Report for the Hearing delivered in Case 56/86

I — Facts and procedure

1. The Community provisions

Commission Regulation No 434/82 of 25 February 1982 (Official Journal L 55, p. 34), as amended by Regulation No 939/82 of 21 April 1982 (Official Journal L 111, p. 13) provided for a standing invitation to tender for the supply of Community sugar to UNRWA as food aid.

The terms for such supply were as follows:

According to the third sentence of Article 1 (2) of Regulation No 434/82 the sugar had to be of standard quality as defined in Article 1 of Regulation No 793/72 of the Council of 17 April 1972 fixing the standard quality for white sugar (Official Journal, English Special Edition 1972 (I), p. 299). Article 15 (3) of Regulation No 434/82 provides: ‘If the sugar is of a quality lower than the standard quality it shall be rejected at the tenderer's risk’.

The successful tenderer was responsible for informing the competent authority of the exporting Member State, in the present case the OBEA, ‘as soon as possible’ of the name of the vessel, the date of loading and the expected date of arrival of the vessel at the port of unloading (Article 15 (1) of Regulation No 434/82).

With regard to the checks to be carried out Article 9 (5) provides: ‘Sampling and analysis shall be carried out by experts approved by the authorities of the [exporting] Member State’.

The security which had to be lodged by the successful tenderer ‘shall be forfeited, except in case of force majeure, in respect of the quantity of sugar which the successful tenderer has not delivered to the port of unloading... in accordance with the prescribed conditions’ (Article 7 (3) of Regulation No 434/82, as amended by Article 2 (5) of Regulation No 939/82). According to Article 7 (5) of Regulation No 434/82, ‘The security shall be released when final payment is made’ of the price of the sugar.

Article 10 (1) of Regulation No 434/82 states the terms of payment. Provisional payment was to be made by the OBEA upon production by the successful tenderer of a certificate from UNRWA made out on the basis of the transport documents together with an estimate of the quantity of sugar in question certifying that the sugar had arrived at the port of unloading (first paragraph). Final payment was to be made after receipt by the OBEA of ‘the documents drawn up by UNRWA certifying that the sugar has been delivered to the stipulated port of unloading... in accordance with the prescribed conditions’ (third paragraph).

2. The facts and the main proceedings

On 7 May 1982 the Société pour l'exportation des sucres SA, the plaintiff in the main proceedings (hereinafter referred to as ‘the company’), was declared the successful tenderer following an invitation to tender issued by the OBEA, the defendant in the main proceedings, for the supply of 755 tonnes of sugar (Lot A 6, see Regulation No 939/82) to be delivered before 15 August 1982 to the port of Ashdod (Israel), at the price of BFR 21600550. On 6 May 1982 the company had lodged security in the form of a bank guarantee for the sum of 37750 ECU, that is BFR 1622390, as laid down in Article 2 (4) of Regulation No 939/82.

On 16 June 1982 the company informed the OBEA that the consignment of 755 tonnes would be shipped on 20 July 1982 on board the M/V ‘Tillia’. The shipping company subsequently informed the company that the lot would be shipped to Ashdod in two different vessels: an initial quantity (400 tonnes) would be shipped on the M/V ‘Pegasia’ on 12 July 1982 and the remainder (355 tonnes) would be shipped on the M/V ‘Camelia’ on 15 July 1982. Without directly informing the OBEA, the company immediately informed the firm of Beckmann & Jorgensen, instructed by the OBEA to check the goods.

On 8 and 9 July 1982 Beckmann & Jorgensen took samples from the first part of the lot (M/V ‘Pegasia’) at the warehouses of the manufacturer at Moerbeke-Waas and on 12 and 13 July 1982 it took samples on the same premises from the remainder (M/V ‘Camelia’). On 13 July the first samples were sent to the central laboratory of the Ministry of Economic Affairs and the second samples on 14 July. On 13 and 15 July the two vessels left the port of Antwerp and arrived at Ashdod on 27 July and 2 August 1982.

On 28 July and 3 August 1982 the consignee, UNRWA, took delivery of the goods and distributed them. On 18 August 1982 UNRWA sent the OBEA certificates drawn up on 13 August stating that the goods (15100 bags containing 755 tonnes of sugar) had arrived on 27 July and 2 August ‘in sound and good condition’.

