Court of Justice of the European Communities (including Court of First Instance Decisions)

JUDGMENT OF THE COURT (Fifth Chamber)

21 September 2000 (1)

(Appeal - European Social Fund - Training programmes - Reduction of financial assistance - Rights of defence - Right to be heard)

In Case C-462/98 P,

Mediocurso - Estabelecimento de Ensino Particular Ld.^a, established in Lisbon (Portugal), represented by C. Botelho Moniz, of the Lisbon Bar, with an address for service in Luxembourg at the Chambers of A. May, 398 Route d'Esch,

appellant,

APPEAL against the judgment of the Court of First Instance of the European Communities (Third Chamber) in Joined Cases T-180/96 and T-181/96 Mediocurso v Commission [1998] ECR II-3477, seeking to have that judgment set aside,

the other party to the proceedings being:

Commission of the European Communities, represented by M.T. Figueira and K. Simonsson, of its Legal Service, acting as Agents, with an address for service in Luxembourg at the office of C. Gómez de la Cruz, also of its Legal Service, Wagner Centre, Kirchberg,

defendant at first instance,

THE COURT (Fifth Chamber),

composed of: D.A.O. Edward, President of the Chamber, L. Sevón, P. Jann, H. Ragnemalm (Rapporteur) and M. Wathelet, Judges,

Advocate General: J. Mischo,

Registrar: R. Grass,

having regard to the report of the Judge-Rapporteur,

after hearing the Opinion of the Advocate General at the sitting on 25 November 1999,

gives the following

Judgment

1. By application lodged at the Court Registry on 17 December 1998, Mediocurso - Estabelecimento de Ensino Particular Ld.^a (hereinafter 'Mediocurso) brought an appeal under Article 49 of the EC Statute of the Court of Justice against the judgment of the Court of First Instance of 15 September 1998 in Joined Cases T-180/96 and T-181/96 Mediocurso v Commission [1998] ECR II-3477, hereinafter 'the contested judgment, seeking to have that judgment partially set aside.

   The facts

2. The facts of the case, as set out in the contested judgment and recorded in the documents considered by the Court of First Instance, may be summarised as follows.

3. In 1988, the Portuguese body Departamento para os Assuntos do Fundo Social Europeu (Department for European Social Fund matters, hereinafter 'DAFSE) lodged with the European Social Fund (hereinafter 'the ESF) two applications for financial assistance in favour of the appellant for two vocational training projects.

4. The training projects were approved by the Commission. In August 1989, the appellant received an advance equal to 50% of the amounts of assistance granted by the ESF and of that granted by the Portuguese Government.

5. The training programmes were carried out between July and December 1989. On completion thereof, the appellant applied to DAFSE for payment of the balance in respect of each of them.

6. However, by letter of 11 April 1990 DAFSE informed the appellant that it might amend the amount of the balance after carrying out financial checks regarding the implementation of the training programmes..

7. In October 1990, DAFSE provided the Commission with a certificate as to the accuracy of the facts and accounts in those final payment applications, although stating at the same time that the certification of the particulars contained in their applications was subject to a financial audit yet to be carried out. In January 1991 DAFSE informed the appellant that the auditing firm 'Audite had been instructed to carry out the financial audit and that its final decision on the two final payment applications would be dependent upon the conclusions reached in the financial audit.

8. On 20 February 1991 Audite sent DAFSE two reports, one for each application, giving the results of its audit in which it disclosed certain irregularities justifying reduction of the financial assistance.

9. On 10 September 1991 a meeting was held between the appellant, DAFSE and the firm Audite in order to discuss the two applications.

10. On 11 September 1991 DAFSE sent a letter to the appellant, informing it of the conclusions of the audit and asking it to pay back the sums which it considered ineligible.

11. The appellant sent no observations to DAFSE regarding its letter but immediately contested the legality of the request for repayment before the Portuguese administrative courts.

12. On 22 September 1995, on conclusion of the proceedings before those courts, DAFSE notified the Commission by letter of the results of the financial audit carried out in 1991 and forwarded to it the final payment applications, amended in accordance with those results.

13. On 6 March 1996, DAFSE informed the appellant that the Commission had taken a decision on its two final payment applications and had confirmed the results of the financial audit which had already been notified to it on 11 September 1991.

14. In April 1996 the appellant asked DAFSE for a copy of the Commission decisions and sought leave to consult the ESF administrative file. When doing so, on 24 April 1996, the appellant found that there were no documents recording any decision other than the Commission's debit notes determining the amounts which it was required to reimburse.

