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Foster Care: Rethinking Horizontal Direct Effect for Directives

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About The Author

Keir Baker (Former Editor in Chief)

Keir is a Trainee Solicitor currently in the fourth and final seat of his training contract at a major US law firm. He is a law graduate from Selwyn College, University of Cambridge. Outside the law, Keir is an accomplished goalkeeper in both football and hockey, as well as a keen actor and pianist. He is a long-suffering supporter of Middlesbrough FC.

The purpose of any legal rule is to achieve some practical aim, and it would be running counter to its essential purpose if one handled it in such a way as to render it practically meaningless.

Pierre Pescatore

The EU has several tools to legislate on areas in which it has the competence to act, all of which are outlined in Article 288 of the Treaty on the Functioning of the European Union (TFEU). Their nature, features, and enforceability differ greatly: though both Decisions and Regulations are binding in their entirety, the former are directly applicable only in the Member States to which they are addressed whereas the latter apply across all 28 EU countries automatically. Recommendations and Opinions, meanwhile, have no binding force.

However, perhaps the most obscure of these five legislative tools are Directives. A Directive operates by stipulating that Member States to which it is addressed must achieve a particular result within a certain period of time. Importantly, however, it will not dictate how that result must be achieved; Member States can therefore implement the Directive however they see fit.

The result stipulated by a Directive, when properly implemented, will become part of the law of a Member State. Citizens of that Member State will therefore be able to enforce the rights which the Directive has conferred in their national courts without relying on any doctrines of EU law; after all, for all intents and purposes, they are just enforcing rights that they have under national law.

However, the discretion given to Member States means that a Directive will sometimes not be correctly implemented – sometimes, Member States decline to even attempt implementation at all. This may mean that a citizen will be unable to enforce the rights granted by the Directive before their national courts.

The law that dictates how this quandary might be resolved is labyrinthine and highly controversial: it involves the application of a mass of exceptions, the majority of which are uncertain in scope. The blame for this arguably lies at the feet of the European Court of Justice (ECJ), which has been vociferous and steadfast in sticking to a position that looks increasingly indefensible, thanks – ironically – to the number of exceptions which it itself has carved out.

And now, a recent ECJ decision appears to have widened the scope of one of these numerous exceptions. In fact, as this article argues, it demonstrates how the ECJ's continued willingness to carve out and extend exceptions that circumvent its position increasingly renders the status quo unsustainable. Indeed, the sheer breadth of the exceptions – such that the initial rule which the ECJ holds so dear is of increasingly limited application – and the analytical and practical issues that result from the current state of affairs means that it is about time that the ECJ lessens its resolve.

The ECJ’s Current Position – Unsustainable and Unjustifiable

The Principle of Direct Effect

The principle of Direct Effect was created by the ECJ to compensate for narrowness of the Commission’s power under Article 258 TFEU and its predecessors to sue Member States for breach of EU law. Direct Effect paves the way for private enforcement of EU law by citizens, as they can rely on their EU law rights before their national courts to challenge Member States whose actions are in breach of those provisions.

Initially applied to Treaties in the seminal case of Van Gend en Loos [1963] but subsequently extended to Regulations in Munoz [2002] and Decisions in Fleisch [1992], Direct Effect operates in relation to these legislative tools so long as the provision in question is clear, unconditional, imposes a negative obligation on the Member State and is not dependent on the Member State having to implement the measure.

Direct Effect and Directives

Though it was originally doubted that unimplemented Directives could have Direct Effect on account of their inherent need for Member State implementing measures, the ECJ in Van Duyn v Home Office [1974] confirmed that ‘clear, precise and unconditional’ provisions in Directives were capable of having Vertical Direct Effect. This means that an unimplemented Directive can be enforced against a Member State, and conflicting domestic law can be disapplied by the national courts where necessary.