The appointed laboratory drew up a first report on 28 July 1982 in respect of the sample taken from the first shipment and two other reports on 4 and 16 August in respect of the samples taken from the two shipments. Two other samples were sent on 12 and 13 August to Agrilab SA, a private laboratory, which drew up two reports on 13 August 1982.

All those reports, which are not challenged, show that all the samples were of sugar quality 3 (inferior quality) and not 2 (which is the standard quality) on the sole ground that the colouring of the solution exceeded by 0.7 points the margin of 6 points, the maximum limit for the standard quality. All the other criteria for that quality were satisfied.

On the basis of those reports the OBEA informed the company by letter dated 19 August 1982 that since the goods were not of the requisite quality it was obliged by Article 15 (3) of Regulation No 434/82 to refuse payment for the sugar and secondly to forfeit the security pursuant to Article 7 (3) of Regulation No 434/82 as amended by Article 2 (5) of Regulation No 939/82.

In a telex message of 25 August 1982 the OBEA informed the Commission of the main aspects of the situation and that it proposed to pay the price for the inferior quality and to withhold the security, expressly stating that after UNRWA had accepted the sugar, it was no longer able to reject the sugar under Article 15 (3) of Regulation No 434/82. In a telex message of 31 August 1982 the Directorate-General for Agriculture expressed its agreement.

After giving formal notice the company brought interlocutory proceedings against the OBEA on 27 August 1982 claiming payment of the whole of the price in its original tender and release of the security.

On 14 September 1982 the OBEA paid the company, without prejudice to the respective rights of the parties, BFR 19782021, that is the price for quality 3 (the quality 2 price of BFR 21600550 less BFR 196139), less the amount of the security, which was thus released. The interlocutory proceeedings thus lost their purpose.

On 9 December 1983 the company brought an action before the tribunal de première instance, Brussels, primarily for an order that the OBEA pay BFR 196139, representing the difference in price between the sugar of quality 2 and quality 3, retained by the OBEA on making payment subject to reservation.

On 21 May 1984 the OBEA lodged a counterclaim essentially for the refund of the sums actually paid and forfeiture of the security to the European Agricultural Guidance and Guarantee Fund (EAGGF).

By its judgment of 20 February 1986 the tribunal de première instance declared that the counterclaim was unfounded in so far as it sought an order for repayment of the sum of BFR 19782021 actually paid. After acceptance and distribution of the goods by UNRWA, the OBEA was no longer entitled to reject the goods actually delivered or payment of the price for quality 3. Disposal of the goods by the consignee meant final acceptance of delivery at least as regards quality 3. The OBEA should have taken the necessary measures before the goods were used if it intended to reserve the right to avail itself of the provisions of Article 15 (3) of Regulation No 434/82, namely to reject the sugar.

Before giving judgment on the payment of the price originally agreed (for quality 2) and on what was to happen to the security the tribunal de première instance, Brussels, decided in the same judgment of 20 February 1986 to submit the following questions to the Court for a preliminary ruling under Article 177 of the EEC Treaty:

‘1. Must Article 9 (4) and (5), the third subparagraph of Article 10 (1) and Article 15 (2) and (3) of Regulation No 434/82 be interpreted as meaning that the quality control necessary to establish that the sugar was of quality 2 had to be carried out (i) before it was loaded, (ii) before the deadline for its delivery, (iii) before the delivery of the documents drawn up by UNRWA or (iv) before UNRWA distributed the sugar and that once one of those events had occurred the defendant was no longer entitled to check the quality of the sugar or dispute that it was of standard quality? 2. Must Article 10 be interpreted as meaning that when the documents referred to in that article have been drawn up by UNRWA and it has disposed of the goods the defendant must pay the price originally agreed and not only a price corresponding to sugar of a quality inferior to the agreed standard quality? Does the fact that UNRWA issued the certificate of receipt on 13 August 1982 without any reservation as to the standard quality of the sugar mean that the defendant must pay the price originally agreed? 3. Must Article 7 (3) be interpreted as meaning that all or part of the security for tender must be retained by the European Agricultural Guidance and Guarantee Fund if the sugar is of quality 3 and not of quality 2 even though the recipient has actually disposed of the sugar delivered which was inferior in quality to that agreed?’ Having regard to the nature of the plaintiff's default, is the loss of the security compatible with the general principle of proportionality?

The request for a preliminary ruling was received at the Court Registry on 26 February 1986.

