61989C0044

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My Lords,

1. This case is a sequel to Case 120/86 Mulder v Minister van Landbouw en Visserij [1988] ECR 2321 and Case 170/86 Von Deetzen v Hauptzollamt Hamburg-Jonas [1988] ECR 2355, in which the Court held that Council Regulation No 857/84 of 31 March 1984 (Official Journal 1984 L 90, p. 13), as supplemented by Commission Regulation No 1371/84 of 16 May 1984 (Official Journal 1984 L 132, p. 11), was invalid in so far as it did not provide for the allocation of a reference quantity ("quota") to milk producers who had entered into an undertaking under Council Regulation No 1078/77 of 17 May 1977 (Official Journal 1977 L 131, p. 1). As a result of those judgments, both given on 28 April 1988, the Council adopted Regulation No 764/89 of 20 March 1989 (Official Journal 1989 L 84, p. 2), inserting an Article 3a in Regulation No 857/84, and the Commission adopted Regulation No 1033/89 of 20 April 1989 (Official Journal 1989 L 110, p. 27), inserting an Article 7a in Commission Regulation No 1546/88 of 3 June 1988 (Official Journal 1988 L 139, p. 12), the consolidating regulation which replaced Regulation No 1371/84). I shall refer to those two new provisions as "the new Article 3a" and "the new Article 7a" respectively.

2. The effect of the new legislation was to make it possible for persons to receive a quota who, like Mr von Deetzen, had entered into a non-marketing undertaking in return for a premium, under Regulation No 1078/77. I shall call the quota available under the new Article 3a "special quota". Mr von Deetzen has now reached the age of retirement, and wishes to make arrangements for his sons to take over the farm.

3. On 19 December 1988, following the judgment of the Court in Case 170/86 Von Deetzen (cited above), the Finanzgericht Hamburg originally referred the following two questions to the Court for a preliminary ruling:

(1) Is Article 177 of the EEC Treaty to be interpreted as meaning that a further request for a preliminary ruling is permissible where the national court cannot reach a decision because the competent Community institutions have not enacted any legislation following a declaration by the Court of Justice that certain legislation is invalid, and measures need to be adopted in order to remedy that legal situation?

(2) If Question 1 is answered in the affirmative, what is the effect of the Court' s judgment of 28 April 1988 in Case 170/86 inasmuch as the Council of the European Communities has taken no action since then?

Those questions obviously ceased to be relevant when the Council and the Commission finally adopted the new legislation in March and April 1989. By an Order dated 8 August 1989, registered at the Court on 20 October 1989, the Finanzgericht accordingly withdrew the questions previously referred and substituted the following:

(1) Are Council Regulation (EEC) No 857/84 of 31 March 1984, as amended by Council Regulation (EEC) No 764/89 of 20 March 1989, and Commission Regulation (EEC) No 1033/89 of 20 April 1989, based upon it, valid in so far as the special reference quantity under Article 3a(2) is equal to only 60% of the quantity of milk or milk equivalent by reference to which the non-marketing or conversion premium was established?

(2) Is the second paragraph of Article 3a(4) of Regulation No 857/84, under which the special reference quantity is to be returned to the Community reserve if the holding is sold or leased before the end of the eighth period of application of the additional levy scheme, valid?

(3) If Question 2 is answered in the affirmative:

(a) For the purposes of the second paragraph of Article 3a(4) of Regulation No 857/84 as amended by Regulation No 764/89, is the concept of "sale" to be interpreted as including the arrangement of the farm as a private firm [Gesellschaft buergerlichen Rechts] of which the producer to whom the special reference quantity is granted is a partner?

Can a "sale" be said to have occurred if the person having arranged his farm as a private firm ceases to be a partner of that firm on account of death or for some other reason and his share accrues to the other members?

(b) How are the words "by any similar transaction" to be construed for the purpose of the first paragraph of Article 7a of Regulation No 1546/88 as amended by Regulation No 1033/89? Do they cover the leasing of the farm to a person who, under the statutory rules of succession, stands to inherit from the producer entitled to the special reference quantity?

