, such as victims and staff (but not shareholders or directors), or the offender’s ability to improve the conditions which led to the offending.

As noted above, so far courts have avoided using the ‘very large’ discretion to deliver unprecedented fines in health and safety cases. In Tata Steel[3], for example, although the Court of Appeal approved the first instance approach to financial circumstances (in which no relief was given for the company’s significant losses, on the basis that these were absorbed by the parent company) ultimately a massive turnover of £4bn (some 80 times greater than the £50m ‘large’ entry point) resulted only in one of two offences being moved up one ‘harm category’ (resulting in a starting point increase from £540,000 to £1.1m) whilst the second offence sentence was reduced from £465,000 to £185,000 to ensure totality with the first.

In Merlin[4], following the Alton Towers rollercoaster crash, the Crown Court declined to move outside the Guideline sentencing ranges, despite a turnover of £400m and an offence in the highest harm and culpability categories.  The recent judgment in Whirlpool suggests that these cases, rather than the punishing approach warned of in Thames Water, are more indicative of future health and safety fines for very large organisations.

Whirlpool involved the death of a self-employed contractor at the defendant’s factory in March 2015. At Bristol Crown Court in May 2017, the defendant pleaded guilty to one offence under s3(1) of the Health and Safety at Work Act 1974.

In applying the Guideline, HHJ Patrick concluded that for a ‘large’ company (i.e. turnover of £50m or more), the defendant’s conduct would have warranted a sentence range of £10,000 – £140,000 and a starting point of £35,000. Given the accident had been fatal, the Guideline indicated that this should result in a fine at the top end of the range, if not into the next ‘harm category’ (i.e. around £140,000).

However, HHJ Patrick considered that the defendant’s reported turnover of approximately £500m meant that it was a ‘very large’ company. As such, he increased the starting point to £1.2m i.e. around 8.5 times the starting point for a ‘large’ company. Most significantly for the purposes of this article, he disagreed with the defendant’s submissions that the company’s very significant manufacturing costs compared to other industries (around 80% of turnover) should be taken into account when calculating the overall fine.

Having reduced that £1.2m for good character and an early guilty plea, the final penalty was £700,000. Whilst not an extraordinary fine, particularly for a fatal accident (it should be noted that company was assisted by its good record and conduct during the prosecution), the decision by HHJ Patrick to disregard the proportion of turnover lost to overheads was a worrying prospect for many companies whose size would also likely lead to a ‘very large’ adjustment in such circumstances.

The defendant appealed on two grounds:

  1. That the starting point of £1.2m was far too high, considering the equivalent sentence range for a ‘large’ company; and
  2. That HHJ Patrick had failed to properly consider the company’s significant manufacturing costs at the ‘stepping back’ stage.

The Court of Appeal agreed that the analysis for a hypothetical ‘large’ company had been correct (i.e. a range of £10,000 – £140,000 and a starting point of £35,000), but a fine at the upper end or into the next range to reflect the fatal outcome.

Noting its own indication in Thames Water that there should be no ‘mechanistic extrapolation’ in moving from ‘large’ to ‘very large’, and the relatively small increase (up one harm category range) to reflect a turnover of £4bn as approved in Tata Steel, the Court of Appeal agreed that the Whirlpool extrapolation was too great. Rather, the fact of the death (irrespective of turnover) should have taken the fine to the top of the next sentencing range (£250,000). This should then have been doubled to take into account the company’s turnover. Thus, a first-instance starting point of £1.2m was reduced by almost 60% to £500,000. This was further reduced to reflect mitigation and early guilty plea to £300,000 from the original £700,000.

On the second appeal point, the Court of Appeal concluded that the first-instance approach had been wrong:

There is a significant difference between an organisation trading on wafer-thin margins and another, perhaps a professional services company where the profits shared between partners or shareholders is a substantial percentage of turnover. An organisation with a consistent recent history of losses is likely to be treated differently from one with consistent profitability. So too, an organisation where the directors and senior management are very handsomely paid when compared to turnover is likely to attract a higher penalty than one where the converse is the case.[5]

However, the Court of Appeal concluded that no such adjustment was required in this case. Despite its protestations, the company was in fact profitable and its turnover was greater than had been presented at first instance (£700m rather than £500m). Losses recorded recently were from exceptional items and directors’ remuneration had not been affected. Nonetheless, it was important that the Court concluded the first-instance approach of looking past profit margins was fundamentally wrong.

Although the Court of Appeal felt obliged to emphasise that the Guideline still allows for very substantial penalties where a sufficiently large organisation is convicted of sufficiently serious wrongdoing, Whirlpool suggests that this may not be on the scale previous suggested in Thames Water.

Furthermore, whilst the Court of Appeal also made the point that no two health and safety cases are the same, and that there should be no ‘arithmetic’ approach to increasing sentences, the relative rigidity of the Guideline, combined with the increasing amount of case law on its application, means that the discretion available to sentencing courts is only likely to narrow in future.

[1] R. v Whirlpool UK Appliances Ltd [2017] EWCA Crim 2186

[2]R v Thames Water Utilities Ltd [2015] EWCA Crim 960

[3]R. v Tata Steel UK Ltd  [2017] EWCA Crim 704

[4] R v Merlin Attractions Operations Ltd – https://www.judiciary.gov.uk/wp-content/uploads/2016/09/r-hse-v-merlin-attractions-operations-ltd-sentencing-remarks.pdf

[5] See para 38

This article was originally published in New Law Journal and can be accessed here, behind a paywall.

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