When fines outstrip profits

Howard Fidderman reports on a Court of Appeal judgment that fines for safety offences can exceed a company’s profits.

On this page:
The sentencing factors
Recorder followed Howe
The starting point
Profit vs turnover
Box 1: The death of Daniel Askew
Box 2: The Howe sentencing criteria
Box 3: ESB Hotels
Box 4: Balfour Beatty.

In March, the Court of Appeal ruled that a crown court judge was perfectly within his rights to fine a company a sum that wiped out its annual profits, even though it had not deliberately cut safety corners to make a profit. The decision is important because the fine is one of only a handful to amount to anything approaching a company’s profits, and is a further reminder to magistrates and judges that the appeal courts consider the current level of fines - rarely above 1% of larger companies’ profits - unacceptable.

The case concerned an appeal from FW Chalcroft (Construction) Ltd, which had been the principal contractor on a construction site where a subcontracted worker, Daniel Askew, had suffered a fatal fall in 2003 (see box 1). The company pleaded guilty on 29 March 2007 at Nottingham Crown Court to two breaches of the HSW Act 1974. On 12 October 2007 at the same court, Recorder Burns imposed fines and costs on Chalcroft totalling £340,000, comprising:

• £180,000 for exposing non-employees to risks from its undertaking (s.3(1));
• £80,000 for failing to ensure the safety of its own employees (s.2(1)); and
• £80,000 prosecution costs.

The fines alone represented 119% of the company’s most recent pre-tax profits, and the company appealed against the amount of both fines.

The sentencing factors

The Court of Appeal’s unanimous judgment was given by Mr Justice Penry-Davey on 29 March¹. He noted that, in sentencing, the recorder had correctly referred to the Court of Appeal’s judgment in R v Howe & Sons Engineers Ltd² (see box 2), which set out aggravating and mitigating factors in sentencing for health and safety offences. The recorder identified the aggravating features for Chalcroft as:

• the fatality;
• a failure to heed warnings from experienced subcontractors that should have made the recipients “take stock”;
• the standard of health and safety (and the large number of failures listed in box 1), which fell below an acceptable level and far short of what was reasonably practicable - a neglect that put people’s lives at risk; and
• the risk identified was not momentary but had continued for several weeks.

The recorder decided the appropriate starting point for the total fine was £400,000, which he discounted by 15% to reflect the company’s plea of guilty. Also, in mitigation, he took account of the company’s previously good record and of the steps it had taken since the accident to avoid any repetition - "steps which it is clear on the accident figures have had positive results,” said the Court of Appeal. Three “other matters” were relevant to the sentence:

• Chalcroft had not deliberately taken safety risks for profit;
• Chalcroft’s “means”, with pre-tax profits varying from £730,000 in 2004 to £219,000 in 2007. “Equally,” said the Court of Appeal, “the turnover figures were very substantial indeed.” In May 2007 there was a management buyout, with annual interest payments consequently amounting to £250,000. The relevance of the pre-tax profit, said the Court of Appeal, followed from its observations in the 2005 case of R v ESB Hotels³ (see box 3), “where the view was expressed that the court should have regard to pre-tax profits rather than gross turnover”; and
• the trial included a lengthy “Newton hearing”, which is used where the prosecution and defence versions of the facts of the case are so different that the appropriate sentence is affected by the factual dispute. Chalcroft had disputed the HSE’s view that Daniel Askew’s death was linked to its HSW Act breaches, and argued that the extent of its offending was not as high as was suggested. But the recorder concluded that the fatality was an aggravating feature because it was linked to the breaches, which had materially increased the chance of the accident occurring. Had the company discharged its duties, it would have been significantly less likely that the accident would have happened in the first place.

Recorder followed Howe

On appeal, Chalcroft argued that, although the recorder had correctly identified the aggravating features, he had not fully reflected the mitigation as set out above. Further, he had adopted too high a starting point for the fine for a company of its size, even if it was substantially culpable for the breaches of duty.

The Court of Appeal observed that the recorder’s “approach to the question of sentence was very careful and detailed”. He had referred to the Howe guidance, indicating that the objective of prosecution was a safe environment for those working and others who might be affected, and that a fine “needed to be large enough to drive the message home and to include a legitimate element of deterrence and expression of the public anger at breaches resulting in loss of life to innocent people”. The recorder had also “mentioned the terrible effects the death had had upon the deceased’s family”.

