Report for the Hearing in Joined Cases C-356/90 and C-180/91
I — Legal background
1. Article 92(1) of the EEC Treaty lays down the principle of prohibiting any aid granted by Member States which distorts or threatens to distort competition, in so far as it affects trade between Member States; Article 92(2) specifies the aid which is compatible with the common market and Article 92(3) aid which may be considered to be compatible with the common market. Article 92(3)(d) states that the Council may specify other categories of aid which may be considered to be compatible with the common market.
2. Pursuant to that provision the Council adopted on 26 January 1987 Directive 87/167/EEC on aid to shipbuilding applicable, according to Article 13, from 1 January 1987 to 31 December 1990 (OJ 1987 L 69, p. 55) (hereinafter ‘the Directive’).
3. According to Article 4(1) of the Directive aid in favour of shipbuilding and ship conversion may be considered compatible with the common market provided that the total amount of aid granted in support of any individual contract does not exceed, in grant equivalent, a common maximum ceiling expressed as a percentage of the contract value before aid. Article 4(2) and (3) provides that the ceiling is to be fixed by the Commission with reference to the prevailing difference between the cost structures of the most competitive Community yards and the prices charged by their main international competitors and shall be reviewed every 12 months, or sooner if warranted by exceptional circumstances, with the aim of progressively reducing the ceiling. With effect from 1 January 1989 the ceiling was fixed at 26% and at 16% for ships costing less than ECU 6 million (Information 89/C32/06 from the Commission on aid to shipbuilding, OJ 1989 C 32, p. 3).
4. Article 4(4) of the Directive provides that the ceiling shall apply not only to all forms of production aid granted directly to the yards but also (Article 3(1) and (2) to all forms of aid to shipowners or to third parties which are available as aid for the building or conversion of ships where such aid is actually used for the building or conversion of ships in Community shipyards.
5. Chapter V of the Directive sets up a monitoring procedure comprising (Article 10) compulsory notification prior to its being put into effect of aid to shipbuilding, ship conversion and ship repair undertakings and provides for the Commission to be supplied with a series of information reports (Article 11).
6. The scheme of aid for shipbuilding in Belgium is governed by the Law of 23 August 1948 (hereinafter ‘the Law’), as several times amended, intended to ensure the maintenance and development of the merchant navy, the fishing fleet and shipbuilding and setting up for those purposes a fund for shipbuilding. The Law, which was duly notified to the Commission, provides for aid in the form of loans repayable at a reduced rate of interest of up to 70% of the value of a new ship, a state guarantee for additional loans contracted at the market rate as well as aid of half the interest rate on such loans, but not exceeding 3%, while the total loans and guaranteed borrowings may not exceed 85% of the price of the ship. The contested decisions state that, according to the information given to the Commission by the Belgian authorities, the loans are granted at an interest rate of 4 to 5% and repayable over 15 years, with a two-year period of grace dating from delivery of the ship.
II — Facts
7. In the course of 1989 the Belgian authorities granted a series of aids to shipbuilding. (a) In the first place loans were granted to Fertex, a ship owner, and Europese Transport Maatschappij Crystal Prince, shipowners, for the building of an LPG ship of 34000 m3 and two refrigerated ships in the Boelwerf yard at a rate of up to 85% of the contract prices at interest of 2% repayable over 15 years with a three-year period of grace. The Commission noted that, in view of the market interest rate of 8.25% at the time, the aid so granted represented grant equivalents of 35% whereas the ceiling for 1989 was 26%, and accordingly adopted the aforementioned Decision 90/627/EEC which declares the said aid to be incompatible with the common market and requires the Belgian Government to review the terms on which the loans were granted in order to ensure that they do not exceed a maximum of 26%. (b) Secondly other loans were granted to the shipowners Europese Transport Maatschappij for the building of two refrigerated ships, to the shipowners NV Ship Finance for the building of a Ro/Ro ferry in the Boelwerf shipyard, to the shipowners NV Unie van Redding en Scheepsdienst for the building of four coastal tugs in the NV Scheepswerf Rupelmonde shipyard, to NV Unie van Redding en Scheepsdienst for a salvage vessel to be built in the Fulton Marine shipyard and to the shipowners Scan Dive Belgium for a tourist submarine to be built in the Boelwerf shipyard. The loans varied from 80% to 85% of the contract prices at a rate of interest of 2 or 3% for a period of 16 or 18 years with a period of grace from one to three years. The Commission noted that, in view of the market interest rate of 8.25% at the time, the aid so granted represented grant equivalents of 35% for seven of the contracts and 24.5% for the salvage vessel and the tourist submarine. The Commission accordingly adopted the aforementioned Decision 91/375/EEC which declares the said aid to be incompatible with the common market and requires the Belgian Government to review the terms on which loans are granted in order to reduce them to a maximum of 26% or 16% depending on the circumstances.
