The Passing-On Problem in EU Law

March 6, 2017

academic law, Author Articles, EU law, Europe, Law - Professional, passing-on

Magnus Strand examines the passing-on problem in EU law damages and restitution.

If you were a baker, your business would be very sensitive to wheat flour prices. Imagine a 5 per cent increase of wheat flour prices. How would you respond? Well, if you wanted to maintain your profit margin, you would consider increasing your own prices by 5 per cent. But what if your local competitor didn’t increase her prices that way? Maybe then it would be better to maintain your prices intact, in order to avoid losing market shares. But then again, if you know your bread is so much better than hers, and that your customers are not likely to buy her bread instead of yours just because of the increased prices, maybe it would be safe to make the 5 per cent increase? Actually, maybe you just might consider a 6 or 7 per cent increase, as it could still be blamed on the wheat flour prices?

Now if instead you ran a famous sandwich parlour, and the bakery from which you bought your bread increased its prices by 5 (or even 7) per cent, what would you do? Well, as above, your answer would depend on your need of a maintained profit margin, local competition, and your experience of customer behavior. You might keep current prices, absorbing the loss, or you might increase your prices, passing the loss on to your customers – perhaps even with an extra increase of profit margin if you felt confident in doing so.

Now, imagine that the increased wheat flour prices were caused by a new system for grain quality declarations introduced by your Member State, which included a charge to cover costs for examining the declarations submitted. Wholesalers on the grain markets had decided to respond to the new costs incurred by reason of this system by incorporating them, or rather an estimate of the incurred costs, in their selling prices. Some of them had even indicated this cost as a specific item on their invoices. However, after a few years, the grain quality assurance system was struck down by the European Court of Justice.

Following the judgment of the Court, the wholesalers bring an action against the national administration responsible for the grain quality declarations, claiming damages at the amount of costs illegally incurred. The national administration however will pay no damages, as the costs at issue were compensated for by increased selling prices. In some instances, the costs were even specified in invoices. Under such circumstances, the national administration argues, an award of damages would be pure profit – indeed, an unjust profit.

Contemplating these arguments as they are presented in the media, you – the baker or sandwich maker – will begin to wonder: If the economic burden of the grain quality declarations was passed on to me, should I perhaps try to bring an action for damages against the national administration? Or should I try to recover from the wholesalers? Meanwhile, the neighbouring café owner starts thinking along the same lines…

The act of letting harm incurred pass through a business and move on to burden your own customers, at the next level of the supply chain, is known as passing-on.

Situations such as the one in the above example are not easily solved in law, as they involve at least three – but usually many more – parties, as it involves several and potentially competing general interests (such as compensation, justice and deterrence from illegal conduct) and, more often than not, involves severe problems with regard to establishing what harm has been suffered by whom and to what extent losses, that seem to have spread through the markets like ripples on water, can be traced for the purposes of reparation. The presupposition is that an economic burden can sometimes be passed on, in whole or in part, down the supply chain. The act of letting harm incurred pass through a business and move on to burden your own customers, at the next level of the supply chain, is known as passing-on. Consequently, the ‘passing-on problem’ is not a distinct legal problem but a set of factual circumstances that triggers various legal problems. I refer to all these legal problems collectively as the passing-on problem.

The passing-on problem can occur in a variety of legal contexts. In EU law, the passing-on problem belongs to the context of private enforcement, i.e., claims brought by individuals or undertakings enforcing their rights under EU law. More precisely it can arise in the context of claims for damages or restitution for a breach of EU law irrespective of whether the claim is aimed at the EU, a Member State, or a private individual. The last class, ‘horizontal’ actions, is uncommon in EU law, with a very prominent exception: damages for a breach of competition law. Indeed, in the context of competition law damages, the Commission has stated that the passing-on problem is ‘at the heart of the way in which a system for damages for breach of antitrust law … functions.

The passing-on problem has many aspects. The legal problems entailed include who among the parties involved should be able to sue whom, how far down the supply chain it is reasonable to trace the passing-on of an economic burden, whether or not to take passing-on into account in the quantification of awards, and how to prove the existence and extent of passing-on. In my own final analysis I have boiled them down to (1) court access issues and (2) substantive proximity issues (such as causation) for downstream claimants, and (3) issues related to the estimation of restitutionary and damages awards, respectively.

The EU legislature and the EU Courts have addressed the issues outlined above with a view primarily to achieve restorative justice for all who have suffered loss, to avoid windfall awards, and to avoid multiple liabilities for a breach of law. This is perfectly laudable, but trouble lurks where these endeavours come into conflict. Sometimes they do.

Magnus Strand is Senior Lecturer in Commercial Law at Uppsala University, Sweden