The first question

4. The first question referred by the Finanzgericht concerns the validity of a restriction on the amount of special quota which can be allocated, contained in paragraph 2 of the new Article 3a. By that paragraph, special quota was limited to 60% of milk delivered or milk equivalent sold by the producer during the year preceding his application for a non-marketing or conversion premium ("the 60% rule").

5. On 12 July 1980, Mr von Deetzen was awarded a non-marketing premium calculated on the basis of his previous milk production of 190 665 kg, in return for which he was to refrain from production until 7 September 1985. Applying the 60% rule, on 20 June 1989 the Landwirtschaftskammer Weser-Ems allocated him a special quota limited to 114 399 kg (i.e. 60% of 190 665 kg).

6. Since the present questions were referred, however, the validity of the 60% rule has been considered by the Court in Case C-189/89 Spagl and in Case C-217/89 Pastaetter (judgments given on 11 December 1990). In those cases the rule was held to be invalid, and it will suffice to follow those judgments in the present case.

The second question

7. The second question referred by the Finanzgericht concerns the validity of the provision in paragraph 4, second subparagraph, of the new Article 3a, according to which special quota is to be returned to the Community reserve "where the holding is sold or leased before the end of the eighth period of application of the additional levy scheme" - i.e. before 1 April 1992 ("the forfeiture rule"). As the Finanzgericht points out, the sale or lease of a holding does not lead to such a forfeiture of quota in the case of producers who did not have to rely upon the new Article 3a to receive their allocation. In the case of such producers, Article 7(1) of Regulation No 857/84, as amended by Council Regulation No 590/85 of 26 February 1985 (Official Journal 1985 L 68, p. 1), provides that:

"Where a holding is sold, leased or transferred by inheritance, all or part of the corresponding reference quantity shall be transferred to the purchaser, tenant or heir according to procedures to be determined."

Those procedures are now to be found in Article 7 of Commission Regulation No 1546/88, which in its first paragraph provides that:

" ...

1. Where an entire holding is sold, leased or transferred by inheritance, the corresponding reference quantity shall be transferred in full to the producer who takes over the holding.

2. Where one or several parts of a holding is sold, leased or transferred by inheritance, the corresponding reference quantity shall be distributed among the producers operating the holding in proportion to the areas used for milk production or according to other objective criteria laid down by Member States. (...)

3. The provisions of points 1 and 2 ... shall be applicable under the various national rules, in other cases of transfer which have comparable legal effects as far as producers are concerned.

..."

8. Detailed rules for the transmission of special quota were provided by the new Article 7a, which, it will be recalled, was inserted in Regulation No 1546/88 by Regulation No 1033/89. As we saw above, Article 7 provides rules for the transmission of quota in the normal case. The first paragraph of Article 7a provides that special quota is transferred in accordance with the same rules "in the event of the transfer of the holding by inheritance or by any similar transaction". In such a case, therefore, there is no difference between rules applying to recipients of special quotas, and those applying to producers who did not participate in a non-marketing scheme. In the light of point 3 of the first paragraph of Article 7 (cited above), a "similar transaction" for the purposes of the new Article 7a means one which has "comparable legal effects as far as producers are concerned".

9. Where the holding is transferred by sale or lease, however, different rules apply to those who did not participate in a non-marketing scheme, on the one hand, and recipients of special quota, on the other: only in the latter case is quota forfeited under paragraph 4, second subparagraph, of the new Article 3a. The second and third paragraphs of the new Article 7a lay down detailed rules for the application of that provision.

10. What is the justification for this different treatment of producers who have been allocated special quotas, as opposed to those who did not participate in a non-marketing scheme? In the sixth recital to Regulation No 764/89, the reasoning is expressed as follows:

"Whereas the quantities granted are not intended to confer an undue advantage but must in fact be produced by those to whom they are allocated; whereas such quantities should therefore be made subject to certain restrictive conditions;".

