Analysis: “Member States’ actions for damages against the EU as a means to offset shortcomings of effective judicial protection? Czech Republic v Commission” by Dolores Utrilla
Yesterday, official publication was made of an action for damages (T-151/20) brought by the Czech Republic against the EU (represented by the European Commission) and based on the principle of the prohibition of unjust enrichment (de in rem verso). This is an extremely interesting and pioneering case, the first known case so far in which an action for damages is brought against the EU by a Member State, and which offers the EU courts the opportunity to clarify whether and how actions for unjust enrichment can contribute to enhance effective judicial protection in areas, such as that of the EU’s system of traditional own resources (TOR), where serious shortcomings for access to court exist.
Yet this case has a long history that needs to be addressed if we are to fully appreciate its relevance and possible implications.
The defective system of judicial review in the area of the EU’s own resources
The EU’s system of TOR, which includes mainly customs duties, relies on the collection and management of such resources by the Member States, governed by Regulation 1150/2000 (subsequently replaced by Council Regulation 609/2014). A key feature of Regulation 1150/2000 is that it does not confer any margin of discretion to the Member States or the Commission. This means, firstly, that Member States can escape the obligation to make the corresponding funds available to the EU only in the cases provided for in Article 17(2) of Regulation 1150/2000 – namely where the amounts turn out to be irrecoverable, whether for reasons of force majeure or for other reasons beyond the responsibility of the State concerned. Therefore, Member States cannot refrain from discharging the payment obligations by the mere fact that they disagree with their existence or with their amount. Secondly, Regulation 1150/2000 does not confer on the Commission any decision-making powers as to whether a Member State may be exempted from its obligation to make funds available to the EU. Article 14(4) of the Regulation obliges the Commission to make observations in this regard, but these ‘letters of formal notice’ are mere opinions without any legal effect. Only the Court of Justice of the European Union (CJEU) – and not the Commission – may settle a dispute between a Member State and the Commission in the area of TOR (as declared in Slovakia v Commission, C-593/15 P and C-594/15 P, and in Romania v Commission, C-599/15 P).
This legal framework leads to a bizarre outcome that can be summarised as follows. Whenever there is a dispute regarding the obligation to pay certain TOR or the amount of such obligation, Member States cannot seek annulment of the assessment performed by the Commission, since that assessment, as a ‘mere opinion’, is not challengeable under Article 263 TFEU. The only way for the issue to reach the CJEU is through an infringement procedure initiated by the Commission, which in this regard enjoys a wide margin of discretion. Until the moment arrives (if it does at all) in which the CJEU rules that no obligation exists for the concerned Member State to make the disputed amounts available to the EU, that Member State remains obliged to discharge such payments. If it fails to do so and the CJEU ends up declaring that the payment should have been made, the concerned Member State risks being obliged to pay (high) default interests. To avoid such a risk, Member States can pay the disputed sums while making reservations as to the merits of the Commission’s assessment. Nevertheless, such reservations will only be examined if the Commission decides to initiate infringement proceedings in which the CJEU can rule on the merits. However, once payments are made, practice shows that the Commission tends to consider that there is no reason to initiate an infringement procedure, thereby closing the route to judicial review on the substance of the reservations expressed by the concerned Member State.
The dispute between the Czech Republic and the Commission
The Czech Republic has been caught up in the depicted bizarre situation with regard to certain imports of pocket flint lighters from Laos in the period from 2004 to 2007. On 30 May 2008, the European Anti-Fraud Office (OLAF) adopted a final report following an investigation into these imports, and concluded that the lighters in fact originated in the People’s Republic of China and should have been subject to an anti-dumping duty. Based on this report, the Director of the Directorate for Own Resources and Financial Programming of the Commission informed the Czech authorities that the conditions for exemption from the obligation to make own resources available, provided for in Article 17(2) of Regulation 1150/2000, were not met, and called on them to make available the corresponding sum to the EU. On 17 March 2015, the Czech Republic paid the disputed amount into the Commission’s account, but expressed its reservations as to the view taken by the Commission in its letter of formal notice.
