(1) TUI TRAVEL PLC, (2) BRITISH AIRWAYS PLC, (3) EASYJET AIRLINE COMPANY PLC AND (4) IATA -V- CIVIL AVIATION AUTHORITY

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1 (1) TUI TRAVEL PLC, (2) BRITISH AIRWAYS PLC, (3) EASYJET AIRLINE COMPANY PLC AND (4) IATA -V- CIVIL AVIATION AUTHORITY Reference to the European Court of Justice of decision in joined cases of Sturgeon v Condor Flugdienst and Bӧck v Air France 1 On 20 March 2012, the ECJ heard oral representations from eight interested parties in the reference to it by two airlines, a tour operator and IATA of the 19 November 2009 ECJ decisions in Sturgeon and Bӧck relating to compensation for delay pursuant to Regulation (EC) 261/04. The Attorney General's decision will be published on 15 May 2012 with the Judgment to follow some time thereafter. BACKGROUND The Sturgeon and Bӧck cases arose out of long delays to two flights, from Frankfurt to Toronto and from Vienna to Mexico City (via Paris) respectively, following which the claimants argued in each case that the flights had been cancelled rather than delayed, thereby entitling them to fixed compensation provided for by Reg 261/04 in the case of cancellation but not delay. The carriers argued that the flights were delayed and no compensation was available to the claimants since Reg 261/04 does not provide for fixed compensation in the event of delay. Instead, the claims should be pursued via the Montreal Convention 1999 which provides a remedy for damage caused by delay. The ECJ found, in favour of the airlines, that the flights were indeed delayed and not cancelled. However, the ECJ also held that passengers who suffer a delay of more than three hours should be entitled to fixed compensation pursuant to Reg 261/04, save in the case of "extraordinary circumstances" which exonerate the carrier from the obligation to compensate. In reaching this decision, the ECJ expressed the view that damage sustained by passengers in the event of delay can be comparable to that sustained as a result of cancellation, and by allowing some passengers compensation under Reg 261/04 but not others would infringe the EU principle of equal treatment. JUDICIAL REVIEW On 11 June 2010, Tui Travel, British Airways, easyjet and IATA commenced judicial review proceedings in the Administrative Court to: (1) seek a declaration that Articles 5 to 7 of Reg 261/04 do not provide for fixed compensation in the event of delay, (2) prevent the CAA from applying the Sturgeon/Bӧck decisions ("Sturgeon"), and (3) refer the matter back to the ECJ for further interpretation. REFERENCE TO ECJ On 10 August 2010, the Administrative Court granted the application and referred the following questions to the ECJ: Are Articles 5 to 7 of Reg 261/04 to be interpreted as requiring the compensation provided for in Article 7

2 to be paid to passengers whose flights are subject to delay within the meaning of Article 6 and, if so, in what circumstances? If not, are Articles 5 to 7 of Reg 261/04 invalid, in whole or in part, for breach of the principle of equal treatment? If the answer to question 1 is yes, are Articles 5 to 7 of Reg 261/04 invalid, in whole or in part, for (a) inconsistency with MC99, (b) breach of the principle of proportionality, and/or (c) breach of the principle of legal certainty? If the answer to question 1 is yes, and the answer to question 3 is no, what if any limits are to be placed upon the temporal effects of the ECJ's ruling? If the answer to question 1 is no, what if any effect is to be given to the Sturgeon decision between 19 November 2012 and the ECJ's ruling? Eight parties expressed their interest in making submissions to the ECJ in respect of the referred questions, namely: (1) Tui Travel, British Airways, easyjet and IATA, (2) Lufthansa, (3) Germany, (4) Poland, (5) United Kingdom, (6) EU Parliament, (7) EU Council, and (8) EU Commission. Submissions were made in writing. While the ECJ will often decide a case referred to it on the basis of written submissions only, in this case a hearing was scheduled in order for the parties to make oral submissions to the Judges. ECJ HEARING On 20 March 2012, the eight interested parties made oral representations at the ECJ in Luxembourg to a 13 strong Judicial panel. All parties, with the exception of the EU Commission and Poland, opposed the introduction of compensation in the case of delay pursuant to Reg 261/04 and requested that the Sturgeon decision be overturned. The EU Commission and Poland supported the Sturgeon decision and requested that it be upheld. ARGUMENTS IN FAVOUR OF OVERTURNING STURGEON Tui Travel, BA, easyjet, IATA (the Airlines) The Airlines submitted that Reg 261/04 as originally drafted was clear and did not provide for compensation for delay. This was supported by the decision in IATA 2 in 2006, which held that Article 6 of Reg 261/04, dealing with delay, was not inconsistent with MC99 given that MC99 already dealt with compensation for damage caused by delay. Article 6 was not invalid on the grounds of legal uncertainty because the court in IATA had formed a clear view on it. Sturgeon, on the other hand, considered an issue which was outside the scope of the questions asked. The absence of compensation for delay in Reg 261/04 is not inconsistent with the EU requirement for equal treatment and, it was submitted, the ECJ should be resistant to override the law on the basis of inequality in a situation which involves cancellation -v- delay. There is great danger in judicial intervention where the law is clear, especially