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The CGPJ targets Airlines and proposes the setting of an annual default interest rate of 240%

  • 14 May 2020 14 May 2020
  • Aviation

The CGPJ targets Airlines and proposes the setting of an annual default interest rate of 240%

On May 7th 2020, the CGPJ released its new proposals for speeding up judicial activity after the end of the State of Alarm, among which there is an application of a 20% monthly default interest for late payment of compensation related to air transport covered by Regulation (EC) No. 261/2004.      

Following the proposals sent on 20th April 2020 by the General Council of the Judiciary (CGPJ) to the Ministry of Justice in the framework of the Emergency Plan for the Administration of Justice aiming to take measures to speed up the judicial activity once the State of Emergency is lifted up (more information here), on 7th May 2020 the CGPJ sent a new set of measures, including a proposal to apply a 20% monthly default interest rate for late payment of due compensations under Regulation (EC) No. 261/20041.

Among other arguments for proposing a measure to "establish a negative incentive for the prompt payment of compensation, which consists of the imposition of a default interest of 20%", the CGPJ mentions (i) that the companies usually disregard passengers' out-of-court claims, forcing them to litigate; (ii) that the Commercial Courts have "other matters of greater relevance" to focus on; (iii) and that the compensation of Regulation (EC) No. 261/2004 is automatic since the norm determines "clearly which are the cases in which the carrier must respond".

As we mentioned, all of the above leads the CGPJ to propose the inclusion as the 4th Additional Provision to Act 7/2017 of November 22, which states "If the obligation consists of the payment of a compensation due under Regulation (EC) No. 261/2004 and the debtor is in default, the interest shall consist of 20% per month and in accordance with the following rules (...)".

Besides the enormous disproportion that the application of a 240% annual interest rate represents, the bias by which these ideas are expressed by the CGPJ is very concerning, as they seem to convey the view that all the problems arising from the content and application of Regulation (EC) No. 261/2004 are responsibility of the airlines.

Firstly, because it is untrue that companies disregard often passengers' out-of-court claims. To begin with, because in this respect there is no such "a companies", but rather there are dozens of airlines operating in our country, all different from each other, and with very particular ways of dealing with their passengers and these claims, so it is inappropriate to convey the idea that all the airlines are acting in an unified manner and that this action also grieves the rights of their passengers.

And to continue, because it is false that companies generally disregard passenger claims. This is shown by the figures published in the document “Ranking de reclamaciones aéreas 2019: Las aerolíneas se ponen las pilas” of one of the main claims platforms3, from which it can be deducted that the year 2019 ended up with a clear improvement by the airlines in terms of the attention and management of passenger claims.

However, the most important thing is not this, but the fact that it is also clear from the aforementioned document that the vast majority of passengers' claims are dealt with and responded to satisfactorily without going to Court.

Indeed, if the platform author of the document, which has an estimated market share of 20%4, states that in 2019 they dealt with 42,219 passengers' claims, this means that passengers' claims exceeded 200,000 in Spain last year; and this is only taking into account those managed by platforms. Thus, and bearing in mind that the CGPJ states that the Spanish courts dealt with 55,000 claims of this kind5 it is clear that the airlines deal satisfactorily with the vast majority of claims received (about 75% of them according to these calculations).

Secondly, the CGPJ's assertion that courts have other "more important" matters to handle is highly symptomatic. It is clear that the subjectivity of this assertion does not take into account the right to effective judicial protection enjoyed by airlines, nor of course the brutal economic impact that Regulation (EC) No. 261/2004 has on their business.

As the European Regions Airlines Association (ERAA) explains in a study6, in flights subject to compensation of 250 euros, while the average profit for the airline per flight was €4,630.23, the cost of compensation was €12,754.28 i.e. the cost of compensation was 275% higher than the profit. This difference rose to 304% for flights subject to compensation of €400, and was 214% for flights of €600.

Likewise, it should also be noted that Regulation (EC) No. 261/2004 was issued in 2004 and that, despite the fact that ticket prices have been falling from year to year since then due to fierce competition on the market, compensation have not only remained unchanged but according to case law of the European Court of Justice (ECJ), they now apply to many more cases than the Statute originally allowed - in particular due to the interpretation of the Nelson (C-581/2010) and Sturgeon (C-402/2007) judgements - it often happens that a passenger gets €250 compensation for a 3 hour delay on a flight for which he paid less than €100.

It is for all these reasons that Regulation (EC) No. 261/2004 is under review, being the last existing proposal the one published on 12th February 2020 by the European Commission in a text that, although only partially, would address some of the asymmetries and obsolescence that the regulation suffers from - in line with more modern legislation such as that of Canada in 2019-.

In view of the above, we are confident that for airlines there should be no other issues "of greater relevance", and that being able to freely defend themselves against those claims they deem appropriate is a right protected by our Constitution that cannot be affected by the threat of the imposition of an absolutely disproportionate default interest.

