Court of Appeal Clarifies Approach to Interpretation of EU Retained Law

A recent decision of the Court of Appeal has clarified the approach that English courts should take to retained EU law following the UK's withdrawal from the EU.  The case concerned the interpretation of an EU regulation which until 31 December 2020 ("IP completion day") had direct effect in the UK but which now applies in the UK by virtue of the European Union (Withdrawal) Act 2018 ("EUWA").

Key points include:

• Retained EU law should be given a purposive construction which takes into account any recitals and other principles referred to in the body of the legislation.
• The meaning and effect of retained EU law should also be determined by reference to case law of the Court of Justice of the EU ("CJEU") made prior to IP completion day.
• General principles of EU law which have been derived from CJEU case law are also relevant to interpretation.
• Only relevant appellate courts may depart from retained EU case law (i.e. from principles laid down by, and decisions of, the CJEU as they have effect in EU law immediately prior to IP completion day). Once an appellate court has considered a piece of retained EU case law and has either applied it or departed from it, that new decision will have precedent value as a UK appellate decision binding on all courts normally bound by that decision.
• English courts and tribunals are not, however, bound by any general principles of EU law laid down, or any decisions made, by the CJEU after IP completion day. These are not "retained EU law".  English courts and tribunals may, however, have regard to anything done after IP completion day by the CJEU, another EU entity or the EU so far as relevant to any matter before them.

The decision in Lipton & Anr v BA City Flyer Ltd [2021] EWCA Civ 454 ("Lipton") concerns the interpretation of laws relating to the compensation of air passengers.  The principles adopted by the Court of Appeal are, however, applicable to all retained EU law, including that applying in the insurance sector.

Retained EU law

The UK's withdrawal from the EU has brought about fundamental changes to UK law.  In particular, the creation of "retained EU law" by the EUWA was driven by a need to provide continuity once the UK was no longer bound by EU legislation.

In summary, retained EU law is a snapshot of EU-derived legislation applying at the end of the Brexit transition period on IP completion day, which was incorporated into the UK domestic legal system by the EUWA. It includes the following three major categories:

• UK legislation which was implemented due to the UK's obligations when it was a member of the EU (for example, UK legislation and regulation which implemented the Solvency II Directive ("Solvency II") and the Insurance Distribution Directive ("IDD"));
• EU legislation which was directly applicable in the UK (for example, the Solvency II Delegated Regulation and Solvency II technical standards); and
• other rights and principles in EU law which had direct effect in the UK.

With the end of the Brexit transition period, it is inevitable that cases involving the interpretation and application of retained EU law will come before the UK courts. The approach they take to determining how, if at all, EU legal principles continue to be relevant is of interest to all.

Background

In Lipton, the Court of Appeal had to construe Regulation (EC) No 261/2004 of the European Parliament and of the Council of 11 February 2004 (the "Regulation"), which established rules on compensation and assistance to passengers in the event of denied boarding, cancellation or long delay of flights.

Although the dispute first arose in 2018 when EU law still applied in the UK, the Court of Appeal hearing and judgment took place after the UK had left the EU (i.e. when the concept of retained EU law had already come into force in the UK).  While Lipton would otherwise have been a straightforward domestic case, it was interesting due to being one of the first cases in which a UK court has discussed retained EU law.

Approach to be adopted after Brexit

The Court of Appeal noted that, following the expiry of the Brexit transitional period, a new set of legal arrangements are in place which govern the relationship of the UK to EU law and the court had to take a new approach.  Even though there was much that was familiar, there were also significant differences.

The court noted, in particular, that to come to a conclusion in this case, it had to discover the object and purpose of the Regulation by construing its recitals. Thus, an emphasis on consumer protection was deemed to be relevant in determining the proper interpretation of the Regulation.

In reaching a decision, the Court also had to consider:

• an international convention for the unification of certain rules applying to international air travel, which was referred to in the recitals of the Regulation;
• relevant judgments of the CJEU; and
• the Trade and Cooperation Agreement signed on 26th December 2020 between the UK and the EU ("TCA"), which was incorporated into UK domestic law by the European Union (Future Relationship) Agreement 2020 ("EU(FR)A 2020").

