**Joined Cases C-346/03 and C-529/03**

**Giuseppe Atzeni and Others**

**v**

**Regione autonoma della Sardegna**

(References for a preliminary ruling from the

Tribunale di Cagliari, sezione civile)

(State aid – Decision 97/612/EC – Preferential loans in favour of agricultural undertakings – Article 92(2)(b) and (3)(a) and (c) of the EC Treaty (now, after amendment, Article 87(2)(b) and (3)(a) and (c) EC) – Admissibility – Legal basis – Legitimate expectations)

Summary of the Judgment

1.        *State aid – Commission decision finding aid to be incompatible with the common market and ordering it to be repaid*

*(EC Treaty, Art. 93 (now Art. 88 EC) and Art. 173, fifth subpara. (now, after amendment, Art. 230, fifth subpara., EC))*

2.        *State aid – Examination by the Commission*

*(EC Treaty, Arts 38 and 92 (now, after amendment, Arts 32 EC and 87 EC), and Arts 42 and 93 (now Arts 36 EC and 88 EC); Council
Regulations Nos 26 and 797/85)*

3.        *State aid – Existing aid and new aid*

4.        *State aid – Examination by the Commission*

*(Council Regulation No 659/1999)*

5.        *State aid – Recovery of unlawful aid*

*(EC Treaty, Art. 93(3) (now Art. 88(3) EC))*

6.        *State aid – Decision of the Commission that aid which has not been notified is incompatible with the common market*

*(EC Treaty, Arts 93(3) and 190 (now Arts 88(3) EC and 253 EC))*

7.        *State aid – Prohibited – Exceptions – Scope – Restrictive interpretation*

*(EC Treaty, Art. 92(2)(b) (now, after amendment, Art. 87(2)(b) EC))*

8.        *State aid – Prohibited – Exceptions – Aid to promote or facilitate the economic development of certain regions or certain
activities*

*(EC Treaty, Art. 92(3)(a) and (c) (now, after amendment, Art. 87(3)(a) and (c) EC))*

1.        The requirements of legal certainty, and more specifically those deriving from the principle of the force of *res judicata*, that it is not possible for a recipient of aid forming the subject-matter of a Commission decision adopted on the basis
of Article 93 of the Treaty (now Article 88 EC), who could have challenged that decision and who allowed the mandatory time-limit
laid down in this regard by the fifth paragraph of Article 173 of the Treaty (now, after amendment, the fifth paragraph of
Article 230 EC) to elapse, to call in question the lawfulness of that decision before the national courts in an action brought
against the measures taken by the national authorities for implementing that decision. To accept that in such circumstances
the person concerned could challenge the implementation of the decision in proceedings before the national court on the ground
that the decision was unlawful would in effect enable the person concerned to overcome the definitive nature which the decision
assumes as against that person once the time-limit for bringing an action has elapsed.

This is particularly the case when the Commission’s decision addressed to the Member State concerned makes explicit reference
to the recipient of the individual aid in question and that State communicated the decision to the recipient, stating that
it could bring an action for annulment thereof.

By contrast, the situation is different when the contested decision, addressed to the Member State, concerns aid schemes intended
for categories of persons defined in a general manner and not explicitly identified recipients, and the decision was not notified
by that Member State to any recipients of the aid in question. In that case, it is not self-evident that an action for annulment
brought against the contested decision brought by the recipients of such aid measures would have been admissible and, accordingly,
references for a preliminary ruling from a national court before which those recipients contest the validity of the decision
and which relate to the validity thereof are admissible.

(see paras 31-34)

2.        It follows from the provisions of Article 42 of the Treaty (now Article 36 EC) that the rules governing competition are applicable
to production of and trade in agricultural products, as defined in Article 38 of the Treaty (now, after amendment, Article
32 EC) only to the extent determined by the Council. The Council has adopted various regulations, principally Regulation No
26 applying certain rules of competition to production of and trade in agricultural products, regulations establishing a common
market organisation, which deal with the aid system, and also various other regulations, in particular Regulation No 797/85
on improving the efficiency of agricultural structures, which also deals with it. Consequently, in order to determine whether,
in examining aid measures in the light of Article 92 of the Treaty (now, after amendment, Article 87 EC) and Article 93 of
the Treaty (now Article 88 EC), the Commission founded the contested decision on a correct legal basis and had the power to
adopt that decision, it is necessary to ascertain whether the products concerned by those aid measures are agricultural products
within the meaning of Article 38 of the Treaty and, if so, to what extent in the light of those regulations which may apply,
they are subject to the provisions of the Treaty governing State aid. Only those agricultural products which are not subject
to a common market organisation come within the scope of the provisions of the Treaty on State aid, the application of which
is limited by Regulation No 26.

(see paras 37-42, 48)

3.        Measures taken after the entry into force of the Treaty to grant or alter aid, whether the alterations relate to existing
aid or to initial plans notified to the Commission, must be regarded as new aid. Consequently, the mere reference in a law
subsequent to the entry into force of the Treaty to a law preceding that date in no way suffices to establish that the aid
measures introduced by the former are founded on the latter and are existing aid, where the law to which reference is thus
made has been amended and supplemented subsequently.

(see paras 51-52)

4.        Even though, until the adoption of Regulation No 659/1999 laying down detailed rules for the application of Article 93 of
the Treaty (now Article 88 EC), the Commission was not bound by any specific time-limits for examining aid measures, nevertheless,
in the absence of any provision in that regard, the fundamental requirement of legal certainty had the effect of preventing
it from indefinitely delaying the exercise of its powers.