Lastly, as the CGPJ claims, it is untrue that the compensations contained in Regulation (EC) No. 261/04 are automatic and that it is statutorily determined the cases in which they are to be paid. On the contrary, there is a very wide range of cases in which delays, cancellations and denied boarding occur, which is why Article 5(3) of the Regulation contains an open exemption clause that allows airlines to defend themselves, provided that the relevant extraordinary circumstance is met.

To give just few examples of issues that are discussed every day in our Courts, we can refer to lawsuits filed against the contractual carrier instead of the effective one, those arising from decisions of the airport manager due to failures in its systems or overcapacity, those initiated by foreign passengers on flights that do not have origin or destination in Spain, or all those that are filed related to subsequent (in chain) delays or cancellations caused by the incidents covered by the Regulation.

This without mentioning other claims that were historically defended and now, at last, have been accepted by the ECJ, whose paradigm is the case of the bird strike. And all this despite the fact that airlines must accept -and so do- the asymmetric case law of the ECJ which, as we said before, has gradually unbalanced the equilibrium by imposing compensation obligations in cases not covered by Regulation (EC) No. 261/2004, such as the judgements in case Wallentin (C-549/07), Pauels (C-501/17), McDonagh (C12/11) or Van der Lars (C-257/14), to name but a few. 

On the other hand, we must mention the number of lawsuits filed by passengers and then satisfied by the airlines as soon as they are notified of the proceeding since, contrary to what the CGPJ indicates, many of them - most of them, we dare say - are due to the fact that the passengers did not file their out-of-court claim with the airline, or did not provide the necessary data for its proper processing.

It is also worth mentioning that claims platforms frequently use tricks that contribute significantly to the judicial bottleneck in order to make their presence necessary and thus collect their commission agreed upon with the passenger.

And in the same way, we must point out that in many occasions legal claims arise from the fact that both parties (passengers and platforms) do not use the correct channel to claim, or simply to the lack of obligation to file an amicable claim, which causes many claims to be initiated directly at Court.

The above is only a summary of the reasons that explain that the CGPJ's approach does not respond to the reality of the problem that exists in relation to passengers' claims before the Courts.

At this point, we must remind that the most important thing is not that the CGPJ does not understand the reality of the problem, but the solution it proposes. The application of a 20% of monthly default rate (240% per year!) is simply nonsense improper Rule of Law system as we should aim to have in Spain.

The disproportionate nature of the CGPJ's proposal is such that it is hard to believe that it is not a mistake and that the proposed 20% is in fact annual. But even if this was the case, it would still be an absolutely disproportionate measure - which does not exist in any other field of Law - all the more so as the delay in handling claims is often due to judicial collapse - which makes the dies a quo proposed by the CGPJ particularly burdensome - or even to the passenger's failure to respond to the (legitimate) requests for information made by the airline as explained above.

Before finishing, we must briefly refer to the effect that it would have on the air transport industry in Spain if the CGPJ's proposal was to be accepted by the legislator. It is very simple: Spanish airlines would be put at risk of bankruptcy and foreign airlines would be forced to stop flying to Spain, thus increasing ticket prices, which would reduce the mobility capacity of the Spaniards and, above all, would seriously damage the tourism industry on which 13% of our GDP depends.

This de facto amendment to the framework of Regulation (EC) No. 261/2004, which of course has no equal in any Member State, would pose such a threat that airlines would prefer to take their aircraft and passengers to other destinations where no sword of Damocles would be hanging over them for years because of the application of a disproportionate interest if they were legitimately trying to defend their rights. 

Perhaps it would be more reasonable to wait for our country to do its homework, as in the other countries around Europe, and finally come up with a method of ADR to solve this type of dispute, as the CGPJ itself proposed in its previous set of measures. In this regard, we must remember that Spain has been delayed seven years since the issue of Directive 2013/11/EU of the European Parliament and the Council of 21st May 2013 on alternative dispute resolution in consumer matters, and that the blame for this delay - and the legal backlog that has not been resolved - must not be laid at the door of the airlines or made to pay.

1 “An ERAA study into Regulation EU261: passenger compensation for delayed or cancelled flights, does it really protect the passengers?”
2 https://www.eraa.org/system/files/era_eu261_study_brochure_final_version_26sep.pdf
3 https://www.reclamador.es/notas-de-prensa/ranking-de-reclamaciones-aereas-2019/
4 Estimate based on the defense at court of thousands of claims every year by Clyde & Co.
5 80% of the 68,737 lawsuits received in our country mentioned in the CGPJ document. 
6 Act 7/2017, of 2 November, by which it is added to the Spanish legal system the Directive 2013/11/EU of the European Parliament and of the Council of 21 May 2013 on alternative dispute resolution for consumer disputes.
7 Regulation (EC) No 261/2004 of the European Parliament and of the Council of 11 February 2004 establishing common rules on compensation and assistance to passengers in the event of denied boarding and of cancellation. As its own name suggests, this Regulation establishes compensation rules for passengers on European flights.

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