Opinion of the Advocate-General
A - Introduction
1 In the present case, the applicant is contesting flat-rate reductions made in EAGGF (1) expenditures. The reductions concern, on the one hand, intervention measures in the context of the public storage of cereals and, on the other hand, an export refund on processed cheese. The reductions were made in particular on the ground that storage control and management procedures were inadequate and that the products had not reached the market. The applicant claims that in both cases the Commission breached Council Regulation (EEC) No 729/70 of 21 April 1970 on the financing of the common agricultural policy. (2) It is advisable, however, to examine the two cases separately.
2 With respect to the intervention measures concerning the public storage of cereals, both parties refer to their pleadings in Case C-232/96. (3) In that action, the Commission justified the reduction in EAGGF expenditures for 1992 on the ground that deficiencies had been found in the control system for the public storage of cereals.
3 Although the applicant had announced improvements for the 1993 financial year, the Commission still found a series of deficiencies, namely:
- delays in booking stocks,
- inadequate surveillance,
- deficiencies in the storage and marking of cereals which should have been stored in the context of intervention,
- absence of plans,
- inadequate stock records.
4 Consequently, the Commission applied a flat-rate reduction of 2% to the expenditure incurred in respect of technical costs, financial charges and other costs for the 1993 financial year.$
5 The Commission justifies the reduction of the export refund on processed cheese on the following grounds:
- the exported products were not of sound and fair marketable quality,
- the quality defect arose during manufacture, and consequently before export
and
- the products were destroyed and as a result did not reach the market in the country of destination.
B - The facts
I. Intervention measures in the context of the public storage of cereals$
6 The French Republic asks the Court to annul the Commission's decision (4) in so far as it disallowed expenditure of FF 103 286 730 on intervention measures concerning the public storage of cereals. The Commission justifies that reduction on the ground that there were deficiencies in the public storage of cereals.$
7 Following inspections in June and July 1993, the Commission found that management of the intervention system was inadequate. It informed the French national authorities, stating, according to the applicant, that there would be financial consequences in the clearance of accounts for 1993. In their reply of December 1993, the French authorities submitted a list of measures which they intended to adopt in order to improve the system of public storage of cereals.$
8 According to the applicant, the Commission then indicated that no overall financial penalty would be imposed, in view, in particular, of the proposed improvements to the management system. The French authorities do not dispute that at the same time, however, the Commission had warned them that financial corrections would be imposed if it should transpire that cereals stored in the context of intervention had been replaced with market cereals.$
9 In the course of further inspections in June and July 1994, the Commission found that, despite the improvements they had announced at the end of 1993, the French authorities had not entirely remedied the deficiencies found in the first inspections in June and July 1993. The Commission informed the national authorities that financial corrections would be decided with effect from 1992. After a further exchange of correspondence with the Commission, the applicant finally referred the matter to the Conciliation Body. In its final report, the Conciliation Body concluded that the financial correction was justified. It also pointed out that the French authorities did not deny having had to modify their previous procedure in order to satisfy the Commission's requirements.$
10 Several improvements were indeed introduced; however, the French Government does not deny that certain procedures had not been observed in the field. The applicant also relies on an audit report by Ernst & Young allegedly confirming the reliability of the storage management and control system applied by the French authorities.