where there is an attempt to read the law across areas where it is not intended. For example, the three hour limit after which compensation is payable makes no sense when read with other parts of Reg 261/04 relevant to care and assistance. There is no rational basis for amending the law purely on the basis of the principle of equal treatment. This approach is manifestly inappropriate and differences were obviously noted in a flight cancellation as opposed to a delay when the legislation was drafted. Responsibility of a carrier in the event of denied boarding, delay and cancellation is different. Denied boarding and cancellation can often occur for commercial reasons, to keep aircraft full. Delay, on the other hand, happens for reasons largely beyond a carrier's control. Compensation acts as a deterrence - it protects the passenger by altering the carrier's behaviour. It therefore makes sense in the event of denied boarding or cancellation. However, there is no such incentive in the case of delay. Further, in the event of delay, the aircraft usually takes off, whereas in the case of denied boarding or cancellation, the passenger must make alternative arrangements. While compensation would assist the passenger, it would financially weaken carriers especially where the compensation outweighs the cost of the original flight - this goes against the principle of proportionality. In a situation where the delay is due to the fault of a third party, such as a ground handler or airport authority, it is not always possible to pass the cost of compensation on to that third party - to renegotiate the terms of such contracts would require something to be offered by the carrier in return. Article 29 of MC99 provides that MC99 is exclusive, and Article 19 of MC99 already provides for compensation for damage caused by delay. This argument is further developed by the German interested parties below. In the event that Sturgeon is upheld, the Airlines submitted, it should only apply to claims brought after the date of the judgment, and should not be applied retrospectively. 02

3 Lufthansa Lufthansa focused on the exclusivity of MC99, which already provides for compensation for damage caused by delay at Article 19. MC99 permits recovery for any length of delay and wherever the delay may occur, for example at the point of departure or destination; whereas the decision in Sturgeon provides for compensation only after three hours of delay at the point of origin. Lufthansa argued that the types of compensation offered are the same - there is no distinction between fixed compensation available pursuant to Sturgeon or compensation for damage caused by delay available under MC99. Further, one is deductible from the other, thereby demonstrating that they are intended to be one and the same. There is no gap in the legislation which requires the ECJ to intervene and award compensation for delay. Reg 261/04 was carefully thought out and is intended to reflect the changing behaviour of carriers, not the change in passenger convenience. Like the Airlines, Lufthansa argued that a carrier has no control over a delay and therefore there is no commercial advantage in awarding compensation in such a situation; whereas, in contrast, compensation in the case of denied boarding or cancellation makes sense. Upholding Sturgeon may result in carriers choosing to cancel flights which would otherwise have flown, subject to a delay. Germany Germany considered equality of grounds for liability. Generally in order for liability to attach to a party, that party must have committed a tort. There must therefore be a finding of fact to establish liability. The repercussion of finding liability is an obligation to compensate, by way of damages. There may be various reasons for liability and different methods of compensating for the same, which will be cumulative. Reg 261/04 provides for deduction of one form of compensation from another. Article 29 of MC99 provides for exclusivity and precludes claims for damages for delay under Reg 261//04. A claim for delay under Reg 261/04 runs parallel to such a claim under MC99 and seeks to remedy the same thing, albeit that Reg 261/04 does not require damage to have been suffered. The IATA case limited damages for delay to care and assistance only, to alleviate a passenger's immediate economic need. This is not provided for in MC99 and it is therefore appropriate to be covered separately in Reg 261/04. Compensation, on the other hand, is already covered by MC99. The Aim of MC99 is to ensure standardised rules are applied internationally. The EU applies MC99 to both domestic and international flights in order to further achieve standardisation of rules. If a claim for damages for delay is permitted under Reg 261/04 the EU will suffer given that damages will be available from two separate sources of legislation in respect of delays over three hours. United Kingdom The UK focused on the principle of equal treatment: similar cases must be treated the same way and different cases must be treated differently unless there is objective justification not to do so. The question is, therefore, are the two cases similar and, if so, is there any justification to treat them differently? Passengers subject to cancellation are not the same as passengers subject to delay: in one case the flight does not exist and in the other case the flight does exist. It is therefore understandable that such passengers should be treated differently. The arrangements of a carrier in respect of cancelled