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State Liability in the EEA

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The Fundamental Principles of EEA Law

Abstract

In Sveinbjörnsdóttir v. Government of Iceland, the EFTA Court extended the principle of state liability from EU law to the European Economic Area. Consequently, EFTA States are obliged to compensate individuals for damage caused by breaches of EEA law for which they are responsible. The EFTA Court has affirmed that the same three conditions apply to state liability claims as in EU law, but with some possible modifications. Section 2 addresses the justifications for state liability in the EEA and Sect. 3 explores the criteria for establishing state liability. Section 4 looks at a contentious example of the lack of state liability—the Icesave I case before the EFTA Court.

In this landmark judgment, the EFTA Court affirmed that the State of Iceland was not liable for deposits in failed credit institutions, provided the state established a deposit insurance scheme in accordance with EU Law. Iceland was under no obligation to use taxpayer funds to recapitalise the Icelandic deposit insurance scheme that the collapse of the Icelandic banking system in October 2008 overwhelmed. Deposit insurance was a liability of the Icelandic banks, and not of the State of Iceland. Even though the Court affirmed the lack of Iceland’s liability under EEA law in the instant case, its obiter dictum does not detract from the principle of state liability in EEA law.

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Notes

  1. 1.

    Case E-9/97, Erla Maria Sveinbjörnsdóttir v. the Government of Iceland [1998] EFTA Ct. Rep. 95, as recognised in C-140/97, Rechberger v. Austria [1999] ECR I-3499. The ECJ first established this principle in the Joined Cases C-6/90 and 9/90, Francovich v. Italian Republic, Bonifaci v. Italian Republic [1991] ECR I-5357. It elaborated on the criteria for establishing state liability in EU law in the Joined Cases C-46/93 and C-48/93, Brasserie du Pêcheur SA v. Federal Republic of Germany; R v. Secretary of State for Transport, Ex parte Factortame Ltd. (No 4) [1996] ECR I-1029.

  2. 2.

    Sveinbjörnsdóttir, supra note 1.

  3. 3.

    Case E-16/11, EFTA Surveillance Authority and the European Commission v Iceland [2013] (“Icesave I”).

  4. 4.

    Case C-26/62, NV Algemene Transport- en Expeditie Onderneming Van Gend en Loos v. Nederlandse Administratie Der Belastingen [1963] ECR 1.

  5. 5.

    Case C-6/64, Flaminio Costa v. E.N.E.L. [1964] ECR 585.

  6. 6.

    Van Gend en Loos, supra note 4, 12, (emphasis added).

  7. 7.

    The Agreement on the European Economic Area 1992, OJ No L 1 (hereafter referred to as the EEA Agreement).

  8. 8.

    See the Court of Justice of the European Union, Opinion 1/91, 14 December 1991, OJ C 110/1, at [20].

  9. 9.

    Baudenbacher (2009), pp. 333–358.

  10. 10.

    Sveinbjörnsdóttir, supra note 1, paragraphs 58, 59. (emphasis added).

  11. 11.

    Van Gend en Loos, supra note 4, 12. See also Francovich, supra note 1, paragraph 171: “State power is limited by the very obligation of the Member States, under Community law, to ensure such effectiveness.”

  12. 12.

    For examples of case law where the ECJ relies on the principle of effectiveness, see: as regards direct effect, Case C-14/83, Sabine von Colson and Elisabeth Kamann v. Land Nordrhein-Westfalen [1984] ECR 1891; as regards primacy, Case C-106/77, Amministrazione delle Finanze dello Stato v. Simmenthal (No 2) [1978] ECR 629; as regards state liability, Francovich, supra note 1; Ex parte Factortame Ltd. (No 4), supra note 1.

  13. 13.

    Costa v. E.N.E.L., supra note 5.

  14. 14.

    To have direct effect, the provision must be sufficiently clear, precise and unconditional and must confer rights on individuals; Van Gend en Loos, supra note 4.

  15. 15.

    Ibid.

  16. 16.

    Forman (1999), pp. 751–781, 775.

