JUDGMENT OF THE COURT OF FIRST INSTANCE (Fourth Chamber)

29 September 1999 (1)

(Action for annulment - European Social Fund - Reduction of financialassistance - Legitimate expectations - Legal certainty - Sound administration -Inadequate statement of reasons)

In Case T-126/97,

Sonasa - Sociedade Nacional de Segurança, Ld.², a company incorporated underPortuguese law, established in Lisbon, represented by Nuno Morais Sarmento, ofthe Lisbon Bar, with an address for service in Luxembourg at the Chambers ofVictor Gillen, 13 Rue Aldringen,

applicant,

v

Commission of the European Communities, represented by Maria Teresa Figueiraand Knut Simonson, of its Legal Service, acting as Agents, with an address forservice in Luxembourg at the office of Carlos Gómez de la Cruz, also of its LegalService, Wagner Centre, Kirchberg,

defendant,

APPLICATION for annulment of Commission Decision C (96) 3451 of 16December 1996 reducing financial assistance granted to the applicant by theEuropean Social Fund,

THE COURT OF FIRST INSTANCE

OF THE EUROPEAN COMMUNITIES (Fourth Chamber),

composed of: R.M. Moura Ramos, President, V. Tiili and P. Mengozzi, Judges,

Registrar: A. Mair, Administrator,

having regard to the written procedure and further to the hearing on 25 March1999,

gives the following

Judgment

Legal background

1.

    Article 1(2)(a) of Council Decision 83/516/EEC of 17 October 1983 on the tasksof the European Social Fund (OJ 1983 L 289, p. 38; hereinafter 'Decision 83/516‘)provides that the European Social Fund (hereinafter the 'ESF‘) is to participatein the financing of operations concerning vocational training and guidance.

2.

    Projects for the financing of such operations, which must be submitted by aMember State or by a body appointed by that State, are approved by Commissiondecision. Under Article 2(2) of Decision 83/516, the Member State in whose namethe project is submitted must guarantee the successful completion of the operation.

3.

    Article 5(4) of Council Regulation (EEC) No 2950/83 of 17 October 1983 on theimplementation of Decision 83/516 (OJ 1983 L 289, p. 1; hereinafter 'RegulationNo 2950/83‘) provides that final payment claims are to contain a detailed reporton the content, results and financial aspects of the relevant operation and requiresthe Member State concerned to certify the accuracy of the facts and accounts inthe payment claims.

4.

    Article 6(1) of that regulation provides that, when ESF assistance is not used inconformity with the conditions set out in the decision of approval, the Commissionmay suspend, reduce or withdraw the aid after having given the Member Stateconcerned an opportunity to comment.

5.

    Article 6(2) provides that sums paid which are not used in accordance with theconditions laid down in the decision of approval are to be refunded.

Facts

6.

    The Departamento para os Assuntos do Fundo Social Europeu (Department ofEuropean Social Fund Affairs; hereinafter 'the DAFSE‘) represents thePortuguese State in matters relating to the ESF. It is the sole and mandatory pointof contact between the Commission departments responsible for the operationssubsidised by the ESF, and the public and private bodies in Portugal seeking ESFassistance.

7.

    The applicant, Sonasa - Sociedade Nacional de Segurança Ld.² (hereinafter'Sonasa‘) applied to the DAFSE for financial assistance from the ESF for avocational training programme to be carried out during 1989.

8.

    The DAFSE subsequently submitted that application to the Commission in thename of the Portuguese State and for the benefit of the applicant.

9.

    The project for which assistance was sought was approved by Commission DecisionC (89) 0570 of 22 March 1989 (hereinafter 'the decision of approval‘) granting theapplicant PTE 35 083 325 for the training of 249 persons below 25 years of age.

10.

    The Portuguese State undertook, for its part, to contribute PTE 28 704 538 infunds for the applicant's project through the Orçamento da SegurançaSocial/Instituto de Gestão Financeira da Segurança Social (Social SecurityBudget/Social Security Financial Management Institute; hereinafter 'OSS/IGFSS‘).

11.

    On 8 May 1989 and 5 July 1989, in the course of the training programme, theapplicant received advance payments of the aid granted by the ESF and theOSS/IGFSS.

12.

