Brasserie du Pêcheur v Germany; R v Secretary of State ex p Factortame (No 4)

These two joined references to the European Court of Justice arise from separate proceedings in Germany and the United Kingdom, each involving claims for damages against a member state for losses caused by primary legislation incompatible with European Community law. The Court of Justice heard them together because both raised the same fundamental constitutional question: whether the principle of state liability established in Francovich v Italy Cases C-6/90 and C-9/90 [1991] ECR I-5357 extends to acts of the national legislature, and if so, upon what conditions such liability arises.

In the German proceedings, Brasserie du Pêcheur SA, a French brewery based in Alsace, had been compelled to discontinue exports of beer to Germany in 1981 because its product did not conform to German purity requirements imposed under the Reinheitsgebot. German legislation restricted the marketing of beer produced with ingredients or additives not permitted under national law and prohibited the use of the designation "Bier" for products not brewed in conformity with those rules. The Commission brought infringement proceedings, and the Court of Justice held in 1987 that the German rules were incompatible with what was then Article 30 EEC (now Article 34 TFEU) on the free movement of goods. Brasserie du Pêcheur subsequently sought compensation for losses suffered during the period of enforced export suspension.

In the United Kingdom proceedings, the Factortame litigation arose from the Merchant Shipping Act 1988 and regulations made thereunder, which imposed nationality, domicile and residence requirements upon the owners and operators of vessels seeking registration in the United Kingdom fishing fleet. Spanish fishing vessel owners and operators, represented by Factortame Ltd and others, contended that these requirements were incompatible with Community law on freedom of establishment and the prohibition of discrimination on grounds of nationality. The Court of Justice had already ruled in Factortame (No 1) Case C-213/89 [1990] ECR I-2433 that national courts were obliged to set aside incompatible national legislation, and the compatibility of the 1988 Act with Community law had been definitively established against the United Kingdom. The Spanish fishermen then sought damages for losses sustained during the period of unlawful exclusion from the register.

Both sets of proceedings were referred to the Court of Justice by the national courts seised of the damages claims. The Bundesgerichtshof in Germany and the Divisional Court in England both required authoritative guidance on whether Community law itself conferred on individuals a right to reparation against the state for damage caused by legislative acts that manifestly breach Community law obligations, and if so, what the conditions for such liability were.

The context of these references was particularly significant because, in both jurisdictions, the applicable domestic law placed significant obstacles in the path of individuals seeking to sue the state for damages attributable to the enactment of primary legislation. In Germany, constitutional doctrine severely limited the circumstances in which the legislature could incur civil liability. In the United Kingdom, the doctrine of parliamentary sovereignty had historically been understood to preclude tortious liability arising from the content of primary Acts of Parliament. The fundamental question was therefore whether Community law could displace these domestic limitations.

The German and UK governments, supported by other member state governments intervening in the proceedings, contended that the principle of state liability established in Francovich was either confined to failures to implement directives or subject to conditions defined wholly by national law. The Commission, by contrast, argued in favour of a general and autonomous Community law principle of state liability applicable to all forms of member state breach, including legislative acts.

The primary issue is whether the principle that member states are obliged to make good damage caused to individuals by breaches of Community law attributable to the state extends to breaches resulting from the acts or omissions of the national legislature. The Court is required to determine whether legislative acts enjoy any special immunity from liability, or whether they are subject to the same Community law principle as administrative failures and non-implementation of directives.

The secondary issue concerns the conditions upon which state liability is established. Specifically, the Court must define what is required by way of seriousness of the breach before a right to reparation arises, and what factors are to be considered in assessing seriousness. A related question concerns whether national procedural and substantive rules governing state liability may restrict or supplement the Community law conditions, and whether the principle of equivalence imposes any constraints on such national rules.

A further procedural question arises as to whether it is for the national court or for the Court of Justice itself to determine whether the particular facts of each case disclose a sufficiently serious breach satisfying the Community law conditions for liability. This question has important implications for the distribution of functions between the Luxembourg Court and national courts in the application of the state liability principle.

The Court begins its analysis by reaffirming the constitutional foundations of Community law. The Treaty has created its own legal order, which is an integral part of the legal systems of the member states and which their courts are bound to apply. The full effectiveness of Community rules and the effective protection of individual rights require that individuals must be able to obtain reparation where their rights are infringed by a breach of Community law attributable to a member state. This principle is inherent in the system of the Treaty and does not depend on the specific provisions of any particular directive or Treaty article.

The Court rejects the argument that liability is confined to failures to implement directives of the kind that arose in Francovich v Italy Cases C-6/90 and C-9/90 [1991] ECR I-5357. Francovich did not purport to establish an exhaustive or limited principle; it expressed a general rule inherent in the Treaty system. The obligation to make good damage is binding upon the member state regardless of which organ of the state is responsible, including the legislature. To hold otherwise would be to permit member states to immunise legislative acts from Community law consequences in a manner fundamentally incompatible with the principle of the primacy and effectiveness of Community law.

The Court draws an analogy with the liability of Community institutions under what was then Article 215(2) of the EC Treaty (now Article 340 TFEU). Under that provision, the Community is liable for damage caused by its institutions in the exercise of their functions. The Court has consistently held that where a Community institution has exercised a wide legislative discretion involving choices of economic policy, liability arises only where there has been a sufficiently serious breach of a superior rule of law for the protection of individuals. The Court reasons that the same principle must govern member state liability where the state has exercised legislative discretion in an area comparable in scope to that available to the Community legislature. It would be paradoxical if member states were subject to stricter liability than Community institutions in analogous circumstances.