(see para. 61)

5.        In view of the mandatory nature of the monitoring of State aid by the Commission under Article 93 of the Treaty (now Article
88 EC), undertakings to which aid has been granted may not, in principle, entertain a legitimate expectation that the aid
is lawful unless it has been granted in compliance with the procedure laid down in that article. A diligent businessman should
normally be able to determine whether that procedure has been followed. Where aid is paid without prior notification to the
Commission, so that it is unlawful under Article 93(3) of the Treaty, the recipient of the aid cannot have at that time a
legitimate expectation that its grant is lawful.

(see paras 64-65)

6.        In the case of aid which was not notified to the Commission at the planning stage, in the statement of reasons for its decision
the Commission is bound to refer at least to the circumstances in which aid has been granted where those circumstances show
that the aid is such as to affect trade between Member States, but it is not bound to demonstrate the real effect of aid already
granted. If it were, that requirement would ultimately favour Member States which grant aid in breach of the duty to notify
laid down in Article 93(3) of the Treaty (now Article 88(3) EC), to the detriment of those which do notify aid at the planning
stage.

(see para. 74)

7.        Article 92(2)(b) of the Treaty (now, after amendment, Article 87(2)(b) EC) provides that aid to make good damage caused by
natural disasters or exceptional occurrences is compatible with the common market. Since this is an exception to the general
principle that State aid is incompatible with the common market, that provision must be interpreted narrowly. Only damage
caused by natural disasters or exceptional occurrences may be compensated for under that provision. It follows that there
must be a direct link between the damage caused by the exceptional occurrence and the State aid and that as precise an assessment
as possible must be made of the damage suffered by the producers concerned.

(see para. 79)

8.        In the assessment of the validity of the aid in the light of the provisions of Article 92(3)(a) and (c) of the Treaty (now,
after amendment, Article 87(3)(a) and (c) EC) relating to aid to promote or facilitate the economic development of certain
regions or certain activities, the Commission enjoys a wide discretion, the exercise of which involves assessments of an economic
and social nature which must be made within a Community context. The Community Courts, in reviewing whether that freedom was
lawfully exercised, cannot substitute their own assessment for that of the competent authority but must restrict themselves
to examining whether the authority’s assessment is vitiated by a manifest error or misuse of powers.

(see para. 84)


JUDGMENT OF THE COURT (Third Chamber)

23 February 2006 ([\*](#Footnote*))

(State aid – Decision 97/612/EC – Preferential loans in favour of agricultural undertakings – Article 92(2)(b) and (3)(a) and (c) of the EC Treaty (now, after amendment, Article 87(2)(b) and (3)(a) and (c) EC) – Admissibility – Legal basis – Legitimate expectations)

In Joined Cases C-346/03 and C-529/03,

REFERENCES to the Court under Article 234 EC by the Tribunale di Cagliari, Sezione civile (Italy), by decisions of 29 April
and 20 October 2003, received at the Court on 6 August and 19 December 2003 respectively, for a preliminary ruling in the
proceedings

**Giuseppe Atzeni and Others** (C-346/03),

**Marco Scalas,**

**Renato Lilliu** (C-529/03)

v

**Regione autonoma della Sardegna,**

THE COURT (Third Chamber),

composed of A. Rosas, President of the Chamber, A. La Pergola, J.-P. Puissochet, S. von Bahr (Rapporteur) and A. Ó Caoimh,
Judges,

Advocate General: D. Ruiz-Jarabo Colomer,

Registrar: L. Hewlett, Principal Administrator,

having regard to the written procedure and further to the hearing on 16 February 2005,

after considering the observations submitted on behalf of:

–        Mr Atzeni and Others, by G. Dore and F. Ciulli, avvocati,

–        Mr Scalas and Mr Lilliu, by G. Dore, F. Ciulli and A. Miglior, avvocati,

–        the Regione autonoma della Sardegna, by A. Camba and S. Trincas, avvocatesse,

–        the Commission of the European Communities, by V. Di Bucci, acting as Agent,

after hearing the Opinion of the Advocate General at the sitting on 28 April 2005,

gives the following

**Judgment**

1        The references for a preliminary ruling concern the validity of Commission Decision 97/612/EC of 16 April 1997 on aid granted
by the Region of Sardinia, Italy, in the agriculture sector (OJ 1997 L 248, p. 27) (‘the contested decision’).

2        Those references were made in the context of two sets of proceedings between, first, Mr Atzeni and Others (‘Atzeni and Others’),
and secondly Mr Scalas and Mr Lilliu (‘Scalas and Lilliu’), and the Regione autonoma della Sardegna (‘the Regione’) concerning
the reimbursement required by the latter of aid previously paid to the parties concerned and the suspension of payment of
additional aid.

**National legal framework and the aid granted**

3        Article 5 of Regional Law No 44 of 13 December 1988 (‘Law No 44/88’) had established a scheme of aid to agricultural undertakings
whose financial situation had been affected by adverse circumstances in the form of loans at reduced rates of interest in
order to enable them to restore their liquidity. Those loans were to be used to consolidate the short-term liabilities of
the undertakings concerned and were for a maximum term of 15 years.

4        The Regional Executive (Giunta regionale) determined the practical arrangements for granting the aid and in particular the
adverse circumstances which justified the Region’s measure, the sectors involved, the amount of the loan in relation to the
degree of indebtedness, and the term of the loan.

5        Since 1988 the Regional Executive has decided on four occasions to grant aid in the form of loans at reduced rates (‘the four
aid measures’) pursuant to Article 5 of Law No 44/88.

