In February this year, low-cost carrier Ryanair secured a significant victory for the airline industry when the English Court of Appeal (CA) ruled in its favour in a dispute with solicitors Bott & Co, who specialise in the volume pursuit of compensation claims against airlines under EU Regulation 261/2004 (EU261)1. In November, Bott & Co were granted permission to appeal, paving the way for the UK Supreme Court (formerly the House of Lords) to consider issues arising out of EU261 for the first time in its history2.

The Supreme Court agreed to hear the case on the grounds that it raises an arguable point of law of public importance. It is highly significant to the airline industry – and the legal sector – as it considers whether a law firm is entitled to an equitable lien for costs over compensation recovered on behalf of its clients.

The CA judgment clarified that airlines could settle EU261 claims directly with the passenger and were not obliged to pay the settlement to third party solicitors and claims handlers. The decision has had significant consequences (i.e. in a non-EU261 context) for claimant lawyers acting against defendants who seek to bypass the lawyers and deal directly with the claimants.

In this briefing, we revisit the CA decision and consider what the appeal to the Supreme Court could mean for airlines in their handling of EU261 claims going forwards.

The terminology

EU261: establishes common rules on compensation and assistance to passengers in the event of denied boarding, flight cancellations, or long delays. It requires airlines to pay compensation of €250 to €600 depending on the flight distance for delays of at least 3 hours, cancellations, or denied boarding from overbooking. It applies to both EU and non-EU carriers departing from an EU member state.

Equitable lien: a solicitor's lien is a form of security for solicitors to recover their agreed charges following a successful outcome for their client in litigation. Equitable liens afford solicitors protection where they hold nothing of value from their client or, in litigation, where the defendant pays damages directly to the solicitor's client.

EU261 Claims Agencies

Claims agencies have developed a lucrative business model for handling flight compensation claims. Bott & Co advertise that they have recovered more than £62 million in compensation from the airline industry. The CA judgment also revealed that Bott & Co's income from Ryanair alone exceeded €100,000 per month.

The practices of such claims agencies have been heavily criticised because the full sum of the compensation in a successful claim is not paid to the passenger as was originally intended by the drafters of EU261.

Recap – The CA Decision

Ryanair successfully argued that the mere negotiation by a solicitor resulting in a recovery for the client could not justify granting an equitable lien over settlement proceeds, as a form of legal proceedings must be underway or at least envisaged in order for an equitable lien to exist.

In coming to its decision, the CA held that:

  • The vast majority of the services conducted by claims agencies did not amount to the provision of "litigation services" because there was no dispute unless and until an airline refused a claim.
  • Only simple information was required to make a claim for delay compensation, so the process was considered "largely mechanical and formulaic".
  • A clause in Ryanair's standard terms and conditions requiring passengers to follow its own claims procedure and wait 28 days for a response before instructing a third party to act was compatible with EU261. The clause also stated that, where a claim succeeded, payment would be made directly to the passenger by Ryanair (and not to the claims agency). The CA held that such a clause did not contravene the wording of EU261.

Practical Implications

The favourable implications for airlines arising out of the February 2019 decision included:

  • Airlines can bypass third-party solicitors and claims handlers: unless legal proceedings have been issued in court, airlines can insist that their own claims handling procedures are followed, avoiding protracted communications through a third-party law firm or claims agency. Since the rise in public awareness of EU261, more passengers have sought to exert the rights that it affords them. In response, airlines have encouraged passengers to contact them directly, instead of a third-party claims agency.
  • A possible reduction in claims received under EU261: a report commissioned by the European Court of Auditors3 found that as many as 50% of EU261 claims received in the EU are from claims agencies. The CA decision was anticipated to have a negative effect on the business of claims agencies. That said, there is a possibility that the February 2019 decision is leading to a more aggressive strategy where legal proceedings are issued immediately in order to increase the chances of claims agencies being able to exert an equitable lien.
  • No right of recovery for claims handlers against airlines: the CA decision recognised that, while passengers are entitled to seek assistance from a third party in completing the airline's online compensation delay form, the third-party claims handlers should not be able to seek recovery of fees directly from the airline in the event the claim is successful.
  • Airlines' reasonable terms and conditions relating to the handling of claims are compatible with EU261: based on HFW's own research, few airlines have adopted a similar clause to Ryanair in their standard terms and conditions. If more were to do so, claims agencies may find their business model becoming unprofitable and the flow of claims could decrease.

What would a successful appeal mean for the airline industry?

If the appeal to the Supreme Court is successful, the implications for the airline industry would be profoundly negative; it would compel airlines to continue dealing with claims agencies in scenarios where litigation is not contemplated. This will embolden claims agencies and increase the administrative burden on airlines in the handling of EU261 claims.

All airlines with EU-based operations and international carriers with EU routings should monitor the Supreme Court case and HFW will issue further briefings as the matter develops. We also advocate that industry bodies representing the airline sector consider whether it may be possible to intervene in the Supreme Court proceedings to ensure that the industry is fairly represented.

Finally, it is worth noting that, if the UK leaves the EU as anticipated, the UK intends to maintain a compensation structure that mirrors EU261. Brexit should therefore not alter or change the implications of the CA's decision, and/or that of the UK Supreme Court.