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

Legal background to the dispute

Regulation No 355/77

Throughout the period during which aid is granted from the [EAGGF], the authority or agency appointed for that purpose by the Member State concerned shall, at the request of the Commission, forward to it all supporting documents which are of relevance in proving that the financial or other conditions laid down for each project have been fulfilled ...

... the Commission may decide, ... to suspend, reduce or discontinue aid from the [EAGGF]:

- if the project has not been carried out as planned, or

- if certain of the conditions laid down have not been fulfilled ...

- ...

...

The Commission shall recover any sums the payment of which was not or is no longer justified.

Regulation (EEC) No 2515/85

The working document

...

(b) the purchase of machines, equipment and building materials, including metal skeletons and prefabricated components (order and supply), provided that assembly, installation, incorporation and work on site, in so far as building materials are concerned, have not taken place before the application for aid was submitted;

(c) costs relating to the purchase of equipment and machines subjected to tests before submission of the project;

....

Regulation (EEC) No 4253/88

... expenditure may not be considered eligible for assistance from the Funds if incurred before the date on which the corresponding application reaches the Commission.

However, for the part-financing of projects and aid schemes, expenditure may be deemed to be eligible for assistance from the Funds if incurred during the six months preceding the date on which the Commission received the corresponding application.

1. If an operation or measure appears to justify neither part nor the whole of the assistance allocated, the Commission shall conduct a suitable examination of the case ...

2. Following this examination, the Commission may reduce or suspend assistance in respect of the operation or a measure concerned if the examination reveals an irregularity or a significant change affecting the nature or conditions for the implementation of the operation or measure for which the Commission's approval has not been sought.

3. Any sum received unduly and to be recovered shall be repaid to the Commission ...

Regulation (EEC) No 4256/88

The Council ... shall by 31 December 1989 decide upon the forms of and the conditions for the [EAGGF] contribution to measures to improve the conditions under which agricultural ... products are processed and marketed ... with a view to achieving the objectives of Regulation ... No 2052/88 and on the basis of the rules laid down by Regulation ... No 4253/88.

Facts giving rise to the dispute

20 On 27 October 1988 the Commission received an application for the grant of aid from the EAGGF lodged by the Italian Government under Regulation No 355/77. That application had been submitted on behalf of Fedital SpA (Fedital) by the Federazione Italiana dei Consorzi Agrari, an association of agricultural cooperatives which administered a large proportion of the Italian agri-foodstuffs sector until it was wound up in May 1991. The aid for which the application was made was intended to support a project for the development, rationalisation and technical modernisation of a Fedital establishment in the municipality of Massa Lombarda.

...

22 While the application was being considered Fedital sold its Massa Lombarda establishment to Colombani Lusuco SpA, which the Federazione Italiana dei Consorzi Agrari also controlled, on 31 December 1989. The business name of the acquiring company was then changed to Massalombarda Colombani SpA (hereinafter Massalombarda Colombani). On 18 October 1994 that company was sold to Frabi SpA (which subsequently became Fincoserve SpA), the finance company of the group Conserve Italia Soc. Coop. arl ... . It specialises in the processing, preservation and marketing of products intended for use as food, such as fruit and vegetables, agricultural products, fishery products, meats, pre-cooked products and foodstuffs in general.

23 On 23 March 1990 the Commission asked Fedital to specify the nature, cost and starting and finishing dates of the work to be financed and to state whether it had been started before the date on which the application was received by the Commission (27 October 1988). Furthermore, the Commission asked for the balance sheet for 1988 and a copy of the contracts of sale relating to the various acquisitions made by the company.

24 On 17 April 1990 Massalombarda Colombani replied that the work had been started on 31 October 1988 and completed by 30 June 1990 and attached copies of the contracts to its reply. One of them, signed on 22 December 1988, concerned the sale of a Tetra Pak packing machine.

25 By decision of 29 June 1990 the Commission granted Massalombarda Colombani aid amounting to ITL 2 002 932 326 in respect of an overall investment of ITL 8 036 600 000 ... .

26 By decision of 18 November 1991 the Italian Government awarded Massalombarda Colombani a grant of ITL 2 008 000 000 in addition to the financial aid from the EAGGF.

27 On 22 November 1991 the Italian authorities carried out a final inspection of the work and approved it on the ground that it satisfied all the conditions laid down in the decision to grant aid.

