Very large organisations and the turnover vs. profit conundrum
Regulatory law - developments in sentencing
Whirlpool Appliances v Regina (HSE)  EWCA Crim 2186 (20.12.17)
On 21 March 2017, the Defendant company was ordered to pay a fine of £700,000, having previously pleaded guilty to an offence contrary to section 3(1) of the Health and Safety at Work Act 1974 ("HSWA 1974"). This prosecution followed the death of a Mr Clive Dalley, a self-employed alarm and telecommunications contractor, who died as a result of an accident at the Defendant’s premises on 21 March 2015.
The sentence was arrived upon by reference to the Definitive Sentencing Guideline for Health and Safety Offences ("the Definitive Guideline") applicable from February 2016 onwards.
The sentencing appeal before their Lordships centred on the argument that the Judge had erred in his application of the Definitive Guideline and, consequently, his sentence was manifestly excessive. There were 3 issues for consideration by their Lordships
Firstly, the impact of a death on the approach to the ranges set out in the Definitive Guideline.
Secondly, how one identifies and then treats a "very large organisation" in accordance with the Definitive Guideline.
Thirdly, the impact of the relatively poor profitability (of the Defendant) in the context of an organisation with a substantial turnover.
In many senses, it is the third of those three issues which is the most interesting to practitioners in the field, as one of the issues with the Definitive Guideline is its focus (arguably to the exclusion of other measuring data points) on turnover as distinct from profit. This focus, in turn, gives rise to an immediate and obvious problem where there is a significant dichotomy between turnover on the one hand and profit on the other.
The facts of the incident were relatively straightforward. The deceased was, as above, a self-employed alarm and telecoms contractor of 30 years’ experience, who was frequently called upon to act as a subcontractor at the Defendant’s Bristol factory (the Indesit factory in Yate, near Bristol). On 21 March 2015, he was working on the fire and heat detector systems from a mobile elevated working platform which he had manoeuvred into position between hanging baskets on the overhead conveyor system. This overhead conveyor system was set in motion by an employee of the Defendant (Appellant) who was part of the maintenance team working elsewhere on the conveyor. One of the baskets knocked the working platform causing it to topple over and the deceased to fall. He suffered multiple fractures and died 10 days later from complications arising from his injuries.
There was, effectively, a break down in communications between the deceased and the Defendant’s maintenance team, such that the latter (according to the Judgment) were unaware of his presence on the mobile elevated platform at the precise moment that the overhead conveyor was put in motion (he had gone for a cup of coffee earlier, but had returned and the maintenance team were unaware of his presence when they switched on the overhead conveyor system). A permit to work system was supposed to be in operation to ensure that both “teams” of workers could separately (and safely) work in the area of the overhead conveyors.
Criticism of the permit to work system was an explicit element of the prosecution, in particular, its failure to identify the risk presented by having an elevated mobile platform and overhead conveyor system operating in close proximity to one another, with separate persons operating each for differing reasons.
Their Lordships began their consideration of the Definitive Guideline by describing the various steps required of the Court, pursuant to the Guideline, to arrive upon an appropriate sentence. Interestingly, their Lordships explicitly stated in this context:
"In considering a guideline replete with so many figures, there is a temptation to approach its application in an arithmetical way. In our opinion, that should be resisted. In this area, as much as any, the Court should not lose sight of the fact that it is engaged in an exercise of Judgment appropriately structured by the Guideline but, as has often been observed, not straitjacketed by it."
In terms of identifying the size of the relevant organisation (by reference to the categories within the Guideline), and in the context of the first issue to be dealt with by the Appeal Court, the Defendant/Appellant sought to argue that in addition to turnover, the broader financial health of the organisation could fall into account at Step 2 for the purpose of the Guideline. Their Lordships did not agree, it was their view that this issue (overall financial “health” of the Defendant) only fell to be considered at Step 3 of the Guideline, ie – once the overall fine parameters (by reference to size of the organisation by reference to turnover) had been set by the Court.
Their Lordships referred to the Sentencing Judge’s sentencing remarks and, in particular, the following passage with regard to size of organisation and impact of profit (or lack of it) in that context:
"I am told that manufacturing costs often amount to some 80% of the turnover and I am asked to contrast this company with those with lower operational costs. I have regard to that point, but decline to draw a distinction between companies with high costs and those with low (costs). In my Judgment, the appropriate starting point (for the fine) is £1.2 million. I give credit for plea and also make allowance for good character and remorse. Other factors have been arrived at when arriving at low culpability and, therefore, I impose a fine of £700,000..."”
Their Lordships extrapolated this to mean that the initial starting point for the fine (£1.2 million) was reduced by £150,000 for good character and remorse, and then reduced by (the conventional) one third to reflect the (early) guilty plea.
