Mariusz J. Golecki
ECONOMIC ANALYSIS OF STATE LIABILITY
FOR MISAPPLICATION OF THE EU LAW.
A COASIAN ALTERNATIVE TO CENTRALIZED ENFORCEMENT?
(The seminar of the Polish Association of Law & Economics, Warsaw, 13-th of April 2011)
Abstract: The standardization of adjudication in the EU law is preserved by three
strategies. The public strategy is based on art. 258 TFEU (Treaty on the Functioning of the
European Union), [ex art 226 of the EC Treaty]. The deliberative strategy has been regulated
under art. 267 of the Treaty on the Functioning of the European Union (TFEU)"[ex art 234
of the The European Communities Treaty]. The rulings of the Court of Justice of the
European Union (CJEU) in Köbler and Traghetti cases have created the framework for the
application of the improved deliberative strategy that might be called a strategy of
privatization. In many cases the heterodoxical judicial practice of the national courts creates
negative externalities for subjects whose rights being formally protected by the EU law are in
fact neglected by the national legal system. Thus, the activity of national courts throughout
the European Union should be standardized, leading to a greater homogeneity of judicial
rulings concerning the application of the EU law in different Member States. The economic
analysis of those strategies will enable one to formulate an answer to fundamental questions
about the application of the EU law by the national courts within Member States.
1. The Problem
The application of the EU law is determined by a division of competences among the
domestic courts of the Member States and the Court of Justice of the European Union
(CJEU). Therefore, it is based primarily on the communication between these judicial
institutions. Such a complex judicial system is becoming increasingly ineffective due to
various reasons: heterogeneous practices adopted by national courts, lack of means of
efficient control, unification of these practices and, last but not least, congestion of cases
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being decided by the CJEU. All those conditions have been reconsidered by the authors of the
Report by the Working Party on the Future of the European Communities’ Court System in
January 2000; they admit that: „A close look at the Community judicial statistics throws three
phenomena into sharp relief, all of them familiar enough and all of them evidence of a serious
crisis in the current court system in the Communities”. It seems that the recent cases decided
by the CJEU dealing with the state liability in case of judicial errors committed by national
courts of last instance within the process of the application of Community law may serve as a
benchmark for development of the most effective instruments of standardization of various
judicial practices and approaches to application of the EU law in different Member States and
various legal cultures, be it common law or civil law in the Romanic or Germanic legal
families. Nevertheless, the question remains what standard of states’ liability would be an
optimal one while taking into account the maximization of three important criteria:
effectiveness of the Community law, efficiency understood as a relationship between costs
and benefits as well as protection of the rights of individuals.
2. Standardization vs. harmonization
Some authors put forward the thesis that law is one of the most important
standardizing systems, sustaining social order and creating the platform for social and
technological development (Jørgensen 1997). In various forms this observation had been well
rooted in the legal theory, at least since the pioneering works of Max Weber who emphasized
the functional nature of legal rules as a framework for economic and administrative activity.
On the other hand, some authors stress the need of a more detailed description of legal
systems. H.L.A. Hart built his concept of legal system upon a distinction between primary and
secondary rules (Hart 1997). The complex nature of the entanglement between coercive
orders addressed to all members of society and power conferring rules, comprising the
institutional nature of any legal system delimited by the rule of recognition and reflecting the
practice of judges and other officials, distinguishes legal rules from other social norms, such
as positive morality, custom or religion.
Hart indicated the important distinction between primitive law and developed legal
systems. Indigenous law does not comprise secondary rules, leaving primitive society with
three main drawbacks: rigidness, since there is no possibility to update obsolete or inadequate
norms; indeterminacy of application of general rules and indeterminacy of law as such, for
there are no universally accepted conditions of validity and identity of a given set of legal
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rules. Additionally the institutional nature of law reflects the distinction between prescriptive
and constitutional rules (Searle 1969). Prescriptive rules confine legitimate behavior whereas
constitutive rules create the possibility and meaning of action itself. However, this distinction
is relatively blurred by the fact that prescriptive and constitutive rules are indispensably
entangled each with other (Schauer 2002).
The above remarks on the complexity of rules may additionally be supplemented by
the propositions about the relationships between rules and standards. Generally speaking
standards may be regarded as a class of rules. The concept of standardization refers to the
submission of some process or object to some standard, treated as a pattern of behavior or the
characteristics of an object. Thus standardization differs slightly from harmonization or
unification of rules. Standardization operates on the level of Hartian primary rules, concerning
either external behavior or some specifications of the given object (Hart 1997).
Whereas standardization refers to the external point of view, harmonization refers to
other rules, including secondary ones. In the EU harmonization has traditionally been defined
as the adoption of „measures for the approximation of the provisions laid down by law,
regulation, or administrative action in Member States which have as their object the
establishment and functioning of the internal market”. Additionally the difference between
approximation and harmonization has been investigated and explained by the CJEU in Case
C-217/04 UK v. EP and Council (European Network and Information Security Agency
(ENISA) [2006] ECR I-3771, par. 43).
