Federal Republic of Germany v Commission of the European Communities. (State aid) [1994] EUECJ C-400/92 (5 October 1994)

Judgment 1 By application lodged at the Court Registry on 26 November 1992, the Federal Republic of Germany brought an action under the first paragraph of Article 173 of the EEC Treaty for the annulment of Commission Decision 92/569/EEC of 31 July 1992 concerning proposed aid by Germany to the Chinese shipping company Cosco for the construction of container vessels (OJ 1992 L 367, p. 29) ("the Decision") or, in the alternative, the annulment of Articles 2 and 3 of that decision. 2 The contested Decision was adopted pursuant to the first subparagraph of Article 93(2) of the Treaty and Article 4(7) of Council Directive 90/684/EEC of 21 December 1990 on aid to shipbuilding (OJ 1990 L 380, p. 27) ("the Directive"). 3 Under the first subparagraph of Article 4(7) of the Directive, aid related to shipbuilding and ship conversion granted as development assistance to a developing country is not subject to the ceiling determined under the rules set out in Article 4(2) and (3). Such aid may be deemed compatible with the common market if it complies with the terms laid down for that purpose by OECD Working Party No 6 in its Agreement concerning the interpretation of Articles 6 to 8 of the Understanding on Export Credits for Ships referred to in Article 4(6) or with any later addendum or corrigendum to that Agreement ("the OECD criteria"). The second subparagraph of Article 4(7) provides that the Commission must be given prior notification of any such individual aid proposal and that it must verify the particular development content of the proposed aid and satisfy itself that it falls within the scope of the Agreement referred to in the first subparagraph. 4 By letter of 21 October 1991 the German Government notified the Commission of its intention to grant to the People' s Republic of China development aid in the form of aid credit for the financing of three container vessels. The vessels had been ordered and were to be operated by Cosco, a State-owned company having its seat in Beijing. The cost of the vessels, DM 604.14 million, was to be subsidized by development aid credit amounting to DM 203.22 million. The vessels were to be built in Germany at the shipyards of Bremer Vulkan in Bremen and Mathias Thesen in Wismar. 5 By a letter of 22 November 1991 which was the subject of a communication to other Member States and interested parties (OJ 1992 C 22, p. 4), the Commission initiated the procedure laid down in Article 93(2) of the Treaty with a view to establishing the genuine nature of the development aid content of the proposed aid in respect of the construction of these three container vessels and a container vessel of 2 700 TEU also likely to be covered by the proposed aid and to establishing the general compatibility of the proposed aid with the common market. 6 The Commission adopted the contested Decision on 31 July 1992. In Article 1 the Commission stated that it had established that "no development aid is involved in the Cosco contract for the construction of a 2 700 TEU container ship by Howaldtswerke-Deutsche Werft AG, Kiel, and that the export credit terms applied are compatible with the common market". Article 2 of the Decision stated that "the proposed aid for the contract to build three further container vessels for the State-owned Chinese shipping company Cosco, at the Bremer Vulkan yard, Bremen, and the Mathias Thesen yard, Wismar, cannot be regarded as genuine development aid within the meaning of Article 4(7) of Council Directive 90/684/EEC on aid to shipbuilding and is therefore incompatible with the common market". Finally, Article 3 stated that "the German Government shall inform the Commission within two months of the date of notification of this Decision of the measures taken to comply herewith". 7 The Federal Republic of Germany bases its application on four pleas in law. The first concerns the breach of the combined provisions of Article 92(3)(d) of the Treaty and Article 4(7) of the Directive. The second relates to infringement of the principles of equal treatment and protection of legitimate expectations. The third alleges an error of assessment, while the fourth concerns infringement of the right to a fair hearing. 8 It should be noted at the outset that the Commission does not dispute that the OECD criteria have been complied with in this case. Article 1 of the Decision 9 For the reasons outlined in points 18 to 20 of the Advocate General' s Opinion, it must be held that Article 1 of the contested Decision does not adversely affect the applicant Member State. The application is therefore inadmissible in so far as it relates to that provision. Articles 2 and 3 of the Decision The alleged breach of Article 92(3)(d) of the Treaty and Article 4(7) of the Directive 10 Article 2 of the contested Decision states that the proposed aid for the construction of three container vessels for the State-owned Chinese shipping company Cosco is incompatible with the common market because it cannot be regarded as genuine development aid within the meaning of Article 4(7) of the Directive. 