Pursuant to Article 20 of the Protocol on the Statute of the Court of Justice of the European Communities, written observations were lodged on 26 May 1986 by the company, represented by Mr Goffin and Mr Lodomez, of the Brussels Bar, on 22 May 1986 by the OBEA, represented by Mr Fruy, of the Brussels Bar, on 2 June 1986 by the government of the Kingdom of Belgium, represented by the Minister for Economic Affairs, and on 26 May 1986 by the Commission of the European Communities, represented by Denise Sorasio, a member of its Legal Department.

Upon hearing the report of the Judge-Rapporteur and the views of the Advocate General the Court decided to open the oral procedure without any preparatory inquiry and pursuant to Article 95 (1) of the Rules of Procedure assigned the case to the Fourth Chamber.

II — Written observations

1. The first and second questions

The Commission refers to the wording of Article 9 (5) of Regulation No 434/82 (‘at the time of loading’) and maintains that the sampling and quality control must take place before the goods leave the territory of the exporting Member State. Moreover, the approved experts referred to therein cannot be authorized to operate outside the Member State in question. In addition, the main function of the successful tenderer's obligation to notify the date of loading (Article 15 (1) (a) of Regulation No 434/82) is to enable the competent authority to carry out the necessary checks. The successful tenderer ought also to have an opportunity to replace the defective goods or to add the necessary quantities before exportation.

On the other hand, that does not prevent the competent agency from contesting the quality of the sugar if the results of the analyses are known only after loading either because the successful tenderer deliberately or otherwise failed to honour his obligation to inform the competent agency in good time of the date of loading or because the agency carried out its checks too late, but without prejudice, in the latter case, to any right of compensation.

The third paragraph of Article 10(1) shows that the quality may be challenged after loading: in any event final payment can be made only after delivery ‘in accordance with the prescribed conditions’ has been certified.

Article 15 (3) is a very clear provision, embodying a right to reject sugar which is of inferior quality. That also implies refusal of provisional and final payment. The fact that the beneficiary has accepted the sugar without reservation cannot release the competent agency from the obligation to refuse payment if it has proof that the goods do not meet the requisite quality standards.

That conclusion is also imposed by the fact that there are legal ties between the Community and the beneficiaries of food aid. The Community has to determine the minimum quality of aid. Neither the intervention agency nor the successful tenderer has any discretion in that respect.

Payment of the price corresponding to the quality actually delivered in the present case represented an amicable solution to which the Commission raised no objection because the shortcomings in quality had not been too serious and that it had in fact been possible to use the sugar for the intended purpose.

The Commission proposes the following answer to the first two questions:

‘Article 9 (5) of Commission Regulation (EEC) No 434/82 of 25 February 1982 as amended by Commission Regulation (EEC) No 939/82 of 21 April 1982 must be interpreted as meaning that the quality of sugar to be delivered as food aid must be checked before the product leaves the territory of the exporting Member State. Under Article 15 (3) of Regulation No 434/82 the competent agency must refuse provisional and final payment of the price agreed under the first and third subparagraphs of Article 10 (1) of the regulation for sugar delivered of a quality inferior to the standard quality even if it had no knowledge of this until after the product had left the territory of the exporting Member State and the other conditions required for payment, in particular production by the successful tenderer of a certificate from the beneficiary provided for in the third subparagraph of Article 10 (1) are satisfied.’

The company argues on the basis of Article 9 (5) of Regulation No 434/82 (‘at the time of loading’) that checks must take place no later than the time of loading. In any event neither checks nor objections as to quality are possible after the goods have been disposed of, for otherwise the vendor would be deprived of the opportunity of defending himself against the objections. The company points out that Belgian and French law treats disposal of the goods by the purchaser or consignee as ‘agréation’ or ‘réception’ (acceptance).

Such acceptance relates also to the quality which is thereby accepted as originally agreed. Consequently, the full original price must be paid. That also follows from the certificates of ‘sound and good condition’ issued by UNRWA. Since they do not expressly contest the quality those documents also constitute certificates of delivery ‘in accordance with the prescribed conditions' within the meaning of the third subparagraph of Article 10 (1) of Regulation No 434/82, which means that the final payment of the agreed price should be made.

Moreover, Regulation No 434/82 provides for a reduction in the price only if ‘the sugar is delivered after the prescribed date’ (Article 15 (2)). There is only one penalty under the regulation for delivery of an inferior quality: rejection of the goods under Article 15 (3); rejection is not the same as refusal of payment.