6        On 30 December 1988 the first aid measure was adopted in favour of agricultural products produced in greenhouses. The adverse
circumstance justifying the Regione’s measure was the fall in prices of those products. The only condition set for granting
the aid related to the undertaking’s short-term indebtedness, which had to be greater than 75% of the value of its gross output
in the year under consideration.

7        On 27 June 1990 a second aid measure related to forestry holdings which were not yet ready for commercial felling. The aid
was aimed at paying off and/or consolidating those undertakings’ debts falling due before 30 June 1990 which resulted from
investments, plantation management, bank drafts, employee wages, rent and amounts owing to suppliers. The short-term indebtedness
had to be equal to or greater than 75% of the gross output of the undertaking concerned in the year under consideration. The
term of the loan was fixed at 13 years, including a three-year pre-redemption period.

8        On 20 November 1990, a third aid measure was aimed at rabbit farmers who had lost at least 20% of their animals as the result
of a disease in the region in the spring of 1990. The loans at reduced interest rates over a term of 15 years, including a
three-year pre-redemption period, could cover up to two annual or four half-yearly repayments on existing long-term loans
and an amount equal to the holding’s financial requirements for one year.

9        The fourth aid measure, decided upon on 26 June 1992, extended to all agricultural undertakings because of the increasingly
unfavourable market conditions and the problems caused by weather conditions. The recipients’ short-term indebtedness had
to be at least equal to 51% of their gross production in 1991. The duration of the loan was 15 years, including a three-year
pre-redemption period. The calculation of the indebtedness took into account the loans with a term of less than 12 months
in existence in 1991, even if they had since been repaid, and the repayment instalments on multi-annual financing falling
due or paid in 1991 or else falling due in previous years and not paid.

10      The aid obtained under this fourth measure could be used to cover operating loans at reduced interest rates, debts on medium-term
loans, except those granted for the purchase of agricultural machinery, and repayments on multi-annual reduced-rate loans
granted by the Regione in relation to losses suffered in natural disasters.

**The procedure before the Commission of the European Communities**

11      By letter of 1 September 1992, the Italian Republic notified to the Commission, under Article 93(3) of the EC Treaty (now
Article 88(3) EC), Regional Law No 17 of 27 August 1992 (‘Law No 17/92’).

12      Article 12 of Law No 17/92 amended Article 5 of Law No 44/88, which had not been notified to the Commission.

13      By letter of 1 August 1994, the Commission informed the Italian Republic of its decision to initiate the procedure laid down
in Article 93(2) of the Treaty in respect of Article 5 of Law No 44/88 and the four aid measures.

14      The Italian Government submitted comments in letters of 30 January, 25 August and 1 December 1995.

15      The Commission adopted the contested decision on 16 April 1997.

**The contested decision**

16      In Article 1 of the of the contested decision, the Commission found that the aid granted by the Regione under Article 5 of
Law No 44/88 and the four aid measures was illegal in that it had not been notified to the Commission at the planning stage
and that it was incompatible with the common market under Article 92(1) to (3) of the EC Treaty (now, after amendment, Article
87(1) to (3) EC).

17      In Article 2 of the contested decision, the Commission stated that the Italian Republic was required to abolish that aid within
two months from the date of notification of that decision and to adopt the measures necessary to recover the amounts previously
paid out within six months of the same date.

**The main proceedings and the questions referred for a preliminary ruling**

18      Following adoption of the contested decision, the Regional Council repealed Article 5 of Law No 44/88 and on 18 December 1997
adopted the decrees ordering revocation of the previously-granted aid (‘the December 1997 decrees’).

*Case C-346/03*

19      On 23 January 2002, Atzeni and Others, owners of agricultural undertakings, brought proceedings before the Tribunale di Cagliari
(Cagliari District Court) seeking a ruling, principally, that the December 1997 decrees were not applicable and that the Regione
should pay them the amounts of the aid still to be paid out under the four aid measures.

20      In the alternative, Atzeni and Others sought a declaration that the Regione had infringed Community legislation governing
State aid, as well as various principles, including those of transparency and sound administration. They also asked that the
Regione be ordered to compensate them for the damage caused, first, by the failure to inform them of the commencement of the
procedure provided for in Article 93(2) of the Treaty and the adoption of the contested decision, and second the communication
to them of the December 1997 decrees only on 16 November 2001.

21      The national court found it necessary to refer a question to the Court on the legality of the contested decision, which is
the basis of the December 1997 decrees. In those circumstances, the Tribunale di Cagliari decided to stay the proceedings
and to refer the following question to the Court for a preliminary ruling:

‘[Is the contested decision vitiated by] the following defects:

(a)      lack of competence of the Commission to adopt the contested decision inasmuch as it infringes the combined provisions of Articles
[38, 40 and 43 of the EC Treaty (now, after amendment, Articles 32 EC, 34 EC and 37 EC), and 39, 41, 42 and 46 of the EC Treaty
(now Articles 33 EC, 35 EC, 36 EC and 38 EC)];

(b)      infringement of the rules which govern the procedure provided for in Article [93(1) of the Treaty];

(c)      infringement of the rules which govern the procedure provided for in Article [93(2) and (3) of the Treaty];

(d)      failure to provide a statement of reasons as required by Article [190 of the EC Treaty (now Article 253 CE)] in conjunction
with Article [93(3) and 92(1) of the Treaty];

(e)      infringement and misapplication of Council Regulation No 797/85 on improving the efficiency of agricultural structures;

(f)      infringement of and failure to observe “practice for aid to farms in difficulty” and the “Community guidelines on State aid
for rescuing and restructuring firms in difficulty”?’