    Following a check carried out in July 1989, the DAFSE found that the length of thetraining programme had been curtailed and that the number of participants initiallyprovided for had dropped, leading it to conclude that the assistance should bereduced. However, it later revised that view and, by letter of 6 March 1990 to theCommission, recommended that the initial decision of approval be maintained.

13.

    On completion of the training project, the applicant presented the DAFSE with therelevant financial statement - which suggested that the actual total cost was lowerthan initially estimated - together with a final payment claim. Both documentswere sent to the Commission on 27 October 1990.

14.

    When it first examined the final payment claim, the DAFSE had misgivings as tothe accuracy of the details given. Nevertheless, on 27 June 1991, it made anotherpart payment, specifying that this was to remain conditional upon a finding by theCommission that the statement of accounts was in order.

15.

    On 20 August 1991 the DAFSE informed the Commission that, after reviewing thefile, it accepted the statement of accounts submitted by Sonasa.

16.

    On receiving that information, the Commission asked the DAFSE to study theapplicant's file at greater length.

17.

    On 12 October 1992 the DAFSE informed the applicant that an independentundertaking had been commissioned to carry out an audit of its occupationaltraining programme.

18.

    In a report prepared in October 1993, the undertaking responsible for the auditrecommended a reduction in the funding granted for the occupational trainingprogramme conducted by Sonasa, on the ground that certain expenditure must beregarded as ineligible for funding. The report states inter alia that the trainees hadbeen given only one week of practical training and had been put to work in thesame way as if they had been ordinary employees in the service of the undertaking.

19.

    On 1 February 1996, following several exchanges of opinion between Sonasa andthe DAFSE concerning the findings of the audit and in accordance with theprocedures laid down in Article 100 of the Portuguese Code of AdministrativeProcedure, the DAFSE adopted the decision to propose to the Commission thatthe financial assistance be reduced.

20.

    By letter of 20 March 1996, the DAFSE called on the applicant to reimburse partof the advance payments given for its training programme, specifying that thisrequest was without prejudice to the decision concerning the definitive amount ofESF funding, which the Commission had yet to adopt.

21.

    The results of the audit were passed to the Commission by the Portuguese Stateon 5 September 1996.

22.

    On 16 December 1996 the Commission adopted Decision C (96) 3451 (hereinafter'the contested decision‘) on the basis of Article 6(1) of Regulation No 2950/83. This decision, by which the Commission reduced the amount of ESF assistanceoriginally granted for Sonasa's occupational training programme, was notified to theapplicant on 19 February 1997.

Procedure and forms of order sought

23.

    In those circumstances, by application lodged at the Registry of the Court of FirstInstance on 22 April 1997, the applicant brought the present action for annulmentof the contested decision.

24.

    Upon hearing the report of the Judge-Rapporteur, the Court of First Instance(Fourth Chamber) decided to open the oral procedure and to put a number ofwritten questions to the Commission, to which the Commission replied on 3 March1999.

25.

    The parties presented oral argument at the hearing which took place in open courton 25 March 1999.

26.

    The applicant claims that the Court should:

-    annul the contested decision;

-    order the defendant to pay the costs.

27.

    The defendant contends that the Court should:

-    dismiss the action as unfounded;

-    order the applicant to pay the costs.

Substance

28.

    The applicant puts forward three pleas in law in support of its action forannulment: (i) breach of the general principles of legal certainty, protection oflegitimate expectations, and sound administration; (ii) breach of the principle ofobservance of vested rights; and (iii) failure to state sufficient reasons in thecontested decision.

The first plea: breach of the principles of legal certainty, protection of legitimateexpectations, and sound administration

Arguments of the parties

29.

    The applicant points out that:

(a)    after approving the training programme, the DAFSE and the Commissionrevised their opinion several times with respect to the amount of fundinggranted for its completion. For instance, they abandoned the decision thatthe funding should be reduced because certain training periods which

nominally formed part of the theory content of the programme ('theorymodules‘) had, on the contrary, a practical bias, contrary to the rule thatpractical training should not predominate at the expense of a grounding intheory;

(b)    in particular, after the DAFSE had corrected the negative view formed atan early stage in the programme, formally attributing this to a substantiveerror in its evaluation - that is to say, after the programme had alreadybeen completed and the DAFSE had indicated to the Commission itsacceptance of the costs structure and the financial situation set out in thefinal payment claim, and had even paid the share of funding due from theState - the DAFSE resumed its criticism and again reduced the amount offunding initially provided for, seeking to recover part of the monies paid;

(c)    the Commission's failure to respond to the letters from the DAFSE couldonly mean that it approved and confirmed the DAFSE's conclusions;

(d)    the fact that the DAFSE paid one of the remaining instalments of financialassistance after approving the financial statement set out in the finalpayment claim had given rise to the legitimate expectation that theapplicant's entitlement to the funding had been recognised;

(e)    the Commission adopted the contested decision confirming the DAFSE'sfinal position on reduction of the financial assistance, without ever verifyingeither the DAFSE's assertions or its findings concerning the financialstatement, and allowing seven years to elapse as from receipt of the finalpayment claim.