28 Following inspections carried out jointly by the Italian authorities and the Commission in March 1993 and from 26 to 30 September 1994, the Commission found that certain purchases had been made and work carried out before the date on which the application for aid had been received and that, contrary to the copy of the contract of sale relating to a Tetra Pak machine which had been forwarded to it on 17 April 1990 in response to its request for information of 23 March 1990, the original showed that the machine in question had already been installed at the purchaser's establishment, under a contract for hire, before the date on which the application was received. Furthermore, a large number of delivery notes relating to machines acquired for the project bore a date before the date on which the application was received, whereas others were missing.

29 By fax to the Commission of 3 November 1994 the Italian authorities stated that they were in favour of initiating a procedure for the discontinuance of the aid granted by the EAGGF in view of the serious irregularities that had been found.

30 On 22 May 1995 the Commission informed Massalombarda Colombani and the Italian authorities of its intention to initiate such a procedure and recover the amounts wrongly paid and asked them to submit their observations on this.

31 Massalombarda Colombani submitted its observations on 3 August and 22 September 1995. It stated that it had in fact purchased the equipment before the Commission received the application for aid, but that those purchases had been made on a trial basis. Moreover, it acknowledged that the project related to some work that was carried out before the application for aid was submitted. Following discussions with officials of the competent services of the Commission on 19 January 1996, it submitted an additional statement on 27 February 1996.

32 On 3 October 1996 the Commission adopted Decision C (96) 2760 discontinuing the aid granted to the company Massalombarda Colombani by Commission Decision C (90) 950/356 of 29 June 1990 on the grant of aid from the EAGGF Guidance Section pursuant to Regulation No 355/77 in connection with EAGGF project No 90.41.IT.109.0 entitled Potenziamento e aggiornamento tecnologico degli impianti di uno stabilimento ortofrutticolo in Massa Lombarda (Ravenna)... .

33 The main grounds of that decision are reproduced below:

...

Whereas the aid was granted having regard in particular to the technical description of the planned work and the period set aside to carry out the work referred to in the file attached to the application for aid and contained in the wording of the decision;

...

Whereas during [a] check it was found that certain definitive purchases had been effected and certain work carried out before the Commission received the application for aid from the beneficiary, that is to say before 27 October 1988, and that was contrary to the undertaking which the beneficiary entered into pursuant to the provision laid down on page 5 of Annex A 1 to Regulation ... No 2515/85 ..., in that application for aid;

Whereas it was also found that a contract of sale relating to a Tetra Pak packing machine had been falsified to conceal the fact that it had already been installed at the establishment before the date on which the application for aid was received;

...

Whereas, in view of the information provided above, the irregularities found affect the conditions of the project in question ....

The procedure before the Court of First Instance and the contested judgment

- annul the contested decision;

- in so far as may be necessary, annul, on the basis of Article 184 of the EC Treaty (now Article 241 EC), any measure carried out in relation to the contested decision, in particular the working document;

- order the Commission to pay the costs.

- declare inadmissible the claim for annulment, in so far as may be necessary, of the working document;

- as for the remainder, dismiss the action as unfounded;

- order the appellant to pay the costs.

Findings of the Court of First Instance on the plea alleging infringement of Article 15(2) of Regulation No 4253/88 and paragraphs 5 and 12 of Point B.1 of the working document

- Purchases and work before the Commission received the application for aid

...

59 ... Article 19(2) of ... [R]egulation [No 355/77] states that the Commission may decide to suspend, reduce or discontinue aid if the project has not been carried out as planned and if certain of the conditions laid down have not been fulfilled.

60 That provision does not state what those conditions are but refers expressly to the financial or other conditions laid down for each project. It follows that all the conditions laid down for each project, irrespective of whether they are technical or financial or whether they lay down a time-limit, are covered by that expression.

61 Article 1(1) of Regulation No 2515/85 provides that [a]pplications for aid from the EAGGF Guidance Section ... shall contain the information and documents specified in the Annexes. It follows that the instructions contained in the aid application form, in particular those relating to the undertaking which the applicant must enter into when submitting his application, examined in the light of point 5.3 of the Explanatory notes for each heading in Annex A to that regulation (see paragraph 6 above), have binding force identical to that of the provisions of the regulation to which the models and explanatory notes are annexed (see, to this effect, Joined Cases T-551/93, [T-231/94,] T-232/94, T-233/94 and T-234/94 Industrias Pesqueras Campos and Others v Commission [1996] ECR II-247, at paragraph 84). Moreover, the company Massalombarda Colombani entered, by its signature, into an express, solemn and unequivocal personal undertaking not to start work on the project before receipt of the application for aid by the EAGGF Guidance Section. Since that undertaking was accepted by the Commission, it became part of the measure granting the aid and is imbued with the legal force of that measure. The condition relating to the point in time to which the undertaking refers, which, amongst other things, makes for legal certainty and helps to further equal treatment of applicants for aid, constitutes a condition laid down within the meaning of Article 19(2) of Regulation No 355/77 and failure to comply with it therefore means that the project financed has not been carried out as planned.

