Op-Ed: “Perseverare diabolicum − Spanish law on State liability for breaches of EU law” by Gabriel Doménech-Pascual
Errare humanum est
A few days ago, on 28 September 2021, the Grand Chamber of the Court of Justice held a hearing in Commission v Spain (C-278/20), a case brought by the European Commission against the Kingdom of Spain for failing to fulfil its obligations under the principles of effectiveness and equivalence when lying down the conditions governing State liability for damages caused to individuals by acts of the legislature in breach of EU law.
This is the second time that the Court of Justice has been called on to assess the compatibility of Spanish law with EU law on this issue. In Transportes Urbanos (C-118/08), the Court already declared that one of the conditions governing State liability for harm caused in breach of EU law was not compatible with EU rules. Now, it seems highly likely that history will repeat itself once again. Let us explain the context of both cases.
In Spain, the rules regarding State liability for losses caused to individuals by unlawful legislation had their origin in the case law. Despite the fact that neither the Spanish Constitution nor the legislature had provided for such a liability, the Spanish Supreme Court declared in 2000 that, under certain conditions, the State was liable for the harm caused by unconstitutional legislation. The leading case was as follows.
In 1996, the Spanish Constitutional Court (SCC) quashed a 1990 law that had established a tax with retroactive effects, thereby violating the principle of legal certainty. At that time, it seemed that most of the people that had paid that tax were not going to recover it. When the judgment of the SCC was published, the four-years limitation period established for requesting the refund of overpaid taxes had already expired, and many courts and administrative authorities had enacted decisions declaring that such law was not unconstitutional and, therefore, the plaintiffs were not entitled to refund. These decisions had become unappealable before the SCC’s Judgment was published and could not be reviewed anymore. Article 40.1 of Organic Law 2/1979 of the Constitutional Court establishes that judgments declaring the unconstitutionality of laws shall not provide grounds for review cases in which the unconstitutional provisions were applied if these cases ended with final judicial decisions, save criminal proceedings where a criminal or an administrative sanction was imposed (if, as a consequence of the nullity of the unconstitutional law, the sanction would be reduced, limited or excluded). Moreover, under the case law of the Spanish Supreme Court, this rule also applies to cases concluded with administrative decisions, if they were not challenged in good time.
Despite (or precisely because) of that, many taxpayers brought actions against the State for the losses they have suffered as a result of such unconstitutional law. Surprisingly enough, the Supreme Court upheld their claims, even though they had gotten an unappealable decision rejecting the overpayment refund or not even applied for refund within the established deadlines. The Supreme Court argued that the action for damages was different from and did not depend on the action for refund. Affected taxpayers thus had one year, from the date of publication of the judgment annulling the unconstitutional provision, to file a claim for damages.
This case law was heavily criticized by several scholars. They argued that it (i) de facto offset the legal effects of administrative and judicial decisions that were unappealable and to be preserved for the sake of legal certainty; (ii) contravened the spirit of Article 40(1) of Organic Law 2/1979; (iii) gave the opportunity to obtain a legal remedy to individuals that did not avail themselves in due time of the legal remedies at their disposal; and (iv) de facto eliminated the four-years limitation period established in the interests of legal certainty.
Afterwards, the Supreme Court restricted the scope of this case law, by declaring that it did not apply to cases where the legislative provision at issue was annulled by the SCC with prospective effects, nor to cases where EU law was breached.
The Supreme Court, nevertheless, ended up making a preliminary reference on whether this second restriction was contrary to the principles of effectiveness and equivalence. In Transportes Urbanos, the Court of Justice found that this rule violated the latter principle, which requires that conditions imposed by national law in relation to actions for damages are not less favourable where the action is based on UE law than where it is based on national law, all other things being equal. Indeed, actions based on breaches of EU law were subject to a requirement that did not apply to similar actions based on national law: the plaintiff had to have previously exhausted all domestic remedies for challenging the validity of the harmful administrative measure adopted on the basis of the unlawful legislation. The Court of Justice also considered that it was not necessary to examine this rule requiring prior exhaustion of such remedies in the light of the principle of effectiveness.
Sed perseverare diabolicum
After Transportes Urbanos, the Spanish Supreme Court extended its case-law on State liability for unconstitutional legislation to legislation contrary to EU law, albeit with a relevant modification: it subjected this liability to the condition of the breach of EU law being ‘sufficiently serious’. The ‘explanation’ for this requirement lies in the fact that, according to settled established case law of the Court of Justice, State liability for breaches of EU law is subject to three conditions: first, the legal rule infringed must be intended to confer rights on individuals; second, the breach of this rule must be sufficiently serious; and third, there must be a causal link between the breach and the loss sustained by the injured person.
However, the Spanish Supreme Court inexplicably overlooked the fact that, under its own case law, that second condition does not apply to actions for damages caused by unconstitutional legislation. Breaches of the Spanish Constitution do not need to be ‘sufficiently serious’ to give rise to State liability. It is therefore obvious that such a divergence violated the principle of equivalence. The conditions imposed by Spanish law in relation to State liability actions for unlawful legislation were less favourable where the action was based on UE law than where it was based on national law. The sufficiently-serious-breach condition applied indeed only to the former cases.
This divergence is nowadays enshrined in Article 33 of Law 40/2015 on the legal rules governing the public sector, which has codified the existing Spanish law on State liability. Moreover, Laws 39/2015 and 40/2015 have subjected State liability for unlawful legislation (either unconstitutional or contrary to EU law) to relatively strict conditions. First, claimants have to have previously exhausted every remedy against the decisions made in application of the unlawful legislation. Second, they also have to have alleged that such legislation was unconstitutional or contrary to EU law. And third, claimants can only be compensated for damages suffered within a period limitation of five years before the unlawful legislation was declared unconstitutional or contrary to EU law. Both Law 40/2015 and Law 39/2015 are the subject-matter of the pending action brought by the Commission against Spain.
In our opinion, these requirements do not violate the principle of effectiveness. Let us remind that, in Transportes Urbanos, Advocate General Poiares Maduro already noted that the first and third conditions (the prior exhaustion of administrative and judicial remedies, and the limitation period of four years) were compatible with EU law. Nevertheless, we also think that the third condition ought to be interpreted in conformity with EU law. Injured plaintiffs may bring an action for damages even though the Court of Justice has not declared yet that the legislation at issue breaches that law. With regard to the second condition, alleging the infringement at issue could well be considered as a reasonable diligence measure required from the injured person to mitigate the loss.
Gabriel Doménech-Pascual is Professor of Administrative Law at the University of Valencia and President of the Spanish Association of Law and Economics.