11 However, the Commission contends that whilst that report examined the theoretical situation by referring to the applicable provisions, the Commission's own inspections showed that there were still deficiencies.$
II. Export refunds for processed cheese
12 The French Government seeks the annulment of Commission Decision 97/333/EC in so far as it disallowed expenditure of FF 720 720 on an export refund for 73.5 tonnes of processed cheese exported to Saudi Arabia.$
13 In the last quarter of 1988, the Bel dairy company exported a total of 14 256 cartons of La Vache Qui Rit cheese (total weight 89 tonnes, market value FF 883 700) to Saudi Arabia. The company ultimately received an export refund of FF 720 720 in that respect.$
14 After the Saudi Arabian buyer complained to the producer, in January 1989, that the product delivered was unusually soft, Bel carried out an internal inquiry (5) and an on-site inspection at the buyer's premises, as a result of which it ordered the destruction of 12 148 cartons of cheese. The product was destroyed in February 1989 (6) at the sole cost of Bel; the purchase price was repaid in full to the Saudi Arabian buyer.$
15 The French authorities responsible for payment of the export refund proceeded on the assumption that the product had been exported to Saudi Arabia in compliance with the applicable provisions, particularly since there was nothing in the quality of the cheese to indicate that it might be reintroduced into the Community and the Saudi authorities had not prevented it from being placed on the market.$
16 The Commission informed the French authorities repeatedly in 1995 that there was no entitlement to an export refund because the quality defect was the result of production fault and the product had not reached the market of destination.$
17 The Commission did not accept the argument of the French authorities that the cheese was of sound and fair marketable quality and had been duly imported and marketed in the country of destination, and the French Government therefore referred the matter to the Conciliation Body. However, since that body was unable to reconcile the parties, the French Government brought the present action contesting the financial corrections.
18 The French Republic claims that the Court should:
- annul Commission Decision 97/333/EC (7) on the clearance of the accounts presented by the Member States in respect of the expenditure for 1993 of the Guarantee Section of the EAGGF in so far it disallowed the following sums for France:
- FF 720 720 for an export refund on 73.5 tonnes of processed cheese exported to Saudi Arabia;
- FF 103 286 730 for intervention measures relating to the public storage of cereals;
and subsidiarily,
- declare that corrections are disproportionately high;
- order the defendant to pay the costs.
19 The Commission claims that the Court should:
- dismiss the action;
- order the French Republic to pay the costs.
C - Analysis
I. Intervention measures in the context of the public storage of cereals
20 The applicant contests the decision of the Commission on three points. It submits that the (supervisory) procedures introduced by the French authorities in the context of intervention measures for cereals were adequate, that the Commission breached the principle of legal certainty and, subsidiarily, that it breached the principle of proportionality.
21 First of all, it must be noted that in their pleas in law the parties rely essentially on their pleadings in Case C-232/96, cited above, (8) which they adopt in this action.
22 22. In that case, the Commission had justified the corrections for 1992 on the grounds that the measures taken by the French authorities were inadequate, claiming that, on the contrary, the shortcomings in the management and control system had exposed the EAGGF to significant financial risk. In response to the detailed list of deficiencies, the French Government simply argued that some of the measures the Commission had called for were not required under the relevant Community regulations. It claimed that the measures it proposed to take were adequate and that due supervision had been exercised. The French Government did not deny, however, that it had been necessary to modify original procedures in order to satisfy the Commission's requirements.
23 That argument, which the French Government also puts forward here, must first be examined in the light of Article 6 of Commission Regulation (EEC) No 689/92 of 19 March 1992 fixing the procedure and conditions for the taking-over of cereals by intervention agencies. (9) Article 6 provides that: `The intervention agencies shall, where necessary, adopt additional procedures and conditions for taking over, compatible with this Regulation, to take account of any special conditions existing in the Member State in question'.$
24 24. However, it is for the Member States to exercise the necessary supervision in the context of the EAGGF, even if the regulations concerned do not contain detailed provisions on the matter. (10)
25 25. Since the Court has consistently held (11) that, when the Commission refuses to charge certain expenditure to the EAGGF on the ground that it was incurred as a result of breaches of Community rules for which a Member State can be held responsible, it is for that State to show that the conditions for obtaining the financing refused by the Commission are fulfilled, it is not sufficient for the applicant to rely on mere assertions. Under that rule on the burden of proof, the Member State must prove that the measures which it has implemented were adequate.
