Cyprus Mail
CM Regular ColumnistOpinion

Was haircut illegal or proportionate?

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By Alper Ali Riza

The Court of Justice of the EU is a political court. It says so on the tin: it controls the European Commission in its supervision of the EU.

The court protects and promotes the EU as a supranational entity. Unlike the Supreme Court of the UK, whose motto is to do right without affection or ill will, the Court of Justice has affection for the European project; and unlike the European Court of Human Rights its role is not to protect the individual citizen against powerful institutions.

For example the decision of the General Court – the first tier of the Court of Justice – that decided last week, on the authority of an earlier decision of the Court of Justice, that the European Commission did not have to pay compensation to those who lost their deposits in 2013 on the grounds that the bail-in of their deposits was proportionate was a political decision.

I remember distinctly that proportionality did not feature at all in the argument during the hearing of the earlier appeal in which the Court of Justice handed the European Commission the gift of proportionality on a plate to enable it to resist claims for compensation from individual depositors from Cyprus.

The Court of Justice invoked proportionality proprio motu – of its own motion – to refuse compensation: it was sprung on us out of the blue for the first time in the judgement of the court.

We had the Commission on the run on every front at the appeal hearing when their legal team were all over the place in their struggle to deal with points that fell from some members of the court; indeed we won the appeal only to lose on proportionality in breach of the principle of audi alteram partem – hear the other side.

Even an omnipotent and omniscient God did not expel Adam and Eve from the Garden of Eden without first giving them an opportunity to be heard on how they came to eat of the tree of knowledge. God knew exactly how it came about but unlike the Court of Justice he followed due process.

It still rankles not only because the highest court in Europe behaved like a kangaroo court but more importantly, because there were powerful arguments why proportionality is irrelevant to illegality.

Proportionality usually comes into play where the law allows a breach of a human right that is not absolute, where the breach is proportionate to a legitimate purpose.

It is a concept from public law that has to be applied with care in private law, as it cannot cure acts that are illegal at the outset: you cannot have proportionate theft just as you cannot have proportionate torture.

All the actions for compensation were brought under the head of non-contractual liability (tort) in private law. Basically whenever the law imposes an important duty on a EU institution and there is a serious breach of that duty that causes harm to an individual, he is entitled to compensation for the harm done to him.

The European Commission has the duty of ensuring compliance with EU law by EU institutions and member states. As such it is the custodian of the EU legal order and if it fails in its duty and causes harm it is liable to pay compensation.

In terms of the 2013 banking crisis in Cyprus the Commission had a duty to refrain from being linked to conditions whose consistency with EU law it doubted.

Cyprus had applied for financial assistance in June 2012 and its application was granted shortly afterwards – primarily to safeguard the financial stability of the Eurozone.

By November 2012 all that remained was agreement on the conditions on which assistance would be given which were going to be included in a memorandum of understanding that the Commission was tasked to sign under the European Stabilisation Mechanism Treaty.

In the earlier appeal the Court of Justice accepted that unlawful conduct linked to the adoption of the memorandum of understanding could be raised against the Commission in a claim for compensation since it had a duty to ensure consistency with EU law.

Thus if the conditions were linked to laws passed by Cyprus that operated retroactively in violation of the principle of legality they could not be saved by the principle of proportionality.

The EU is a legal construct that relies enormously on the principle of legality – legal backup for all acts of EU institutions and of member states when implementing EU law. Moreover the principle of legality applies “more strictly in the case of a measure liable to have financial consequences in order that those concerned may know the extent of the obligation which it imposes on them.”

The Commission failed to uphold this fundamental principle of EU law. As a result it failed to oversee the application of EU law by Cyprus and went along with the legislative appropriation of deposits at a time when depositors could not access their money and freedom of movement of capital was suspended.

The legislative appropriation of deposits operated retroactively: it was not the law when depositors had free access to their deposits. The Commission knew or ought to have known that this was in breach of the principle of legality and failed in its duty to oversee the application of EU law by Cyprus and the other parties.

The bail-in (haircut) that took place in Cyprus was, therefore, without legal foundation since at the material time it had no legal back up under EU or Cyprus law.

If any thing the fact that Cypriot parliament was driven to pass domestic legislation to provide such back up after the crisis broke, while depositors lacked the ability to protect their deposits, compounded the violation of the principle of legality.

Depositors in Cyprus simply did not know that their bank deposits could be appropriated and were thus unable to organise their finances prudently and transfer their money to safe financial institutions when they free to do so.

The General Court last week followed the Court of Justice and held that the bail-in on deposits did not constitute a disproportionate and intolerable interference impairing the very substance of the appellants’ right to property.

Because it is a political court the court was unwilling to confront the proposition that before considering proportionality it had first to be satisfied the legislative appropriation of deposits with retroactive effect by Cyprus was in accordance with the general principle of EU law on legality.

If it was not consistent with legality: cadit questio – the question of proportionality could not arise at all.

There is method to the frequent use of Latin tags because there are cases still in the pipeline that were put on hold in which the court will be confronted with the principle of antecedent legality, and the Latin tags are a useful shorthand of the principles involved, the better to jog the conscience of the court.

Watch this space.

Alper Ali Riza is a queen’s counsel in the UK and a part time judge

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