The above-mentioned observations indicate that harmonization generally operates on
the level of rules, regulations or administrative actions; hence it may include the process of
standards creation. This is especially evident in case of the so-called “technical
harmonization” which relies on standards created by independent private bodies (Barnard
2007). It is, however, worth mentioning that art. 95 (1) of the EC Treaty does not refer to
approximation of judicial, especially interpretative practices, leaving adjudication practically
out of the scope of harmonization. The cohesion of adjudication is should rather be preserved
by the complex system of judicial cooperation and the procedure of preliminary references.
The case law created by the CJEU contains some basic framework for the division of
competences between the CJEU and national courts. In this paper it is assumed that judicial
activity may be regulated by some standards even in highly sophisticated cases.
Standardization usually concerns the process of production or some characteristics of a
product. Nevertheless, it may be assumed that some operations of legal system such as
adjudication may be apt for standardization in a way analogous to the process of production.
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Such an approach to adjudication has been suggested in law and economics literature; for
example R. Posner suggests that adjudication is just a process of production of cases (Posner,
1973). This approach could be expanded in order to embrace not only the production of
binding precedents but any judicial decisions in forms of judgments, rulings or verdicts even
if not binding for other courts. Economic theory prompts that standardization aiming at
unification of services or policies may be applied in order to internalize negative externalities,
internalizing network or system effects (Holler, Knieps and Niskanen 1997).
3. Liability for judicial error as an instrument of standardization of application of the
EU law – the positive analysis
The standardization of adjudication within a hierarchical judicial system is usually
preserved by the system of appeals and by the control of cases exerted by higher courts such
as a court of appeal or eventually by the Supreme Court. The underlying rationale for this
strategy is based on the behavioral assumption according to which each judge tends to avoid
overruling. As a result the court system usually sustains the cohesion and diminishes the
number of judicial errors (Shavell 1995).
The economic literature on judicial system is well established. Major topics concern
such problems as optimal judicial structure (Kornhauser, Lewis and Sager 1986) and optimal
judicial discretion (Landes 1971, Landes and Posner 1979, Cohen 1992, Cooter and Ginsburg
1996, Higgins and Rubin 1980). What would happen however if the Supreme Court within
some jurisdiction had no virtual possibility to review cases from lower instances? This is the
arrangement present in the EU law. The relationship between the CJEU and national courts,
especially in regard to the courts of last instance, cannot be properly described as a
hierarchical structure. The CJEU does not have the competences to revise or control verdicts
of national courts. Concurringly, the European courts do not have powers to overrule
judgments given by national courts. This kind of arrangement is somehow puzzling for many
commentators for it requires a completely new approach to standardization and unification of
judicial activity. It seems that in case of conflict between the approach adopted by the CJEU
and a ruling given by a national court of the last instance, two strategies are prima facie
possible.
The first strategy may be called a public strategy and it finds its normative ground in
art. 258 of TFEU, which states that:
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“If the Commission considers that a Member State has failed to fulfill an obligation
under the Treaties, it shall deliver a reasoned opinion on the matter after giving the State
concerned the opportunity to submit its observations. If the State concerned does not comply
with the opinion within the period laid down by the Commission, the latter may bring the
matter before the Court of Justice of the European Union.”
According to this provision, the Commission has the power to initiate the procedure
leading to the application of sanctions against the Member State violating the EU law.
However, it is not clear to what extend the procedure based on art. 258 of TFEU could be
applied in case of infringement of the EU law by the highest court within the Member State.
In the ruling C-129/00 Commission v. Italy [2003] ECR I-14637 the CJEU has admitted that
the well-established judicial practice being contradictory with the EU law could be treated as
a breach of the EU law by the given Member State. This case concerned the problem of the
notorious practice of the Italian Corte di Cassazione which had been alleged to be
contradictory with the EU law. Nevertheless, the Italian court had relied on its own
interpretation of the EU law in cases dealing with custom duties. Some commentators
(Chalmers et al. 2006) observed that the ruling of the CJEU had been based on vague
assumptions according to which the main reason for breach of the EU law stems rather from
the bad quality of statutory law as enacted by the Italian parliament than from the direct
actions of the Italian court. The CJEU was not apt to admit openly that the interpretative
practice of the Italian Supreme Court led directly to infringement of individual’s rights
protected by the European law. Hence, it may be stated that the application of the procedure
based art. 258 of the Treaty on the Functioning of the European Union (TFEU). in case of
judicial practice of national courts seems to be problematic, if not impractical. Additionally,
the public strategy seems to be very rarely applied by the European Commission, especially
in case of infringements of the EU law by the national courts.
The second strategy which may be called a deliberative strategy is formulated as a
preliminary reference procedure under art. 267 of TFEU. The strategy is based upon a
procedural link between national courts and the CJEU. Art. 267 stipulates a duty imposed on
the court of last instance to make references to the CJEU. Therefore, „a court or tribunal of a
Member State against whose decisions there is no judicial remedy under national law” shall
bring also questions of mere interpretation of the European law before the CJEU. There are
precise obligations of supreme national courts, stemming from the primary European law as
interpreted by the CJEU. According to the CILIFT decision (case C-283/81 CILFIT Srl i
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Lanificio Galardo SpA v. Ministry of Health [1982]), it would be safe to assume that there is
no duty to refer a question to the CJEU in two instances: either when the question is not
relevant for the national court’s decision or when the interpretation of the EU law is obvious.