The OBEA or its agent, UNRWA, disposed of the goods and are thus deemed to have waived the right to rely on any discrepancies between the conditions of sale and the goods delivered and the right provided for in Article 15 (3).

The company therefore proposes that the first two questions should be answered as follows:

‘1. Article 9 (5) of Regulation No 434/82 must be interpreted as meaning that the quality control of the sugar provided for by the regulation must take place at the time of loading of the sugar. The latest date for delivery laid down in the regulation is irrelevant in that respect. In no event, however, can such control take place or the quality delivered be challenged after the sugar delivered has been disposed of and the consignee, UNRWA, has issued the certificate referred to in the third subparagraph of Article 10 (1) of the regulation. 2. The third subparagraph of Article 10 (1) of Regulation No 434/82 must be interpreted aş meaning that the competent agency of the exporting Member State must pay the price originally agreed once it is in possession of a document issued by UNRWA certifying that the sugar has been delivered to the port of unloading in accordance with the prescribed conditions. A document drawn up by UNRWA which contains no objectionor reservation about the standard quality of the sugar delivered but states on the contrary that the sugar has been delivered “in sound and good condition” amounts to such a certificate. The effect of the issue of such a certificate, when it is accompanied by disposal of the sugar by the consignee, is that the competent agency of the exporting Member State recognizes, even if acceptance of the sugar and the issue of such a certificate are the act of UNRWA, that the tenderer has satisfactorily performed his obligation, or, at least, that the agency waives the right to rely on any discrepancies between the quality delivered and the standard quality agreed and in consequence waives the only right given by the regulation in such a case, namely to reject the sugar at the tenderer's risk.’

The OBEA, supported by the Belgian Government, argues that there is no provision in the relevant regulations imposing a time-limit on the intervention agency for carrying out the quality controls and for informing the tenderer of the results. The controls are not for the benefit of the tenderer but for that of the donor, the Community, and the consignee, UNRWA. Only the Community authorities could invoke any failure in duty on the part of the intervention agency. It is not the objective or effect of the controls to release the tenderer from liability.

By very belatedly informing the firm of Beckmann & Jorgensen of the changes the company in the present case made it impossible to notify the results of the controls before loading. It was thus in breach of its obligation to provide information under Article 15 (1) of Regulation No 434/82. The company preferred to accept exclusive responsibility for the consequences of delivering sugar of inferior quality.

Rejection of the sugar under Article 15 (3) of Regulation No 434/82 may be made either on loading or after unloading and in any event before final payment.

The wording of the regulations allow rejection of sugar of inferior quality even after it has been consumed but equity, which is a superior rule of national and Community law, would prevent this.

With regard to the price to be paid, the OBEA relies on the distinction which Article 10 (1) of Regulation No 434/82 makes between provisional payment and final payment. In certifying ‘sound and good condition’ without carrying out any thorough quality control, UNRWA did not certify that the sugar had been delivered in accordance with the prescribed conditions. However, only such certification, an imperative requirement, enables final payment of the full price agreed to be made. The third subparagraph of Article 10 (1) does not authorize substitution of any other condition such as acceptance without reservation or disposal of the sugar.

The certificates drawn up by UNRWA at most allow provisional payment of 90% of the price quoted in the tender under the first subparagraph of Article 10 (1). Any other result would lead to unjust enrichment of the successful tenderer.

The OBEA proposes the following answers:

‘1. Article 9 (4) and (5), the third subparagraph of Article 10 (1) and Article 15 (2) and (3) impose no specific time-limit on the intervention agency for carrying out the quality control and informing the tenderer of the result thereof. The sugar may be rejected so long as final payment under the third subparagraph of Article 10 (1) has not been made since the tenderer is fully responsible for the quality of the sugar delivered. 2. The “certificates of receipt” issued by UNRWA on 18 August 1982 do not constitute the document required by the third subparagraph of Article 10 (1) of Regulation (EEC) No 434/82 which alone allows final payment of the price originally agreed to be made and the disposal by UNRWA of the sugar of an inferior quality cannot oblige the intervention agency to pay the price proposed in the tender.’