*Case C-529/03*

22      On 31 July 2002, Scalas and Lilliu, representing 389 persons, brought proceedings before the Tribunale di Cagliari seeking
a ruling, principally, that there was no obligation to reimburse the aid granted by the Regione under the four aid measures
or, in the alternative, that the Regione be ordered to compensate for the losses suffered by the farmers concerned.

23      The Tribunale di Cagliari decided to stay the proceedings and to ask the Court to examine the legality of the contested decision
in the light of the six points raised in Case C-346/03 and referred to in paragraph 21 of this judgment, and also of three
questions referred for a preliminary ruling, which can be formulated as follows:

1.      Does the contested decision undermine the principle of the protection of legitimate expectations, having regard to the time
which elapsed between the following four stages, namely the publication of Law No 44/88 in 1988, the commencement of infringement
proceedings in 1994, the adoption of the contested decision in 1997 and the notification of the demand for reimbursement to
the farmers in November 2001?

2.      Does the contested decision contain an insufficient statement of reasons in stating that the aid in question ‘is such as to
distort competition and affect trade between Member States’ without examining the actual form of each aid granted or taking
account of the fact that the economic and social conditions in Sardinia prevent local operations from disturbing or threatening
to disturb competition in the Member States, or taking into account the serious unemployment situation in the region, or giving
a valid reason for excluding the aid intended to remedy the effects of natural disasters or other exceptional occurrences?

3.      Does the contested decision also contain insufficient reasons in classifying the aid granted as ‘operating aid’ relating to
short-term debts, without taking into account the fact that they are intended to restructure existing long-term debt which
has not been repaid due to repeated difficulties owing to factors external to the undertaking such as exceptional weather
conditions?

24      By order of 6 May 2004, Cases C‐346/03 and C‐529/03 were joined for the purposes of the oral procedure and the judgment.

**The request to have the oral procedure reopened**

25      By letter of 19 September 2005, Atzeni and Others, and also Scalas and Lilliu, requested the Court to reopen the oral procedure
pursuant to Article 61 of the Rules of Procedure. They gave as grounds for their request the complexity of the main proceedings
and their disagreement with the Opinion of the Advocate General.

26      It must be pointed out in this regard that the Court may, of its own motion, on a proposal from the Advocate General, or at
the request of the parties, order the reopening of the oral procedure, if it takes the view that it lacks sufficient information
or that the case should be decided on the basis of an argument which has not been debated between the parties (see Case C-309/99
*Wouters and Others* [2002] ECR I-1577, paragraph 42, and Case C-210/03 *Swedish Match* [2004] ECR I-11893, paragraph 25).

27      In the present case, Atzeni and Others and Scalas and Lilliu have not put forward any ground which would justify reopening
the oral procedure and the Court, having heard the Advocate General, takes the view that it has all the information necessary
to answer the questions referred. Consequently, the request to have the oral procedure reopened must be dismissed.

**The questions**

*Preliminary remarks*

28      By its questions, reproduced in paragraphs 21 and 23 of this judgment, the Tribunale di Cagliari asks the Court essentially
about the validity of the contested decision in the light of the following points, which cover those raised in those questions:

–        the legal basis of the contested decision and the effect thereof on the Commission’s competence to adopt that decision (Case
C‐346/03, point (a));

–        incorrect application of Article 93(1) of the Treaty relating to existing aid (Case C-346/03, point (b));

–        excessively lengthy procedure undermining the proper conduct thereof and the aid recipients’ legitimate expectations (Case
C‐346/03, point (c), and Case C-529/03, first question);

–        insufficient reasons and errors of assessment as to the compatibility of the four aid measures with the common market (Case
C-346/03, points (d), (e) and (f), and Case C-529/03, second and third questions).

29      The Tribunale di Cagliari also inquires as to the admissibility of the questions referred for a preliminary ruling. Given
the remarks of the national court and the observations submitted by Scalas and Lilliu and the Commission on this point, it
is appropriate to begin by examining that issue.

*The admissibility of the questions referred for a preliminary ruling*

30      The issue of the admissibility of the questions referred for a preliminary ruling arises because Atzeni and Others already
brought an action for annulment of the contested decision on 25 January 2002 before the Court of First Instance of the European
Communities. By order of 29 May 2002 in Case T‐21/02 *Atzeni and Others* v *Commission*, not published in the ECR, the Court of First Instance dismissed the action as inadmissible because it had been brought after
the time-limit, without, however, ruling on a second ground of inadmissibility raised by the Commission, relating to the applicants’
lack of standing to bring proceedings before the Court of First Instance. If they had had standing to bring proceedings but
had merely failed to bring their action within the prescribed time-limits, the present references for a preliminary ruling,
relating to the validity of the contested decision, would be inadmissible before this Court.

31      It follows from the requirements of legal certainty, and more specifically those deriving from the principle of the force
of res judicata, that it is not possible for a recipient of aid, forming the subject-matter of a Commission decision adopted
on the basis of Article 93 of the Treaty, who could have challenged that decision and who allowed the mandatory time-limit
laid down in this regard by the fifth paragraph of Article 173 of the Treaty (now, after amendment, the fifth paragraph of
Article 230 EC) to elapse, to call in question the lawfulness of that decision before the national courts in an action brought
against the measures taken by the national authorities for implementing that decision. To accept that in such circumstances
the person concerned could challenge the implementation of the decision in proceedings before the national court on the ground
that the decision was unlawful would in effect enable the person concerned to overcome the definitive nature which the decision
assumes as against that person once the time-limit for bringing an action has elapsed (see Case C‐188/92 *TWD Textilwerke Deggendorf* [1994] ECR I‐833, paragraphs 17 and 18).