There are, in fact, a number of such "restrictive conditions" in the new Article 3a. In particular, applicants for special quota must not have ceased farming or transferred the whole of their dairy enterprise before the end of the period of their non-marketing undertaking (Article 3a(1)(a) ); they must establish that they are able to produce on their holding up to the quantity requested (Article 3a(1)(b) ); they must establish, within two years from 29 March 1989, that they have resumed sales or deliveries up to a level of at least 80% of the quantity provisionally allocated (Article 3a(1) and (3); I note that 29 March 1989, the date of publication of the regulation in the Official Journal, is the earliest date for applications for special quota, and applications must be made within three months of that date: see Article 3a(1) ). Unused quota may not be made the subject of a temporary transfer (Article 3a(4), first subparagraph). Finally, the condition with which we are presently concerned, the quota must be returned to the Community reserve if the holding is sold or leased before the end of the "eighth period", i.e. before 1 April 1992 (Article 3a(4), second subparagraph).

11. As the Council points out in its written observations, these provisions are clearly designed to prevent the farmer obtaining a special quota merely in order to increase the market value of his holding, as opposed to making use of the quota by continuing to produce. Notwithstanding the doubts of the Finanzgericht, this reasoning appears to me to be sufficiently expressed in the sixth recital to Regulation No 764/89 (cited above). Thus, the difference in treatment as between applicants for special quota, on the one hand, and quota holders who did not participate in a non-marketing scheme, on the other, can be explained by the fact that the former group are proposing to return to milk production after participating in such a scheme. The requirement that the holding is not to be sold or leased before 1 April 1992 can then be seen to be an integral part of a group of conditions which require an applicant for special quota genuinely to return to milk production at a level corresponding to the quota for which he has applied.

12. It is true that in Case 170/86 (cited above in paragraph 1), Mr von Deetzen was held to have a legitimate expectation of resuming production without being subject, upon expiry of his non-marketing undertaking, to "restrictions which specifically affect him precisely because he availed himself [of a non-marketing scheme]" (see paragraph 13 of the judgment). Furthermore it cannot be denied that the restrictive conditions in the new Article 3a include restrictions which specifically affect those returning to production after participation in such a scheme. Only in the case of these producers is the retention of quota linked with the use of the quota to farm.

13. It seems to me however that the scope of the legitimate expectations at issue must be more carefully defined. In paragraph 15 of its judgment in Case 170/86, the Court put the matter as follows:

"... a total and continuous exclusion ... for the entire period of application of the regulations on the additional levy, preventing the producers concerned from resuming the marketing of milk at the end of the five-year period, was not an occurrence which those producers could have foreseen when they entered into an undertaking, for a limited period, not to deliver milk. There is nothing in the provisions of Regulation No 1078/77 or in its preamble to show that the non-marketing undertaking entered into under that regulation might, upon its expiry, entail a bar to resumption of the activity in question. Such an effect therefore frustrates those producers' legitimate expectation that the effects of the system to which they had rendered themselves subject would be limited." (my emphasis)

Similarly, in Case C-189/89 Spagl and Case C-217/89 Pastaetter (cited above in paragraph 6), the Court found the 60% rule to be invalid. The Court held that if special quota were to be limited to 60% of previous production, the farmer returning to production would be subject to a limitation on production which was more than twice the maximum reduction suffered by those who had not participated in a non-marketing scheme (see paragaph 24 of the judgment in Spagl, and paragraph 15 in Pastaetter). In other words, the farmer who had agreed to suspend production for a limited period would find himself subject to a further restriction on production which specifically affected him on his return to farming activity. Thus, although Spagl and Pastaetter go further than Case 170/86, in that they were concerned with a restriction not amounting to a total ban on milk production, they were none the less still concerned with the legitimate expectation of resuming production at the end of a non-marketing period.

14. Such a legitimate expectation must be taken to include, not only the return to production of the farmer himself, but also that of an heir or similar successor: see Case C-314/89 Rauh v Hauptzollamt Nuernberg-Fuerth, judgment of 21 March 1991. In that case, the prospective heir of farmers who had participated in a non-marketing scheme had taken over the holding from his parents after their non-marketing undertaking had expired, but before it had become possible to apply for a special quota. The Court held that the right to apply for a quota must be taken to extend, not only to farmers who had given the undertaking, but also to those who had taken over the holding by inheritance or similar transaction: see paragraph 23 of the judgment. The rationale of the decision, in my view, is that in such a case, a producer' s farming activities can be said to be continued by his or her successor, the producer accordingly having a legitimate expectation that farming could continue by that means. Such an expectation does not in my opinion extend to the transfer of quota to a person unconnected with the producer by means of a commercial transaction of sale or lease.