The peculiar system of conversation between the CJEU and the supreme courts in
Member States had been deprived of much of its attraction in recent years. The deliberative
strategy seems to be ineffective since the CJEU has no instrument of control over the practice
of national courts as far as preliminary references are concerned. This institutional lacuna
may be illustrated by the differentiated number of preliminary references from Member States
as well as by the various practices adopted in different national court systems.
As an institutional response to the deficiencies of the deliberative strategy the CJEU
endorsed the principle of state liability for judicial error committed by the domestic court,
especially the court of last instance. The recent rulings of the CJEU in Köbler and Traghetti
cases have created the normative framework for the application of the improved deliberative
strategy that might be called a strategy of privatization. This strategy relies upon the
assumption that private individuals may bring suits against their states in case of infringement
of the EU law (Somek 2007). The suit should be brought in front of the national court which
has the obligation to make a preliminary reference, in majority of cases. This obligation
concerns all courts of last instance. Other courts have the right, but not the obligation, to make
a preliminary reference. As a result one may state that this arrangement may constitute a
backdoors method to regain the CJEU’s control over the interpretation and application of the
EU law.
The approach consists in the recognition of the principle of state liability and might be
derived from joined cases C-6/90 and C-9/90 Francovich and Bonifaci v Italy, where the
CJEU held that a Member State was liable for the loss and damage caused to individuals as a
result of breach of the Community law for which it was responsible. The existence of State
liability was derived from various assumptions: Community law creates rights for individuals,
national courts should protect those rights, the full effectiveness of Community law should
not be impaired and the protection of the rights weakened due to impossibility to obtain
redress when rights of individuals were infringed by a breach of Community law for which a
Member State can be held responsible (van Gerven 1995).
The relationship between deliberative and privatization strategies has been examined
by the CJEU’s ruling in Köbler v. Republic of Austria, (case C-224/01, [2003] E.C.R. I10239). The Court stated that a Member State may be liable for damages in case of national
court’s serious misapplication of the EU law. The Court explained that the specific nature of
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the judicial function would limit the availability of such damages to exceptional cases only, in
which a national court has manifestly infringed the applicable European law. Additionally,
other factors should be taken into account, such as the clarity and specificity of the rule that
was violated, whether the violation was intentional, whether the erroneous legal conclusion
was excusable, the views expressed by a Community institution, and the court’s failure to
comply with its obligation to make a reference for a preliminary ruling.
The effect of Köbler case is far from being clear. On one hand, some decisions of the
national supreme courts can render the State liable for breach of the Community law. On the
other hand, the application of this principle will be elaborated by the CJEU on a case-by-case
basis (Breuer 2004). The approach presented in Köbler has been repeated and reinforced in
case C-173/03 Traghetti del Mediterraneo SpA v. Italy, [2006] where the CJEU stated that
any limitation of State liability on the part of the court was contrary to the Community law if
such limitations were to lead to the exclusion of liability of the Member State concerned in
other cases where a manifest infringement of the applicable law was committed. The CJEU
held that: “Community law precludes national legislation which excludes State liability, in a
general manner, for damage caused to individuals by an infringement of the Community law
attributable to a court adjudicating at last instance by reason of the fact that the infringement
in question results from an interpretation of provisions of law or an assessment of facts or
evidence carried out by that court. Community law also precludes national legislation which
limits such liability solely to cases of intentional fault and serious misconduct on the part of
the court, if such a limitation were to lead to exclusion of the liability of the Member State
concerned in other cases where a manifest infringement of the applicable law was committed,
as set out in (…) the judgment in Case C-224/01 Köbler [2003] ECR I-10239”.
The strategy of privatization adopted by the CJEU in Köbler has thus been reinforced
in the CJEU judgment in Traghetti. This fact has induced serious debate in literature (Ruffert
2007, Albors-Llorens). Many commentators emphasized the threat of uncertainty and
instability of legal position. Some of them expressed doubts concerning the potential
distortions resulting from those rulings and the application of doctrine of state liability to
judicial errors (Somek 2006). Moreover, it had been pointed out that the privatization strategy
inevitably lead to the redefinition, if not destruction, of the traditional, hierarchical structure
of national courts within Member States. Those structures will eventually be transformed into
some layers composed of: constitutional courts (first level), highest courts (or courts of last
instance, ending the procedure – second level), lower courts (third level). Thus, the question
arises whether the destruction of the hierarchical order of court system in Europe does mean
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that the strategy of privatization adopted by the CJEU is inadequate and wrong. The
sustainability of centralized enforcement and hierarchical court system in the EU may
surprisingly turn out to be an unrealistic or too expensive option. Therefore the adoption of
the strategy of privatization may lead to a more plausible alternative, based on tort liability for
judicial error in the EU law. It is especially discernible from the perspective of administration
of the EC court system, as has been emphasized in The Report by the Working Party on the
Future of the European Communities’ Court System, where the Working Party admitted that:
“(…) to be consistent with the above remarks on the ordinary courts, there should therefore be
an obligation on courts of final instance to consult the Court of Justice only on questions
which "are sufficiently important for Community law" and about whose solution there is still
"reasonable doubt" after examination by the lower courts”.