30.

    On the basis of the points set out above, the applicant maintains that theCommission acted in flagrant breach of the general principles of legal certainty,protection of legitimate expectations and sound administration.

31.

    The defendant contends that:

(a)    the contested decision is not based solely on the classification of the trainingperiods nominally devoted to theory (the 'theory modules‘), but also on thefact that the applicant had arranged training for only 137 out of the 249trainees initially provided for, and on the finding that other conditions towhich the approved application was subject had not been satisfied;

(b)    the DAFSE's payment of the provisional balance representing both theState contribution and the ESF funding does not mean that it acknowledgedthe sum paid as being in fact due. It is quite clear from the relevantPortuguese legislation in force that such payment was made subject to theCommission's subsequent verification of the accounts when it came to adoptthe decision approving final settlement;

(c)    it is settled law that the last word on final payment claims rests with theCommission, not the national authorities;

(d)    the Community legislation applicable to the ESF does not require theCommission to carry out an independent investigation of the situation andallows it to base its final decision on recommendations, duly reasoned, madeby the Member State.

Findings of the Court

32.

    The Court will consider in turn each of the three grounds of complaint raised bythe applicant.

- Breach of the principle of protection of legitimate expectations

33.

    The right to rely on the principle of protection of legitimate expectations extendsto any economic operator to whom an institution has given justified hopes (CaseT-81/95 Interhotel v Commission [1997] ECR II-1265, paragraph 45).

34.

    However, it is settled law that the principle of protection of legitimate expectationsmay not be relied upon by an undertaking which has committed a manifestinfringement of the rules in force (Joined Cases T-551/93, T-231/94, T-232/94, T-233/94 and T-234/94 Industrias Pesqueras Campos and Others v Commission [1996]ECR II-247, paragraph 76).

35.

    It should be noted at the outset that the contested decision was taken pursuant toArticle 6(1) of Regulation No 2950/83, which provides that when ESF assistanceis not used in conformity with the conditions set out in the decision of approval theCommission may suspend, reduce or withdraw the aid after having given therelevant Member State an opportunity to comment.

36.

    It is clear from that provision that the grant of ESF funding depends on therecipient's compliance with the conditions laid down by the Commission in thedecision of approval. Consequently, where those conditions are not satisfied, therecipient cannot legitimately expect payment in full of the amount granted in thatdecision.

37.

    The Commission was thus empowered by Regulation No 2950/83 to check whetherthe ESF funding had been used in accordance with the conditions set out in thedecision of approval granting the applicant the sum of PTE 35 083 325 by way offinancial assistance for the vocational training of 249 persons. In dealing with thefinal payment claim, the Commission was required to consider, after hearing theviews of the Member State concerned, whether there had been any infringements

of the above conditions such as to justify reduction of the assistance pursuant toArticle 6 of Regulation No 2950/83 (Case T-73/95 Oliveira v Commission [1997]ECR II-381, paragraphs 30 and 31).

38.

    However, it is common ground that the number of trainees taking part in Sonasa'svocational training programme had dropped remarkably (from 249 to 137) and thatthe duration of the programme had been considerably curtailed. Furthermore, theCommission discovered from its reading of the auditors' report that the traineeshad had only one week of practical training and had been put to work in the sameway as if they had been ordinary employees in the service of the undertaking.

39.

    It follows that the applicant manifestly failed to comply with the requirementsgoverning the grant of ESF funding. Consequently, it cannot rely on the principleof protection of legitimate expectations in order to seek annulment of the contesteddecision.

40.

    Moreover, the applicant cannot validly maintain that the DAFSE's payment of allor part of the assistance, after accepting the financial statement submitted with thefinal payment claim, gave it a legitimate expectation that the amount of fundinginitially approved would be paid in full.