Their Lordships also reflected in detail on the profit and loss figures for the Defendant/Appellant which are worthy of consideration, if only in terms of illustrating the disparity (in this company) between turnover and profit. The relevant figures were as follows:
Profit: £27,738,000.00 (Gross)
Profit (Loss): (£165,041,000.00)
There were exceptional reasons for the (very significant) loss in 2015; firstly, a product recall (and the significant costs thereof) and, secondly, an "impairment to an investment in a related company" (paragraph 26 of the Judgment).
At the same time, the Defendant/Appellant company was noted to have significant assets; £546,518,000 worth in 2014 and £567,548,000 worth in 2015.
It was further noted (ultimately, in the context of the fine being required to fulfil the purpose of bringing home the message to shareholders and directors regarding transgression of health and safety rules – see later comments) that directors’ remuneration was £579,000 in 2014 and £584,000 in 2015, with the highest paid director receiving £480,000 in 2014 and £488,000 in 2015.
The Defendant/Appellant (through Counsel) advanced two principal criticisms of the sentencing approach of the first instance Judge. First, it was submitted that the starting point for the fine of £1.2 million was “far too high”, by comparison with the starting points and category ranges in the Definitive Guideline for large organisations. Secondly, the Defendant/Appellant asserted that the Judge failed to examine the financial circumstances of the company at stage 3 of the sentencing process, which requires the Court to consider whether the proposed fine, based on turnover, is proportionate to the overall means of the offender; as part of this assessment, explicitly, profitability (as distinct from, but related to, turnover) is relevant according to the Guideline. In particular, it is envisaged within the Guideline that if an organisation has a small profit margin relative to its turnover downward, adjustment of the fine may be needed.
Their Lordships, therefore, analysed, stage by stage, the approach taken by the Sentencing Judge.
They agreed, firstly, that the Judge’s conclusion (at step 1 of the Guideline) that this was a case involving "harm category 3" was more than justified, bearing in mind the undisputed factual circumstances of the incident. In that context, and by reference to the fine table produced with regard to "Large Organisations" within the Guideline, their Lordships noted that the starting point (in terms of fine) for such an offence normally would be £35,000. It is noteworthy, and explicitly made clear in the Judgment, that culpability of the Defendant has a significant impact on fine starting point(s) in this context. So, by analogy, if the Defendant/Appellant’s culpability had been higher, thus, the fine starting point would have been considerably higher; £1 million, for example, in a very high culpability case, £540,000 if the culpability was high and £300,000 if medium.
Their Lordships also recognised the impact of (actual) harm; in this instance the harm being death and, therefore, the highest category of harm on any assessment. They stated:
"A consistent feature of sentencing policy in recent years, reflected both in statute and Judgments of this Court, has been to treat the fact of death as something that substantially increases a sentence, as required by the second stage of the assessment of harm at Step 1. Without more, we consider that the fact of death would justify a move not only into the next category, but to the top of the next category range, suggesting a starting point of perhaps £250,000."
So, the fact of the incident resulting in a death had the effect of moving the starting point for the fine from Harm category 3 (and a starting point, as above, of £35,000) to Harm category 2 and, moreover, to the top of Harm category 2 (which ranges from £35,000 to £250,000).
Their Lordships then considered the impact of the actual turnover of the Defendant/Appellant. As above, the turnover of the Defendant/Appellant was significantly above the “bottom” of the Large Organisation threshold at £50 million. In that context, their Lordships noted that there was explicit justification within the Guideline for the Judge to move out with the parameters set by the Guideline to achieve a proportionate sentence where the Defendant’s turnover puts it into the separate category of "very large organisation" (ie – an organisation whose turnover greatly exceeds £50 million). In that context, albeit the sentencing remarks of the first instance Judge were not explicit on the issue, their Lordships accepted that the Sentencing Judge must have accepted that the Defendant/Appellant was a "very large organisation", ie – justifying further upward movement within the overall fine range to achieve a proportionate sentence, having regard to turnover.
Unsurprisingly, their Lordships declined to establish an "artificial" boundary for very large organisations, explicitly stating that the Guideline was simply that, and not to be an arithmetical template or rigid checklist. What their Lordships did state, however, (in this context) was:
"The language of the Guideline suggests that a very large organisation is likely to have a turnover of multiples of £50 million, but we would not wish to create an artificial boundary. The turnover of the Appellant was of the order of £700m. Although the Judge did not say in terms that the Appellant was, therefore, a very large organisation within the language of the Guideline, it is clear to us that it must be; and, indeed, that must have been the view of the Judge. It was, therefore, permissible to move outside the appropriate range in order to achieve a proportionate sentence."
Thus, their Lordships found that a combination of the following factors impacted the starting point for the fine:
The fact of death would increase the fine in itself.