III — Written procedure and forms of order sought by the parties
8. The Kingdom of Belgium's applications were lodged at the Court Registry on 6 December 1990 and 11 July 1991.
9. By a separate document lodged at the Court Registry on 6 December 1990 at the same time as the application in Case C-356/90, the Kingdom of Belgium applied under Articles 185 and 186 of the Treaty for interim relief to suspend the operation of Decision 90/627/EEC and to order the Commission to reopen the administrative procedure provided for in Article 93(2) of the Treaty. By order in Case C-356/90R [1991] ECR I-2424 the President of the Court dismissed the application for interim relief and reserved the costs.
10. 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. A written question was however addressed to the Commission, the defendant, which replied within the period laid down.
11. The Kingdom of Belgium, the applicant, claims in its applications that the Court should, in Case C-356/90: declare void Commission Decision 90/627/EEC of 4 July 1990 on loans granted by the Belgian authorities to two shipowners for the purchase of a 34000 m3 LPG ship and two refrigerator ships; order the defendant to pay the costs; and in Case C-180/91: declare void Commission Decision 91/375/EEC of 13 March 1991 concerning loans granted by the Belgian authorities to various shipowners for the building of nine vessels; order the defendant to pay the costs.
12. The Commission, the defendant, contends in both cases that the Court should: dismiss the application; order the applicant to pay the costs.
IV — Pleas in law and arguments of the parties
13. The Belgian Government maintains in the first place that the Commission, in wrongly interpreting the nature of the loans granted, calculated a grant equivalent which does not take into account the twofold objective pursued by Article 1(a) and (d) of the Law: on the one hand, direct aid, granted in relation to a specific contract to shipyards for the building or conversion of a ship and on the other, operating aid granted to shipowners, that is to say aid to encourage sailing under the Belgian or Luxembourg flags, even on ships built in nonmember countries, instead of under a flag of convenience; such aid is aimed both at the use and the modernization of a particular shipowner's nautical equipment in general apart from any contract with a shipyard for building or refitting. Only the first kind of aid falls within the scope of the directive, which is intended to avoid increasing capacity, so that the Commission ought to have separated the portion of ‘operating aid’ from the total amount of loans granted in order to concern itself only with the portion of ‘production aid’ and to check only whether the latter, expressed as a grant equivalent, was compatible with the applicable common ceiling. If the Commission had thus acted the ceiling would not have been exceeded and the aid in question would therefore be compatible with the common market. On the other hand, in refusing to recognize the said distinction the Commission infringed Article 3(1) and (2) of the directive which states that it applies to all forms of aid to shipowners or to third parties which are available as aid for the building or conversion of ships and that the grant equivalent of these aids is subject in full in particular to observance of the ceiling and the monitoring procedures where the aids are actually used for the building or conversion of ships in Community shipyards. The Commission's attitude also involves an infringement of Articles 155 and 169 of the Treaty as well as the general principle of the protection of legitimate expectation. Since the operating aid does not fall within the scope of the directive, if the Commission nevertheless considered that the grant of aid infringed Article 3(1) and (2), that would not constitute a problem of State aid to ship builders or shipyards but an infringement of a rule of Community law on the part of Belgium by way of Article 1(a) and (d) of the Law. The Commission would then have power only to initiate proceedings in due form under Article 169 of the Treaty; on the other hand it could not attempt to declare the aforementioned Belgian legislation inapplicable in relation to mere individual aid.
14. In the second place the Belgian Government claims that there is an infringement of Article 92(1) and (3)(c) of the Treaty and Article 4(1) of the Directive. In the Belgian Government's view the Commission wrongly gives an absolute scope to the common ceiling laid down in Article 4(1) of the Directive as meaning that any production aid must automatically be regarded as incompatible with the common market simply because it exceeds the said ceiling. It is clear both from the structure of the preamble to the Directive, the object of which is to avoid overcapacity in the shipbuilding sector, and from the actual terms of Article 4(1) (‘... may ...’) that it lays down only a positive presumption in favour of aid which does not exceed the ceiling. It does not follow on the other hand from the words used that no production aid may exceed the ceiling or that aid which exceeds it is in all cases prohibited. The ceiling laid down is intended, by means of the presumption of compatibility with the common market and the waiver of notification and the need to obtain authorization from the Commission (Article 4(1) and (5), only to encourage Member States not to grant, when that is possible, individual aid exceeding the ceiling.