However, in Marshall v Southampton Health Authority [1986], the ECJ held that unimplemented Directives could not be allowed to have Horizontal Direct Effect (‘the Prohibition’), meaning they cannot be enforced by one citizen against another. This is a position to which the ECJ has stuck resolutely over the years, despite widespread criticism from academics and several Advocate-Generals.

It has articulated three separate rationales for maintaining the Prohibition: in Marshall v Southampton Health Authority [1986], it advanced a textual argument based on the wording of Article 288 TFEU:

The binding nature of a Directive… exists only in relation to 'each Member State to which it is addressed.’ It follows that a Directive may not of itself impose obligations on an individual.

In the same case, it also argued that breaching the Prohibition would erode the distinction between Regulations and Directives. Furthermore, it suggested in Wells [2002] that the Prohibition upheld the principle of legal certainty, because Directives should only create rights and not obligations on individuals; to hold otherwise, it argued, would impose an undue burden to keep track of rules contained with unimplemented Directives.

These arguments are unsatisfactory. The textual argument is unconvincing, because the wording of Article 288 TFEU actually contradicts the ECJ’s argument – it says nothing that in fact prevents Directives from imposing an obligation on private individuals.

Secondly, the ECJ’s claim that assigning Horizontal Direct Effect to unimplemented Directives would erode the distinction between Regulations and Directives is incorrect. Directives differ from Regulations because they give States choice as to the form and methods through which they implement a directive’s binding end. Thus, giving Horizontal Direct Effect to unimplemented Directives does not undermine this choice; it merely reinforces the idea that if such implementing measures had not been enacted, then the Directive’s binding end can still be enforced.

Finally, the legal certainty justification employed in Wells [2002] overlooks the fact that only provisions from unimplemented Directives that are sufficiently clear, precise and unconditional would be eligible. Furthermore, as examined below, there are very real legal certainty problems with many of the exceptions that the ECJ has carved out, which must be viewed as cancelling out this justification.

The Five Exceptions

Many important areas of EU policy rely on Directives being properly implemented by the Member States. The ECJ has therefore felt it necessary to carve out a myriad of exceptions to the Prohibition to allow citizens to secure the full extent of their rights under EU law.

Exception One: Indirect Effect

In simple terms, the principle of EU supremacy – articulated by the ECJ in Costa v ENEL [1964] – holds that where there is a conflict between EU law and Member States’ domestic law, EU law prevails. The far-reaching nature of this principle allowed the ECJ in Van Colson [1984] and Marleasing [1990] to use it to circumvent the Prohibition.

In those cases, it developed the doctrine of ‘Indirect Effect’ – by requiring all Member State authorities with the power to interpret national law to, as far as possible, interpret and apply the legislation adopted for the implementation of the unimplemented Directive in conformity with EU law, the ECJ allowed unimplemented Directives (or, more accurately, their effects) to be ‘read into’ national law.

Exception Two: Incidental Horizontal Effect

A complex and confusing line of case law outlines another exception to the Prohibition, whereby unimplemented Directives are permitted to incidentally gain Horizontal Direct Effect.

Simply put, the exception– articulated in CIA Security v Signalson [1996] and Unilever Italia v Central Food [2000] – holds that an unimplemented Directive (typically of a regulatory nature) can be invoked in a horizontal case to have conflicting national law disapplied, thereby leaving a lacuna into which an earlier piece of national law that complies with the unimplemented Directive can step. The unimplemented Directive is thus not creating new national law; rather, it is unearthing an EU law-compliant national law that has been buried by its conflicting counterpart.

Exception Three: General Principle of EU Law

The ECJ has controversially used a so-called ‘General Principle of EU law’ to bypass the Prohibition. In two separate cases – Mangold [2005] and Kücükdeveci [2010] – it held that German law which contravened an unimplemented Directive that prohibited discrimination on the grounds of age had to be set aside, despite the fact that the period for implementing the Directive with which it conflicted was yet to expire.