Later, and as the Commission decided not to initiate infringement proceedings because the TOR amount that was owed had been paid, the Czech Republic brought an action for annulment against the Commission’s letter of formal notice (T-147/15). By its order of 28 June 2018, the General Court dismissed the action as inadmissible, considering that the letter of formal notice constituted a mere written statement of opinion supplemented by an invitation to make available the disputed TOR amounts. According to the General Court, the Commission’s letter was not able to produce legal effects and therefore could not be subject to an action for annulment under Article 263 TFEU.
Three pending cases: in search of a mechanism to fill in the judicial review gap
The General Court’s inadmissibility order in T-147/15 gave rise to a strong reaction from the Czech Republic, which brought: (i) an appeal against that order before the Court of Justice (C-575/18 P), (ii) an action for failure to act against the Commission because it did not open infringement procedures against the Czech Republic, or return the paid amount (T-13/19), and (iii) an action for damages against the Commission on the basis of the prohibition of unjust enrichment, as explained at the beginning of this Analysis (T-151/20). Although formally separated, these three pending actions are closely intertwined in substance.
(i) Case C-575/18 P: the challengeable character of the Commission’s assessment
By its appeal before the Court of Justice, the Czech Republic claims, in essence, that the order in T-147/15 should be annulled, and the case referred back to the General Court, because the conclusion that the Commission’s assessment was not a challengeable act is contrary to the Czech Republic’s right to effective judicial protection under Article 47 of the Charter, read in conjunction with Article 263 TFEU. According to the Czech Republic, the General Court did not take into account the margin of discretion recognised by the case law to the Commission as regards the initiation of proceedings for failure to fulfil obligations. Therefore, the appellant claims that the General Court erred in law when it considered that the Czech Republic’s right to judicial protection was safeguarded because there was a possibility that the Commission would make an application under Article 258 TFEU.
In her Opinion in this case, delivered on 12 March 2020, Advocate General Sharpston agrees with the General Court that the Commission’s assessment under Regulation 1150/2000 cannot be the object of an action for annulment. Nevertheless, she agreed with Czechia’s view that this conclusion creates a gap for judicial protection in the field of TOR. For this reason, she suggests that the Court of Justice declare that, in the area of TOR, a payment with reservations cannot be regarded as legally perfect and that, in such circumstances, the Commission has an obligation to bring an action for failure to fulfil obligations against the concerned Member State in order to provide the CJEU with the opportunity to rule on the merits of the case. In the alternative, she suggests that a subsidiary remedy for the Member State could be to bring before the CJEU an action for damages based on the EU’s unjust enrichment.
(ii) Case T-13/19: the obligation of the Commission to open infringement proceedings or to return the paid amounts
On 8 January 2019, the Czech Republic had already brought an action for failure to act against the Commission, claiming that it breached its obligations under EU law by failing to bring proceedings against the Czech Republic for failure to fulfil obligations regarding the disputed TOR payments. By this (still pending) action, and partially in line with the subsequent Opinion by AG Sharpston in C-575/18 P, the Czech Republic claims that the principle of sincere cooperation in Article 4(3) TEU, read in conjunction with the right to effective legal protection in Article 47 of the Charter, impose on the Commission the obligation of either bring infringement proceedings without undue delay, or return the conditional payments made by Member States if it finds no grounds upon which to bring such proceedings.
(ii) Case T-151/20: the right of Member States to be compensated on the basis of the prohibition of unjust enrichment
By this action, brought on 16 March 2020 (only a few days after publication of AG Sharpston’s Opinion in C-575/18 P), the Czech Republic asks the General Court to order the EU to restore the sums paid conditionally by that Member State to the Commission on 17 March 2015 and on 22 December 2016. According to the Czech Republic, the disputed amounts were not paid under any legal basis. Specifically, the Czech Republic claims that the customs duty in question could not be collected for reasons which cannot be attributed to that Member State, which, therefore, should be considered as released from the obligation to place the disputed sum at the Commission’s disposal, in accordance with Article 17(2)(b) of Regulation 1150/2000.
