JUDGMENT OF THE COURT (Fifth Chamber)
29 April 2004(1)

(Appeal – State aid – Shipbuilding – Commission decisions authorising payment of aid – Condition – Compliance with a ‘capacity restriction’ – Definition)

In Case C-181/02 P,

Commission of the European Communities, represented by K.-D. Borchardt and V. Kreuschitz, acting as Agents, with an address for service in Luxembourg,

appellant,

APPEAL against the judgment of the Court of First Instance of the European Communities (Fourth Chamber, Extended Composition) of 28 February 2002 in Joined Cases T-227/99 and T-134/00 Kvaerner Warnow Werft v Commission [2002] ECR II-1205, seeking to have that judgment set aside,

the other party to the proceedings being:

Kvaerner Warnow Werft GmbH, established in Rostock-Warnemünde (Germany), represented by M. Schütte, Rechtsanwalt, with an address for service in Luxembourg,

applicant at first instance,

THE COURT (Fifth Chamber),,

composed of: C.W.A. Timmermans, acting as President of the Fifth Chamber, A. La Pergola (Rapporteur) and S. von Bahr, Judges,

Advocate General: P. Léger,
Registrar: M. Arzamendi, Principal Administrator,

after hearing oral argument from the parties at the hearing on 10 July 2003,

after hearing the Opinion of the Advocate General at the sitting on 27 November 2003,

gives the following

Judgment

The following may be considered to be compatible with the common market:

...

(e)

such other categories of aid as may be specified by decision of the Council acting by a qualified majority on a proposal from the Commission.’

–

the amount and intensity of such aid are justified by the extent of the restructuring involved,

–

it is limited to supporting expenditure directly related to the investment.’

‘4

In 1992 Warnow Werft, an East German shipyard, was sold by the Treuhandanstalt, the [public-law] body with the task of restructuring the undertakings of the former German Democratic Republic, to the Norwegian industrial group Kvaerner. According to the sales contract sent by Germany to the Commission, Kvaerner undertook until 31 December 2005, with regard to the Warnow yard, not to exceed an annual building capacity of 85 000 cgt unless that restriction under Community legislation was relaxed. The 85 000 cgt capacity restriction was the amount allocated to the applicant by the Federal Republic of Germany in pursuance of Article 10a(2)(c) of Directive 90/684.

5

By decisions communicated to the Federal Republic of Germany by letters of 3 March 1993, 17 January 1994, 20 February 1995, 18 October 1995 and 11 December 1995 (“the authorising decisions”), the Commission authorised, in accordance with Directive 90/684 and Directive 92/68, planned aid from the Federal Republic of Germany to Kvaerner totalling DEM 1 246.9 million, on condition that the capacity restriction of 85 000 cgt per year was complied with. The authorised aid was broken down as follows:

N 692/D/91 ─ Commission letter of 3 March 1993 (SG (93) D/4052)

─ DEM 45.5 million operating aid;

─ DEM 82.4 million operating aid in the form of an exemption from previous liabilities;

─ DEM 127.5 million investment aid;

─ DEM 27 million closure aid;

N 692/J/91 ─ Commission letter of 17 January 1994 (SG (94) D/567)

─ DEM 617.1 million operating aid;

N 1/95 ─ Commission letter of 20 February 1995 (SG (95) D/1818)

─ DEM 222.5 million investment aid;

N 637/95 ─ Commission letter of 18 October 1995 (SG (95) D/12821)

─ DEM 66.9 million investment aid;

N 797/95 ─ Commission letter of 11 December 1995 (SG (95) D/15969)

─ DEM 58 million investment aid.

6

In 1997, the applicant’s actual production was 93 862 cgt. In 1998, its actual production was 122 414 cgt.

7

The Commission took the view that the restriction of 85 000 cgt per year had been exceeded for 1998 and, by letter dated 16 December 1998, it informed the Federal Republic of Germany of its decision to initiate the procedure laid down in Article [88](2) of the EC Treaty. This letter was the subject of a communication published on 16 February 1999 in the Official Journal of the European Communities (OJ 1999 C 41, p. 23).

8

The German authorities submitted their observations on 18 February 1999.

9

On 14 January and 25 March 1999, Commission representatives visited the yard with an independent … expert.

10

By Decision 1999/675 …, the Commission decided as follows:

“Article 1

The State aid, which Germany has implemented in favour of Kvaerner Warnow Werft GmbH in an amount of EUR 41.5 million (DEM 83 million), is incompatible with the common market pursuant to Article 87(1) of the EC Treaty.

Article 2

1. Germany shall take the necessary measures to recover from the recipient the aid of EUR 41.5 million (DEM 83 million)

...

3. The sums to be recovered shall bear interest from the date on which they were made available to the recipient until their actual recovery. Interest shall be calculated on the basis of the reference rate used for calculating the grant equivalent of regional aids.