In both cases, the ECJ restated the Prohibition and argued that the Directive in question merely gave expression to the General Principle, such the national court was under a duty to disapply any provision of national legislation breaching it.

However, it must not be overlooked that the ECJ’s decision is – in effect – granting Horizontal Direct Effect to a Directive by the back door. Furthermore, this line of case law remains somewhat of an enigma: it has only been applied in relation to age discrimination, thus creating a cloud of uncertainty over whether this will apply to other General Principles, and what the criteria are for doing so.

Exception Four: State Liability

A separate doctrine rather than an exemption to the Prohibition as such, the mechanism of State Liability – originating from Francovich [1991] – allows a citizen to enforce an unimplemented Directive by suing their Member State for damages for losses caused by the Member State’s failure to implement a Directive.

Exception Five: Emanation of the State

Having accepted that unimplemented Directives were capable of Vertical Direct Effect in Van Duyn v Home Office [1974], the ECJ has circumvented the Prohibition by interpreting what constitutes a Member State in a broad way. In this way, it utilises the availability of Vertical Direct Effect to allow the citizen to enforce their rights against a wide range of bodies.

Indeed, in Foster v British Gas [1990] – which involved a citizen suing a company in what was, at the time, a nationalised industry – the ECJ held that:

A body, whatever its legal form, which has been made responsible, pursuant to a measure adopted by the state, for providing a public service under the control of the state and has for that purpose special powers beyond those which result from the normal rules applicable in relation between individuals, is included... among the bodies against which the provisions of a Directive [capable of direct effect] may be relied upon.

Earlier in the decision, it had also stated that:

[A] directive [capable of direct effect] could be relied on against organisations or bodies which were subject to the authority or control of the State or had special powers beyond those which result from the normal rules applicable to relations between individuals.

In subsequent case law, a broad range of bodies ranging from universities, health authorities and private undertakings have considered to be ‘Emanations of the State’ and capable of having unimplemented Directives enforced against  them.

However, because of the slight discrepancy between these two sections of the judgment, it has been debated by academics as to what the exact conditions needed to engage the exception are – usually focusing on whether the body needs to be providing a public service – and the extent to which they are cumulative or not. It was these debates that the ECJ’s decision in Farrell (Approximation of Laws – Insurance Against Civil Liability – Motor Vehicles) [2017] was intended to solve.

Farrell v Whitty and the Emanation of the State Exception

The Facts

In 1996, Elaine Farrell (the claimant) was injured in a road accident involving a van driven by Alan Whitty (the defendant). All the parties to the case agreed that the defendant was liable for the claimant’s injuries; however, because the claimant had been sitting in the rear of the van – where there were no seats – his insurance did not cover the amount needed to compensate the claimant. Compensation therefore needed to come from elsewhere.

Directive 84/5 required Member States to set up a body to provide compensation for property damage or personal injury caused by unidentified or uninsured vehicles. In this case, Ireland had set up the Motor Insurers Bureau of Ireland (MIBI). A subsequent Directive, Directive 90/232, had extended the obligation of bodies like MIBI to the compensating of all passengers travelling in uninsured vehicles. Ireland, failing in their obligations to implement Directive 90/232, had not extended MIBI’s powers that far.

Initially, the claimant had sought compensation from MIBI but had been denied it. She challenged this before the ECJ which, in its first decision on the matter – Farrell v Whitty [2007] – held that Ireland had failed to transpose Directive 90/232 properly. It therefore needed to provide the claimant with compensation.

However, the case returned to the Irish Supreme Court: a dispute had emerged as to whether liability to pay the compensation fell upon Ireland as a Member State or upon MIBI itself. Unsure of how to reach a decision, the Irish Supreme Court in Farrell v Whitty [2015] requested a Preliminary Reference under Article 267 TFEU and asked the ECJ to clarify the scope of the exception from Foster v British Gas [1990]. Specifically, it asked:

  • Whether the Foster v British Gas [1990] criteria are cumulative?
  • Is there a fundamental principle underlying the Foster v British Gas [1990] criteria which should accounted for?
  • Is it sufficient that a broad measure of responsibility has been transferred to a body by a Member State, or must that body have special powers or operate under direct control or supervision of the Member State?