The pioneering Czech action for unjust enrichment
The legal framework of actions for damages under EU law was recently clarified by the Court of Justice, unsurprisingly, in disputes dealing with TOR rules (Commission v UK, C-391/17, and Commission v The Netherlands, C-395/17). However, as explained here by Daniel Sarmiento, in those cases the problem examined by the Court of Justice was a different one: namely, whether the EU can use the infringement procedure (which actually covers a claim for damages) to seek recovery of a legal wrong that causes the EU a patrimonial loss.
In view of the pioneering nature of the Czech pending claim for damages, one may well wonder whether this action has an appropriate legal basis under EU law, and whether it is a suitable means to obtain redress in the absence of procedural mechanisms at the disposal of Member States to obtain substantive judicial review in the specific area of TOR.
Building on previous versions of the EU Treaties, Article 340 TFEU provides for liability of the EU in the form of action for damages. A fundamental matter that this provision leaves open is who may bring an action of this kind. In particular, the issue as to whether a Member State (or a third country) can bring an action for damages against the EU institution remains open. So far, no precedent of this kind of action existed, and therefore the CJEU has never had the opportunity to express its view on the matter.
At the same time, it must be noted that, in principle, Article 340 TFEU covers non-contractual liability in the strict sense, which, to be invoked, requires a number of conditions to be satisfied (relating to the unlawfulness of the conduct imputed to the EU, the existence of a damage, and the existence of a causal link between the unlawful conduct and the damage). The application of these requirements would render the action for damages ineffective in the area of TOR law, because in that field the underlying problem for the concerned Member State is the impossibility to obtain a declaration of unlawfulness of the EU’s action.
However, the Court of Justice has broadened the scope of Article 340 TFEU, including also actions for unjust enrichment brought against the EU by ‘any natural or legal person’. In its judgment of 16 December 2008 in Masdar (UK) Ltd v Commission (C-47/07 P), the Grand Chamber of the Court of Justice ruled that, according to the principles common to the laws of the Member States, actions for unjust enrichment could be brought against the EU itself, when the affected natural or legal person alleges that the EU has been unjustly enriched to the detriment of that person. According to the Court of Justice, the possibility of bringing an action for unjust enrichment against the Community cannot be denied to a person solely on the ground that the (then) EC Treaty did not make express provision for a means of pursuing that type of action, because it would be contrary to the principle of effective judicial protection. The Court of Justice stated that, as any obligation arising out of unjust enrichment is by definition non-contractual in nature, it is necessary to allow it to be invoked pursuant to Article 235 EC (current Article 268 TFEU) and the second paragraph of Article 288 EC (current Article 340 TFEU).
In Masdar, the Court of Justice also made clear that actions for unjust enrichment do not require proof of unlawful conduct on the part of the defendant, but merely proof of enrichment on the part of the defendant for which there is no valid legal basis and of impoverishment on the part of the applicant which is linked to that enrichment. This turns this kind of action into a tool worth exploring in areas, such as TOR, in which substantive judicial review of EU action is inaccessible to the affected parties, whether they are individuals or Member States.
As pointed out by Advocate General Sharpston in C-575/18 P, the unjust enrichment action does not perfectly fit into the current judicial architecture, in so far as it would lead the General Court to indirectly rule on a Member State’s compliance with its obligations under EU law. However, this option may be considered acceptable, as a default solution, if the CJEU considers that no other means for judicial protection are available for Member States. There are good reasons to await with great interest the CJEU’s take on the Czechia-Commission dispute, as there are to wonder about its possible spillover effects on other areas of EU law where similar judicial protection shortcomings exist. It may well be a further step in this line, following cases related to the use of the action for damages to obtain redress for losses resulting from the CJEU’s breach of its obligation to adjudicate within a reasonable time, as occurred in the Gascogne case (T-577/14 and C-138/17 P).
Dolores Utrilla is Assistant Editor at EU Law Live and Associate Professor at the University of Castilla-La Mancha.