15. It seems to me, therefore, that the Commission is correct in saying that the legitimate expectation of those who participated in a non-marketing scheme was that of returning to production after the non-marketing period had expired, rather than that of being able to realize the market value of the quota. Thus, when Mr von Deetzen entered into his non-marketing undertaking, no legitimate expectation arose of reaping the incidental financial rewards of a quota system which, at the time the undertaking was entered into, was not yet in existence.

16. It follows that the legitimate expectations of a returning producer are not frustrated by conditions which are designed to ensure that his return is more than merely transitory or partial. In particular, the condition that a holding should not be transferred (except by inheritance or similar transaction) before 1 April 1992, that is to say within three years of allocation of the special quota, cannot be said to frustrate the legitimate expectations of the producer.

17. Nor, in my view, does such a condition infringe any other general principle of Community law. It is true that the restriction does treat recipients of special quota differently, in that they are subject to a limitation not imposed on other quota holders. It seems to me however that this is a difference of treatment which does not constitute discrimination, since it can be justified by the different circumstances of the two groups of farmers. Those who were returning to production after the expiry of a non-marketing undertaking were returning at a time when the quota system had been in existence for a number of years, in the course of which quotas had become a valuable asset. It is for good reason, therefore, that such farmers were made subject to conditions preventing them from obtaining a purely financial advantage from the allocation of quota. There was no need to impose such conditions at the time quotas were first introduced, when quotas had not yet acquired a market value.

18. Furthermore, it does not seem to me that the forfeiture rule can be regarded as an unjustified impairment of the right to property. It is true that it constitutes a temporary restriction on the profitable disposal of a farming business. In my view, however, the restriction is one which can be justified by the need to discourage a return to production which has the sole purpose of augmenting the value of a holding (by receiving an allocation of quota), as opposed to using the quota to farm. Allowing the transmission of quota in such circumstances would have the consequence of increasing the total pool of quota, to the prejudice of the Community' s goal of controlling milk production. The only interest it would serve, on the other hand, would be that of the individual farmer hoping to make a speculative gain. As the Court pointed out in Case 265/87 Schraeder v Hauptzollamt Gronau [1989] ECR 2237, the right to property, although forming part of the general principles of law, is not an absolute prerogative, and its exercise may be subject to limited restrictions in the general interest which do not impair the very substance of the right: see paragraph 15 of the judgment.

19. Finally, given that the forfeiture rule applies for a maximum period of three years from the allocation of quota, I do not think that it can be said to infringe the principle of proportionality.

20. In my opinion, therefore, no reason has been found to establish that the provision referred to in the Finanzgericht' s second question is invalid. It is therefore necessary to answer the remaining questions.

The third question

21. The third question, which is divided into two parts, is concerned with the distinction between sale or lease, on the one hand, and transfer by inheritance, on the other. It will be remembered that it is only in the former case that a transfer of the holding leads to a forfeiture of special quota. The object of the question is to determine how that rule applies in various hypothetical situations.

22. In the main proceedings, Mr von Deetzen is in effect seeking advice so as to enable him to make arrangements to retire without forfeiting his quota. I do not think that courts in all of the Member States would consider themselves bound to answer hypothetical questions in such circumstances; but, under Article 177 of the Treaty, this is a matter for the national court. There may of course be circumstances in which, in the context of a reference under Article 177, the Court will decline to answer questions which are entirely general or hypothetical: see Case 244/80 Foglia v Novello [1981] ECR 3045, paragraph 18 of the judgment. Such circumstances are however exceptional, and if the national court considers that the questions raised before it require to be answered, the Court will not as a general rule refuse to do so. On the other hand, where, as here, questions are referred on the effect of transactions whose precise details are unknown, it is evident that the Court will be able to give only general guidelines on the approach to be adopted by the national court.

(a) The concept of "sale"

23. In the first part of the question, the Finanzgericht asks whether the concept of "sale" in paragraph 4, second subparagraph, of the new Article 3a covers the following transactions: (i) where the holding in question is arranged as a private firm of which the quota holder is a partner, and (ii) where he ceases to be a partner on account of death or for some other reason, and his share accrues to the other members.