The Decision

The ECJ held that MIBI was liable to provide the claimant with compensation, on the grounds that the conditions it has articulated in Foster v British Gas [1990] were not cumulative or exhaustive; it was therefore sufficient for an entity to have been delegated the performance of a task in the public interest by the Member State and to possess for that purpose special powers. It also noted that state control was not necessary, thereby allowing private entities to fall under the exception.

It was keen to stress that, when reaching its decision in Foster v British Gas [1990], the ECJ in that case:

[W]as not attempting to formulate a general test designed to cover all situations in which a body might be one against which the provisions of a Directive capable of having Direct Effect might be relied upon.

It was also quick to highlight the potential breadth of the exception, noting that the bodies falling under the 'Emanation of the State' exception:

[C]an be distinguished from individuals and must be treated as comparable to the State, either because they are legal persons governed by public law that are part of the State in the broad sense, or because they are subject to the authority or control of a public body, or because they have been required, by such a body, to perform a task in the public interest and have been given, for that purpose, such special powers.

Accordingly, a body or an organisation  even one governed by private law  to which a Member State has delegated the performance of a task in the public interest and which possesses for that purpose special powers beyond those which result from the normal rules applicable to relations between individuals is one against which the provisions of an unimplemented Directive may be relied upon.

Comment – An Insufficient Step Forward

Albert Sanchez-Graells has welcomed the decision in Farrell [2017] as a useful clarification which ‘can potentially catalyse a higher level of effectiveness of secondary EU law’. In many ways, this is true: as he points out, the ECJ has now clearly established that a body is an Emanation of the State if it meets just one of three criteria:

  • It is governed by public law.
  • It is subject to the authority or control of a public body.
  • It performs a public interest task on the basis of special powers.

Though this seems a major expansion of the extension, it is arguably mitigated by the fact that bodies that meet one limb will tend to meet at least one other. However, problems remain from a legal certainty perspective: the required degree of Member State control or authority remains unclear while what exactly constitutes public interest might also be debated. This may expose certain private companies to liability they cannot anticipate.

Such a result would further highlight another key flaw with the Emanation of the State exception that Farrell [2017] does little to address: its application unfairly leaves bodies open to liability that they may have no power to mitigate against. After all, bodies such as universities and local authorities rarely play any part in the formal implementation of Directives by Member States and therefore are unable – practically or legally – to independently comply with the Directive’s provisions.

Furthermore, from a claimant’s perspective, there is the potential for unjust gaps in its application which – as more and more state functions undergo privatization – are ever-increasing. The potential for this can be viewed in the context of Marshall v Southampton Health Authority [1986]: here, the ECJ’s decision that a public hospital constitutes an Emanation of the State against which claimants could enforce a Directive creates a seemingly unjustifiable paradox whereby the likelihood of a claimant’s success depends entirely on whether the infringing hospital is privately or publicly run.

Conclusion

The extent to which the newly interpreted version of the exception from Foster v British Gas [1990] has been satisfactorily clarified by Farrell [2017] is arguably besides the point. Though increased certainty in the law is welcome, it remains disappointing that the ECJ’s continues to view advocating the Prohibition while applying all its exceptions as a sustainable legal situation.

For one thing, even when the clarification from Farrell [2017] is accounted for, the confusion that comes from trying to navigate the labyrinthine path that these exceptions represent arguably leaves the law in a state of net uncertainty. Throw in the doubtful nature of the justifications for the Prohibition, and the fact that – when taken together – all the exceptions to the Prohibition leave very little for it to catch, it seems obvious that the Prohibition has been rendered all but redundant. Ultimately, it should either be scrapped or left to rot in its own irrelevance.

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Tagged: European Union, Insurance

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