15. Article 4(1) contains both an express positive presumption in relation to aid not exceeding the ceiling and an implied negative presumption in relation to aid which does exceed it. It is a simple presumption in the sense that in the first case it is not ruled out that the Commission may initiate the procedure provided for in Article 93(2) of the Treaty and, if necessary, declare even aid not exceeding the ceiling to be incompatible with the common market; in the second case the Commission must accept that the Member State concerned may adduce evidence that in spite of exceeding the ceiling the specific aid at issue is nevertheless compatible with the common market. In this case, in adopting a mistaken interpretation of Article 4(1), the Commission, while asserting that the fact that a particular aid does not exceed the ceiling creates only a presumption of compatibility with the common market which may be rebutted, has not recognized that Belgium has the right to adduce evidence that the aid in question, although exceeding the ceiling, is nevertheless compatible with the common market and has confined itself to noting simply that the aid has exceeded the ceiling in order to infer that it is incompatible.
16. In order to substantiate its argument (especially in relation to Case C-180/91 where this plea constitutes the sole ground of annulment) the Belgian Government states that although the Council may, by means of a directive such as this, lay down for Member States a coordinated aid policy in a particular sector, a directive may nevertheless not derogate from the primary Community law contained in the Treaty, since Articles 145 and 189 do not empower the Council to amend it. The essential basic criterion in Article 92 of the Treaty for determining whether aid is compatible with the common market is constituted by its negative, even potentially negative, effect on competition. Where it is not a question of aid which by its nature distorts competition, it is the amount of aid which must be considered in relation to the circumstances of the recipient undertaking and competing undertakings which may be adversely affected, the structural situation and the general economic situation of the market as well as, more particularly, that situation in relation to the part of the common market particularly affected by the aid. Since therefore each case must be considered separately, the Commission, in the exercise of the powers given it by Article 93 of the Treaty, may not declare aid to be incompatible with the common market in the case of a form of State aid which cannot be regarded in principle as distorting competition unless it has separately found in relation to each aid that its amount distorts or threatens to distort competition. If it is so, the Directive, as a measure of secondary legislation, cannot be interpreted as meaning that it imposes a criterion, called a maximum ceiling, expressed in the form of a percentage of aid, as a criterion of general application which is not capable of proof to the contrary.
17. According to the Belgian Government, the Court stated in its judgment in Case 47/69 France v Commission [1970] ECR 487 that the combined provisions of Articles 92 and 93 of the Treaty require the Commission to consider all the legal and factual circumstances in order to establish whether competition is distorted. The Commission must consider each aid individually in order to determine the amount of aid, assess all the relevant economic, commercial and financial circumstances of the market and consider in what circumstances inter-State trade may be obstructed and competition distorted. No other institutionally lawful conclusion may be drawn from the common maximum ceiling provided for in Article 4(1) of the Directive since the Council is not entitled, without infringing Articles 92 and 93 of the Treaty, to fix by means of a directive or any other measure referred to in Article 189 of the Treaty an amount of aid which must, as it were, be mandatorily observed. That would mean that an item (namely the effect of a particular amount in a particular market situation on State trade and competition), which is essentially dependent on the market conditions existing in each individual case, must be mandatorily determined by legislation, that is to say by a general rule which cannot take account of the specific circumstances of aid, without any inquiry carried out by the Commission. In such a case there would no longer be just a presumption but a replacement of Articles 92 and 93 of the Treaty, in the sense that the condition of distortion of competition referred to in Article 92 would be determined by legislation and not by the Commission after discretionary legal and economic analysis on the basis of the criteria laid down in Article 92(1).
18. The Belgian Government thinks that a proper comparison may be made between the individual exemptions under Article 85(3) of the Treaty granted by the Commission by individual decision on the one hand and the so-called ‘collective exemptions’ which the Council may itself adopt under Article 87 of the Treaty or authorize the Commission to adopt. Collective exemptions do not preclude a special exemption declaring Article 85(1) inapplicable to an agreement not meeting the conditions laid down.
19. Finally the third ground on which the decisions should be declared void concerns infringement of Articles 93(2) and 190 of the Treaty as well as of the general principle of respect for the rights of the defence. The Belgian Government contends that the contested decisions constitute measures for which the institution adopting them must state the reasons on which they are based. In its case-law and in particular in its judgment in Joined Cases 296/82 and 318/82 Netherlands and Leeuwarder v Commission [1985] ECR 809 and Case 70/72 Commission v Germany [1973] ECR 813 the Court stated that the obligation to state reasons referred to in Article 190 of the Treaty requires the Commission in relation to State aid to take account of the circumstances of the case and the market situation. There is obviously no such statement of reasons in the contested decisions, for the Commission in no way shows that the objective of Article 92(3)(c) of the Treaty, clarified and implemented by the Directive, namely to avoid an increase in the capacity of the Community shipyards, was disregarded by the grant of the aid in question. Furthermore that failure to state reasons was inevitable since, by relying on the said mistaken interpretation of Article 4(1) and prematurely terminating its analysis of the said aid, the Commission failed to offer the applicant government an opportunity to show that the aid is consistent with the Community interest of avoiding surplus capacity in Community shipyards or even reducing the existing capacity. For that reason the rights of the defence of the Member State concerned were also infringed.