41.

    It must be borne in mind that it is the Commission which takes the decision onfinal payment claims and it is the Commission - and the Commission alone - whichhas the power to reduce ESF financial assistance, in accordance with Article 6(1)of Regulation No 2950/83 (Case T-85/94 (122) Commission v Branco [1995] ECRII-2993, paragraph 23).

42.

    Although the DAFSE, like any other national authority which has competence inthe area of the financing of ESF programmes, may, in a final payment claimsubmitted in accordance with Article 5(4) of Regulation No 2950/83, propose eitherthe acceptance or the reduction of ESF financial assistance, the Commission alonehas the power to take such a decision. Furthermore, any payment made by thecompetent national authorities must be regarded as provisional, in that it isconditional upon the final decision taken by the Commission.

43.

    It is also apparent from the documents before the Court that the DAFSEconsistently made it clear to the applicant that the payments received wereprovisional, and conditional upon that decision.

44.

    Accordingly, all the communications addressed by the DAFSE to the applicant orto the Commission concerning acceptance of the ESF assistance or a possiblereduction must be regarded merely as proposals made by the national authority inthe course of ensuring the successful completion of the training programmes, inaccordance with the duty placed on national authorities by Article 2(2) ofDecision 83/516.

45.

    It follows that the applicant cannot, in the present case, rely on the principle ofprotection of legitimate expectations in order to seek annulment of the contesteddecision.

46.

    That ground of complaint is therefore without foundation.

- Breach of the principle of legal certainty

47.

    Nor can the applicant rely on the principle of legal certainty in order to seekannulment of the contested decision. That principle, which requires that legal rulesbe clear and precise, and aims to ensure that situations and legal relationshipsgoverned by Community law remain foreseeable (Case C-63/93 Duff and Others[1996] ECR I-569, paragraph 20), cannot be regarded as having been breached inthe present case, since the applicable rules expressly provide for the possibility offinancial assistance being recovered in cases where the conditions to which itspayment is subject have not been fulfilled (Interhotel v Commission, cited above,paragraph 61).

48.

    That ground of complaint is therefore without foundation.

- Breach of the principle of sound administration

49.

    It should be observed that the Commission acted with due diligence.

50.

    First, on receiving the financial and accounting statement on 5 September 1996, theCommission adopted the contested decision on 16 December 1996.

51.

    Secondly, the contested decision is not based exclusively on that statement, or onthe appraisal of the content of the 'theory modules‘. On the contrary, it is clearfrom the reasons given in the decision that the Commission relied on all thedocuments passed to it by the DAFSE.

52.

    Thirdly, the grant of ESF financial assistance is based on close collaborationbetween the Commission and the Member States, which places Member Statesunder an obligation to facilitate the checks made by the Commission to establishwhether the activities completed or in course of completion comply with therelevant provisions (Case T-85/94 Branco v Commission [1995] ECR II-45,paragraph 35; Case 310/81 EISS v Commission [1984] ECR 1341, paragraph 14). It should also be borne in mind that, pursuant to Article 2(2) of Decision 83/516,the Member State in whose name the project is submitted must guarantee itssuccessful completion. Accordingly, the applicant cannot take issue with theCommission for basing its conclusions on the information gathered by the MemberState concerned.

53.

    In the present case, and notwithstanding the length of time which elapsed betweenthe date on which the final payment claim was received and that on which thecontested decision was adopted, the Commission acted properly in awaiting theoutcome of the audit commissioned by the DAFSE, which was in turn justified bythe number of irregularities found in the case (see paragraph 38). Accordingly, theCommission's conduct in awaiting the results of the audit cannot constitutedisregard for the principle of sound administration.

54.

    Furthermore, the fact that the Commission was aware of the various views adoptedby the DAFSE in no way means that the Commission was responsible for thenational authority's conduct. Although, admittedly, the Commission could havecalled upon the DAFSE to speed up the procedure, the fact remains that it wasobliged to take its decision on the basis of all the information which might have abearing on the result (Oliveira v Commission, cited above, paragraph 32). Thatbeing so, the Commission cannot be criticised for having awaited completion of theinvestigation conducted by the national authority before adopting its decision.

55.

    The third ground of complaint is therefore without foundation.

56.

    It follows that the first plea in law must be rejected as being unfounded in itsentirety.