The sentence also reflected the guidance in R v Balfour Beattie⁴ (see box 4), including the particular seriousness that courts should attach to breaches of s.3 of the HSW Act and the fact that historically fines had been too low and in many cases “derisory”. The recorder also “took into consideration that as a result of the management buyout the company was not showing much profit. His conclusion was basically that it was a well-run business that was going to be profitable in the future” and was consequently able to pay the fine. The Court of Appeal noted that during its appeal the company had “not sought in any way to rely on [its] poverty … in the context of payment of fines”.

The recorder, said the Court of Appeal, described the loss of life as “needless”, with a failure to heed warnings. Safety standards, the recorder said, amounted to people going through the motions and fell far short of what was reasonably practicable. This had created a high risk for a significant period of time.

The starting point

In short, said the Court of Appeal, the recorder “regarded the case as very serious, but not in the most serious category of those who sacrifice safety for profit with fines at or about £600,000. It was on that basis that he took a starting point of £400,000.” Chalcroft argued that this starting point was outside the proper range for a company of its size. While it accepted that averages do not provide a tariff, it nonetheless believed they offered some insight into the framework of penalties. The provisional figures for 2004/05 showed the average fine per “offender” at £12,642. (It should be noted that this figure is erroneous. The average is per offence, not offender (which can commit more than one offence). Further, the final average was £12,525.) But the Court of Appeal pointed out that the average during that year encompassed several fines of £100,000 and above and, where a case had involved a fatality, the average penalty per case was £42,795. (Ironically, the HSE’s decision to cease publishing information on fines for fatalities means that these will be the last such averages available to courts, unless the HSE implements the recent parliamentary select committee recommendation that it starts compiling and publishing such figures again).

The recorder, said the Court of Appeal, had “exercised his discretion in … fixing the levels of fine on the basis of very full and careful analysis of the relevant aspects of this case, both for and against the appellant”. The Court of Appeal did “not consider that this fine overall was out of scale”. The approach of the recorder was very careful; he identified the relevant aggravating and mitigating factors, and was in a particularly good position to assess the appropriate level of penalty, following the long Newton hearing. In short, “the overall fine in this case was neither manifestly excessive nor wrong in principle.”

Profits vs turnover

While the decision of the Court of Appeal is welcome, and the level of the fine is appropriate to the gravity of the offence and its outcome, it should be noted that it still leaves a situation in which smaller companies are fined proportionally higher amounts of their profits than are larger organisations. In HSB 366, we showed that, of the 48 fines of £100,000 and over imposed since April 2006-December 2007, only three (including Chalcroft) exceeded annual profits. A further 32 ranged from below 1% to 10% of profits (nine had no profits). At the same time, smaller firms were being fined smaller amounts that often represented a higher proportion of their profits. Chalcroft has considerable justification in believing that it has received a proportionately far higher fine than those imposed on many other companies guilty of equally serious criminal offences; the remedy, however, lies in increasing the general level of fines, not decreasing that imposed on Chalcroft.

The use of profit as a basis for sentencing is, in any case, in doubt. Although the Chalcroft judgments both cite previous Court of Appeal precedence that courts should look at profits, not turnover, when sentencing, this is at odds with current proposals from the Sentencing Advisory Panel. These suggest a starting point of 2.5% of turnover for an HSW Act conviction where a fatality has been involved (and 5% for a conviction involving manslaughter). As such they would result in significantly higher fines for health and safety crimes: not one of the 48 fines cited above (and 33 involved fatalities) exceeded 1% of turnover. (As a medium-sized company, Chalcroft submits abbreviated accounts that don’t give total annual turnover figures, although it would seem that the Court of Appeal had access to turnover figures.)

1. R v FJ Chalcroft Construction Ltd [2008] EWCA Crim 770.

2. R v Howe & Sons Engineers Ltd [1999] 2 All ER 249, [1999] IRLR 434, [1999] 2 Cr App Rep (S) 37.

3. R v ESB Hotels [2005] EWCA Crim 132, [2005] 2 Cr App Rep (S) 332.

4. R v Balfour Beattie [2006] EWCA Crim 1586, [2007] 1 Cr App Rep (S) 370, [2007] ICR 354.

Howard Fidderman is a freelance journalist and editor of HSB.