  17. 17.

    Opinion 1/91, supra note 8, at paragraphs 13–29.

  18. 18.

    Ibid., at paragraph 15.

  19. 19.

    Ibid., at paragraph 17.

  20. 20.

    Ibid., at paragraph 20; European Economic Area Agreement (1992) 1 CMLR 921, Protocol 35, Preamble.

  21. 21.

    Norway, Liechtenstein and Iceland are in the EEA but not the EU.

  22. 22.

    See Eyjolfsson (2000), pp. 191–211, 191.

  23. 23.

    Baudenbacher (2009), p. 358.

  24. 24.

    Ibid.

  25. 25.

    EEA Agreement, Protocol 35, supra note 20, Sole Article.

  26. 26.

    Sveinbjörnsdóttir, supra note 1, at paragraph 65.

  27. 27.

    See the chapter by Philipp Speitler, Judicial Homogeneity as a Fundamental Principle of the EEA.

  28. 28.

    Article 3(2) of the Agreement between the EFTA States on the Establishment of a Surveillance Authority and a Court of Justice 1992.

  29. 29.

    Article 6 of the EEA Agreement. See also Art 1(1) EEA Agreement and the 15th Recital of the Preamble of the EEA Agreement: “a uniform interpretation and application of this Agreement and those provisions of Community legislation which are substantially reproduced in this Agreement.”

  30. 30.

    Baudenbacher (2009), p. 338.

  31. 31.

    Opinion 1/91, supra note 8, at paragraph 28.

  32. 32.

    Magnússon and Hannesson (2013), pp. 167–186, 179; Fredriksen (2013), pp. 884–895, 885.

  33. 33.

    Sveinbjörnsdóttir, supra note 1, at paragraphs 48–60.

  34. 34.

    Ibid., at paragraph 60.

  35. 35.

    In EEA law, Article 3 of the EEA Agreement provides for a duty of loyal cooperation.

  36. 36.

    Sveinbjörnsdóttir, Report for the Hearing, 1998 EFTA Ct Rep 115, at paragraph 52.

  37. 37.

    Sveinbjörnsdóttir, supra note 1, at paragraph 61.

  38. 38.

    Francovich, supra note 1, at paragraph 40. The ECJ clarified that state liability could also arise for directly effective provisions of EU law, Brasserie du Pêcheur/ex parte Factortame, supra note 1, at paragraph 22.

  39. 39.

    See e.g. Schütze (2012), pp. 398–402.

  40. 40.

    Joined Cases C-178-9/94 & 188-90/94, Dillenkofer & others v. Federal Republic of Germany [1996] ECR I-4845, at paragraphs 21–23.

  41. 41.

    Brasserie du Pêcheur/ex parte Factortame, supra note 1, at paragraph 56.

  42. 42.

    Ibidem, at paragraphs 55–56.

  43. 43.

    Sveinbjörnsdóttir, supra note 1, at paragraph 69.

  44. 44.

    Case E-4/01, Karlsson HF v. Iceland [2002] EFTA Ct Rep. 240, at paragraph 30, (emphasis added). This paragraph has recently been cited in Case E-2/12, HOB-Vin ehf v. Áfengis- og Tóbaksverslun Ríkisins [2012] EFTA Ct Rep. 1092, at paragraph 120.

  45. 45.

    Magnússon S, Hannesson Ó, supra note 32.

  46. 46.

    Fredriksen H, supra note 32 (contending that this will occur only rarely).

  47. 47.

    Article 288 TFEU.

  48. 48.

    Tridimas (2006), p. 504.

  49. 49.

    Sveinbjörnsdóttir, supra note 1, paragraph 66.

  50. 50.

    Brasserie du Pêcheur/ex parte Factortame, supra note 1.

  51. 51.

    Ibid.

  52. 52.

    Karlsson HF, supra note 50, at paragraph 117.

  53. 53.

