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Record bill for Thames Water may be tip of the iceberg

  • Proportional fines
  • “Wicked” actions
  • Courts ready to act

A record fine imposed on Thames Water in March shows the willingness of the courts to exercise new-found powers, with extra discretion for large businesses.

While household water rates have risen to an average of £395 a year, the country’s largest water company, Thames Water, has recently faced a rather heftier bill courtesy of Aylesbury Crown Court.

In imposing a £20.3m fine on the utility company for a catalogue of water pollution offences, Judge Francis Sheridan set a new yardstick, smashing the previous record environmental fine by more than 10 times.

In doing so, he perhaps signalled a loosening of the judicial shackles when sentencing the very largest organisations, warning that “it should not be cheaper to offend than to take appropriate precautions”. And while much of the construction industry’s focus has been on hikes in health and safety penalties, environmental sentencing has (again) quietly but decisively set the benchmark for punishing corporate regulatory offenders.

Proportional fines

The courts apply definitive guidelines for sentencing both environmental and health and safety cases. The guidelines require courts to classify organisations principally by reference to turnover. Having done so, there are identifiable starting points and financial ranges for judges to apply when sentencing.

A large organisation is one with a turnover exceeding £50m. But had the judge treated Thames Water as simply ‘large’, the guideline range available for the admitted offences was a mere £100,000-£650,000.

“Environmental sentencing has (again) quietly but decisively set the benchmark for punishing corporate regulatory offenders”

However, the guidelines also recognise that there will be “very large organisations”, where turnover “very greatly exceeds” £50m. In those cases, “it may be necessary to move outside the suggested [sentencing] range in order to achieve a proportionate sentence”. This is exactly what Judge Sheridan did.

‘Wicked’ actions

In describing Thames Water’s offending as “wicked”, the judge was clearly unimpressed by what he described as a “history of non-compliance”. Seemingly most influential, however, was the £2m daily profit disclosed by the business.

Tasked with achieving proportionality, the judge determined that £20.3m was the appropriate penalty “to get the message across to shareholders that the environment is to be treasured and protected, and not poisoned”.

This case was significant in many ways: the Environment Agency described it as the biggest freshwater pollution case it had ever dealt with. The sewage release was unprecedented, with 1.4bn litres of sewage entering the watercourses, causing lasting damage.

“Tasked with achieving proportionality, the judge determined that £20.3m was the appropriate penalty ‘to get the message across to shareholders that the environment is to be treasured and protected, and not poisoned’”

It is tough to envisage a construction business finding itself liable for this level of environmental offending. But with the guideline already suggesting a top-end fine of £3m for large organisations and a clear judicial will to exceed that in appropriate cases, environmental management systems around the sector suddenly come into sharp focus.

Courts ready to act

Thames Water was also the subject of an earlier appeal case, which was a harbinger of what was to come.

In that case, the Court of Appeal said: “Starting with turnover but having regard to all the financial circumstances, including profitability…the objectives of punishment, deterrence and the removal of gain must be achieved…this may well result in a fine equal to a substantial percentage, up to 100 per cent, of the company’s pre-tax net profit…even if this results in fines of £100m.”

Set against that background, the recent fine may be just the tip of the iceberg. Introduced to bring proportionality to the sentencing process, particularly in the case of very large organisations, the guidelines are now really starting to bite.

That said, the woes of Thames Water were quickly put into perspective by the £42m fine levied on BT just a few days later for late line installations. This shows the courts still have some way to go to compete with the penalties imposed by the non-judicial regulators.

Fines have tended to be within the guidelines’ ranges so far but this case provides a clear signal that the courts are becoming more comfortable with their new-found sentencing prowess and are ready to exercise their discretion, where appropriate, particularly for the very largest businesses.

Rod Hunt is a partner in the safety, health and environmental regulatory team at Clyde & Co

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