The traditional assumption of the legal theory states that we live in a world where
legal rules are commonly known, especially by judges, who operate within a costless
environment. In other words, it is assumed that the application of law (adjudication) takes
place within a world without scarcity of resources. Since adjudication and potential judicial
errors are expensive, and a properly working judicial system requires an optimal allocation of
judicial resources, then it is the role of the economic analysis of law to provide with an
adequate set of instruments and explanatory tools.
The alternative between public strategy based on centralized enforcement of the EU
law and the private strategy based on the activity of potential litigants resembles the famous
discussion initiated by R. Coase in “The problem of social cost” (Coase 1988). Coase
observed that the traditional approach of welfare economics as concentrated in Pigou’s
doctrine of taxation was wrong. Whereas A. Pigou saw taxation as the exclusive instrument of
internalization of externalities, Coase indicated the relative character of such a claim. Whether
taxation is necessary it would depend on the level of transaction cost and the capacity of e.g.
polluter and pollute to enter into agreement. Alternatively tort law could intervene by virtue
of protection by norms later called by Calabresi and Melamed as “liability rules” (Calabresi
and Melamed 1972).
Thus, the fundamental assumption of Coasian approach is based on relativity of a
potential instrument, both public and private one. A similar alternative is discernible between
public vs. private strategy of enforcement of the EU law. The action of the Commission based
on art. 258 of TFEU could be regarded as an equivalent of taxation. The infringement of the
EU law by the State is to be punished with a special fine, calculated according to the detailed
instructions respecting the financial situation of the state, the gravity and notoriousness of the
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breach. The strategy of privatization requires no action from the Commission. Hence it is a
more flexible instrument of internalization of externalities by the application of private law
rather than a centralized sanction on the EC level. The injured party may claim compensation
from the infringing State. Therefore, a control of the quality of application of the EU law is
provided on a very micro scale.
The complex liaisons between the CJEU and national courts give rise to two additional
problems. The first one concerns the negative externalities arising in case of nonstandardized, heterogeneous or even contradictory practices of national courts applying the
EU law. The second issue is a typical agency problem. National courts, especially courts of
the last instance, are supposed to act as agents of the CJEU. However, the judicial
independence and a relative autonomy of national legal systems do not offer a firm ground for
a proper principal-agent relationship. On the one hand the EC Treaty provides the CJEU with
the exclusive competence to interpret the EU law; on the other had it lacks the power to
maintain an effective control over the national courts. This paradoxical nature of the EU law
has led the CJEU to produce various methods of coordination, such as the state liability for
judicial error in the application of the EU law.
The application of the economic analysis of law in order to examine state liability for
wrong decisions of domestic courts applying the Community law is possible as a result of the
acceptance of an additional assumption. According to this, adjudication should be treated in
an analogous way to production activity (Posner 1992). Therefore, there are two areas of the
application of the economic analysis of law. The first one is linked to the modelling of the
judicial strategy, depending on a probability of correct judgment (epistemic perspective). The
second one comprises the modelling costs of the application of the EU law using the
standards set out by the CJEU case-law (CILFIT standard). Those costs include costs of
adjudicating on the EU law according or contrary to the CILFIT standard plus costs of
potential judicial errors: loss suffered by individuals deprived of the adequate and effective
protection of their rights established by the EU law.
One of the assumptions, broadly accepted within the economic analysis of law,
declares that individuals tend to maximize their utility function. This fundamental assumption
may be transferred to the economic analysis of State liability for the breach of Community
law by national courts. In particular it points out that judges tend to maximize their
satisfaction, hence they behave as if they were rational utility maximizers. This activity of
judges is discernible in the increase of the number of correct decisions, therefore in the
maximization of the number of rulings that would not be reversed in the appeal proceedings,
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so these verdicts would not result in excessive costs of litigation or diminishing the courts’
prestige.
The maximization of utility function by judges results in the inclination to force their
own preferences through the increase of influence on judicial decisions, broadening the scope
of their factual competences as well as maximization of the impact of given decisions by
creating case-law lines (Chalmers, 1997).
According to this assumption (assumption A), the judges’ motive may be described as
the tendency towards the maximization of benefits resulting from a decision (Posner 1973,
Landes and Posner 1980). Let denote the value of the case v.
In case of a proper decision these benefits have a positive value, while in case of a
wrong decision (judicial mistake) they take a negative value
The attempts to elaborate a precise characteristics of judges’ behaviour, in particular
the description of their preferences, have not been completely successful (Pound 1940,
Higgins and Rubin 1980, Greenberg and Haley 1986, Elder 1987, Cohen 1991, Cohen 1992,
Cooter 1983, Posner 1996). Nevertheless, it may be stated that judges tend to decrease the
number of revised or annulled decisions, to decrease arrears linked to the examination of
cases (particularly within the context of the requirement of case examination in a reasonable
time) and to decrease the costs linked to setting out a single judgment. Relying on the abovementioned assumptions, the problem of economic optimization of adjudication may be
described in the following way:
Let SC mean the social cost of judicial ruling, Cd include the costs of delay in
proceedings, Ci the costs of detailed investigation of Community law, Ce cost of judicial error.