The fact of actual turnover would have a further impact in terms of increasing the fine.
The fact that the turnover places the Appellant into the separate very large organisation category.
These factors, in combination, entitled the Sentencing Judge to move into the next category of harm above that considered (consistent with the R v TATA Steel Judgment); this range of fines would cover the range £180,000 to £700,000. Their Lordships concluded that the appropriate starting point for the fine (before moving to consider aggravating and mitigating factors) was £500,000; in large part because of the company turnover and, therefore, its status as a very large organisation.
In light of the strong mitigation which the Sentencing Judge accepted, this figure should be reduced, their Lordships found, to £450,000.
Their Lordships then considered the potential impact of profit (as compared to turnover) in the context of Step 3 of the Guideline and the need to consider the overall financial position of the offender; they noted that the Sentencing Judge did not further adjust the fine to account for the significant difference between turnover and profit (see figures above). They had the following (rather interesting remarks) to make in this regard:
"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."
"However, when one has regard to the overall means of this Appellant, we do not consider that the figure at which we have arrived requires (downward) adjustment. The Appellant has an underlying profitability. The recent loss was the result of two exceptional items. Furthermore, the assets of the company both in 2014 and 2015 were about £550m. The fluctuations in the profitability did not affect the directors’ remuneration. As required by the Guideline, we have stepped back and reviewed the proposed level of fine. Having regard to the underlying culpability, risk of harm, actual harm and turnover, in our view a starting point of £450,000 at Step 3 is sufficient to have a real economic impact which will bring home to the management and shareholders the need to comply with health and safety legislation, but it is also proportionate to the Appellant’s overall means. As the Judge noted, this is an organisation with an impeccable safety record which has done everything possible to make good the deficiencies exposed by these events."
Finally, their Lordships then reduced the starting point fine of £450,000 (arrived upon as above) to account for the early guilty plea, the conventional reduction of one third, leading to a fine of £300,000. Accordingly, they quashed the original fine of £700,000 and substituted one of £300,000.
There are a number of interesting features to this Judgment.
Firstly, it clearly anticipates that commercial organisations with a turnover significantly in excess of £50 million will find themselves, even in circumstances of low culpability and low likelihood of harm (as distinct from actual harm), facing fines commensurate with a higher category of harm to reflect their greater financial size. This, in one sense, is hardly surprising, but it also serves to underline the already existing understanding that the Definitive Guideline is ushering in a new era of much higher fines in regard to "routine" health and safety offences (albeit it must be borne in mind at all times in regard to this case that it involved a fatality – see below).
Secondly, the Court of Appeal’s treatment of the turnover v profit conundrum is very interesting. Albeit they declined to make any further adjustment, in this case, to allow for the disparity between turnover and profit, they clearly anticipate that, in the right case, this may be permissible. In order for a Defendant to benefit from such an adjustment, it appears very clear that they would need to show a consistent historical pattern of radical disparity between turnover and profit, as distinct from a situation (as here) of a temporary impact on profitability consequence upon exceptional (but short duration) circumstances.
It will be very interesting to see what might happen in the context of sentencing if and when such a case were to come before the Courts. The Court of Appeal has made it clear that turnover is not the sole criterion and, therefore, the right case might be capable of advancing such an argument with some hope of some level of success.
Thirdly, the influence of the Defendant’s background solid financial position (with assets in excess of £500m), has clearly impacted significantly. Moreover, that background solid financial position appears to have fed through into significant remuneration for senior personnel within the organisation. Those 2 factors have clearly weighed heavily in the balance in terms of the Court of Appeal’s decision not to further adjust the starting point fine fixed at £450,000. The reason for this is obvious and grows directly out of the intention of the Definitive Guideline to set fines which bring home to both senior officers and shareholders the financial implications of failure to properly engage with health and safety legislation. It is perhaps interesting to note that the eventual fine arrived upon in this case (prior to reduction for early plea) is comparable to the annual salary of the most senior director (according to the figures provided earlier in the Judgment).
Fourthly, it should be explicitly noted that the level of fine imposed in this case was, quite explicitly, characterised by their Lordships to be reflective of the low culpability and low risk of harm. Their Lordships made it very clear that had those two factors not mitigated in favour of the Defendant/Appellant, the eventual fine would have been much larger. Accordingly, in a situation where a similarly sized Defendant was unable to demonstrate such a favourable interpretation of those factors, an even larger fine would be expected without, it is submitted, any real prospect of appeal, given the attitude displayed by the Court of Appeal.
Fifthly, this decision serves to underline that where there is any significant injury, let alone a fatality, a (very) significant fine is now to be expected (in comparison to historic fine parameters). Where a fatality has eventuated, that level of fine will be further enhanced.