62 However, that undertaking - as prescribed in the aid application form and entered into by the beneficiary when he submits his application - does not refer to a six-month period before the application is received. It is therefore necessary to consider whether, as the applicant claims, the entry into force of Article 15(2) of Regulation No 4253/88 on 1 January 1989 amended the undertaking so as to allow expenditure to be incurred during the six months preceding the date on which the Commission received the application.

63 It is clear from the first subparagraph of Article 15(2) of Regulation No 4253/88 and the term may in the second subparagraph thereof that, as a general rule, expenditure is eligible only if incurred after the date on which the Commission received the corresponding application. It is only in exceptional cases that the Commission has the power to consider expenditure eligible if it was incurred during the six months preceding the date on which the Commission received the application.

64 By the decision to grant aid ... the Commission approved the application containing the personal undertaking not to start work on the project before receipt of the application for aid, without specifying that it intended to use the power provided for in the second subparagraph of Article 15(2) of Regulation No 4253/88.

65 Even if it were necessary to accept the argument that the undertaking must be interpreted in the light of Article 15(2) of Regulation No 4253/88, the criterion to be taken into consideration for determining the date from which the work may be started is that set out in the first subparagraph of that provision, unless otherwise indicated by the Commission.

66 It is therefore necessary to ascertain the date to be taken into consideration for determining whether the work was started before receipt by the Commission of the application for aid, bearing in mind the undertaking entered into at the time the application for the aid at issue was submitted. In particular, it is necessary to consider whether, as the applicant claims, that date is the date on which the initial purchases or subsidised work were paid for or, possibly, the date on which they were invoiced.

67 The conclusion of contracts, even subject to a condition having suspensory effect, as part of a supported investment project has a decisive effect on the manner in which it is carried out. Such contracts therefore constitute a measure executing a project. Accordingly, it is their conclusion which determines the date on which work is started for the purposes of the undertaking entered into by the beneficiary.

68 The applicant does not deny that the contracts relating to the machines which are covered by the supported project were concluded before the date on which the Commission received the application for aid.

69 Consequently, the beneficiary acted in breach of the undertaking, entered into in the application form, not to start work on the project before that date. It follows that the condition laid down in the decision to grant aid was not fulfilled and that the project was not carried out as planned.

70 The applicant's submission that the relevant date is the date of payment, or at least the date of invoicing, cannot be upheld. It is doubtful that the beneficiary of the aid could have thought that no start had been made on the work on the project before the invoices had been drawn up or paid. Even assuming that the beneficiary had no fraudulent intent, it must at the very least have had doubts as to its interpretation of the undertaking not to start work on the project before the Commission had received the application for aid. In such circumstances it was for the beneficiary to inform itself of the significance of the undertaking required, not only so as not to commit itself lightly but also to avoid any risk of misleading the Commission.

71 Applicants for, and beneficiaries of, aid are required to satisfy themselves that they are submitting to the Commission reliable information which is not liable to mislead it, otherwise the system of controls and evidence set up to determine whether the conditions for granting aid are fulfilled cannot function properly. In the absence of reliable information projects which do not fulfil the conditions required could become the subject of aid. It follows that the obligation on applicants for, and beneficiaries of, aid to provide information and act in good faith is inherent in the EAGGF aid system and essential for its effective functioning.

72 The fact that, in this case, the information relating to the date on which work was started was concealed or presented in such a way as to mislead the Commission constitutes breach of that obligation and, consequently, of the applicable rules.

73 Accordingly, there is no valid ground for charging the defendant with an infringement of Article 15(2) of Regulation No 4253/88.

74 Since the complaint alleging breach of the principle of the protection of legitimate expectations is based on the premiss that Article 15(2) of Regulation No 4253/88 has been infringed and the argument which the applicant derives from the alleged infringement of that provision is unfounded for the reasons set out above, it must also be rejected.