32      The Court notes that, in the circumstances giving rise to the judgment in *TWD Textilwerke Deggendorf*, the Commission’s decision addressed to the Member State concerned made explicit reference to the recipient of the individual
aid in question and that State had communicated the decision to the recipient, stating that it could bring an action for annulment
thereof.

33      In the main proceedings here, by contrast, the contested decision, addressed to the Italian Republic, concerns aid schemes
intended for categories of persons defined in a general manner and not explicitly identified recipients. Nor was the decision
notified by the Italian Republic to Atzeni and Others or to any other recipients of the aid in question.

34      Thus, unlike the circumstances giving rise to the judgment in *TWD Textilwerke Deggendorf*, it was not self-evident that an action for annulment brought against the contested decision brought by the recipients of
the four aid measures would have been admissible. Accordingly, the Court finds that the references for a preliminary ruling
are admissible.

*The legal basis of the contested decision and the effect thereof on the Commission’s competence to adopt that decision*

 Observations submitted to the Court

35      Scalas and Lilliu maintain that the competition rules, in particular those laid down in Articles 92 and 93 of the Treaty,
are not applicable to the agricultural sector. Referring to Article 42 of the Treaty, they state that those rules are applicable
only in so far as determined by the Council of the European Union. Council Regulation No 26 of 4 April 1962 applying certain
rules of competition to production of and trade in agricultural products (OJ, English Special Edition 1959-1962, p. 129),
adopted on the basis of Article 42 of the EEC Treaty (now Article 42 of the EC Treaty), provides only for a very restricted
application of the Treaty provisions on State aid in the agricultural sector. It follows that the Commission was not competent
to initiate the procedure referred to in Article 93(2) of the Treaty or to adopt the contested decision cancelling the aid
granted.

36      The Commission maintains that all of the rules of the Treaty on State aid in Articles 92 and 93 of the Treaty apply to the
four aid measures:

–        the aid to the rabbit farmers is subject to those rules under Regulation (EEC) No 827/68 of the Council of 28 June 1968 on
the common organisation of the market in certain products listed in Annex II to the Treaty (OJ, English Special Edition 1968
(I), p. 209);

–        the aid to forestry holdings fall directly within the scope of those rules;

–        the aid to greenhouse production and the aid to indebted agricultural undertakings must comply with those rules, either because
it relates to products covered by a common organisation of markets and is subject to those rules under the regulation establishing
that organisation, or because it comes within the scope of Council Regulation (EEC) No 797/85 of 12 March 1985 on improving
the efficiency of agricultural structures (OJ 1985 L 93, p. 1) or the regulation which replaced it, namely Council Regulation
(EEC) No 2328/91 of 15 July 1991 (OJ 1991 L 218, p. 1).

 Reply of the Court

37      It follows from the provisions of Article 42 of the Treaty that the rules governing competition are applicable to production
of and trade in agricultural products, as defined in Article 38 of the Treaty, only to the extent determined by the Council.

38      The Council has adopted various regulations.

39      First, Regulation No 26 provides for the application of the provisions of the Treaty on State aid in the agricultural sector
to be restricted to those contained in Article 93(1) and the first sentence of Article 93(3) of the Treaty. It follows that,
in the case of products coming within the scope of that regulation, the Commission is not empowered to initiate the procedure
provided for in Article 93(2) thereof. It can only submit its observations, not oppose the grant of the aid in question.

40      Next, when regulations establishing a common market organisation were adopted, which was the case for most of the agricultural
products within the meaning of Article 38 of the Treaty, those regulations provided that all of the rules of the Treaty on
State aid in Articles 92, 93 and 94 of the EC Treaty (now Article 89 EC) were applicable, subject in some cases to certain
limits. Consequently, only those agricultural products which are not subject to a common market organisation come within the
scope of the provisions of the Treaty on State aid, the application of which is limited by Regulation No 26.

41      Lastly, various other regulations have been adopted, in particular Regulation No 797/85 containing provisions relating to
the grant of State aid, which provide that aid measures which depart from the rules laid down in that regulation may nevertheless
be permitted, provided that they are adopted in accordance with Articles 92 to 94 of the Treaty.

42      It is, accordingly, necessary to ascertain whether the products concerned by the four aid measures are agricultural products
within the meaning of Article 38 of the Treaty and, if so, to what extent they are subject to the provisions of the Treaty
governing State aid.

43      First of all, the aid to the forestry holdings is aimed at a sector, the forestry sector, which is not included in the list
of agricultural products in Annex II to the Treaty and therefore does not relate to an agricultural product within the meaning
of Article 38 of the Treaty. Accordingly, the aid to forestry holdings is not part of a specific scheme and is, therefore,
subject in its entirety to the provisions of Articles 92 and 93 of the Treaty.

44      Next, the aid to rabbit farmers concerns an agricultural product which was subject to a common market organisation established
by Regulation No 827/68. Article 5 of that regulation provides that Articles 92 and 93 of the Treaty are applicable without
restriction to production of and trade in that product.

45      Lastly, the two other aid measures were aimed, first, at greenhouse production and, second, indebted agricultural undertakings
and may therefore relate to a wide variety of agricultural products.

46      It has not been argued that those measures concerned agricultural products which are not subject to a common market organisation
and, consequently, come within the scope of the provisions of the Treaty governing State aid, the application of which has
been restricted by Regulation No 26.