The economic purpose of the process of application of law is the minimization of total costs
of the application of law, which include administrative costs and costs of judicial mistakes
(assumption B):
min SC= Cd + Ci + Ce
(1)
The level of costs of judicial errors should equal the sum of loss resulting from the
improper application of Community law. Therefore when a domestic court makes a mistake in
the process of application of Community law this may result (but not always should result)
with the necessity of paying by the Member State compensation D. The amount of
compensation will be dependent upon the regime of State liability accepted on the level of
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Community law. Under the assumption of full compensation from court’s budget under strict
liability rule the sum of loss Ce =D.
This loss might, but not necessarily has to be covered, as it depends on the standard of
liability for judicial error. However, the cost of judicial error for a given court additionally
depends on the link between the potential compensation and the court.
The problem of a potential distortion of judges’ behaviour in case of liability for
judicial error has already been signalled in the law and economics literature (Fon and
Schaefer 2007). It has been suggested that the liability for judicial error should be placed on a
state agency relatively far from the court as this would minimize the potential distortions of
judge’s behavior. The above proposition was regarded as valid at least in case of the criminal
courts.
The EU law cases have unique characteristics, hence the potential liability should not
result in jeopardy for judicial independence. Assuming the optimal liability it would rather
strengthen the rule of law. Additionally, is should be stressed that the liability for judicial
error plays the role sufficiently different from compensation for wrongful convictions in the
criminal cases. The principle of State liability is being regarded as an alternative to public
strategy or deliberative strategy and as a means of potential control, or as standardization of
judicial practices in the EU law cases throughout Member States. The effectiveness of a given
strategy depends on the character of incentives influencing judges’ behaviour. The strength of
this “incentive effect” is to be reflected by the γ parameter. The value of the parameter lies
between 0 and 1, thus :γ  [0;1]
In case of deliberative strategy γ=0, which means that there is virtually no expected
influence of the outcome of litigation and potential judicial error in case of wrongful
application of the EU law. This situation corresponds with the deliberative strategy having
been adopted by the CJEU before Köbler and Traghetti cases, when no liability rule had been
recognized.
Within the strategy of privatization γ>0 and γ  1. Under γ=1 one may assume the full
compensation under strict liability rule with the assumption that the liability for judicial error
is effectively placed upon the court.
The examination of economic results of state liability for the decisions of domestic
courts in case of the EU law should be based on the modelling of potential court’s strategies.
Therefore, one may assume that in case of the application of Community law domestic courts
may choose between a thorough examination of a case (close scrutiny), according to the
standard of Community law set out by the CJEU in CILFIT case, or making a decision
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concerning another choice (Case C-283/81 CILFIT Srl i Lanificio Galardo SpA v. Ministry of
Health [1982]).
This second strategy comprises the possibility of making a decision or commencing a
procedure of a preliminary reference, without engaging in a deep analysis of Community law
and ignoring the standard elaborated by the CJEU in CILFIT case. The option is justified by
the presumption of an adequate competence of the national court even in cases where the EU
law plays a paramount role, as it has been suggested by Lord Denning in a famous English
case Bulmer v. Bollinger ([1974] Ch. 401, [1974] 3 WLR 202 (CA). The same position has
been taken by the Polish Supreme Court in case I CK 207/05 of 08.11.2005 (OSN 9/2006 p.
54), where the Court stated that the CJEU has no power to give an opinion on the potential
contradiction between national legislation and the EU law, since the power of the CJEU is
limited to the interpretation of the EU law. This ruling is openly contradictory not only with
judgment of the CJEU in C-283/81 CILFIT Srl i Lanificio Galardo SpA v. Ministry of Health
[1982] but also with the ruling in C-173/03 Traghetti del Mediterraneo SpA v. Italy, [2006]
case.
The acceptance of the assumption of a two-stage process of decision-making enables
one to compare two regimes of liability for a mistake in the application of Community law. A
given domestic court examines a particular number of cases within the scope of the EU law.
The court may engage in three potential actions: a) pass an “independent” ruling thoroughly
ignoring the EU law, b) examine the state of affairs using the criteria developed by the CJEU,
c) pass a preliminary question without a close investigation and thus shifting the cost of the
application of the EU law on the CJEU. (Fig. 1).
As far as the first situation is concerned, domestic court may pass the ruling in a way
which is not consistent with the assumptions of the doctrine of acte claire, hence not taking
into account the specific features of Community law. Such an action is rational only under the
assumption that the court is minimizing the costs of the application of Community law Ci.
This approach had been adopted in English case Bulmer v. Bollinger [1974]; therefore the
strategy could be described as the application of Bulmer standard. This standard is
incompatible with the criteria formulated by the CJEU (in case 283/81 CILFIT Srl i Lanificio
Galardo SpA v. Ministry of Health [1982]), according to which domestic court is obliged to
examine whether the application of the Community law is so obvious as not to create any
doubts (acte claire). The adoption by the court of the strategy of an independent ruling might
be profitable, since the court seems to minimize the costs of the application of the EU law.