    Baudenbacher (2015a), p. 377; Case E-11/12, Beatrix Koch and Others v. Swiss Life AG [2013] EFTA Ct Rep 272; Case E-15/12, Jan Anfinn Wahl v. Iceland, judgment of 22 July 2013, published electronically.

  54. 54.

    E.g. Case C-33/76, Rewe-Zentralfinanz v. Landwirtschaftskammer für das Saarland [1976] ECR 1989; Case C-45/76 Comet v. Produktschap voor Siergewassen [1976] ECR 2043; Case C-158/80, Rewe-Handelsgesellschaft Nord GmbH and Rewe-Mark Steffen v. Hauptzollamt Kiel [1981] ECR 1805; Case C-60/75, Russo v. Azienda di Stato per gli interventi sul mercato agricolo [1976] ECR 45; Case C-26/74 Roquette Freres v. European Commission [1976] ECR 677.

  55. 55.

    E.g. Case C-208/90 Emmott v. Minister for Social Welfare and the Attorney General [1991] ECR I-4269; Case C-271/91 Marshall v. Southampton and South-Hampshire Area Health Authority [1993] ECR I-4367; Brasserie du Pêcheur/ex parte Factortame, supra note 1; Ex parte Factortame Ltd. (No 4), supra note 1, Francovich v. supra note 1.

  56. 56.

    E.g. Case C-188/95, Fantask v. Industriministeriet [1997] ECR I-6783; C-218/95, Societe Comateb v. Directeur general des douanes et droits indirects [1997] ECR I-00165; Case C-180/95, Draehmpaehl v. Urania Immobilienservice [1997] ECR I-2195.

  57. 57.

    The evolution of the principles of equivalence and effectiveness in EU law is more complex. For a detailed discussion, see Dougan (2011), pp. 407–438; Arnull (2011), pp. 51–70.

  58. 58.

    Icesave I, supra note 3. Icesave II and Icesave III were referred to EFTA Court, but withdrawn after a settlement.

  59. 59.

    The EFTA Court took care to point out that state liability as such was not before the Court, but used the lack of state liability as one prong in its reasoning to conclude that Iceland had fully complied with its obligations under the 1994 deposit insurance directive.

  60. 60.

    Icesave I, supra note 3, at paragraph 123.

  61. 61.

    The Icelandic crisis was one of the fastest and most comprehensive banking crises in history that occurred at the height of the global credit crunch shortly after the collapse of Lehman Brothers. For background on the Icesave dispute, see Waibel (2010a), p. 14; Fuchs (2010), p. 12; Kelsey (2015) pp. 30–42.

  62. 62.

    Act on Authorisation for Treasury Disbursements due to Unusual Financial Market Circumstances (“the Emergency Act”, No. 125/2008 (Iceland), 6 October 2008.

  63. 63.

    The Icelandic people twice rejected contracts that would have indemnified the Dutch and UK deposit insurance schemes for the pay-outs. The sums at stake were significant. The Iceland-U.K. agreement was for 2.35 billion pounds, and Iceland-Netherlands agreement for 1.33 billion Euros.

  64. 64.

    Opinion on the Obligations of Iceland under the Deposit Guarantee Directive No. 1994/19/EC of 7 November 2009.

  65. 65.

    The total liabilities of the three collapsed Icelandic banks exceeded US$ 60 billion.

  66. 66.

    Directive No. 1994/194/EC of the European Parliament and of the Council of 30 May 1994 on Deposit-Guarantee Schemes.

  67. 67.

    Ibid., (OJ 1994 L 135/5, page 5), as amended by Directive No. 2005/1/EC of 24 March 2005 (OJ 2005 L/79, page 9).

  68. 68.

    Decision of the European Economic Joint Area Committee No. 18/94 amending Annex IX (Financial Services) to the EEA Agreement incorporated the Directive into the Agreement on the European Economic Area of which Island is a member.

  69. 69.

    Case C-233/94, Germany v Parliament and Council [1997] ECR I-2405, at paragraphs 10–21.

  70. 70.