...”

11

The Commission took the view that the capacity limit had also been exceeded in 1997 and, by letter dated 20 July 1999, notified the Federal Republic of Germany that it had decided to initiate the procedure provided for in Article 88(2) EC. This letter was the subject of a communication published on 28 August 1999 in the Official Journal of the European Communities (OJ 1999 C 245, p. 24).

12

The German authorities submitted their observations on 4 October 1999.

13

By Decision 2000/336 …, the Commission decided as follows:

“Article 1

Aid which Germany has implemented in favour of Kvaerner Warnow Werft GmbH amounting to EUR 6.3 million (DEM 12.6 million) is incompatible with the common market pursuant to Article 87(1) of the EC Treaty.

Article 2

1. Germany shall take the necessary measures to recover from the recipient the aid amounting to EUR 6.3 million (DEM 12.6 million).

...

3. The sum to be recovered shall bear interest from the date on which it was made available to the recipient until its actual recovery. Interest shall be calculated on the basis of the reference rate used for calculating the grant equivalent of regional aid.

...”

14

By Decision 2000/416 …, the Commission decided as follows:

“Article 1

Kvaerner Warnow Werft GmbH (KWW) complied in 1999 with the capacity limitation compliance with which is, pursuant to the Decision on State aid measure N 325/99, notified by letter of 5 August 1999, a condition for the compatibility of the aid with the common market.

Article 2

Article 1 of Decision 1999/675/EC shall be worded as follows:

‘Article 1

The State aid which Germany has implemented in favour of Kvaerner Warnow Werft GmbH in an amount of EUR 41.1 million (DEM 82.2 million) is incompatible with the common market pursuant to Article 87(1) of the EC Treaty.’”

...’

‘94

As regards, first, the legal framework within which the authorising decisions were taken, it must be observed that the objective of the capacity reduction laid down by Article 10a(2)(c) of Directive 90/684 (“the German Government agrees to carry out ... a genuine and irreversible reduction of capacity of 40% net of the capacity of 545 000 cgt existing on 1 July 1990”), of which the capacity restriction of 85 000 cgt per annum imposed on the applicant forms part ..., is to restore a normal market situation within the shipbuilding sector and the competitiveness of the shipyards of the former German Democratic Republic, while reducing excess capacity.

95

As the reason for inserting the new Article 10a into Directive 90/684, the Council stated in the third recital to Directive 92/68 that “competition considerations dictate that the sector of the shipbuilding industry of the [former German Democratic Republic] should contribute significantly to the reduction of the excess capacity which, worldwide, continues to impede the restoration of normal market conditions for the shipbuilding industry”.

96

The wording of Directive 90/684 also reveals its objective of eliminating the structural overcapacity of shipyards in the European Community in order to make them more efficient and competitive. That objective may be deduced, in particular, from Article 6 of Directive 90/684 ... and from the third, sixth, eighth and ninth recitals to that directive. According to the third recital, “although since 1989 there have been significant improvements in the world market for shipbuilding, a satisfactory equilibrium between supply and demand has still not been established and the price improvements which have taken place are still insufficient in the overall context to restore a normal market situation within the sector ...”. According to the sixth recital, “[an agreement between the most important shipbuilding nations] must ensure fair competition at an international level among shipyards through a balanced and equitable elimination of all existing impediments to normal competition conditions ...”. The eighth recital states “a competitive shipbuilding industry is of vital interest to the Community ...”. Lastly, according to the ninth recital, “a tight and selective aid policy should be continued in order to support the present trend in production towards more technologically advanced ships and in order to ensure fair and uniform conditions for intra-Community competition”.’

‘97

It must be observed, next, that the reduction of excess capacity through the introduction of a capacity restriction is in essence ensured by the fixing of technical restrictions, known as “technical bottlenecks”. That emerges clearly from the authorising decisions … .

98

First of all, in its letter of 3 March 1993, which constitutes the first authorising decision, the Commission states that, “although the independent expert’s report ordered by the Commission has shown that the construction capacity [of the Warnow shipyard] will hardly exceed 85 000 cgt ─ the quota granted to the shipyard by the German Government out of the total of 327 000 cgt granted to the East German shipyards ─ monitoring of the carrying out of the investments is deemed necessary in order to ensure that the capacities will actually be reduced. The reduction is dependent upon the investments being carried out according to the plans and designs presented to the consultant. Kvaerner acknowledged that the following restrictions would have to be placed on the yard:

–

the new steel cutting shop to stay as developed with no additions except for a mechanical edge preparation machine (milling machine type);

–

the number of work stations on the large panel line and the double bottom line to be fixed at eight respectively six as defined in the designs in the consultant’s report EECI:0001A;

–

any increase in length of these lines should be allowed only if the commensurate area is deducted from the 600 tonne super unit shop. The converse must also be applied, that is, any reduction in large panel/double bottom line area could be accompanied by an increase of the super unit shop area equal to the reduction in the large panel/double bottom line area;

–

the number of work stations on the curved panel line to remain at six as defined in the consultant’s report EECI:0001A;

–

the number of work stations on the small panel line to remain at a maximum of three as defined in the consultant’s report EECI:0001A;

–

only one 600 tonne crane to be fitted over the dock. The dockside cranes (two identified) to be of the jib type with a maximum lifting capacity of 50 tonnes.”

