Abuse of Law
ABUSE OF LAW
ORIGINS & HISTORY IN EU LAW.
Roderick Cordara QC
Abuse of law: nomenclature
There are many names in play for this concept or group of overlapping concepts: see inter alia ‘abuse of law’, ‘abuse of right’, ‘abus de droit’, ‘fraus legis’, ‘fraud on the law’, ‘abusive practice’.
Abuse of law: origins outside EU law
Roman law
The underlying Roman law origins are not straightforward:
See: Fraus legis but cf “nullus videtur dolo facere, qui suo iure utitur” Gaius Digest 50.17.55
International law
The concept of abuse of right is certainly discussed in international law, though it may not be accepted as a fully fledged principle recognised by all nations.
See C Rousseau, Principes generaux du droit international public, 1944, 1, pg 44, citing a 1870 reference in an arbitral decision (President of Chile): “il est de jurisprudence universelle que celui qui fair usage de son droit ne lese personne”
France and the rest of Europe
It is essentially a concept of French law, with varying reflections in many, but not all, continental European systems.
In its basic form, it may be defined as the exercise of a person’s rights in a manner which is unreasonable, with consequent harm to another, whether there was an intent to harm or mere carelessness or indifference as to harm resulting.
It is related to proportionality – at least in its private law manifestations. The excessive or inappropriate use of private rights is not to be supported by the law.
It seems to have begun in France in a tortious context, then spreading to controlling the exercise of rights in civil procedure, and beyond. There seems always to be some statutory basis for it.
Different nuances exist. See:
· Civil Code Art 1382 (no tort of nuisance concept in French law?)
· ‘Troubles de voisinage’ cases: Coquerel c. Clement - Baynard Req 3 Aug 1915 (airships and large spikes), C 1920 1. 300; cf Civ 20 Jan 1964 D 1964, 518 (giant ferns). St Galmier (CA Lyons: Dalloz Periodique 1856.2.1999) (Bradford v Pickles facts, but decided the other way: Art 641 CC).
The concept in its basic form is clearly focussed on abuse of rights, not avoidance of obligations/duties.
Concepts of malice and/or sham/collusion are strong in the doctrine in its basic form – and were strongly present in its early Community manifestations.
The extent of malicious intent necessary varies between European states:
· Actual intent of harm, or likelihood of harm obvious to reasonable man: France, Belgium, Netherlands
· Requiring a subjective intent to harm: Italy, Austria
· Objective harmful effects sufficient: Germany, Greece, Portugal, Spain, Luxembourg
Abuse concepts in a tax context
See France: general tax anti-avoidance provision, Art L 64 under the heading “procedure de repression des abus de droit”.
“Acts which conceal the true nature of a contract or of an agreement are ineffective against the tax administration if they employ clauses:
(a) which give rise to lower registration duties or real estate registration tax;
(b) or which disguise either the generation or the transfer of profits or income;
(c) or which permit the avoidance, either in whole or in part, of turnover taxes on the transactions carried out pursuant to the contract or agreement.
The tax administration is authorised to restore the true nature of the transactions challenged.”
Clearly, malice is not required in a tax situation. It may be that in this context abus de droit is merely referring to unacceptable tax avoidance – in France evasion fiscale (either simulation (sham) or fraude a la loi (evasion of the law)). Habilite fiscale is acceptable planning.
In 1981, the Article was held by the Conseil d’Etat to extend to transactions which either “..have a fictitious character, or if not, that .. have no other motive than to avoid or alleviate the tax burden on the taxpayer which the taxpayer, if he had not carried out these acts, would normally have had to bear having regard to his actual situation and activity.”
English law
One can be confident that English law has not contributed in any way to the origins of the doctrine (save to supply facts for its recent application by the ECJ).
There is clearly no equivalent doctrine in English common law: Bradford v Pickles [1895] AC 587 continues to be definitive.
If a right exists, no enquiry is made as to the motives with which it is exercised, nor the harm it will cause (assuming proper exercise).
This is perhaps an aspect of the ‘legal Wild West’ that Maduro A-G identifies in Halifax (paragraph 77): ie a society in which you may do whatever is not expressly against the law. Such a primitive system also easily tolerates the Bradford v Pickles view of rights.
But note:
· ‘clean hands’ and ‘clear conscience’ concepts in English equity law and practice
· Human Rights Act 1998 Sched 1, part 1, Art 17 ‘Prohibition of abuse of rights’
· sed quaere the position in Scotland: ie doubts whether Bradford v Pickles is the law there; re: neighbours, the tort of use of land in aemulationem vicini.
Community law
The concept of abuse of right has taken root in Community law relatively recently. As late as 1993, it was possible for a learned author to conclude that it was not a principle of Community law (see Prof N Brown ‘Is there a general principle of abuse of rights in European Community law?’). Perhaps this is not surprising in the wake of Factortame and the success of the quota-hopping Spanish fishermen.
Yet, within a decade, the situation had completely altered.
It is not easy precisely to track the influence of the continental concepts clustered around abuse of right. However, the influence of the French approach is clearly very powerful.
In Emsland-Starke a reference was made by the Commission to the law of Member States in the area of abuse: see A-G Opinion paragraph 41 quoting the submission (‘..This legal principle exists in almost all Member States and has already been applied in appropriate circumstances in the case-law of the Court ..’).
In Halifax, the A-G made express reference to comparative research at the tax avoidance level:
77 “However, a comparative analysis of the Member States’ legal rules is sufficient to make it clear that such concerns [ie legal certainty] do not exclude the use of certain general provisions and indeterminate concepts in the realm of tax law to prevent illegitimate tax avoidance. Legal certainty must be balanced against other values of the legal system. Tax law should not become a sort of legal ‘wild-west’ in which virtually every sort of opportunistic behaviour has to be tolerated so long as it conforms with a strict formalistic interpretation of the relevant tax provisions and the legislature has not expressly taken measures to prevent such behaviour.”