24. As we have seen, the forfeiture rule can be justified in terms of the objective of preventing an undue advantage from accruing as a result of the allocation of the quota. Such an advantage would arise where the special quota is obtained in order to enhance the immediate market value of the holding, rather than in order to resume production. Conversely, there is no reason for the quota to be forfeited as a result of a transaction which is designed solely to ensure that the quota holder or his heirs can continue farming.

25. It will be recalled that, by point 3 of the first paragraph of Article 7 of Regulation No 1546/88, the rules for the transmission of quota in that paragraph apply "in other cases of transfer which have comparable legal effects as far as producers are concerned". In the case of transfer of the holding "by inheritance or by any similar transaction", the first paragraph of the new Article 7a applies the same rules to the transmission of special quota. The second paragraph of Article 7a, on the other hand, refers simply to the case "where the second subparagraph of Article 3a(4) ... applies". The second paragraph of the new Article 7a does not therefore expressly extend the forfeiture rule to transactions which are "similar" to a sale or a lease. In my view, however, such an extension is implicit in the scheme of the new Article 7a which, like Article 7 of the same regulation, has regard to the effects and not merely the form of the transactions in question.

26. It might be objected that the forfeiture rule is a restriction on the exercise of a quota holder' s property rights, and that express provision would therefore be necessary before the rule could be extended to transactions with "comparable legal effects" to a sale or a lease. In my view, however, it is sufficient that the provisions in question lend themselves to such an extended interpretation, having regard to their wording, context and purpose. That would be so even in the case of the imposition of a penalty: see Case 117/83 Koenecke v BALM [1984] ECR 3291, paragraphs 11-16 of the judgment; it is therefore true a fortiori in the case of provisions which merely restrict the exercise of rights for a limited period. As we have seen, the purpose of the provisions is to prevent the immediate realization of the market value of a quota. Such a realization could be effected by transactions with comparable legal effects to a sale or lease as easily as by sale or lease themselves, and any narrower construction of the new Article 3a(4) and the second paragraph of the new Article 7a would consequently defeat the clear objective of those provisions.

27. The concepts of "sale" and "lease" used in the new Article 3a are therefore to be taken to extend to transactions with "comparable legal effects" on producers. They thus include, not only transactions which have the form of a sale or a lease, but also other transactions in which an interest in the holding is transferred from the quota holder to another party, wherever such transactions are calculated to realize the commercial value of the quota.

28. Whether a transaction is designed solely to promote the continuance of farming by the original quota holder, as opposed to enabling him to realize the market value of the quota, can only be determined by means of an examination of the details of the transaction in question; and that is clearly a task for the national court. Where the transaction consists in the formation of a partnership, the answer to the question will depend upon the details of the partnership agreement and its effects in national law. Thus, the criterion to be applied is whether the formation of the partnership will lead to the exchange of quota, or of the profits derived from working the quota, for a share in other profits or assets. In such circumstances, the commercial value of all or part of the quota will effectively be realized by the quota holder; and this will no doubt generally be the case where the partnership is a commercial arrangement made between persons dealing at arm' s length. A partnership made with prospective heirs, on the other hand, may fall outside the definition of "sale" or "lease" by virtue of being a transaction similar to inheritance: see below, paragraphs 32-33.

29. Similar principles will have to be applied by the national court in classifying transactions whereby the original quota holder ceases to be a partner in a firm. If the transaction has the object or effect of enabling the quota holder to realize the value of his interest by, for instance, being bought out by the remaining partners, it is clear that it can properly be regarded as a "sale" for the purposes of the forfeiture rule; although, as we have seen, an operation equivalent to a "sale" or "lease" may already have taken place at the time of the formation of the partnership.

30. The Finanzgericht also mentions the case in which the quota holder ceases to be a partner on account of death and his share thereby accrues to the other partners. This could, depending upon the circumstances, be more easily seen as "sale" or as "inheritance"; but the problem is, I think, better discussed in the context of the second part of the Finanzgericht' s question (see below, paragraphs 35-36).