11 The Commission, considering itself to be under a duty to establish the genuine nature of the development content of the aid in question, formed the view that Cosco was not a company that needed development aid in order to contribute to the general development of China. According to the information in the Commission' s possession, that company was financially capable of buying new ships on the normal market; furthermore, since it operated on international shipping routes with time-charter and spot contracts, its operations were not directly linked to China' s export or import trade. 12 By its first plea, the German Government argues that the provisions of the Directive alone apply to the proposed aid, on the ground that the Directive takes precedence over the general provisions of Article 92(3)(a), (b) and (c) of the Treaty. Article 4(7) of the Directive, which sets out the specific criteria which must be satisfied so that in each case the aid may be regarded as compatible with the common market, does not mention the criterion of the necessity of the aid, included by the Commission in its statement of reasons, and provides only for a procedure of simple verification designed to establish whether the proposed aid meets the OECD criteria. 13 As the Court pointed out in its judgment in Joined Cases C-356/90 and C-180/91 Belgium v Commission [1993] ECR I-2323, at paragraphs 25 and 26, it follows from the structure and purpose of Article 92 that paragraph 3 of that article introduces the possibility of derogating, in certain specified cases, from the prohibition of aid which would otherwise be incompatible. Moreover, Article 92(3)(d) allows the Council, acting by a qualified majority on a proposal from the Commission, to increase the range of categories of aid which may be regarded as compatible with the common market over and above those set out in subheadings (a), (b) and (c). 14 By adopting Directive 90/684, which is the seventh directive on aid to shipbuilding, the Council has made use of that possibility. 15 As the Court has already pointed out in its judgment in Belgium v Commission, cited above, with regard to the sixth directive ° Directive 87/167/EEC of 26 January 1987 on aid to shipbuilding (OJ 1987 L 69, p. 55) ° the Council acted in accordance with the spirit of Article 92(3) when, after establishing that the shipbuilding aid in question was incompatible with the common market, it took account of a series of economic and social requirements which led it to make use of the option, recognized by the Treaty, to regard that aid nevertheless as compatible with the common market provided that it satisfied the criteria for derogations contained in the directive (paragraph 30). 16 For production aid in favour of shipbuilding and ship conversion, the criterion chosen is that the proposed aid must not exceed the maximum ceiling defined in Article 4(1) to (3) of the Directive. 17 Article 4(7), in contrast, dispenses with that criterion in the case of aid related to shipbuilding and ship conversion granted as development assistance to a developing country, provided that such aid satisfies a number of other conditions. 18 According to the German Government, the only condition which must be satisfied in such a case is that the aid complies with the OECD criteria. 19 That argument cannot be accepted. 20 First, by providing that the aid in question "may" be deemed compatible with the common market if it complies with the provisions of the abovementioned OECD Agreement, Article 4(7) confers a discretion on the Commission. Second, according to the second subparagraph of Article 4(7) the Commission is required not only to satisfy itself that the aid complies with the OECD criteria but also to verify the particular development content of the proposed aid. 21 It is precisely the examination of this particular content which enables the Commission to ensure that aid based on Article 4(7) and intended to reduce the cost of vessels for certain developing countries pursues, in the light of the specific conditions of its application, a genuine development objective and does not, despite the fact that it complies with the OECD criteria, constitute aid in favour of a shipyard in a Member State which must be subject to the ceiling as specified in the preceding paragraphs of Article 4 in respect of production aid in favour of shipbuilding and ship conversion. Consequently, if this discretion were to be denied to the Commission, Member States could make payments exceeding the ceiling in question in order to improve the financial position of their shipyards, even though such aid would not be necessary to secure the objective of development set out in Article 4(7). 22 In those circumstances, it must be held that the Commission did not breach either Article 92(3)(d) of the Treaty or Article 4(7) of the Directive when it formed the opinion, for the reasons set out in paragraph 11 above, that Cosco was not a company which needed development aid in order to contribute to the general development of China and that the aid in question could for that reason not be regarded as genuine development aid within the meaning of Article 4(7) of the Directive. 