20. As regards the first plea the Commission considers that there is no substance in the complaint based on the distinction between production aid (in favour of the shipyard) and operating aid (in favour of the shipbuilder) and that the ceiling, according to the Belgian Government, applies only to the former. It is clear from the wording of Article 4(4) of the Directive that the ceiling applies ‘to all forms of production aid’. Article 4(5) provides in addition that ‘the combined effect of aid under the various aid schemes applied must in no case exceed the ceiling’. Furthermore the Commission refers to paragraph 13 of the order of the President of the Court in Case C-356/90 R where it is stated that under Articles 3(2) and 4(4) of the directive, the ceiling is to apply not only to all forms of production aid granted directly to shipyards but also to all forms of aid to shipowners which are available as aid for the building or conversion of ships, where that aid is actually used for the building or conversion of ships in Community shipyards. It would therefore be contrary to the wording and scope of the Directive to distinguish operating aid from production aid. That would lead to an arbitrary distinction and therefore a difference in treatment. The Commission adds that in practice it is not possible to separate the grant of loans into two amounts, one under production aid and the other under operating aid. Furthermore the loans in question do not seem to make that distinction but are shown as a single loan. In the same context the Commission considers that the Belgian Government's argument that, since the said distinction has its origin in the Belgian Law of 23 August 1948, the Commission ought to have followed the procedure of Articles 169 of the Treaty and not that of Article 93(2), cannot be accepted. In that respect the Commission refers to the judgment in Case 290/83 Commission v France [1985] ECR 439 which shows exactly the contrary to what the Belgian Government maintains, that is to say that the Commission cannot follow the procedure of Article 169 but must follow that of Article 93(2).
21. As regards the plea for annulment in relation to the interpr etation of Article 4(1) of the Directive which is the central issue in Case C-180/91, the Commission considers that the Belgian Government's reasoning is based on a misunderstanding which must be dispelled by considering the structure of Article 92 of the Treaty.
22. In the Commission's view the main rule is contained in Article 92(1): any aid which distorts or threatens to distort competition, in so far as it affects trade between Member States, is incompatible with the common market. Article 92(3) lists certain categories which may be considered to be compatible with the common market. Article 92(3)(d) empowers the Council to specify ‘by decision’ other categories of aid which may be considered to be compatible with the common market. The measure referred to is not a ‘decision’ within the meaning of the fourth paragraph of Article 189 of the Treaty but a decision intended to supplement the Treaty, which may take the form of a regulation or directive (similar cases are to be found in Articles 38(3) and 223(3) of the Treaty). It is not a question of declaring certain aid to be compatible with the common market in the same way as those referred to in Article 92(2) but solely to extend the list referred to in Article 92(3)(a) to (c). In consequence the procedural provisions referred to in Article 93 in relation to the Commission's constant review of aid remain applicable.
23. Article 4(1) of the Directive adopts word for word the beginning of Article 92(3) of the Treaty. Aid, of which the grant equivalent is less than the ceiling is presumed to be compatible with the common market. That does not however exonerate the Commission from its duty of monitoring the aid and a special investigation may lead to the conclusion that such aid may nevertheless not be granted. Aids, the grant equivalent of which is more than the ceiling, do not fall under the Directive and in consequence comes under the general rule of Article 92(1) and the Commission must determine whether it is incompatible. That does not however mean, as the Belgian Government claims, that to exceed the ceiling is not unlawful in itself and that any aid exceeding the ceiling must always be considered according to the criteria of Article 92(1). In the Commission's view that confuses two distinct concepts, ‘incompatibility per se’ and ‘automatic incompatibility’. Aid exceeding the authorized ceiling falls under the first concept although the Commission still has to determine that incompatibility by means of a decision according to the procedure of Article 93(2).