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This kind of strategy by domestic courts, which is likely to ignore Community law, may be
described as a cheap and weak standardization of the application of the EU law.
As far as the second option is concerned, the examination of the state of affairs using
the criteria developed by the CJEU, a domestic court may examine whether in a given case
there is a necessity of passing a preliminary question. According to the principle formulated
in case 283/81 CILFIT Srl i Lanificio Galardo SpA v. Ministry of Health [1982], domestic
court should check whether Community law is so obvious that does not raise any doubts (acte
claire). While performing the task domestic courts should take into account the fact of the
existence of many equivalent linguistic versions of the legal provisions and should compare
them. Additionally, domestic courts should establish the precise meaning of legal terms used
in Community law. Moreover, the court should perform an integral interpretation of the
norms of Community law in a proper context, in relation to the aims realized by the
Community law, in the light of the dynamism of the integration, and also taking into account
a specific stage of integration in a particular moment of law application.
Hence domestic courts should perform a deep analysis of a given norm, taking into
account also possible interpretative divergences within the Community. The court before
passing a judgement or before passing a preliminary ruling should examine thoroughly and
interpret properly the norms of Community law as well as adjudication of the CJEU
(according to the doctrine of acte eclaire). This possibility is also used in case when the
domestic court first passes a preliminary question to the CJEU and then withdraws it. In such
a case the court bears the costs of preliminary investigation of the EU laws. The investigation
allows it to choose with greater precision a possible path: either to pass a judgement
independently or to pass a preliminary question of the CJEU (optimal standardization of
application of the EU law).
The third option is linked to the preliminary reference procedure being initiated by the
domestic court. The verdict of the CJEU contains an official interpretation of the EU law.
That interpretation part of the ruling is binding and it should serve as a basis for a judgment to
be given by the national court. Therefore, while applying the CJEU verdict the domestic court
should be free from a potential liability based on the improper use of the Community law.
Moreover, the judgment of the national court is virtually always consistent with the EU law,
since it is based on the preliminary ruling issued by the CJEU. This strategy may be described
as a costly and strong standardization of application of the EU law.
The model of domestic courts’ action is based on the estimation of expected benefits
(gains) or costs of every of the above-mentioned strategies, taking into account various
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probabilities linked to different factors in the process of delimiting the sphere of probability,
where the court would choose a given path.
Every case is linked to some level of probability p that it may be solved properly by
domestic court where p has a given function of density f(p) (probability density function). The
complexity of every potential case has an accidental and exogenous character.
In situation when the court resolves a given case properly it gains a benefit denoted V.
However, when the court will pass an improper decision it results with a loss (the cost of
judicial mistake) denominated as D. The cost is not dependent on the fact whether the given
verdict which is inconsistent with Community law would result with liability of the Member
State. Therefore when domestic court makes a mistake in the process of application of
Community law this may result (but not always should result) with the necessity of paying by
the Member State compensation, depending on the value of the parameter γ, where γ  [0;1].
The acceptance of the second strategy (b) will increase the cost of application of the
EU law stemming from the thorough investigation of the relevant legal sources. Let this cost
be denoted Ci. It is important that the proper application of the EU law is not costless, since
the cost results from the proper application of Community law according to the standard
accepted by the CJEU. Still, it should be stressed that a detailed examination according the
CILFIT standard increases the detection of cases, which due to their complexity are very
probable not to be ruled independently by domestic courts. In other words, the exogenous
probability of a proper decision in those cases is low and the preliminary investigation by
national court increases the probability of an optimal choice.
Hence it should be assumed that the examination of a case according to the CILFIT
standard is an imperfect method. The court’s output may be improper in two different ways.
Firstly, while caring out the examination, the court may mistakenly assume that the case at
stake is too complex while in fact it is not. Then the court is apt to set up the preliminary
reference procedure, thus raising the costs without justification. Such a situation may happen
if the court has no knowledge about the already passed verdict of the CJEU in a similar case.
The error usually stems from the fact that the national court was not sure about the analogous
relationship between the two cases, holding that the case under examination is not similar
enough to the already given CJEU ruling. The occurrence of this type of error is linked to the
fact that while addressing the preliminary reference the CJEU assumes that national court
could have deployed the already existing CJEU case law. Thus the error is detected only ex
post and against the later ruling of the CJEU.
14
Let  be the probability that the correct decision taken by the domestic court is
mistakenly taken by that court to be prima facie improper (type 1 error). Let  be the
probability that the erroneous decision taken by the domestic court is mistakenly taken by that
court to be proper (type 2 error). This later error results with the ruling set up independently
by the national court. Type 2 error can only be detected by other national court which
supervises the decision on basis of breach of the EU law or by the European Commission
monitoring the application of the EU law in Member States.
The assumption about the probability of two kinds of errors indicates that the
probability of type 1 error equals the probability of the type 2 errors. Therefore one may
further assume that  <0,5 and  <0,5. Hence it may be still further assumed that the tort
liability of the national highest court in case of infringement resulting with loss to the
individual may be either based on strict liability or negligence.