15. The appellant then instituted proceedings before the Court of First Instance against those measures which the Commission withdrew without the Court having given judgment.

16. The Commission replaced the contested measures by two decisions adopted on 14 August 1996, namely decision C (96) 1185 reducing the assistance granted in decision C (89) 0570 of 22 March 1989, and decision C (96) 1186 reducing the assistance granted in decision C (89) 0570 of 22 March 1989 (hereinafter 'the decisions of 14 August 1996). Those decisions, the wording of which was almost identical and which were notified to the appellant on 20 September 1996, related to the two training programmes. They stated that the Member State had discovered irregularities in the implementation of the training programmes financed by the ESF, that it had re-examined the applications for assistance and that some of the expenditure could not be accepted for the reasons sets out in the letter from DAFSE of 22 September 1995. The Commission stated that the Member State had notified the appellant of the results of the check carried out by the auditor, by letter of 11 September 1991, and that the appellant had not submitted any observations. The Commission concluded that the ESF assistance should be reduced to the sum of PTE 2 251 894 for the first training programme and to PTE 2 174 072 for the second, representing, in each case, more than two thirds of the assistance initially allocated to the appellant.

    The contested judgment

17. On 14 November 1996, the appellant brought two actions before the Court of First Instance seeking annulment of the decisions of 14 August 1996, giving rise to Cases T-180/96 and T-181/96.

18. The Court of First Instance joined the two cases for the purposes of judgment.

19. In Case T-180/96, the Court of First Instance accepted only one of the five pleas in law put forward by the appellant, alleging, essentially, manifest errors of assessment committed by the Commission, and did so only to the extent to which they related to the payment of expenses under subheading 14.3.12 relating to raw materials, auxiliary materials and consumables. The Court thus partially annulled the first contested decision, to the extent to which it related to that matter, and for the rest dismissed the action. It rejected all the pleas put forward in so far as they related to Case T-181/96, thereby dismissing the action in that case.

20. In particular, the Court of First Instance rejected the plea alleging breach of the rights of defence.

21. It stated, in paragraph 49 of the contested judgment, that according to settled case-law (in particular, Case C-32/95 P Commission v Lisrestal and Others [1996] ECR I-5373, paragraphs 21 to 44), the rights of defence of a beneficiary of ESF aid must be respected where the Commission reduces such aid.

22. In paragraph 50 of the contested judgment, the Court of First Instance also pointed out that, in its judgment in Case T-450/93 Lisrestal and Others v Commission [1994] ECR II-1177, it had stated, without being criticised on that point by the Court of Justice in Case C-32/95 P Commission v Lisrestal, cited above, that the Commission, which alone assumes legal liability to the beneficiary of ESF aid for decisions to reduce such aid, was not entitled to adopt such a decision without first giving the beneficiary the possibility, or ensuring that it had the possibility, of effectively setting forth its views on the proposed reduction.

23. The Court of First Instance observed, in paragraph 51 of the contested judgment, that the appellant, both in setting out the forms of order which it sought and in its answer to the written question put to it by the Court, recognised that it was heard by DAFSE before the letter of 11 September 1991 was formalised. It added that, in that letter, DAFSE did not accept all the observations made by the appellant regarding the proposed reductions.

24. In paragraph 52 of the contested judgment, the Court of First Instance found that the appellant had not formally submitted observations on that letter, as the decisions of 14 August 1996 rightly indicated. It stated that the appellant had merely commenced proceedings against that letter before the Portuguese administrative courts. However, according to the Court of First Instance, the appellant should also have formally submitted such observations so that they could be notified to the Commission by DAFSE. It concluded that, in such circumstances, the appellant could not complain that its observations had not been notified to the Commission since that fact was attributable to its own omission.

25. The Court of First Instance considered, in paragraph 53 of the contested judgment, that the appellant had thus been given the possibility of 'effectively setting forth its views on the findings against it within the meaning of the judgment of the Court of First Instance in Lisrestal v Commission, cited above.