The position as a matter of EC law pre-Halifax
The relevant case law of the ECJ is drawn from a number of very different areas of Community law and therefore some caution may be required when seeking to transpose the dicta in one case to the facts of another.
However, broadly speaking there are three strands of abuse of rights cases in the ECJ. They share a common feature: in all of these cases it was alleged that the individual in question (whether natural or legal person) was seeking to rely directly on Community legislation.
Strand 1: In those cases where the “abuse” was purportedly designed to circumvent national law (see e.g. Case 33/74 Van Binsbergen [1974] ECR 1299, Case 115/78 Knoors v Secretary of State for Economic Affairs [1979] ECR 399, Case C-23/93 TV 10 v Commissariaat voor de Media [1994] ECR I-4795, Case C-148/91 Veronica v Commissariaat voor de Media [1993] ECR I-485, Case C-212/97 Centros [1999] ECR I-1459 and Case C-36/96 Günaydin v Freistaat Bayern [1997] ECR I-5143), the individual in question sought to rely on directly effective provisions of Community law in order to avoid the limitations or restrictions of domestic law which would otherwise be applicable to him.
Strand 2: In those cases where the “abuse” was purportedly designed to dishonestly or fraudulently seek an advantage provided by Community law itself (and possibly to derive benefit from Community funds) (see e.g. Case C-441/93 Parfitis et al v TKE et al [1996] ECR I-1347, Case C-367/96 Kefalas v Greek State [1998] ECR I-2843, Diamantis v Greek State [2000] ECR I-1705, Case C-8/92 General Milk Products v Hauptzollamt Hamburg-Jonas [1993] ECR I-779, Case C-110/99 Emsland Stärke v Hauptzollamt Hamburg-Jonas [2000] ECR I-11569 and Case C-206/94 Brennet v Paletta [1996] ECR I-2357), the individual in question either sought to rely on a directly effective provision of Community law in order to achieve a benefit to which he was not entitled or, while achieving a prima facie legitimate benefit, would cause such serious damage to the legitimate interests of others so as to be manifestly disproportionate.
Strand 3: Those cases where there was a national abuse of law concept in existence (eg the Greek company law cases, such as Kefalis, Diamantis, etc [loc cit]).
All or nothing
Once an abuse has been established the Community right is withdrawn. (As will be seen, in applying the abuse process to tax, Halifax has pushed this aspect of the doctrine into a more complex process.)
Some quotes from the pre-Emsland-Starke cases
The Court said in Kefalas:
“Although the Court cannot substitute its assessment for that of a national court, which is the only forum competent to establish the facts of the case before it, it must be pointed out that the application of such a national [abuse of rights] rule must not prejudice the full effect and uniform application of Community law in the Member States. In particular, it is not open to national courts, when assessing the exercise of a right arising from a provision of Community law, to alter the scope of that provision or to compromise the objectives pursued by it.”
(In Kefalas, the Court was concerned with the interaction between the applicant’s reliance on an EC Directive and the operation of Article 281 of the Greek Civil Code which provided that “the exercise of a right is prohibited where it manifestly exceeds the bounds of good faith, morality or the economic or social purpose of that right”.)
In Diamantis, the Court (concerned with the identical provisions as in Kefalas) applied the test thus:
“In this case it would not appear that the uniform application and full effect of Community law would be compromised if it were to be held an abuse of rights for a shareholder to rely on Article 25(1) of the Second Directive on the ground that, of the remedies available for a situation that has arisen in breach of that provision, he has chosen a remedy that will cause such serious damage to the legitimate interests of others that it appears manifestly disproportionate. Such a determination would not alter the scope of that provision and would not compromise its objectives.” (para. 43)
In other non-tax cases, the European Court of Justice has made clear that an “abuse” can only exist where there is no genuine exercise of the right in question.
In General Milk Products the Court held that:
“The plaintiff company in the main proceedings and the Commission take the view essentially that, in the light of the applicable Community provisions, the re-exportation of that cheese in such circumstances may continue to give rise to the application of monetary compensatory amounts, unless there is evidence of fictitious transactions effected solely for the purpose of wrongfully obtaining monetary compensatory amounts.
These observations are well founded.” (paras. 13 and 14, emphasis added)
and
“As stated by the plaintiff company in the main proceedings and the Commission, the position would be different only if it could be shown that the importation and re-exportation of that cheese were not realised as bona fide commercial transactions but only in order wrongfully to benefit from the grant of monetary compensatory amounts. The bona fide nature of those transactions is a question of fact to be decided by the national court.” (para. 21, emphasis added)
Centros
In this case, the importance of ensuring that the supposed abuse is truly contrary to the intent of the law was stressed (see Case C-212/97 Centros [2000] All ER (EC) 481).
Danish company law requirements as to corporate formation were circumvented by forming in UK, and then trading in Denmark. Abuse was unsuccessfully suggested by the Danish Government in connection with Arts 52 & 58 of the Treaty (freedom of establishment) .
The Court acknowledged the abuse of right case-law as it then stood (paragraph 24). However, it made the point that the freedom of establishment provisions were not offended by what had happened. Accordingly, no policy was offended by what had occurred – the relevant treaty provisions were not sensitive to the allegations being made by the Danish authorities.
Key passage:
25
However, although, in such circumstances, the national courts may, case by case, take account - on the basis of objective evidence - of abuse or fraudulent conduct on the part of the persons concerned in order, where appropriate, to deny them the benefit of the provisions of Community law on which they seek to rely, they must nevertheless assess such conduct in the light of the objectives pursued by those provisions (Paletta II, paragraph 25).