- Falsification of a contract for the purchase of a packing machine

75 The applicant acknowledges that the copy of the contract for the sale of a Tetra Pak packing machine forwarded to the Commission in response to a request for information did not show, as the original did, that the machine in question had been installed at the beneficiary's establishment pursuant to a contract for hire ... by the date on which the Commission received the application for aid.

76 The beneficiary of the aid should have assumed that complete information concerning the contract in question was essential to enable the Commission to exercise its powers correctly, particularly as it had requested the relevant information. Consequently, the beneficiary should have forwarded a copy that was consistent with the original of the contract in question ... . The forwarding of a document that was not a true copy of that contract constitutes a manifest and serious irregularity which, even if it were not intentional, is at the very least the result of gross negligence.

77 Contrary to the contention of the applicant, that irregularity could have affected the amount of the aid. The purpose of Regulation No 355/77, as is clear from its title, the fourth recital in its preamble and the provisions under Title II, is to improve the conditions under which agricultural products are processed and marketed. Improvement is determined by comparing the situation which is intended to result from the measure financed with that which existed before the project was started. Since work on that project may not start before the Commission receives the application for aid, improvement must be assessed in relation to the situation prior to that date. However, it is possible that the definitive purchase of a packaging machine, which has already been installed, under a contract for hire, at the establishment of the undertaking receiving the aid, may not constitute such an improvement. The applicant has in any event failed to show that the purchase of the machine would bring about improvement in the conditions under which the agricultural products in question are processed and marketed.

78 It cannot be inferred from the working document that the irregularity in question has no effect. First, even assuming that paragraph 5(b) of point B.1 of the working document relates to machines of the type at issue, it applies, on any view, only to machines which were not installed before the application for aid was submitted, which is not the case here. Second, paragraph 12 of point B.1 of the working document provides that investments financed by leasing are eligible only where the contract stipulates that the beneficiary will become the owner of the equipment financed during the four years following the date on which the aid is granted. In this instance the contract for hire contained no clause stipulating a transfer of ownership within such a period.

...

80 It follows from all the foregoing that the pleas alleging infringement of Article 15(2) of Regulation No 4253/88 and paragraphs 5 and 12 of point B.1 of the working document must be rejected.

Findings of the Court of First Instance on the plea alleging infringement of Article 24(2) of Regulation No 4253/88 as amended

90 As is clear from paragraphs 69 and 72 to 76 above, the beneficiary of the aid did not carry out the project as planned and certain conditions laid down were not fulfilled. Article 19(2) of Regulation No 355/77 allows the Commission to suspend, reduce or discontinue aid which has been granted beforehand where the project has not been carried out as planned or certain conditions laid down have not been fulfilled. Consequently, that provision constitutes a sufficient legal basis for the adoption of the contested decision.

91 The infringements found by the Court at paragraphs 69 and 72 to 76 above constitute irregularities within the meaning of Article 24(2) of Regulation No 4253/88. It follows that that provision is also applicable in this case.

92 Although the wording of Article 24(2) does not expressly provide for the possibility for the Commission to adopt a measure to cancel assistance, the fact remains that it is entitled Reduction, suspension and cancellation of assistance. Where there is a discrepancy between the wording of a provision and the title thereof, both must be construed in such a manner that all the terms employed serve a useful purpose. Having regard, first, to that rule of interpretation and, second, to the existence of another provision, also applicable to the aid in question, which provides for the possibility of discontinuing aid from the EAGGF in certain circumstances (Article 19(2) of Regulation No 355/77 ...), Article 24(2) of Regulation No 4253/88 must be construed as meaning that all the terms employed by the legislature, in particular the word cancellation in the title of that provision, serve a useful purpose. That article must therefore be construed as meaning that it allows the Commission to discontinue aid from the EAGGF in the event of an irregularity, in particular where a significant change to the operation affecting its nature or the conditions governing its execution is involved, for which the Commission's prior approval has not been sought.

93 Since the existence of a legal basis empowering the Commission to discontinue aid has been established, the complaints alleging infringement of the principle of legality of penalties and a misuse of powers cannot succeed.

Findings of the Court of First Instance on the plea alleging infringement of the principle of proportionality

101 It is settled case-law that by virtue of the principle of proportionality ... the measures adopted by Community institutions must not exceed what is appropriate and necessary for attaining the objective pursued ... .