(b) The concept of "inheritance or ... similar transaction"

31. It will be recalled that the first paragraph of the new Article 7a provides that, in the event of the transfer of the holding "by inheritance or by any similar transaction", special quota is transferred in accordance with the usual rules applicable to quotas. Such transactions lead therefore to a transfer rather than to a forfeiture of quota. In the second part of its question, the Finanzgericht asks how the words "by any similar transaction" are to be construed, and, in particular, whether they cover the lease of the farm to a statutory heir of the quota holder.

32. As in the case of the interpretation of the notions of "sale" and "lease", it seems to me that the guiding principle should be whether the transaction is one which is calculated to realize the market value of the quota, as opposed to assisting the continued farming activity of the original quota holder. It is clear furthermore that in enacting Articles 7 and 7a of Regulation No 1546/88, the Community legislator recognized that the quota holder' s farming activities can be regarded as being continued by his heirs, who should accordingly be allowed to retain the benefit of the quota.

33. In principle, therefore, transactions "similar" to inheritance can include arrangements made with a prospective heir during the lifetime of the quota holder: see Case C-314/89 Rauh, cited above at paragraph 14. Once again, however, whether a particular arrangement comes within the meaning of "inheritance or ... similar transaction" will depend upon the details of the arrangement in question. There are some transactions which would fall outside the scope of this expression, even if made with a prospective heir: for instance where the holding is sold at full market value. Again, it will be for the national court to examine the details of the transaction in order to determine which objective it is best calculated to serve.

34. In the case of a lease of the holding to a prospective heir, the transaction must again not amount to an indirect means of realizing the value of the quota. Furthermore, the object of the transaction must be to allow farming to be taken over by the prospective heir. Thus, a lease to a prospective heir which does not terminate during the lifetime of the quota holder, and which cannot be sublet or assigned during that period, could fairly be regarded as coming within the meaning of "inheritance or ... similar transaction" for the purposes of the first paragraph of the new Article 7a.

35. On the other hand, not every transmission of an interest consequent upon the death of the quota holder need be regarded as a transaction "similar" to inheritance. To return to the question of the transmission of a share in a partnership upon the death of a partner (see above, paragraph 30), there are clearly circumstances in which this could be an incident of a purely commercial arrangement. In such cases, however, it will have to be considered whether a "sale" took place at the date of the formation of the partnership, or at the date of the quota holder' s death. Although the latter is the date where the quota holder' s interest passes to the other partners, an examination of the terms of the bargain made at the former date might reveal that an operation equivalent to a "sale" had already taken place on that earlier occasion.

36. In contrast, if the partnership is one made with prospective heirs, the transmission of the interest on death would be more naturally seen as an operation similar to inheritance, even if the passing of the share to the other partners is a matter expressly regulated by the partnership agreement, rather than by the will of the quota holder. Again, the true nature of the transaction will have to be gathered from the terms of the bargain made at the time of formation of the partnership, and a relevant transaction may be found already to have taken place at the time the partnership was formed.

Conclusion

37. I am accordingly of the opinion that the questions referred by the Finanzgericht should be answered as follows:

(1) Article 3a, paragraph 2, of Council Regulation No 857/84 of 31 March 1984, as amended by Council Regulation No 764/89 of 20 March 1989, is invalid in so far as it limits the special reference quantity under that provision to 60% of the quantity of milk delivered or the quantity of milk equivalent sold by the producer during the 12 calendar months preceding the application for the non-marketing or conversion premium.

(2) Examination of the questions referred has not revealed any factor of such a kind as to affect the validity of Article 3a(4), second subparagraph, of Regulation No 857/84 as amended by Regulation No 764/89.

(3) (a) For the purposes of the second subparagraph of Article 3a(4) of Regulation No 857/84 as amended by Regulation No 764/89, the concepts of "sale" or "lease" must be interpreted as including transactions which are designed to realize the value of the quota, as opposed to facilitating the continuation of milk production from the holding by the quota holder or his prospective heirs.

(b) The words "transfer of the holding by inheritance or by any similar transaction" in the first paragraph of Article 7a of Commission Regulation No 1546/88 of 3 June 1988, as amended by Commission Regulation No 1033/89 of 20 April 1989, must be interpreted as including transactions between the original quota holder and his prospective heirs which are designed to facilitate the continuation by them of production from the holding, as opposed to realizing the value of the quota.

(*) Original language: English.