Having established the general principle, the Court proceeds to define the conditions for member state liability in terms applicable to all breaches of Community law, whether administrative or legislative. Three conditions must be satisfied: first, the rule of Community law infringed must be intended to confer rights on individuals; second, the breach must be sufficiently serious; and third, there must be a direct causal link between the breach of the obligation resting on the state and the damage sustained by the injured party. These conditions correspond broadly to those articulated in Francovich but are reformulated in terms that make explicit the requirement of a sufficiently serious breach.

The decisive test for whether a breach is sufficiently serious is whether the member state manifestly and gravely disregarded the limits of its discretion under Community law. The Court identifies several factors relevant to this assessment: the clarity and precision of the rule breached; the measure of discretion left to the national or Community authorities; whether the infringement or damage was intentional or involuntary; whether any error of law was excusable or inexcusable; the fact that the position taken by a Community institution may have contributed to the adoption or maintenance of national measures contrary to Community law; and whether the member state had adopted or retained national measures or practices contrary to Community law. No single factor is conclusive; the assessment requires a global evaluation of the circumstances.

Where the member state has little or no legislative discretion, a mere infringement of Community law may in itself constitute a sufficiently serious breach. The Court explains that when a member state is required to achieve a specific result or to abstain from a particular course of conduct, and the content of the obligation is clear and unconditional, deliberate non-compliance or persistence in a position already declared incompatible with Community law will ordinarily satisfy the seriousness requirement without further inquiry. The width of the discretion available to the member state is therefore a critical variable in the assessment.

The Court addresses the German government's argument that domestic constitutional limitations on legislative liability must be respected. It is settled law that the member state as a whole bears responsibility for all its organs, including the legislature, under Community law. The constitutional internal distribution of functions within the member state cannot be relied upon as a justification for failure to observe Community law obligations, nor can it operate to limit or qualify the right to reparation conferred on individuals by Community law. If the national legislature could immunise itself from Community law liability by pleading constitutional immunity, the principle of effectiveness would be systematically undermined.

The Court also addresses the relationship between Community law conditions for liability and national procedural and substantive rules. Community law does not preclude national law from imposing more favourable conditions for liability than those required by Community law. However, national law may not make it excessively difficult or practically impossible to obtain reparation. Two principles apply: the principle of equivalence, requiring that conditions for reparation must not be less favourable than those applying to similar claims founded on domestic law; and the principle of effectiveness, requiring that conditions must not render the exercise of rights conferred by Community law practically impossible or excessively difficult. Any national rule that imposes an additional condition such as fault on the part of the offending organ — where Community law does not require fault — must be assessed against these principles.

On the question of who determines whether the facts disclose a sufficiently serious breach, the Court holds that it is for the national court to make the necessary findings of fact and to apply the Community law criteria to those facts in order to reach a conclusion. The Court of Justice may, however, provide guidance as to whether particular circumstances are capable of constituting a sufficiently serious breach, and it takes the opportunity to do so in relation to both cases under consideration, giving the national courts substantial assistance without wholly determining the outcome.

In relation to the Factortame litigation specifically, the Court observes that the nationality, domicile and residence requirements imposed by the Merchant Shipping Act 1988 were manifestly incompatible with Community law on freedom of establishment, as confirmed by the infringement proceedings against the United Kingdom. The United Kingdom had maintained these requirements despite the clear obligations under the Treaty and despite the Court's earlier rulings. These circumstances — the clarity of the Community law rule, the absence of any plausible justification, and the deliberate persistence in an incompatible position — are strongly indicative of a sufficiently serious breach, though the final determination rests with the national court.

In relation to Brasserie du Pêcheur, the Court acknowledges that the compatibility of the German beer purity rules with the free movement of goods provisions was less immediately obvious at the time the rules were originally enacted and enforced, given the complexity of the relevant case law at the relevant period. Nevertheless, once the Court of Justice had ruled against Germany in the infringement proceedings in 1987, any continued enforcement of incompatible rules would be more readily characterised as a sufficiently serious breach. The national court must therefore examine whether the losses claimed by Brasserie du Pêcheur arose before or after that date and assess the circumstances accordingly.

The Court affirms that reparation must be commensurate with the loss or damage sustained. National courts must not apply rules that limit reparation to damage caused to certain specifically protected interests and exclude loss of profit suffered by individuals, since such a restriction may make reparation practically impossible in cases involving commercial activities. Exemplary or punitive damages are not required by Community law, but they may be awarded under national law if they would be available in analogous domestic claims. The requirement of a sufficiently serious breach does not affect the quantum of reparation once liability is established.

The Court of Justice holds that the principle that member states are obliged to make good loss and damage caused to individuals by breaches of Community law attributable to the state is applicable where the national legislature was responsible for the breach in question. Community law does not reserve any special immunity to acts of the legislature; the state is liable in its entirety regardless of which organ caused the infringement.

State liability for legislative breaches arises where three conditions are met: the rule of Community law infringed must be intended to confer rights on individuals; the breach must be sufficiently serious, in the sense that the member state manifestly and gravely disregarded the limits of its discretion; and there must be a direct causal link between the breach and the damage suffered. The seriousness of a breach is to be assessed by reference to all relevant factors, including the clarity of the rule, the breadth of discretion available to the state, and whether the breach was excusable.

National procedural rules governing reparation must comply with the principles of equivalence and effectiveness. They may not impose conditions that make reparation excessively difficult to obtain, may not restrict reparation to interests protected by domestic law where Community law requires broader coverage, and may not require fault beyond what Community law itself demands. It falls to the national court to apply these Community law conditions to the specific facts of the domestic proceedings.