    The appeal

26. In its appeal, the appellant claims that the Court should:

    - set aside the contested judgment on the ground that it is incorrect in law in that the principle requiring a prior hearing was misapplied, without prejudice to the part of the judgment which partially upheld the application in Case T-180/96, and annul the decisions of 14 August 1996, or

    - if it should dismiss the foregoing claim, set aside the contested judgment to the extent to which it upholds the decisions adopted by the Commission which treat as ineligible, in their entirety, both the expenditure relating to the remuneration paid to the teaching staff (subheading 14.3.1.a) and the expenditure relating to the value added tax chargeable on that remuneration (subheading 14.3.13), by reason of the material inaccuracy of the findings of fact made by the Court of First Instance and the error of law deriving from inconsistency of the grounds of the judgment and breach of the principle of proportionality, and consequently, annul the decisions of 14 August 1996 to the same extent and on the same basis;

    - set aside the contested judgment to the extent to which it requires the appellant to bear its own costs in Case T-180/96 and to the extent to which it requires the appellant to pay the costs in Case T-181/96;

    - order the Commission to pay the costs.

27. The Commission contends that the Court of Justice should:

    - dismiss the appeal in its entirety;

    - uphold the contested judgment;

    - order the appellant to pay the costs.

    Findings of the Court

    The plea alleging breach of the right to a proper hearing

28. In this plea, the appellant maintains that the Court of First Instance erred in law by not observing the principle of the right to a proper hearing, as mentioned by the Court of Justice in its judgment in Commission v Lisrestal, cited above, thereby infringing the rights of defence. The appellant submits that it was not able to examine the observations and the reservations included in the audit reports prepared by the firm Audite until the meeting of 10 September 1991. However, as early as 11 September 1991, DAFSE ordered it, by letter, to repay certain sums.

29. The appellant states that it could not effectively make its views known on the content of the audit reports until it had analysed them in the light of the documents in its possession.

30. As regards the letter of 11 September 1991, the appellant maintains that it contained an order to repay and could not therefore be regarded as inviting its addressee to submit observations in the exercise of its right to be heard.

31. According to the appellant, the only possible reaction to that order to repay, which the Supremo Tribunal Administrativo (Supreme Administrative Court), moreover, found to be unlawful, was to institute proceedings before the competent court.

32. The Commission contends that the Court of first Instance correctly held that the appellant had an opportunity effectively to express its views on the letter of 11 September 1991, but failed to do so.

33. It contends that that ground of challenge has already been dealt with by the Court of First Instance, so that it is now a question of fact which it is not for the Court of Justice to determine.

34. The Commission adds that, by choosing to bring the matter before the Portuguese courts, the appellant itself waived the right to be heard by the Commission. It contends, finally, that the appellant recognised that most of the content of the audit reports prepared by the firm Audite had been brought to its notice by the letter of 11 September 1991 and that it had been heard by DAFSE before that letter was formalised.

35. Contrary to the Commission's contention, the question whether the Court of First Instance correctly applied the principles governing the rights of defence and in particular the right to be heard constitutes a question of law which it falls to the Court of Justice to examine.

36. In that connection, it must be pointed out that, according to settled case-law of the Court of Justice, respect for the rights of defence is, in all proceedings initiated against a person which are liable to culminate in a measure adversely affecting that person, a fundamental principle of Community law which must be guaranteed even in the absence of any rules governing the proceedings in question. That principle, as expounded in paragraph 21 of the judgment in Commission v Lisrestal, cited above, requires that the addressees of decisions which significantly affect their interests should be placed in a position in which they may effectively make known their views.

37. Accordingly, it is necessary to consider whether the appellant was placed in a position effectively to make known its views on the reports of the firm Audite which formed the basis of the conclusions adopted by DAFSE and the Commission, and on the letter of 11 September 1991 by which DAFSE informed the appellant of its conclusions.

38. As regards the reports of the firm Audite, it is clear from the documents before the Court that the reports were disclosed to the appellant on 10 September 1991. However, no reasonable period was granted to it between the time at which it was able to examine the reports and the time at which it had to express its view. Indeed, it was on the very day that the reports were disclosed to it, during a meeting, that the appellant was called on to comment on the reports if it wished to do so. It must beheld that, in such circumstances, the appellant did not on that occasion have an opportunity effectively to put forward its views on those documents.

39. The meeting of 10 September 1991 was followed by the letter from DAFSE of 11 September 1991. According to the Commission, the appellant should not have confined itself to instituting proceedings before the national courts in response to that letter but should have formally presented to DAFSE its observations on the letter for forwarding to the Commission. The Commission contends that the Court of First Instance correctly concluded, in paragraph 52 of the contested judgment, that the appellant could not rely on the failure to forward any observations which it might make to the Commission given that such failure was attributable to its own omission.