24. The Belgian Government's opinion in relation to a case where the ceiling is exceeded reflects an incorrect view of the relationship between the Directive and Article 92(1). To maintain that aid exceeding the authorized ceiling must still be considered from the aspect of the latter provision conflicts with the fact that the Directive has specified in a general and uniform way for the Community the prohibition laid down in Article 92(1) in relation to aid for shipbuilding. If the Commission finds that aid exceeds the ceiling by the same token it finds that the aid is incompatible with the said provision. Such aid is regarded as exhibiting all the features of prohibited aid including the condition in relation to affecting trade between Member States. The Belgium Government's argument would mean in fact that aid could never be prohibited as being in breach of the Directive on the ground that it would still be necessary to check separately whether or not it was compatible with Article 92(1) of the Treaty.
25. In order to illustrate its argument even better the Commission states that it is possible to establish a parallel with Article 85(3) of the Treaty by comparing the Directive to a Commission regulation exempting certain classes of agreements from the prohibition of Article 85(1). Agreements which exactly meet the conditions laid down by the regulation are exempt under Article 85(3) whereas the Commission reserves the right to take away that exemption in particular cases. On the other hand agreements which do not satisfy all the conditions of the regulation completely escape its application. It is the main rule of Article 85(1) which applies as it stands to such agreements. The same principle applies in the context of aid to shipbuilding referred to by the Directive: aid less than the ceiling is presumed to be compatible with the common market unless special examination leads the Commission to conclude that the aid may nevertheless not be granted; aid more than the ceiling on the other hand falls under the general rule in Article 92(1) and thereby remains incompatible with the common market. To maintain, as the Belgian Government does, that an agreement which does not come within the scope of a general exemption must still be considered according to the criteria of Article 85(1) is, in the Commission's view to confuse two different matters: on the one hand agreements which in fact fall within the scope of a regulation providing exemption by category but which do not meet the conditions referred to in it; and secondly agreements which do not fall within the scope of such a regulation. Article 85(1) and (2) applies in the first case but not necessarily in the second.
26. As regards the third plea (failure to state reasons and disregard of the rights of the defence) the Commission states that Article 190 of the Treaty does not require it to show that aid granted may give rise to surplus capacity in the shipyard sector. It is sufficient to show that the said aid exceeds the ceiling laid down. The Commission states furthermore that during the administrative procedure the Belgian authorities did not ask to be allowed to show that the aid did not involve surplus capacity so that there was no disregard of the rights of the defence. The Commission does not moreover see that there was any reason why it should have heard the Belgian Government on an issue which is neither an objection which it put forward nor, what is more, an argument put forward by the Belgian Government at a prior stage of the procedure.
V — Reply by the Commission to the question put- by the Court
27. The following question was put to the Commission:
‘In its pleadings the Commission maintains that “aid, the grant equivalent of which is less than the ceiling is presumed to be compatible with the common market” but that the Commission “is not thereby exonerated from its duty to check” (paragraph 13 of the defence in Case C-180/91); and that “a special investigation by the Commission may lead to the conclusion that the aid may nevertheless not be granted” (paragraph 11 of the rejoinder in Case C-356/90).
The Commission is requested to specify to what extent it appears to it to be possible to consider aid of an amount less than the ceiling to be compatible with the Community rules whereas any excess automatically, and without its being possible to show any justification, involves the loans granted being called in question.
The Commission should state its practice in relation to aid of an amount less than the ceiling.’
28. The Commission replied in the following terms:
‘A distinction must be drawn between schemes of aid and individual aid. According to Article 10(2)(a) of Directive 87/167 (OJ 1987 L 69, p. 55) which applies in these cases, Member States are to notify the Commission of any “aid scheme — new or existing — or any amendment of an existing scheme”. The Commission must first have authorized the aid schemes for the Member States to be able to implement them in individual cases in accordance with their plan. After the Commission has given its authorization it is no longer in principle necessary to notify it of individual aid decided under the general aid scheme. Authorization given to a general aid scheme covers in principle all individual aid (see Article 4(1) of the Directive).
There is however one exception to that rule. Under Article 4(5) the Commission may at the request of a Member State require prior notification of one or more particular aid proposals. That possibility exists only in the event of competition between shipyards of various Member States for a particular contract. In practice things generally proceed in the following manner: a shipyard which is in competition for the award of a contract for the building of a ship in another Member State requests its national authorities to ask the Commission to initiate the procedure provided for in the second subparagraph of Article 4(5). The Commission then considers whether the aid in question is likely to distort competition between Community shipyards. At the end of its inquiry the Commission may decide that the aid, even if the grant equivalent is less than the ceiling laid down in accordance with Article 4(2), must be regarded as incompatible with the common market. In its decision the Commission may fix the level authorized at a percentage appreciably less than the ceiling and even at 0%.’
G. F. Mancini
Judge-Rapporteur
1 Language of the case: Dutch.