26 In addition to the arguments already put forward by it in Case C-232/96, the French Government relies essentially on the changes made in the public storage system and supervisory procedures and alleges that the audit report by Ernst & Young supports its view. It contends that, in the meantime, supervisory procedures have become more efficient and that most deficiencies have been remedied. Nevertheless, the French Government concedes that not all the Commission's complaints were acted upon.
27 The Commission refers to the deficiencies still found to exist and claims that the French Government has not demonstrated that the measures it introduced were adequate.
28 In the result, the Commission's reasoning is correct. In substance, the French Government does little more in its pleadings than make mere assertions. Thus, it concedes that not all the proposed improvements in the public storage management and control system were implemented; nor does the audit report establish that the measures taken were adequate. The pleadings of the French Government indicate in fact that the report was based only on the theoretical application of the rules in force and not on their implementation in practice. The report is not capable of proving that the deficiencies criticised by the Commission did not exist. In that respect the applicant's plea in law must therefore be dismissed.
29 In its plea that there was a breach of the principle of legal certainty, the French Government refers to the communication of the Commission stating that no financial corrections would be imposed in view, in particular, of the improvements the French authorities had announced. By imposing a correction for 1993, the Commission breached the principle of legal certainty. (12) This point essentially concerns an infringement consisting in the switching of cereals stored under different regimes.
30 It must be pointed out that when the Commission made that statement it was relying essentially on the fact that the French authorities had announced that they would make improvements. However, according to the Commission not all those improvements were put into effect, a fact which the French Government does not deny, moreover.
31 It must be also be observed that the Commission had made it clear in its correspondence that significant financial corrections would be imposed if further infringements were found. The fact that, as a result of such infringements, those corrections were then imposed cannot be deemed to breach the principle of legal certainty.
32 The applicant also contends that the Commission should not have relied upon mere rumours concerning the switching of cereals stored under different regimes. The Commission's arguments in that respect are, however, sufficient, in so far as its inspectors had indeed found that cereals which should have been stored under different regimes had been mixed or switched.
33 Lastly, the applicant submits that the Commission has not cited a single case where cereals stored under different regimes were switched. This point must be examined under the relevant case-law. The Court has established that the fact that the Commission does not adduce evidence relating to individual cases in which the agricultural rules were not complied with does not mean in any way that the supervisory system existing in the Member State concerned (effectively) guarantees the correct application of those rules. Proven individual cases constitute an additional factor which may substantiate the Commission's criticisms regarding the effectiveness of the Member State's supervisory system. (13) Moreover, the applicant does not deny that such switches occurred. Therefore, there is no evidence that the principle of legal certainty was breached.
34 In conclusion, the applicant claims in the alternative that the Commission breached the principle of proportionality. In its view, the 2% correction should not have been applied in respect of budgetary items 10-13, which concern losses in stocks sold. Those losses were fully offset under Commission Regulation (EEC) No 3597/90 of 12 December 1990 on the accounting rules for intervention measures involving the buying-in, storage and sale of agricultural products by intervention agencies. (14) In that respect, the EAGGF did not suffer any loss under that budgetary item.
35 For its part, the Commission argues that that budgetary item concerns the financial effects of losses on sales. The fact that it had been established that quantities were missing could, in addition to the deficiencies in the control system, cause losses to the detriment of the EAGGF.
36 Following the rules the Court has laid down in the matter of burden of proof, it is for the applicant to prove that the conduct for which it is held responsible did not cause an increase in the expenditure financed by the EAGGF. (15)
37 In the relevant case-law, the Court has also established that the mere probability of losses to the detriment of the Community budget is a criterion to be taken into account in determining the proportionality of the corrections imposed. (16)
38 38. Whether or not quantities were indeed missing is a matter of dispute between the parties. As I have already shown, however, it can be assumed that there were deficiencies in the control system. In that case, the argument put forward by the applicant that such losses on sales were immediately offset cannot be accepted. That would presuppose that controls were flawless, which was not, in fact, the case. In that respect there was also a risk of losses in respect of budget item 10-13. The applicant has not, therefore, demonstrated that the EAGGF did not suffer any prejudice.