40. In that connection, it must be observed that the letter from DAFSE of 11 September 1991 did not invite the appellant to submit its observations on an envisaged reduction of assistance. On the contrary, that letter contained a request for repayment and did not call for any comment, merely due repayment.

41. In those circumstances, the appellant was entitled to consider that it had no alternative but to contest that request by means of legal proceedings.

42. Finally, it must be added that no other opportunity was given to the appellant effectively to express its views. In particular, no draft Commission Decision was submitted to the appellant to enable it to submit any observations. It is clear from the file that, following the dispatch on 22 September 1995 by DAFSE to the Commission of the results of the financial audit carried out by the firm Audite, the appellant was simply given an opportunity, at its request, to consult the ESF file. On reading that file, it realised that it contained debit notes determining the amounts which it was to repay - notes which, moreover, were withdrawn by the Commission following proceedings instituted by the appellant before the Court of First Instance. It follows that those notes did not constitute a valid draft decision on which the appellant could have given its opinion in the exercise of its right to be heard.

43. In the absence of an invitation to the appellant by or on behalf of the Commission to submit its observations after a reasonable period on the documents recording the actions for which it was criticised and on the basis of which the Commission adopted its decisions of 14 August 1996, it must be concluded that the appellant was not placed in a position effectively to make known its views on the accusations made against it.

44. In such circumstances, the Court of First Instance was wrong to consider, in paragraph 53 of the contested judgment, that the appellant's right to a proper hearing had been observed.

45. It must be added that, if the appellant had been properly heard, it might have been able to indicate the reason for which, in its view, the principle of proportionality had not been observed.

46. Accordingly, without there being any need to adjudicate on the other pleas raised by the appellant, it is necessary to uphold the plea alleging breach of the rights of defence and to set aside the contested judgment save to the extent that it granted the appellant's application in Case T-186/96.

47. Pursuant to the first paragraph of Article 54 of the EC Statute of the Court of Justice, the latter may, if it sets aside the decision of the Court of First Instance, give final judgment in the matter, where the state of the proceedings so permits. The Court considers that that is the position in this case.

    The actions brought before the Court of First Instance for annulment of the decisions of 14 August 1996

48. In its actions for annulment, the appellant put forward five pleas.

49. In its first plea, alleging breach of the rights of defence, the appellant claimed that the Commission had not given it opportunity to state its views on the reductions of financial assistance concerned. It contended that it had not been given a proper hearing by the Commission or by DAFSE. A hearing by the latter might, in the appellant's view, have been sufficient if the matters dealt with at the hearing had been brought to the notice of the Commission.

50. Since that first plea is, for the reasons set out in paragraphs 28 to 47 of this judgment, well founded, the applications for annulment made to the Court of First Instance on 14 November 1996 must be granted and, accordingly, the decisions of 14 August 1996 must be annulled.

    Costs

51. Under the first paragraph of Article 122 of the Rules of Procedure, where the appeal is well founded and the Court of Justice itself gives final judgment in the case, the Court is to make a decision as to costs. Under Article 69(2) of those rules, which applies to appeals by virtue of Article 118, the unsuccessful party is to be ordered to pay the costs if they have been applied for in the successful party's pleadings.

52. Since the appeal and the actions brought by the appellant are well founded, the Commission should be ordered to pay all the costs incurred before the Court of First Instance and the Court of Justice.

On those grounds,

THE COURT (Fifth Chamber)

hereby:

1. Sets aside the judgment of the Court of First Instance of the European Communities of 15 September 1998 in Joined Cases T-180/96 and T-181/96 Mediocurso v Commission with the exception of paragraph 2 of the operative part which partially uphold the action by Mediocurso - Estabelecimento de Ensino Particular Ld.^a in Case T-180/96;

2. Annuls Commission Decision C (96) 1185 of 14 August 1996 reducing the assistance granted in Decision C (89) 0570 of 22 March 1989 and Commission Decision C (96) 1186 of 14 August 1996 reducing the assistance granted in Decision C (89) 0570 of 22 March 1989;

3. Orders the Commission to pay the costs of the proceedings before both the Court of First Instance and the Court of Justice.

Edward Sevón Jann Ragnemalm Wathelet

Delivered in open court in Luxembourg on 21 September 2000.

R. Grass D.A.O. Edward

Registrar President of the Fifth Chamber

---

1: Language of the case: Portuguese.