47      More specifically, the aid to indebted agricultural undertakings is not aimed at specific products and is rather general aid
to those undertakings. As such, it is likely to come within the scope of Regulation No 797/85, Article 31 of which, in any
event, refers to the provisions of the Treaty governing State aid.

48      Consequently, in examining the four aid measures in the light of Articles 92 and 93 of the Treaty, the Commission did not
found the contested decision on an incorrect legal basis and did not lack competence to adopt that decision.

*The failure to apply Article 93(1) of the Treaty relating to existing aid*

 Observations submitted to the Court

49      Scalas and Lilliu state that the four aid measures are based not only on Law No 44/88 but also on an earlier law, dating from
1928, which is referred to in Law No 44/88. Consequently, the Commission should not have examined those measures on the basis
of the provisions of Article 93(3) of the Treaty, relating to new aid, but rather on those of Article 93(1) of the Treaty,
applicable to existing aid schemes. Under the latter provisions, aid under the four measures at issue in the main proceedings
could have continued to be lawfully paid until such time as the Commission adopted the contested decision and therefore should
not be the subject of reimbursement.

50      The Commission submits that that argument is unfounded.

 Reply of the Court

51      Measures taken after the entry into force of the Treaty to grant or alter aid, whether the alterations relate to existing
aid or to initial plans notified to the Commission, must be regarded as new aid (see, to that effect, Case C‐295/97 *Piaggio* [1999] ECR I‐3735, paragraph 48).

52      Consequently, the mere reference in Law No 44/88 to a law of 1928 in no way suffices to establish that the four aid measures
are founded on that law of 1928 and are existing aid, since that law has been amended and supplemented subsequently.

53      In the present case, it is apparent from the information submitted to the Court that the four aid measures are based directly
on Article 5 of Law No 44/88, which permits the grant of loans at reduced rates of interest to enable the liquidity of agricultural
undertakings whose financial situation has been affected by adverse circumstances to be restored.

54      It follows that the aid at issue in the main proceedings is new aid and not existing aid and that the Commission did not make
any error in not basing itself on the provisions of Article 93(1) of the Treaty.

*The allegedly excessively lengthy procedure undermining the proper conduct thereof and the principle of the protection of
legitimate expectations*

 Observations submitted to the Court

55      Scalas and Lilliu maintain that the Commission was unreasonably slow in its examination of the aid at issue in the main proceedings.
The Commission should have conducted the assessment immediately when Law No 44/88 was communicated to it by letter of 1 September
1992. They submit that the Commission should have issued an opinion on the four aid measures within two months of receiving
that letter and ordered the Italian Republic to suspend the aid payments immediately.

56      Instead, the Commission first allowed two years to elapse before opening a formal investigation procedure in 1994, and then
three years before adopting the contested decision in 1997. Thus over nine years lapsed between the start of the aid scheme
in 1988 and the adoption of that decision and more than 13 years between the date of the start of that scheme and the notification,
in November 2001, of the December 1997 decrees to the parties concerned. Scalas and Lilliu maintain that those delays undermined
the principle of the protection of legitimate expectations.

57      The Commission submits that the complaints of tardiness made against it are unfounded and that the Italian Government is responsible
for the various delays. On two occasions the Italian Government took five and six months to respond to the Commission’s requests.

 Reply of the Court

58      As regards the alleged procedural defect caused by the Commission’s unreasonable delay in the examination of the four aid
measures, the Court finds, first, that some of the delay may be attributed to the Italian Government.

59      Thus it was the Italian Government which failed to notify the Commission of Law No 44/88 before it was adopted and which allowed
almost four years to elapse before informing the Commission of the adoption of that law.

60      It is also apparent from the information provided to the Court that the Commission was not in a position to rule on the validity
of the aid scheme provided for by that law solely on the basis of an examination of the text thereof. The Commission required
other information, which it requested from the Italian Government. On several occasions, the Italian Government was slow in
responding to the Commission’s requests, sometimes taking several months to do so.

61      Second, even though the Commission’s procedure for examining Law No 44/88 and the four aid measures may appear to have been
relatively lengthy, it should be borne in mind that until the adoption of Council Regulation (EC) No 659/1999 of 22 March
1999 laying down detailed rules for the application of Article 93 of the EC Treaty (OJ 1999 L 83, p. 1), the Commission was
not bound by any specific time-limits. In the absence of any provision in that regard, the fundamental requirement of legal
certainty nevertheless had the effect of preventing the Commission from indefinitely delaying the exercise of its powers (see
Joined Cases C‐74/00 P and C‐75/00 P *Falck and Acciaierie di Bolzano* v *Commission* [2002] ECR I‐7869, paragraph 140).

62      As noted by the Advocate General in his analysis of the periods which elapsed in points 160 to 167 of his Opinion, examination
of the course of the procedure has not revealed any delay such as to undermine that fundamental requirement. In particular,
an initial two-year stage, from 1992 to 1994, was necessary in order to gather relevant facts, since the Italian Government
had not taken the initiative to notify Law No 44/88 and the four aid measures. A second stage, which began in 1994, continued
until the adoption of the contested decision in 1997. During that second stage, the Commission found it necessary on several
occasions to seek clarifications from the Italian Government, as a result of, inter alia, the amendment of the Italian legislation
in the last quarter of 1995.

63      As regards the alleged infringement of the principle of the protection of legitimate expectations, it is appropriate to bear
in mind the Court’s settled case-law in matters of aid.