102 The Court of Justice has held, furthermore, that where the evaluation of a complex situation is involved, which is the case with respect to the common agricultural policy, the Community institutions enjoy a wide measure of discretion (see, to this effect, in particular Case 29/77 Roquette [1977] ECR 1835, at paragraph 19). In reviewing the legality of the exercise of such discretion, the Court must confine itself to examining whether it discloses a manifest error or constitutes a misuse of powers or whether the institution has clearly exceeded the limits of its discretion ... .

103 Furthermore, the Court of Justice has held that the infringement of obligations whose observance is of fundamental importance to the proper functioning of a Community system may be penalised by forfeiture of a right conferred by Community legislation, such as entitlement to aid (see, to this effect, Case C-104/94 Cereol Italia [1995] ECR I-2983, at paragraph 24 ...) .

104 As has been pointed out at paragraph 77 above, the purpose of Regulation No 355/77 is to improve the conditions under which agricultural products are processed and marketed, improvement being assessed by comparing the situation which was intended to be the result of the operation funded with that which existed before the commencement of the project. It also follows from the seventh recital in the preamble to Regulation No 355/77 that the legislature sought to lay down an effective control procedure in order to ensure that beneficiaries comply with the conditions laid down when the EAGGF aid is granted. It follows from paragraph 71 above that the submission by the applicants for, and beneficiaries of, aid of reliable information which is not liable to mislead the Commission is essential for the proper functioning of the system of controls and evidence set up in order to determine, in particular, whether the condition that work on the project is not to be started before the Commission has received the application for aid has been fulfilled.

105 At the hearing the applicant acknowledged, first, that the work had been started before the Commission had received the application for aid in the sum of ITL 1 780 663 116 and, second, that the irregularity relating to the contract for the sale of the Tetra Pak packing machine involved a sum of ITL 470 000 000. A total of ITL 2 250 663 116 was thus involved. Since the aid granted from the EAGGF was ITL 2 002 932 326 and the overall investment was ITL 8 036 600 000, the irregularities complained of therefore represent 112% of the aid and 28% of the investment. The fact that the applicant failed to comply with its undertaking not to start work on the project before receipt of the application for aid by the Commission, failed to inform the Commission of this and, in response to a request for information, forwarded a copy which was not consistent with the original of the contract for the sale of a machine referred to in the subsidised project constitutes a serious breach of fundamental obligations.

106 Although the circumstances of this case differ from those which the Court of First Instance had to consider in the case which gave rise to the judgment in Industrias Pesqueras Campos and Others v Commission, ... it was reasonable for the Commission to take the view that any measure other than discontinuance of the aid might constitute an invitation to commit fraud. Beneficiaries might be tempted to supply false information or to conceal certain information in order to increase artificially the amount of investment eligible for financing, so that greater financial aid from the Community could be obtained, their risk being confined to having that aid reduced only by the amount of the investment which did not fulfil a condition governing the grant of the aid.

107 Furthermore, the applicant's argument that the discontinuance of the aid is disproportionate, on the ground that Fedital but not the applicant itself can be held responsible for the irregularities complained of, must be rejected since the applicant assumed Fedital's rights and obligations following ... successive purchases ... .

...

109 Consequently, the applicant has failed to show that the discontinuance of the aid was disproportionate in the light of the infringements committed and the objective of the legislation at issue.

The appeal

- annul and/or vary the contested judgment;

- accordingly, annul the Commission's Decision No C (96) 2760 of 3 October 1996;

- order the defendant to pay the costs.

- dismiss the appeal in its entirety;

- order the appellant to pay the costs.

The first ground of appeal, alleging infringement and misinterpretation of Article 19(2) of Regulation No 355/77 as regards the working document, and of the principle of the protection of legitimate expectations, and infringement and misinterpretation of paragraph 12 of point B.1 of the working document

Arguments of the parties

Findings of the Court of Justice

The second ground of appeal, alleging infringement and misinterpretation of the second subparagraph of Article 15(2) of Regulation No 4253/88

Arguments of the parties

Findings of the Court of Justice

The third ground of appeal alleging infringement and misinterpretation of Article 24(2) of Regulation No 4253/88 as amended

Arguments of the parties

Findings of the Court of Justice

The fourth ground of appeal, alleging infringement and misapplication of the principle of proportionality, misappraisal of the Commission's discretion and infringement of the rule of precedent

Arguments of the parties

Findings of the Court

Costs