UK: State Liability On Failure To Implement An EC Directive

The Court of Appeal has recently considered the liability of EU Member States to compensate individuals where the State has failed to implement a Directive into national law.

Lloyd’s Names brought proceedings to recover underwriting losses, alleging that the British government had failed to introduce proper regulation of Lloyd’s syndicates. The claim was unsuccessful at first instance and the Names appealed. The Court of Appeal dismissed the appeal.

• For a Member State to be liable for failing to implement a Directive the Directive should involve the grant of rights to individuals and those rights must be the particular right being claimed as justification for the proceedings.

• It was not enough to argue that the Directive was intended to protect the individual’s economic welfare.

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The Court of Appeal has recently given judgment in an appeal brought by a group of Names in the Lloyd’s market. The judgment provides guidance on the conditions on which liability of a Member State would arise where a State has failed to implement a Directive. It is also an interesting commentary on how the courts dealt with arguments that Lloyd’s Names have suffered loss due to an alleged failure of regulation.

The case concerned claims brought by a substantial number of disaffected Lloyd’s Names who suffered considerable underwriting losses between 1980 and 1996. Having failed to secure redress through proceedings against Lloyd’s, a claim was brought on the basis that, as a result of inadequate market regulation, they had accepted risks and suffered losses that proper regulation would have identified or lessened.

To ground such a claim, the Names had to point to a failure to transpose into national law an EC Directive that granted them specific rights. The Directive pointed to was council Directive 73/239EEC.

This Directive concerns the co-ordination of national provisions on the taking up and pursuit of direct insurance business. The Directive requires consistency in regulation to promote freedom of establishment across the Community.

The claimants sued the British government, in the form of HM Treasury, for failure to implement Directive 73/239. They sued for their underwriting losses on the basis that these were caused by the failure to implement proper regulation accordingly, specifically that the Directive obliged the government to create national laws that ensured that syndicates had adequate reserves to meet liabilities, which did not happen. Langley J gave judgment in favour of the government. This judgment was appealed.

The Court of Appeal analysed whether the Names could claim a failure to transpose the Directive into domestic law against the national government. The main issue was whether there was a sufficient "Grant of Rights" to the claimant Names pursuant to the Directive.

The ECJ case of Francovich was a major point of reference. Francovich provides that Member States are obliged to compensate individuals where the State has breached Community law and is responsible for the individual’s loss and damage. The ECJ set out three conditions that together create State liability:

• The Directive should involve the grant of rights to individuals

• The content of those rights should be identifiable in the Directive

• A causal link between the breach of the State’s obligation and the loss and damage suffered by the injured parties should exist.

The Names contended that the Francovich test was satisfied if some right, not necessarily the right being claimed as justification for the proceedings, was conferred, or if the Directive was intended to protect the claimants’ economic welfare. The Court of Appeal ruled against the Names’ arguments. The court reasserted the conventional interpretation and understanding of the Francovich decision.
The court commented that the recitals and terms of Directive 73/239 meant that an insured under a policy might have a right to expect that his government will require an insurer to meet certain requirements before being permitted to do business. However, to submit that an individual claimant Name, as in this case, has a right to expect the government to require such regulation of him was to assert in substance that such an individual had a right to be regulated. This was regarded as nonsensical.

The judge at first instance was correct to reject the idea that the Directive granted rights to the claimants. The Court of Appeal unanimously decided to dismiss the appeal. Reference to the ECJ was neither required, nor permitted.

The case reveals the Court of Appeal’s endorsement of the standard interpretation of the three-step test in Francovich. Should anybody wish to bring a claim, in an insurance context, against the government for failure to implement a Directive, the first -major- hurdle still remains showing that the Directive concerned grants rights to the claimant.