64      In view of the mandatory nature of the monitoring of State aid by the Commission under Article 93 of the Treaty, undertakings
to which aid has been granted may not, in principle, entertain a legitimate expectation that the aid is lawful unless it has
been granted in compliance with the procedure laid down in that article. A diligent businessman should normally be able to
determine whether that procedure has been followed (see Case C‐24/95 *Alcan Deutschland* [1997] ECR I‐1591, paragraph 25).

65      Where aid is paid without prior notification to the Commission, so that it is unlawful under Article 93(3) of the Treaty,
the recipient of the aid cannot have at that time a legitimate expectation that its grant is lawful (see *Alcan Deutschland*, paragraphs 30 and 31, and Joined Cases C‐183/02 P and C‐187/02 P *Demesa and Territorio histórico de Álava* v *Commission* [2004] ECR I‐10609, paragraph 45).

66      Consequently, since Law No 44/88 had not been duly notified to the Commission, the Sardinian farmers concerned could not have
any expectation that the aid which had been granted to them was lawful, nor can the alleged slowness of the procedure have
given them any such expectation.

67      It follows that it has not been demonstrated that there was any unreasonable delay sufficient to constitute a procedural defect
or undermine the principle of the protection of legitimate expectations.

*The alleged failure to state adequate reasons and the alleged error of assessment as to the compatibility of the aid with
the common market*

 Preliminary remarks

68      The national court asks the Court to examine the validity of the contested decision in the light of, first, the obligation
to state reasons and, second, the assessment of the compatibility of the aid at issue in the main proceedings with the common
market. As regards the latter point, the national court asks whether the Commission carried out that assessment in accordance
with, in particular, the provisions of Article 92(2)(b) and 3(a) of the Treaty, given, on the one hand, the Commission’s practice
in that area at the time of the initiation of the procedure (hereinafter, in keeping with the expression used in the contested
decision, ‘the specific Commission practice for aid to farms in difficulty’) and, on the other, the Community guidelines on
State aid for rescuing and restructuring firms in difficulty (OJ 1994 C 368, p. 12) (‘the Guidelines’). The national court
also asks whether the contested decision fails to comply with Regulation No 797/85.

 Observations submitted to the Court

69      Scalas and Lilliu maintain that the contested decision does not contain a sufficient statement of reasons because it does
not refer to the manner in which the aid at issue in the main proceedings affected or threatened to affect competition. In
particular, the decision’s analysis of the effects on competition is incomplete because it does not contain a description
of the market.

70      Nor does the contested decision contain sufficient reasons as to the impact on trade. Scalas and Lilliu state in this respect
that, given the economic and social situation in Sardinia, there can be no question of trade being affected by that aid.

71      Scalas and Lilliu maintain that, in any event, that aid was compatible with Article 92(2)(b) and 3(a) and (c) of the Treaty.
The Commission also misapplied the criteria derived from the specific Commission practice for aid to farms in difficulty and
the Guidelines, which were, in any event, not binding. Moreover, the Commission misapplied Council Directive 72/159/EEC of
17 April 1972 on the modernisation of farms (OJ, English Special Edition 1972 (II), p. 324), Council Directive 75/268/EEC
of 28 April 1975 on mountain and hill farming and farming in certain less-favoured areas (OJ 1975 L 128, p. 1) and Regulation
No 797/85.

72      The Commission maintains that the contested decision fulfils all of the requirements for statements of reasons. As to the
compatibility of the aid at issue in the main proceedings with the common market, it argues that the criteria for the disputed
aid to be covered by the provisions of Article 92(2)(b) and (3) of the Treaty are not met.

 Reply of the Court

73      Article 190 of the Treaty requires that the statement of reasons be appropriate to the act at issue and must disclose in a
clear and unequivocal fashion the reasoning followed by the institution which adopted the measure in question in such a way
as to enable the persons concerned to ascertain the reasons for the measure and to enable the competent court to exercise
its power of review. Depending on the circumstances of each case, it is not necessary for the reasoning to go into all the
relevant facts and points of law, since the question whether the statement of reasons meets the requirements of Article 190
of the Treaty must be assessed with regard not only to its wording but also to its context and all the legal rules governing
the matter in question (see, inter alia, Case C‐113/00 *Spain* v *Commission* [2002] ECR I‐7601, paragraphs 47 and 48).

74      Thus, in the case of aid which was not notified to the Commission at the planning stage, in the statement of reasons for its
decision the Commission is bound to refer at least to the circumstances in which aid has been granted where those circumstances
show that the aid is such as to affect trade between Member States, but it is not bound to demonstrate the real effect of
aid already granted. If it were, that requirement would ultimately favour Member States which grant aid in breach of the duty
to notify laid down in Article 93(3) of the Treaty, to the detriment of those which do notify aid at the planning stage (Case
C-113/00 *Spain* v *Commission*, paragraph 54).

75      In the present case, it is apparent from the contested decision that the Commission stated how the aid granted conferred an
advantage on the recipients. The Commission also stated that, for agricultural products, any aid which favours domestic products
may affect trade between Member States. Consequently, it stated the reasons for which it was of the view that the aid granted
distorted competition and could affect trade between Member States. Since Law No 44/88 and the four aid measures had not been
notified, it was not required to give a description of the market or explain in detail the trade flows for the products concerned
between Member States.

76      The Commission also set out in detail, in parts IV and V of the contested decision, the reasons for which, in the light of
the information provided by the Italian authorities, the conditions required for application of the derogations provided for
in Article 92(2) and (3) of the Treaty were not met.