    Directive 2009/14/EC Amending Directive 94/19/EC on Deposit-Guarantee Schemes as regards the Coverage Level and the Payout Delay, OJ L 68/3, 13 March 2009.

  71. 71.

    Directive on Deposit-Guarantee Schemes, OJ L 173, 16 April 2014.

  72. 72.

    Icesave I, at paragraph 103.

  73. 73.

    Ibid., at paragraph 110.

  74. 74.

    Ibid., at paragraph 113. Recital 24 to the preamble to Directive 94/19 provides as follows: “Whereas this Directive may not result in the Member States’s or their competent authorities being made liable in respect of depositors if they ensured that one or more schemes guaranteeing deposits or credit institutions themselves and ensuring the compensation or protection of depositors under the conditions prescribed in the Directive have been introduced and officially recognized.”

  75. 75.

    The EFTA Court referred to Case C-222/02 Paul and Others v Germany [2004] ECR I-9425 (negligence in the conduct of banking supervision led to Germany’s liability for the failure to implement the 1994 Directive of 1994).

  76. 76.

    Icesave I, at paragraph 135.

  77. 77.

    Ibid., at paragraph 143.

  78. 78.

    Emphasis added.

  79. 79.

    Emphasis added.

  80. 80.

    Icesave I, at paragraphs 137–138.

  81. 81.

    Ibid., at paragraph 139.

  82. 82.

    Ibid., at paragraph 161.

  83. 83.

    Recital 4 provided: “Whereas the cost to credit institutions of participating in a guarantee scheme bears no relation to the cost that would result from a massive withdrawal of bank deposits not only from a credit institution in difficulties but also from healthy institutions following a loss of depositor confidence in the soundness of the banking system.”

  84. 84.

    Icesave I, at paragraph 159.

  85. 85.

    As mentioned above, Iceland had urged the EFTA Court to give weight to moral hazard concerns; See also Waibel (2010b); Bowers (2013); Baudenbacher (2015b), pp. 90–92.

  86. 86.

    Recital 16 of Directive 94/19 provides in part “Whereas, on the one hand, the minimum guarantee level prescribed in this Directive should not leave too great a proportion of deposits without protection in the interest both of consumer protection and of the stability of the financial system; whereas, on the other hand, it would not be appropriate to impose throughout the Community a level of protection which might in certain cases have the effect of encouraging the unsound management of credit institutions” (emphasis added). For criticism on the Court’s reliance on moral hazard as a matter of principle, see Kupelyants (2017).

  87. 87.

    Icesave I, at paragraph 168.

  88. 88.

    See e.g., Demirgüç-Kunt and Detragiache (2002), pp. 1373–1406; Jenkins (2016).

  89. 89.

    See, e.g. Calomiris (1999), pp. 1508–1516; Lastra and Ayadi (2010).

  90. 90.

    Chalmers et al. (2014), p. 17.

  91. 91.

    Ibid, p 19.

  92. 92.

    As the EFTA Court correctly emphasized throughout, the financial obligations via depositors were those of the banks and TIF, rather than the Icelandic State—a fundamental distinction. Indeed, as Iceland predicted following the EFTA Court’s ruling, the Icesave claims are likely to be paid out in full by the debtor, the estate of the failed Landsbankinn bank, Ministry of Foreign Affairs (Iceland), “Iceland welcomes acquittal in Icesave base2”, 28 January 2013. As of January 2016, the UK has recouped fully what it paid out to depositors (£4.6 billion), Dunkley E Treasury recoups last Landsbanki payment Financial Times 15 January 2016.

  93. 93.

    On the frequent migration of private debt obligations, mostly as a policy matter rather than out of legal obligation, onto public balance sheets in financial crisis, see Waibel (2011), pp. 345–367.

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  1. Faculty of Law, University of Cambridge, Cambridge, UK

    Michael Waibel & Fiona Petersen

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Waibel, M., Petersen, F. (2017). State Liability in the EEA. In: Baudenbacher, C. (eds) The Fundamental Principles of EEA Law. Springer, Cham. https://doi.org/10.1007/978-3-319-45189-3_11

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