2. The third question

On the basis of the wording of Article 7 (3) of Regulation No 434/82 as amended by Article 2 (5) of Regulation No 939/82 the Commission considers that if none of the sugar satisfies the prescribed conditions the whole security is forfeited. Quality is one of the essential elements in a food-aid operation. That is clear from the express mention of that condition in several places in the regulation and also from the general scheme of the provisions: whereas for belated delivery there is provision for a price reduction (Article 15 (2) of Regulation No 434/82), that is not so if the sugar is not of standard quality. The only penalty is then rejection of the goods and refusal of payment (Article 15 (3)). A fortiori in the latter case, which is regarded as more serious by the regulation, the security must suffer the same fate as when the delivery is only belated, a case in which Article 15 (2) provides expressly for the possibility that the security should be forfeited (‘without prejudice to Article 7 (3)’).

The Commission also refers to the case-law of the Court in relation to the clearance of accounts in which the need for rigorous observance of all provisions, strictly interpreted, is affirmed. A margin of discretion might give rise to distortion of competition and unequal treatment of tenderers.

The fact that UNRWA had already disposed of the sugar in no way alters that conclusion.

As regards the validity of the provisions relating to the security from the point of view of the principle of proportionality, the Commission cites the relevant decisions of the Court according to which the means which a provision adopts to achieve an objective must be in proportion to the importance of that objective and be necessary in order to achieve it. In the case of infringement of principal obligations the Court has taken the view that forfeiture of a security is not contrary to the principle of proportionality even if the infringement is a minor one.

The Commission proposes the following answer:

‘Article 7 (3) of the aforesaid regulation must be interpreted as meaning that the security lodged by the tenderer is forfeited for the quantities of sugar duly delivered but not of the standard quality. Consideration of Article 7 (3) of the aforesaid regulation has disclosed no factor of such a nature as to affect its validity.’

The OBEA, supported by the Belgian Government, likewise cites Article 7 (5) to stress the mandatory nature of the requirement of quality from the point of view of the beneficiary and the authority and the credibility of the Community. Since forfeiture of the security is the penalty for breach of contract the disposal of the sugar by UNRWA does not affect the position.

Further, since Article 7 (5) provides for release of the security on final payment of the price, the OBEA considers that there can be no release in the absence of the possibility of the payment, as it has shown in its observations to the second question.

The OBEA also refers to the case-law of the Court on the principle of proportionality. If in cases such as the present one that principle could prevent loss of the security, observance of contractual obligations would be at issue and distortion of competition would be created between traders of the Member States. Forfeiture of the security is not only appropriate but indispensable to achieve the objectives pursued.

The OBEA proposes that the Court's answer should be as follows:

‘Disposal of the sugar by the beneficiary does not prevent forfeiture of the security to the EAGGF in respect of the quantity of sugar of category 3 delivered by the tenderer and forfeiture of the security under Article 7 (3) of Regulation (EEC) No 434/82 as amended by Article 2 (5) of Regulation (EEC) No 939/82 is an appropriate penalty for failure by the tenderer to observe the standards of quality.’

The company also cites the connection between final payment of the price and release of the security. In making the release of the security subject to final payment of the price Article 7 (5) intends to subject it to the same condition as that imposed for payment of the price. Since the company takes the view that those conditions are satisfied, it draws the conclusion that the security should be released.

In any event the company argues that in the present case forfeiture of the security would infringe the principle of proportionality. The criterion which causes the sugar delivered to be classified in category 3 rather than category 2 is only one of several which could lead to the same result. The deficiency in relation to colouring is quite insignificant for the normal user. That is corroborated by the fact that the price reduction made by the OBEA was minimal (BFR 196139 out of BFR 21600550). Colouring was relevant only to manufacturers of drinks. Category 3 sugar is perfectly edible. Forfeiture of the security would therefore be disproportionate.

The company proposes the following answer:

‘Article 7 of Regulation No 434/82 and in particular paragraphs (5) and (3) thereof must be interpreted as meaning that the security is to be released if the condition provided for in Article 10 (1) of the same regulation for final payment of the agreed price is satisfied. On the other hand the security may be forfeited, but only to the extent laid down in Article 7 (3), when that condition is not satisfied. In any event, forfeiture of the security as a measure designed as a penalty for supplying quality 3 instead of quality 2 sugar is, having regard to the insignificance of such a breach and its complete absence of effect on the consignee of the goods, a quite disproportionate penalty and therefore contrary to Community law. Article 7 (3) would therefore be invalid if it were to allow or authorize, quod non, such a penalty.’

G. C. Rodriguez Iglesias

Judge-Rapporteur

1 Language of the Case: French.