39 With regard to the amount of the reductions, the Commission is right in referring to the Court's decisions to the effect that, where it proves impossible to establish with certainty the financial consequences of a national measure that is incompatible with Community law, the expenditure in question may even be disallowed in its entirety. (17)
40 In the case of flat-rate reductions, the Commission has adopted certain guidelines proposed by an inter-directorate group (the Belle Group Report). Depending on the seriousness of the deficiency, the Commission proposes the application on a flat-rate basis of one of three possible percentages: 2%, 5% or 10%. The lowest possible reduction, namely 2%, is applied where the deficiencies only affect secondary elements of the control system or where they affect the implementation of controls which are not indispensable to the proper accounting of expenditures so that it can be assumed that there is only a minor risk of loss for the EAGGF.
41 However, as I have already stated, the applicant was unable to prove that the Commission's comments concerning the financial corrections imposed on the clearance of accounts were incorrect, since there were indeed deficiencies in the control system.
42 Consequently, it cannot be held that the principle of proportionality was breached, especially as the lump-sum correction was made at the lowest possible rate. Therefore, the refusal to recognise expenditure concerning intervention measures in the context of the public storage of cereals affords no ground for annulling the Commission's decision.
II. Export refunds for processed cheese
43 The Commission justifies its decision to disallow expenditure concerning export refunds for processed cheese on the ground that the product did not reach the market in the country of destination because it was not of sound and fair marketable quality, the quality defect having been caused by a production error before the product was exported.
44 The French Government maintains that at the time it was exported the cheese was free of defects, sound and proper for consumption. It makes no difference that its consistency was altered. The product entered Saudi Arabia in compliance with local regulations and the competent authorities did not formulate any objections in its regard. The decision to destroy the 14 256 cartons was taken only out of concern for the brand image and in the interest of the good and sizeable business relationship with the client.
45 Article 6 of Council Regulation (EEC) No 876/68 (18) provides that export refunds are payable upon proof that the products have been exported from the Community.
46 Pursuant to Article 3(1) of Regulation (EEC) No 3665/87, (19) the day of export is `... the date on which the customs authority accepts the export declaration in which it is stated that a refund will be applied for.'
47 47. Article 3(4) provides that that date `... shall be used to establish the quantity, nature and characteristics of the product exported.'
48 According to Article 5(1) of Regulation No 3665/87, payment of the refund `.... shall be conditional not only on the product having left the customs territory of the Community but also .... on its having been imported into a non-member country ... within 12 months following the date of acceptance of the export declaration ... .
In addition, the competent authorities of the Member States may require that additional evidence be provided such as to satisfy them that the product has actually been placed on the market in the non-member country of import in the unaltered state.'
49 Article 13 of Regulation No 3665/87 provides, however, that no refund is to be granted `on products which are not of sound and fair marketable quality.'$
50 Article 17(1) of Regulation No 3665/87 provides that the products must `... have been imported in the unaltered state into the non-member country ... within 12 months following the date of acceptance of the export declaration.'$
51 Article 17(3) provides that a product is to be considered to have been imported `... when it has been cleared through customs for release for consumption in the non-member country concerned.'