While aiming at determination of the optimal strategy of action for domestic court one
should compare the expected values of potential strategies, in relation to probability factor
linked to them. These probabilities may be described as an indifference curve along which the
court is neutral (indifferent) whether to perform an examination and ask a preliminary
question or whether to perform an examination and pass a verdict independently. The first
expectation is that the court asks a preliminary question when the probability of passing a
proper ruling is below the lower curve of probability. The court passes an independent ruling
in cases when the probability of a proper ruling is above the higher curve. All cases between
the higher and lower curve of probability will thus be examined.
It should be assumed that the court tends to the maximization of expected benefits
stemming from the ruling, thus taking into account the existing standard of liability in case of
a breach of Community law. The court maximizes benefits as a result of verdicts consistent
with Community law, while passing of a judgement with mistakes, results in State liability.
Therefore the expected value of each case solved by domestic court is a function of standard
liability, probability that the passed verdict is a proper one, and actions of the court such as
passing judgments, asking a preliminary question or making detailed examination of a case
from the Community law perspective.
Let then Cd denote the costs of delay in proceedings, Ci the costs of investigation of
Community law, Ce cost of judicial error. Additionally according to the above assumptions let
p denote the probability of the correct application of the EU law by domestic court, related to
the complexity of a given case. Let v be the value of a case; it is assumed that judges tend to
15
maximize this value. Let V1 denote the total value of the case under the strategy of costly and
strong standardization of application of the EU law. Consecutively, let V2 be the total value
of the case under the strategy of cheap and weak standardization of application of the EU
law. Finally let V3 denote the total value of the case under the strategy of the optimal
standardization of application of the EU law. Therefore the total values of given cases under
those strategies are following:
1) When domestic court asks a preliminary question to the CJEU, without performing detailed
examination - strategy c) costly and strong standardization on fig. 1, then:
V1= pv- Cd- Ci-, where Cd =0, Ci =0, p=1, then V1= v- Cd
(2)
The assumption is that in case of asking a preliminary question the potential benefits of
solving the case as well as the costs of prolonged litigation balance each other, V1= Cd and
hence in equals zero. V1= 0.
2) When domestic court passes a judgement independently, without performing detailed
examination of EU law - strategy a) cheap and weak standardization on fig. 1, then:
V2=pv-(1-p)γD
(3)
3) In cases when domestic court before passing a judgement or before passing a preliminary
ruling examines thoroughly and interprets properly the relevant part of the EU law according
to the CILFIT standard - strategy b) optimal standardization of application on fig. 1, then
value of case (V3) holds as follows:
V3=p(1-α)v-[(1-p)βγD]-Ci
(4)
If one assumes that the standard liability adopted within the Community law is based on no
liability rule as in case of deliberative strategy, which means that γ=0, then:
pv>p(1-α)v-Ci, consecutively V2>V3
(5)
and
16
pv >v- Cd, , hence V2> V1
(6)
The potential cost of a judicial error does not influence the expected value of a ruling
in case when the court initiates a preliminary reference procedure and also when the
judgement is made independently by the court, using the CILFIT standard. According to both
basic assumptions, A and B, the court will tend to adopt (strategy a), which means that courts
will avoid any preliminary references; with or without detailed examination of the EU law.
Thus the national court would adopt cheap and weak standardization (strategy b). In the long
run under no liability rule heterodox English Bulmer standard would prevail over the
orthodox CILFIT standard. This might be the best justification for the adoption of the
principle of State liability in case of judicial error in a form adopted by the CJEU in Köbler
and Traghetti cases.
4. Liability for judicial error as an instrument of standardization of application of EU
law - normative analysis
The question remains how should the application of the principle of State liability in
case of judicial error in the EU law be applied, which factors should be taken into account in
order to standardize the judicial practice within the scope of application of the EU law
throughout the EU Member States. The economic analysis of State liability for judicial error
should be based on the assumption that judicial activity of domestic courts in some instances
may result in damage. Moreover, it should be stressed that this issue is directly linked to the
sphere of operation of the principle of State liability in the EU law, aiming at the
maximization of the effectiveness of European law and also for the minimization of the costs
resulting from that activity. Thus the adoption of the standard of examination of the EU law
by national court should be strictly dependent on the relative probability of correct application
of the EU law.
The optimal standardization according to the CILFIT standard should enable judges to
distinguish complicated or difficult cases from the relatively easy ones. Still the CILFIT
standard should not be associated with preliminary investigation. The aim of the preliminary
investigation is to enable the judges to decide whether the application of the CILFIT standard
is necessary and thus justified. In case of a very promising (easy) or very hard litigation there
is no need for national court to spend its resources for the application of the CILFIT standard.
17
The standard should be used particularly in dubious cases, after the preliminary examination,
when the court will use the CILFIT standard with costs Ci>0, and then will decide whether to
start the procedure of preliminary reference, leaving the interpretation of the EU law to the
CJEU or giving its own independent final judgment.
The application of this two-step procedure (initial investigation and/or CILFIT
examination) would optimize the process of application of the EU law and would standardize
the judicial practice, since the investment in a thorough examination of the EU law could be
potentially efficient. However this condition is fulfilled only under the liability rule. Within
the principle of strict liability with full compensation rule, where γ=1, two possible bounds of
probability are to be indicated: the higher probability bound and the lower probability bound.