flights are very different to those in respect of delayed flights. A cancellation by its nature leads to a re-route, whereas a delay leads the passenger to depart on the same flight, but later. A distinction was made in Reg 261/04 because, to do otherwise would have been contrary to MC99. It is clear that the primary objective of compensation is to deter carriers from denied boarding or cancellation commercial practices by making such decisions economically unattractive. Carriers can control these situations and can act responsibly. However, there is no commercial decision taken in the event of delay, nor any incentive not to delay a flight and so the legislature draws a distinction between a cancellation and a delay. It is tempting to think that the damage - namely loss of time - is the same, but it is not right to say that a cancellation and a delay is the same: one gets you there and the other does not. MC99 covers liability resulting from carriage by air, including delay, and generally there is no need to prove fault on the part of the carrier. However, MC99 does not cover liability for flight cancellation, which can occur prior to the operation of MC99 and is effectively a termination of the contract for carriage. The difference has been repeatedly recognised by US courts. A flat rate of compensation for delay available under Reg 261/04 would run contrary to MC99, as it would be noncompensatory in nature. Further Reg 261/04 does not require that compensation for delay be read into it. To do so creates an ambiguity which should not be created. EVERYTHING MATTERS 03

4 The right to care and assistance after four hours, as provided for in Reg 261/04, demonstrates the inconsistency that would be created if compensation were available after just three hours. Further, Reg 261/04 only relates to delay in departure, whereas MC99 provides for damage caused by any delay, thereby creating a further inconsistency and further demonstrating why a delay should not lead to a right to compensation pursuant to Reg 261/04. EU Parliament Parliament asked the question whether MC99 and Reg 261/04 permit the same thing. There are two categories of passenger, namely those who are delayed and those who are cancelled. The question is whether they should be treated equally. Counsel submitted that separate rules in respect of delay were superfluous as they had already been reviewed in the IATA decision in While comparable situations must be treated the same way, to treat the two situations of cancellation and delay differently was not discriminatory. Denied boarding and cancellation lead to a drastic modification of the contract. The consumer fulfils the contract but the carrier decides not to. It is necessary to look at responsibility and control, as well as what the passenger needs to do in order to get to his destination. Where compensation is due under Reg 261/04, this is because the passenger is faced with no choice. In the case of delay, on the other hand, a flight is still valid, albeit that serious discomfort may be suffered. Denied boarding and cancellation, where compensation has been adopted, are often imposed for commercial reasons and are invariably against the will of, and cause unacceptable trouble to, the passenger. The purpose of providing for compensation in the event of commercial cancellation or overbooking is that it avoids a careless attitude being adopted by the carrier. In a delay situation, there is no control over the causing event, and the delay comes at a cost to the carrier. Further, to introduce compensation for a three hour delay would lead to an entitlement to 600 before a passenger is entitled to a refreshment. Compensation is not intended to merely compensate a passenger for loss of time - if this were the case, no compensation would be available in a situation where the carrier has delivered the passenger to his destination sooner. With regard to the temporal effect of Sturgeon, if it is overturned but has already been applied by carriers, if should not be held to have been done so incorrectly. EU Council The Council argued that the principal objective of Reg 261/04 is to provide a high level of protection for the passenger in the most common situations where the passenger's interests are at risk. The legislators intended there to be a clear distinction between cancellation and delay. Different situations should be objectively treated differently, even if they appear similar, and the Council considered that the differences were objectively justified and did not contravene the law. The legislature chose not to provide compensation for delay and that should be respected. A separation of powers, which is what appears to have happened in the Sturgeon case, is a cause for serious concern. ARGUMENTS IN FAVOUR OF UPHOLDING STURGEON Poland Poland argue that the provision of damages for delay, in addition to denied boarding and cancellation, is on all fours with the principle of equality. If a carrier is not responsible for the delay, it can rely on the "extraordinary circumstances" defence in Reg 261/04 or the "all measures" defence in MC99. Furthermore, the carrier can seek redress via third parties. As currently drafted, Reg 261/04 is inadequate and disproportionate, and contravenes the principle of equal treatment. Compensation in respect of a delay of more than three hours is reasonable and prevents long delays, which are the most inconvenient. It guarantees an amount to the passenger, without the need to go through the proof of loss procedure. The ECJ is able