52 Therefore, two questions must be answered in the present case:
1. Was the La Vache Qui Rit cheese which was exported to Saudi Arabia of sound and fair marketable quality?
2. Was the processed cheese imported and placed on the market in compliance with Regulation No 3665/87?
On the question of sound and fair marketable quality
53 In the absence of binding Community provisions defining the concept of `sound and fair marketable quality', it is in principle for the Member States to set more precise rules in the matter. (20)$
54 Such national provisions cannot, however, be inconsistent with the aims and content of the Community regulations in force. In order to prevent abuses, the fourth recital in the preamble to Regulation No 3665/87 provides that payment of the refund shall be subject `to the condition that the product ... has also been imported into a non-member country and, where applicable, actually marketed there'. The ninth recital goes on to provide that products on which an export refund is to be granted should be `of a quality such that they can be marketed on normal terms.'$
55 In the present case, therefore, it makes no difference that neither the French export authorities nor the Saudi Arabian import authorities made any reservations concerning the quality of the product. The decisive question is rather whether the product was such that it could be marketed on normal terms.$
56 In that respect, the French Government itself contends that Bel decided to destroy most of the consignment after the importer had notified it that the cheese would be difficult to market in view of its altered consistency. The concern alleged for brand image also indicates that the producer expected to encounter difficulties in marketing the product.$
57 If that was indeed the reason the product was withheld from the market, then it cannot be held that the product was of sound and fair marketable quality.$
58 To conclude, I would point out that the applicant also concedes that, even if the `defect' only came to light when the Saudi Arabian buyer inspected the product, the deviation from the usual quality was the result of a production error. The internal inquiries conducted by the producer established that the manufacturing process was defective at the time when the cheese was produced. Consequently, when it was exported it was already defective, so that it could no longer be considered to be of sound and fair marketable quality. It makes no difference that not all the cheese in the consignment was destroyed and that cheese of like quality was exported to other countries. Only the specific case at issue, where an export refund was applied for, is decisive.$
59 Therefore, it must first and foremost be borne in mind that the cheese delivered was not of sound and fair marketable quality within the meaning of Article 13 of Regulation No 3665/87.$
On the question whether the product reached the market
60 The French Government argues that in order to qualify for payment of the export refund, it is sufficient for the product delivered to have been imported in compliance with the import regulations of the non-member country and without any objection on the part of the import authorities.$
61 The Commission maintains that that alone is not sufficient and that on the contrary proof is required that the product actually reached the market in the country of destination.$
62 The Court has consistently held that the system of export refunds `is intended to gain and maintain access for Community exports to the markets of the non-member countries concerned'. (21) The Court has concluded that if it sufficed, in order to qualify for payment of the refund, for the products simply to be unloaded, without reaching the market of the territory of destination, the raison d'être of the refund system would be disregarded. The completion of customs formalities is normally sufficient to ensure that the products have actual access to the market of the territory of destination. But it is only a precondition for access to the market and does not mean that the products actually entered into free circulation.$
63 It follows that, in view of the objectives of the system of export refunds, it is essential that products subsidised by such refunds should actually reach the market of destination and be marketed there. (22)$
64 The fact that the last sentence of Article 5(1) of Regulation No 3665/87 allows the competent authorities to require that additional evidence (other than import documents) be provided to satisfy them `... that the product has actually been placed on the market in the non-member country of import' (23) shows that the proof of import amounts only to rebuttable evidence that the objective of the export refunds has in fact been attained. That objective seeks precisely to ensure that the products reach the market of destination (in order to be marketed there). (24)
65 According to the afore-cited case-law, actual access of the products to the market of destination is not possible `where the destruction or re-exportation takes place after the completion, in the country of destination, of the formalities prescribed by that State as a precondition for the entry into free circulation or marketing of the product within its territory, in so far as the destruction or re-exportation of the product was the result of decisions taken by the competent authorities of the State of destination on completion of those formalities'. (25) This means that the defect which was the cause of the destruction or re-exportation must have occurred before completion of the import formalities.