77      It follows that the complaint relating to failure to state adequate reasons must be rejected.

78      Next, the compatibility of the aid with the common market must be considered in the light of Article 92(2)(b) and (3)(a) and
(c) of the Treaty.

79      Article 92(2)(b) of the Treaty provides that aid to make good damage caused by natural disasters or exceptional occurrences
is compatible with the common market. Since this is an exception to the general principle that State aid is incompatible with
the common market, that provision must be interpreted narrowly. The Court has held that only damage caused by natural disasters
or exceptional occurrences may be compensated for under that provision. It follows that there must be a direct link between
the damage caused by the exceptional occurrence and the State aid and that as precise an assessment as possible must be made
of the damage suffered by the producers concerned (judgment of 11 November 2004 in Case C‐73/03 *Spain* v *Commission*, not published in the ECR, paragraph 37).

80      In the present case, no link has been demonstrated between the four aid measures and a natural disaster or exceptional occurrence.
The Italian Republic has stated that some of the aid measures were to compensate for the difficulties relating to a crisis
in the market concerned and high interest rates but, as the Commission noted in the contested decision, those phenomena are
the expression of the market forces which must be faced by any business.

81      Weather problems, such as drought, are referred to by the Italian Republic only in a general manner. No specific severity
in relation to the usual weather conditions has been demonstrated and no estimate has been given of the alleged losses suffered
by the farmers due to such phenomena.

82      As regards the aid to the rabbit farmers, the very nature of the aid indicates that it was not reserved to farmers who had
lost all of their animals, but was granted if the loss was at least 20% of the animals. Moreover, the Italian Republic has
offered no proof of the existence of a link between the aid granted and the losses suffered.

83      It follows that it has not been demonstrated that the Commission made an error of assessment in the application of Article
92(2)(b) of the Treaty.

84      As regards the assessment of the validity of the aid in the light of the provisions of Article 92(3)(a) and (c) of the Treaty,
relating to aid to promote or facilitate the economic development of certain regions or certain activities, it should be remembered
that for the purposes of applying those provisions the Commission enjoys a wide discretion, the exercise of which involves
assessments of an economic and social nature which must be made within a Community context, and that the Court, in reviewing
whether that freedom was lawfully exercised, cannot substitute its own assessment for that of the competent authority but
must restrict itself to examining whether the authority’s assessment is vitiated by a manifest error or misuse of powers (see
Case C‐456/00 *France* v *Commission* [2002] ECR I‐11949, paragraph 41).

85      As is apparent from the contested decision, the four aid measures were examined in the light of the criteria applicable under
the specific Commission practice for aid to farms in difficulty. The Commission also indicated in that decision that the Guidelines
had not yet entered into force and were not applicable. It nevertheless mentions that, in any event, the conditions laid down
in those guidelines were not fulfilled.

86      In relying on the criteria applicable under the specific Commission practice for aid to farms in difficulty, which are not
disputed by the Italian Republic, the Commission did not commit an error of law. The criteria were ones commonly applied by
it at the date of the opening of the procedure under Article 92(2) of the Treaty.

87      Under those criteria, the aid at issue in the main proceedings had to meet three conditions, namely: to contribute to the
financing of investments already made, not to exceed the rates generally allowed by the Commission and either be consequent
upon a readjustment of the rate to offset variations in the cost of money, or be granted to farms which offer sufficient guarantees
of economic recovery.

88      As is apparent from the contested decision and the observations submitted to the Court, the four aid measures do not fulfil
those conditions. In the first place, the fact of having made investments was not a condition for the grant of aid. In the
second place, even if in certain special cases the farmers who had received aid had made investments, it has not been demonstrated
that the two other conditions were met. Consequently, it does not appear that the Commission made a manifest error of assessment
or misused its powers in finding, at the end of its assessment, that the four aid measures were operating aid which could
not improve permanently the conditions of the sector and region concerned.

89      As regards the Guidelines, Scalas and Lilliu maintain that they call for flexibility in the assessment of the compatibility
of aid with the common market in the case of assisted regions such as Sardinia and that the Commission should have found that
the four aid measures were compatible with the common market.

90      It is apparent from the information provided to the Court, however, that, even if it had been possible to apply the Guidelines,
Scalas and Lilliu have not demonstrated through their general remarks that the conditions laid down in those guidelines were
met.

91      Lastly, as regards the alleged misapplication of Regulation No 797/85 and Directives 72/159 and 75/268, the Court finds that
the assessment of the compatibility of the four aid measures with the common market was not at all based on those texts. The
contested decision merely refers to Directive 75/268 and Regulation No 797/85 in order to clarify the concept of ‘less-favoured
area’. Directive 72/159 is not referred to anywhere in that decision.

92      It follows that it has not been demonstrated that there was an error of assessment in the application of Article 92(3)(a)
and (c) of the Treaty.

93      In the light of all the foregoing, the answer to the questions referred must be that examination of the contested decision
has revealed no ground capable of affecting the validity of that decision.

**Costs**

94      Since these proceedings are, for the parties to the main proceedings, a step in the action pending before the national court,
the decision on costs is a matter for that court. Costs incurred in submitting observations to the Court, other than the costs
of those parties, are not recoverable.

On those grounds, the Court (Third Chamber) hereby rules:

**Examination of Commission Decision 97/612/EC of 16 April 1997 on aid granted by the Region of Sardinia, Italy, in the agricultural
sector has revealed no ground capable of affecting the validity of that decision.**

[Signatures]

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[\*](#Footref*) Language of the case: Italian.