to legislate in this area, as it did in the IATA case in Further, the flat rate offered does not mean that the compensation is not compensatory - it does not seek to compensate for material damage, but for loss of time. MC99 Article 22 limits damage for delay to 4,150 SDRS, so in some cases passengers do not get full damages. Compensation can be deducted from other compensation paid, and therefore the two systems complement one another. In the event that Sturgeon is upheld, Poland submitted, it should apply retrospectively to all claims for compensation for delay pursuant to Reg 261/04. EU Commission The Commission supported Sturgeon and considered that it was based on legally sound reasoning which was consistent, proportionate and in line with MC99. The purpose of Reg 261/04 is to ensure a high level of protection for passengers. 04

5 The economic impact of Sturgeon has been reviewed by the Commission to ensure that it is proportionate. The Commission is also currently considering a revision of Reg 261/04 and has carried out an impact assessment as part of that process. In doing so it has commissioned a report on the economic burden on carriers in 27 Member States, Iceland, Norway and Switzerland. In addition, Eurocontrol data has been analysed from which showed that only 0.6 to 0.7% of flights were delayed for more than two hours. In 2010, the figure was higher due to the volcanic ash. An estimate of the cost of Reg 261/04 has been made, albeit that this has been based on assumptions, for example the assumption that carriers follow Sturgeon when it is known that most do not; the assumption that 10% of passengers make a claim when the reality is only 5%; and the assumption that extraordinary circumstances is applied to 50% of technical faults. The real cost of Sturgeon is therefore insignificant. In 2009, the total cost of Reg 261/04 for carriers was 767m - 0.6% of average turnover; the total cost that related to Sturgeon was 77m or 0.06% of average turnover. The main issue is therefore the impact of the Judgment on passengers - the cost of compensation for relatively few passengers is borne by all passengers by way of increase in fares. Any passengers may be a victim and therefore there is a need to protect all passengers. QUESTIONS Following representations, the Raporteur asked two questions, namely: 1. If Reg 261/04 defines delay and restricts it to a delay of more than three hours, whereas MC99 does not define delay or provide any time limit for the same, can you really say that Reg 261/04 is contrary to MC99? Instead, is it possible to say that the scope of the two are different and the consequences would be different, and therefore Article 29 of MC99 in respect of exclusivity is not contravened? In response, it was submitted that MC99 provides for delay in the arrival of the passenger and the consequences of the same for the passenger, whereas Reg 261/04 provides for delay in departure and the care and assistance needs that must be met at the departure airport as a result. Sturgeon, however, did not look at delay on departure, but instead focused on delay on arrival. If a claim is made that way, then MC99 covers any damage suffered. On the contrary, if an aircraft leaves late but arrives early there is no scope for damage suffered. It was submitted, in any event, that there is no need to compare the two pieces of legislation. 2. Submissions have focused on the difference between denied boarding and cancellation, which are often imposed by the carrier for commercial reasons, and delay which is largely beyond the carrier's control. In Sturgeon, there was argument as to whether the situations which arose amounted to a cancellation or a delay. If the legislature had known that carriers would have attempted to extend the meaning of delay in order to avoid compensation, would it have drafted Reg 261/04 in such a way to deter such practices? In response it was submitted that, while carriers have been accused of delaying aircraft that should have been cancelled in order to avoid compensation, the reality is that this does not happen. If they did, the figures would have shown a drop in cancellations and an increase in delays. There is no evidence of this. Further, Sturgeon could have been decided differently if a cancellation had been defined differently to include their individual circumstances. After questioning, the interested parties were given an opportunity to make brief replies. NEXT STEPS The Attorney General will hand down his opinion on 15 May 2012, following which we expect a judgment from the ECJ shortly thereafter. For further information please contact: 1 2 Case references C-402/07 and C432/07 C344/04 Kathryn Ward Partner T kathryn.ward@dlapiper.com This publication is intended as a general overview and discussion of the subjects dealt with. It is not intended to be, and should not be used as, a substitute for taking legal advice in any specific situation. DLA Piper UK LLP and DLA Piper SCOTLAND LLP will accept no responsibility for any actions taken or not taken on the basis of this publication. If you would like further advice, please speak to Kathryn Ward on DLA Piper UK LLP is authorised and regulated by the Solicitors Regulation Authority. DLA Piper SCOTLAND LLP is regulated by the Law Society of Scotland. Both are part of DLA Piper, a global law firm operating through various separate and distinct legal entities. For further information please refer to UK switchboard: +44 (0) Copyright 2012 DLA Piper. All rights reserved. MAR12 LONDP: UKG\L&R\