23 The first plea in law must for that reason be rejected. The alleged error of assessment 24 In its third plea, the German Government argues that the Commission Decision is vitiated by an error of assessment in so far as it states in one place that the granting of the proposed aid carries the risk of creating a serious distortion of competition between the Member States, in both the shipbuilding and shipping sectors, and in another that the Commission is not in a position to demonstrate that the pricing package acts as an aid to the shipyards. 25 It should be noted in this regard that, even if the contested Decision is vitiated by an error of assessment on this point, the fact that the aid granted could not be regarded as genuine development aid within the meaning of Article 4(7) of the Directive is sufficient to render that aid incompatible with the common market. 26 It is for that reason unnecessary to rule on the third plea. The alleged infringements of the principles of equal treatment, the protection of legitimate expectations and the right to a fair hearing 27 In its second and fourth pleas, the German Government claims that, by imposing a new criterion for the conformity of development aid with Community law ° the criterion of necessity ° the Commission has infringed the principles of equal treatment and the protection of legitimate expectations. This new measure, so it is argued, has been particularly damaging to the shipyards which had taken the necessary steps to secure the contract with Cosco and had already incurred considerable expense in the legitimate expectation of a Commission decision in which that institution would merely apply the OECD criteria notified to the Member States by letter of 3 January 1989 on the interpretation and application of Article 4(7) of the Directive. The German Government also takes the view that the Commission has infringed its right to a fair hearing by failing to provide it with an opportunity to state its views on the introduction of this new criterion. 28 With regard to the principle of the protection of legitimate expectations, it must be pointed out that, contrary to the claims of the German Government, it does not follow from the letter of 3 January 1989 that the Commission intended merely to apply the OECD criteria listed therein. In that letter the Commission maintained the distinction, established by Article 4(7) of the Directive, between the particular development content of the proposed aid and the question whether the aid fell within the scope of the OECD Understanding on Export Credits for Ships. It is only in connection with this latter point that the Commission referred to the OECD criteria with which such aid must comply. 29 The Commission' s intention not to confine itself to the application of the OECD criteria alone is corroborated by a letter, annexed to its rejoinder, which it sent on 29 July 1991 to the German Government in connection with a separate aid proposal. On reading that letter, it is clear that the Commission, by distinguishing clearly the criteria defining genuine development aid from those of the OECD and by stating "that the aid granted ... for the purchase of a tug will contribute to the economic development of the Port of Sousse and the surrounding area", determined whether the aid in question was necessary to secure the specific object of the projected development. 30 Next, so far as the right to a fair hearing is concerned, it should be noted that, in its letter of 22 November 1991, cited above, which was intended, pursuant to Article 93(2) of the Treaty, precisely to allow the German Government to submit its comments, the Commission declared that it was unsure, in particular, "whether the aid project for the Cosco ... contract is not more of an operating aid to the German shipyards involved rather than genuine aid to a developing country" and accordingly decided to initiate the procedure under Article 93(2) in order to examine whether the project involved genuine development aid. 31 In those circumstances, it must be held that the Commission was able to determine whether the aid in question was necessary to secure the objective of development provided for under Article 4(7) of the directive without infringing the principle of the protection of the German Government' s legitimate expectations or its right to a fair hearing. 32 So far as the argument based on the principle of equal treatment is concerned, suffice it to hold, as the Advocate General did at point 102 of his Opinion, that the German Government has failed to identify any act on the part of the Commission within the area in question which would provide a basis for this complaint. 33 It follows that the second and fourth pleas must also be rejected. 34 In the light of the foregoing, the application must be dismissed in so far as it relates to Articles 2 and 3 of the Decision. Costs 35 Under Article 69(2) of the Rules of Procedure, the unsuccessful party is to be ordered to pay the costs. As the Federal Republic of Germany has failed in its submissions it must be ordered to pay the costs. On those grounds, THE COURT hereby: 1. Dismisses the application; 2. Orders the Federal Republic of Germany to pay the costs. © European Communities, 2001 All rights reserved BAILII: Copyright Policy | Disclaimers | Privacy Policy | Feedback | Donate to BAILII