66 In such a case, the product does not qualify for an export refund. It is true that, in the present case, the destruction of the product was not the result of decisions taken by the competent authorities of the State of destination and that it was the producer who prevented the product from actually entering into free circulation on the market of destination.$
67 In the present case, the product was still being delivered (in part) in December 1988, whilst the decision to destroy the products was taken as early as January 1989. So although the product had indeed been duly imported into the country of destination and delivered to the client there, it was nevertheless destroyed, on the producer's decision, shortly after completion of the customs formalities and could not, therefore, be placed on the market of destination.$
68 Consequently, the reductions imposed by the Commission on expenditure financed by the EAGGF were justified. In the final analysis, there is no ground to find fault with the Commission's decision and the action of the French Republic is therefore unfounded.$
Costs
69 Under the first sentence of Article 69(2) of the Rules of Procedure, the unsuccessful party is to be ordered to pay the costs if they have been applied for. Since on the basis of the outcome proposed the French Republic is unsuccessful in its action, it must be ordered to pay the costs.
D - Conclusion
70 In the light of the foregoing, I propose that the Court should:
(1) dismiss the application;
(2) order the French Republic to pay the costs.
(1) - The European Agricultural Guidance and Guarantee Fund.
(2) - OJ, English Special Edition 1970 (I), p. 218.
(3) - France v Commission [1998] ECR I-0000. See also the Opinion delivered in that case by Advocate General Alber on 24 March 1998.
(4) - Commission Decision 97/333/EC of 23 April 1997 on the clearance of the accounts presented by the Member States in respect of the expenditure for 1993 of the Guarantee Section of the European Agricultural Guidance and Guarantee Fund (EAGGF) (OJ 1997 L 139, p. 30).
(5) - That inquiry found that the unusual consistency was caused by a production fault.
(6) - The remaining 8 476 cartons were sold in Saudi Arabia.
(7) - See footnote 4.
(8) - France v Commission, cited in footnote 3.
(9) - OJ 1992 L 74, p. 18.
(10) - See paragraphs 51 and 52, and the references contained therein, in the Opinion of Advocate General Alber in Case C-232/96, cited above.
(11) - Case C-48/91 Netherlands v Commission [1993] ECR I-5611, paragraph 14, and Case 347/85 United Kingdom v Commission [1988] ECR 1749, paragraph 14.
(12) - Here again, the reasoning is the same as in Case C-232/96, cited above.
(13) - See Netherlands v Commission (cited above), paragraph 33.
(14) - OJ 1990 L 350, p. 43.
(15) - See Netherlands v Commission, cited above.
(16) - Case C-49/94 Ireland v Commission [1995] ECR I-2683, paragraph 22.
(17) - Case C-50/94 Greece v Commission [1996] ECR I-3331, paragraph 26; Joined Cases 15/76 and 16/76 France v Commission [1979] ECR 321, paragraph 32 et seq., and United Kingdom v Commission, cited above, paragraph 13.
(18) - Council Regulation (EEC) No 876/68 of 28 June 1968 laying down general rules for granting export refunds on milk and milk products and criteria for fixing the amount of such refunds, OJ, English Special Edition 1968 (I), p. 234.
(19) - Commission Regulation (EEC) No 3665/87 of 27 November 1987 laying down common detailed rules for the application of the system of export refunds on agricultural products (OJ 1987 L 351, p. 1).
(20) - Case C-371/92 Elliniko Dimosio v Ellinika Dimitriaka [1994] ECR I-2391, paragraph 23.
(21) - Case 125/75 Milch-, Fett- und Eier-Kontor v Hauptzollamt Hamburg-Jonas [1976] ECR 771,
Case 44/76 Milch-, Fett- und Eier-Kontor v Council and Commission [1977] ECR 393, Case 89/83 Hauptzollamt Hamburg-Jonas v Dimex [1984] ECR 2815 and Case C-299/94 Anglo- Irish Beef Processors International and Others [1996] ECR I-1925.
(22) - Judgment in Dimex, cited above.
(23) - The italics are mine.
(24) - In its judgment in Eier-Kontor v Council and Commission (cited above), the Court also stated that proof of marketing is required. It considered that requirement as being justified by the need to avoid fraud (paragraph 16 of the judgment).
(25) - Judgment in Dimex, cited above (footnote 21), paragraph 18.
Full & Egal Universal Law Academy