99

It is clear from that passage that the objective set out in it, namely an actual reduction of capacity, was to be achieved essentially through compliance with a series of technical restrictions concerning the production plant of the shipyard.

100

The Commission’s letter of 17 January 1994, which comprises the second authorising decision, is to the same effect. The Commission states in it that “the capacity restriction depends on the investments being made in accordance with the plans and designs presented to the consultants, in particular with regard to the adherence to the maximum steel consumption of 73 000 tonnes and in accordance with the restrictions provided for in the consultant’s report.” The fact that the capacity restriction of 85 000 cgt was based on a body of specific technical restrictions is also corroborated by the explanation in the same letter that “in the event of a failure to comply with the capacity restrictions, the Commission will be obliged to require all the aid to be repaid” and in particular by the use of the plural (“capacity restrictions”) in that sentence.

101

In that context it should be added that if the Commission had really wished to impose on the applicant, when it authorised the aid, an annual ceiling on actual production, it would have sufficed for it to use the terms “production limit” or to specify that the capacity restriction referred, in the present case, to maximum production in optimum conditions. In the absence of such explanations, the applicant cannot be criticised for having exceeded the capacity restriction of 85 000 cgt per annum, since it is common ground that it complied, throughout the period in question, with all the technical restrictions.

102

However, in the authorising decisions there is no explanation of that kind. In particular, interpretation of the capacity restriction expressed in cgt per annum as being a restriction of actual production cannot be inferred from the following sentences in the letters of 20 February, 18 October and 11 December 1995 (the third, fourth and fifth authorising decisions respectively): “Furthermore, the first production monitoring report sent to the Commission shows that it is also necessary to monitor compliance with the capacity restrictions at the time of the planning of production and of production itself … In the light of the two production monitoring reports sent to the Commission to date, monitoring clearly remains necessary in order to ensure compliance with the maximum capacity authorised in the framework of the planned production as in that of actual production … In accordance with the production monitoring reports sent to the Commission to date, monitoring remains necessary in order to ensure compliance with the maximum capacity in the framework of actual production as in that of planned production”. Those sentences [merely] indicate that the applicant must, in the planning and actual production phases, comply with the technical restrictions on capacity. If, for example, the applicant receives two orders which would lead it to produce more than 85 000 cgt in one year, it is permissible for it to accept and perform those orders within that year if it is able to do so while complying at the same time with the technical restrictions on capacity laid down (such as those set out in paragraph 98 above relating inter alia to the number of work stations on the curved panel line and to the presence of only one 600 tonne crane over the dock).

103

Furthermore, in the same letters some sentences clearly indicate that compliance with the capacity restriction of 85 000 cgt per annum is treated in the same way as compliance with the technical restrictions on the installations. Thus in the letter of 20 February 1995 (third authorising decision) the Commission explains that “in carrying out the investment plan it is appropriate to monitor compliance with the capacity restriction applicable to shipbuilding. Such compliance is ensured only if the investment plan presented to the consultants is scrupulously observed; that applies in particular with regard to the maximum permissible output of 73 000 tonnes of steel, the double bottom line and the two panel lines. The German Government has given an assurance that the shipyard will comply with the capacity restriction.” In its letters of 18 October and 11 December 1995 (the fourth and fifth authorising decisions), the Commission observes, in almost identical terms, that the double bottom assembly line and the large panel line limit the shipyard’s capacity to [process] steel and by that very fact restrict the shipyard’s production capacity to 85 000 cgt per annum. The Commission adds in those two letters that for the duration of that capacity restriction it is indispensable that the layout of the shipyard should not be [altered] and that the “optional” equipment which has not yet been installed should comply with the specifications which the shipyard submitted for an opinion by the consultant.

104

Directives 90/684 and 92/68 and the authorising decisions are therefore consistent in showing that, in line with the Commission’s administrative practice as shown by another case on which the applicant relies (Skibsværftsforeningen and Others v Commission [Case T-266/94 [1996] ECR II-1399], paragraph 177), the capacity restriction laid down in those authorising decisions corresponded to the production achievable under favourable normal conditions, given the facilities available. When accepting and executing orders for the construction of ships, the applicant therefore had to comply with the technical restrictions on its installations, restrictions which had been calculated and laid down in such a way that under favourable normal conditions it would not produce more than 85 000 cgt per annum. However, the authorising decisions did not prohibit the applicant from producing, under exceptionally favourable conditions such as those which might result from the receipt of orders which could be executed more quickly than normal, more than 85 000 cgt per annum, but merely required compliance with the technical restrictions set out in particular in the authorising decisions, such as those limiting the number of work stations on the curved panel line to six and the number of work stations on the small panel line to three.’