Summary of basic principles

Lipton sets out a number of basic principles applying to the construction of the Regulation.  Applying those same principles to all retained EU law:

• EU legislation that previously applied directly in the UK now takes effect in domestic law, as amended by domestic law.
• It should be given a purposive construction which takes into account its recitals and other principles referred to in the body of the EU legislation.
• To the extent necessary, this process of interpretation would include any provision of international law that has been incorporated into the legislation by reference.
• The meaning and effect of a measure should be determined by reference to case law of the CJEU made on or prior to IP completion day ("retained CJEU case law").
• General principles of EU law that applied as at IP completion day ("retained general principles"), including those derived from retained CJEU case law, are also relevant to interpretation.
• In construing and applying retained EU law, an appellate court (such as the Court of Appeal or Supreme Court, but not a court of first instance) can depart from any retained CJEU case law or any retained general principles if it considers it right to do so. This is the same principle as the Supreme Court applies when deciding whether to depart from its own prior decisions, or prior decisions of the House of Lords.
• The provisions of the TCA and the EU(FR)A 2020 may be relevant to the effect of domestic law (which in this context was the Regulation as incorporated into English law) insofar as:

• • the subject matter of the domestic law in issue overlaps with the subject matter of the TCA and/or EU(FR)A 2020; or
  • domestic law does not already cover the subject matter of the TCA.
• If domestic law does not already reflect the substance of the TCA, domestic law takes effect in the terms of the TCA.

The court also noted that its task in this case was relatively straightforward because, as of the date of its judgment, the new, post-Brexit, legal regime had been in place for only a few months and nothing of relevance in the CJEU case law had changed. The analysis may, however, become more complex as the case law of the CJEU evolves and the differences between the current state of EU law and that which the court is to take into account become more accentuated.

Application to (re)insurance sector

Lipton is significant because it sets out the basic principles of relevance when UK courts approach the construction of retained EU law. In the context of (re)insurance, both Solvency II and the IDD had been implemented into UK law prior to the end of the transition period and the regimes they established are part of retained EU law.  Therefore, their interpretation in court disputes should follow the basic principles set out above.

As very few CJEU decisions to date have considered the Solvency II regime (or similar provisions in the predecessor EU directives), however, the more relevant aspect of the Lipton decision is likely to be the Court of Appeal's ruling on the need to construe retained EU law according to its purpose, taking account of any recitals.  In the case of the Solvency II Directive itself, this will include the additional recitals to the Omnibus II Directive (dated 2014), which were not consolidated into the original Solvency II recitals but nonetheless relevant to interpretation.

Lipton does not shed any light on the use, if any, by English courts of EU guidance in the interpretation of retained EU law.  The PRA and the FCA have, on the other hand, both confirmed that they expect firms to make every effort to comply with EU guidelines that were applicable at the end of the transition period, at least to the extent that they remain relevant. The PRA has confirmed that firms are not expected to comply with changes to guidelines made since the beginning of 2021 or with any new guidelines.  The PRA may, however, issue further statements in relation to new EU materials.  The FCA has indicated that it may consider materials produced after the end of the transition period, but that it will also set out its expectations as to their treatment.

For now, at least, UK regulation of (re)insurers is almost completely aligned with Solvency II.  Work is already underway, however, to make changes to the UK rules.  HM Treasury's current review of Solvency II is likely to result in at least some differences from the EU regime even if only limited change is made.  The EU is also conducting a review of Solvency II, which may further widen the divide.

The post-Brexit UK regulation of (re)insurance intermediaries can be expected to remain much the same as today because the IDD establishes minimum standards only for the conduct of insurance distribution business. Even before Brexit, the UK had greater freedom under IDD than under Solvency II to establish its own rules.

As the EU and UK legal regimes diverge, it is very likely that the relevance of EU case law and principles will gradually reduce.  Nonetheless, the principles described above will remain important for some time and the Court of Appeal's clarification is welcome.