The second plea: breach of the principle of observance of vested rights

Arguments of the parties

57.

    According to the applicant, the facts show beyond a doubt that the Commissiondirectly impaired its vested rights. The decision of approval conferred rights on theapplicant individually, entitling it to demand full payment of the financial assistance.

58.

    The defendant contends that the recipient of assistance for which the applicationwas approved by the Commission does not thereby acquire any definitive right tofull payment of the assistance if it does not satisfy the conditions set out in thedecision of approval. Accordingly, the applicant could not legitimately expect allthe expenditure taken into account on its initial application for financial assistanceto be ultimately accepted.

Findings of the Court

59.

    It is settled law that the recipient of assistance for which the application wasapproved by the Commission does not thereby acquire any definitive right to fullpayment of that funding if it does not satisfy the conditions to which the assistancewas subject (Interhotel v Commission, cited above, paragraph 62).

60.

    As the Court has already pointed out in paragraphs 38 and 39 above, the applicantfailed to comply, in the present case, with the conditions to which the vocationaltraining was subject.

61.

    It follows that the second plea in law, alleging disregard for the principle ofobservance of vested rights, must also be rejected.

The third plea: failure to state sufficient reasons

Arguments of the parties

62.

    The applicant claims that the Commission adopted the decision solely in the lightof the DAFSE's conclusions, which were in turn based exclusively on the results ofthe audit, which was grounded in speculation. Accordingly, the reasons given bythe Commission for its decision were not only vague but incomplete, in that theywere based on documents vitiated by the same defects.

63.

    The defendant emphasises that, on the contrary, in a situation such as that in thepresent case, where the Commission simply upholds a proposal by the MemberState to reduce assistance initially granted, its decision must be regarded as beingadequately reasoned provided that it refers to that proposal with sufficient clarity.

Findings of the Court

64.

    According to a consistent line of case-law, the purpose of the obligation to state thereasons on which an individual decision is based is to enable the Communityjudicature to review the legality of the decision and to provide the personconcerned with sufficient information to make it possible to ascertain whether thedecision is well founded or whether it is vitiated by a defect which may permit itslegality to be contested. The extent of that obligation depends on the nature of themeasure in question and on the context in which it was adopted (Branco vCommission, cited above, paragraph 32).

65.

    It has already been held that a decision to reduce ESF assistance initially granted,given the serious consequences for the recipient of that assistance, must clearlyshow the grounds justifying a reduction in the amount initially authorised (CaseT-450/93 Lisrestal v Commission [1994] ECR II-1177, paragraph 52).

66.

    Consequently, it is necessary to consider whether, in the present case, the contesteddecision satisfies the requirements laid down by Article 190 of the EC Treaty (nowArticle 253 EC), as interpreted by the Community judicature.

67.

    It has already been established that, according to the relevant legislation and case-law, the grant of ESF financial assistance is based on close collaboration betweenthe Commission and the Member States.

68.

    Consequently, where the Commission merely confirms the proposal of a MemberState to reduce assistance initially granted, as in this case, its decision may beregarded as adequately reasoned, for the purposes of Article 190 of the Treaty, ifit either clearly sets out itself the reasons justifying the reduction or, failing that,refers with sufficient clarity to a measure of the competent national authorities ofthe Member State concerned in which those authorities set out clearly the reasonsfor such a reduction (Branco v Commission, cited above, paragraph 36).

69.

    In the present case, the contested decision gives precise reasons for theCommission's reduction of the financial assistance initially granted, and alsomentions the DAFSE documents on which the Commission relied.

70.

    The third plea in law, alleging failure to state sufficient reasons, must therefore berejected as unfounded.

71.

    It follows from all the foregoing that the action must be dismissed in its entirety.

Costs

72.

    Under Article 87(2) of the Rules of Procedure, the unsuccessful party is to pay thecosts if they have been applied for in the successful party's pleadings. Since theapplicant has been unsuccessful and the defendant has applied for costs, theapplicant must be ordered to bear all the costs.

On those grounds,

THE COURT OF FIRST INSTANCE (Fourth Chamber)

hereby:

1.    Dismisses the action;

2.    Orders the applicant to pay all the costs.

Moura RamosTiili Mengozzi

Delivered in open court in Luxembourg on 29 September 1999.

H. Jung

R.M. Moura Ramos

Registrar

President

1: Language of the case: Portuguese.

ECR