‘105

Moreover, it has already been held by the Court of Justice and the Court of First Instance that although construction capacity – in the present case 85 000 cgt per annum – is by its nature capacity for production purposes, that concept is not in itself the same as “actual production” (Alpha Steel v Commission [Case 14/81 [1982] ECR 749], paragraph 22; Joined Cases 311/81 and 30/82 Klöckner-Werke v Commission [1983] ECR 1549, paragraph 23; Joined Cases T-164/96 to T-167/96, T-122/97 and T-130/97 Moccia Irme and Others v Commission [1999] ECR II-1477, paragraph 138) or “maximum production achievable under optimum conditions” (Skibsværftsforeningen and Others v Commission, paragraph 174).

106

According to that case‑law, a capacity restriction may, as is apparent in the present case from the wording of the authorising decisions, relate to “production achievable under favourable normal conditions, given the facilities available” and not express an actual maximum production which may not be exceeded even under exceptionally favourable conditions. The Commission cannot convincingly argue that the capacity restriction imposed on the applicant, even though relating to “the production achievable under favourable normal conditions, given the facilities available”, nevertheless indicates a maximum actual production which may not be exceeded in any event … . If the capacity restriction reflects production achievable under favourable normal conditions, that in itself implies that the figure indicated by that restriction may be exceeded in periods of optimal conditions. Contrary to the Commission’s assertions, that finding is not incompatible with the objective of Directive 90/684. That objective, reduction in excess capacity, is achieved by restricting the applicant’s capacity at the level of its assembly lines, which ensures that in normal conditions 85 000 cgt per annum will not be exceeded.’

‘107

Lastly, several documents submitted by the applicant confirm that the capacity restriction imposed on it relates to the production achievable under favourable normal conditions, given the facilities available.

108

Thus, the minutes of a meeting held on 1 June 1993 concerning privatisation of the shipyards in the former German Democratic Republic state as follows: “The Danish, Italian and UK delegates were expressing their worry that the actual production would exceed the assigned capacity after the investments would be implemented. The Commission was confident that future production would not exceed the agreed capacity limits because of the technical bottlenecks in the investment plans, because of the present and future monitoring of the investment plans together with the contractual capacity limits in the privatisation contracts, because of the German Government’s undertaking to respect the limits and because all aid payments are conditional on respect of the capacity limits.” That discussion between the Danish, Italian and UK delegations, on the one hand, and the Commission, on the other, would be meaningless if the capacity restriction of 85 000 cgt were to be understood as an absolute limit on actual production. In such a case it would have sufficed for the Commission to explain that the 85 000 cgt limit per annum was a ceiling on actual production and that the applicant was quite simply prohibited from producing above that ceiling. The position adopted by the Commission at that meeting indicates, on the contrary, that its confidence that production would be lower or equal to 85 000 cgt [per annum] was based simply on the calculation that the technical restrictions on the applicant’s installations would normally prevent it from producing more than that tonnage per annum.

109

Likewise, the Commission’s report on the monitoring of the privatisation of shipyards in the former German Democratic Republic annexed to the letter of 6 May 1993 addressed to the Permanent Representative of the Federal Republic of Germany states that, in the Commission’s view, the capacity restriction was constituted by the entirety of the technical restrictions imposed:

“... the significant technical restrictions contained in the investment plans ensure compliance with the capacity restrictions for each shipyard, even though it seems necessary to maintain detailed monitoring when the investments are implemented. The main technical bottlenecks and conditions guarantee the capacity restriction ...”.’

‘110

It follows from the whole of the foregoing that the applicant has duly proved that the Commission committed a manifest error of appraisal in treating in the contested decisions, contrary to its approach in the authorising decisions, the concept of a capacity restriction as a limit on actual production. Since the Commission based the contested decisions on the mere fact that the applicant’s actual production in 1997 and 1998 exceeded 85 000 cgt (see, in that regard, points 60 and 108 of Decision 1999/675 and points 47 and 84 of Decision 2000/336), the operative parts of those decisions are vitiated in their entirety by that error of appraisal.

111

It should be observed in that regard that the sole basis for the contested decisions is the simple fact that actual production exceeded 85 000 cgt per annum. The Commission neither examined, nor alleged, that the excess production during the years in question is the result of a failure to comply with the restrictive conditions laid down in the authorising decisions.’

On those grounds,

THE COURT (Fifth Chamber)