Let the higher probability bound be denoted ph and the lower probability bound be
denoted pl. The main purpose of the preliminary investigation and examination lies in the
possibility of indication whether the case is strong (ph) or weak (pl). While considering the
extreme case in which γ=1 (full strict liability rule) the expected ex ante value of the case
holds as follows:
V2=V3 for the higher bound of probability (ph)
(7)
Hence for ph:
pv-(1-p)γD= p(1-α)v-[(1-p)βγD]- Ci
(8)
V3= V1 for the lower bound of probability (pl)
(9)
Hence for pl:
p(1-α)v-[(1-p)βγD]- Ci=0
(10)
At this stage one may repeat the comparison of the value of cases V1, V2, V3 related to
both higher and lower probability bounds.
For ph:
pv-(1-p)γD< p(1-α)v-[(1-p)βγD]- Ci,
which means that if
p<
(1   ) D  Ci
,
v  1   D
(11)
(12)
18
then the national court will make a preliminary reference even without a detailed examination.
On the other hand, for pl:
p(1-α)v-[(1-p)βγD]- Ci > 0,
which means that if p>
 ( D )  Ci
,
(1   )v  D
(13)
(14)
then the national court will adopt Bulmer standard, giving the judgment without both detailed
examination and preliminary reference.
Finally, for p>
 ( D )  Ci
(1   ) D  Ci
and p<
,
(1   )v  D
v  1   D
(15)
when the probability of the appropriate judgment lies between the lower and the higher
probability bound, national court will apply the CILFIT standard, spending resources for an
expensive and detailed examination of the case. Depending on the result of the examination
the court will give judgment or make a preliminary reference.
If probability of a given ruling lies below pl, then the court is not willing to use
resources for performing an examination; therefore it will ask a preliminary question without
making the examination according to the CILFIT criteria. When the probability of a proper
ruling lies above ph, the court will pass a judgement independently without making the
examination according to the CILFIT criteria. In the zone between pl, and ph, the court will
perform an examination according to CILFIT standard and will rely on the results of this
examination. In a situation when State liability is based on the standard of strict liability, the
examination of a case according to the CILFIT standard serves only to distinguish those cases
which may be solved independently by domestic court from those cases where domestic court
should initiate a preliminary reference procedure and rely on the CJEU’s judgment. The fact
that such an examination has been performed does not exempt State from the potential
liability if the judicial ruling appears to be ex post inconsistent with the EU law. The
application of the CILFIT is, however, not always efficient. The court minimizes redundant
costs Ci, and maximizes the value of the case. This will lead to the strong correlation between
the ex ante complexity of a given case in front of the court and total expected costs, including
the cost of judicial error. This observation proves the hypothesis that the privatization strategy
is primarily conducive to the unification of the adjudicative practices in the EU, while the
19
protection of rights is of a secondary concern; as has rightly been suggested by some authors
(Bertolino 2008).
5. Conclusion
The basic conclusions concern the prospective actions of the national court: under the
strict liability with full compensation from court’s budget, the court has a strong incentive to
apply the CILFIT standard, when it is justified by the expected complexity of the case. The
national court is apt to comply with the strategy of privatization, making the preliminary
reference only in case of a reasonable doubt. Thus the strategy of privatization adopted in the
recent rulings of the Court of Justice of the European Union seems to be a valuable and
feasible alternative to centralized public strategy based on art. 258 of TFEU, maintaining both
the uniformity of application of the EU law as well as efficiency. Additionally, it might be
observed that the potential results of the extension of the strategy of privatization are difficult
to foresee.
The standardization of the EU law by the indirect, economic incentives seems to bear
some costs. If national courts will review the judgments of other national courts in case of the
potential infringement of the EU law, the process may lead to some unexpected results. The
privatization strategy could inevitably lead to the redefinition or even destruction of the
traditional, hierarchical structure of national courts within Member States. As an effect the
imposition of State liability for judicial acts would be likely to lead to the situation in which
lower national courts may be unwilling to find that superior national courts have infringed the
European law. They might therefore look to the CJEU to make the final judgment, which
would eventually lead to the potential conflict within a presumably cooperative institutional
environment.
It is worth reminding that at the moment the EC Treaty does not provide for a system
of appeals to the CJEU against national court decisions. Therefore it is not surprising that the
question still remains open whether the strategy of privatization is going to be an intermediate
stage of development of the European hierarchical system with the CJEU on the top of the
hierarchy, or whether it will become a stable institutional solution based on the structural
peculiarity of the European law. In both cases however, economic analysis of law remains a
valuable analytic tool enhancing the understanding of the formal as well as informal practices
of legal actors and illuminating the weight of available institutional alternatives.
20
a) WEAK
STANDARDIZATION
(the Bulmer standard)
RULING
b) OPTIMAL
STANDARDIZATION
(the CILFIT standard)
c) STRONG
STANDARDIZATION
(HIGH
ADMINISTRATIVE
COSTS)
PRELIMINARY
REFERENCE
Fig. 1. The possible options of national court in case of application of the EU law.
21
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