Judgment of the Court (Fifth Chamber) of 19 November 1998. - French Republic v Commission of the European Communities. - EAGGF - Clearance of accounts - 1993 - Cereals - Export refunds in respect of processed cheese. - Case C-235/97.



European Court reports 1998 Page I-07555



Summary

Parties

Grounds

Decision on costs

Operative part



Keywords

1 Agriculture - Common agricultural policy - Financing by the EAGGF - Principles - Compatibility of expenditure with the Community rules - Burden of proof - Divided between the Commission and the Member State concerned

2 Agriculture - Common agricultural policy - Financing by the EAGGF - Principles - Compatibility of expenditure with the Community rules - Member States' duty of supervision - Scope

(Council Regulation No 729/70, Art. 8(1))

3 Agriculture - Common organisation of the markets - Export refunds - Conditions for granting - Products of sound and fair marketable quality - Concept - Definition by the Member States - Limits - Assessment of quality on the day of export

(Commission Regulation No 3665/87, Art. 13)

Summary

4 In the context of the procedure for the clearance of EAGGF accounts, the Commission is only permitted to charge to the EAGGF sums paid in accordance with the rules laid down in the various sectors of agricultural production, leaving the Member States to bear the burden of any other sum paid, and in particular any amounts which the national authorities wrongly believed themselves authorised to pay in the context of the common organisation of the markets. Whilst it is for the Commission to prove that there has been a breach of Community rules, it is for the Member State to demonstrate, if appropriate, that the Commission erred as to the financial consequences to be put into effect as a result.

5 The legality of a Commission decision refusing to charge certain expenditure to the EAGGF on the ground that the Member State has failed to satisfy certain requirements intended to avoid the risk of losses on the part of the EAGGF cannot be affected by the fact that those requirements are not expressly laid down by the Community rules. Article 8(1) of Regulation No 729/70, which defines the principles according to which the Community and the Member States are to ensure the implementation of Community decisions on agricultural intervention financed by the EAGGF and combat fraud and irregularities in relation to those operations, imposes on the Member States the obligation to take the measures necessary to satisfy themselves that the transactions financed by the EAGGF are actually carried out and are executed correctly, to prevent and deal with irregularities and to recover sums lost as a result of irregularities or negligence, even if the specific Community act does not expressly provide for the adoption of particular supervisory measures.

6 Article 13 of Regulation No 3665/87 makes the payment of export refunds conditional on the products concerned being of sound and fair marketable quality. In the absence of Community rules providing a definition of that term, it is for the Member States themselves to adopt more precise provisions. However, such provisions may not conflict with the general scheme of the applicable Community rules, which require that products must be of a quality such that they can be marketed on normal terms.

In that connection, where a defect in quality is the result of a manufacturing defect and therefore affects the product on the day of export, it is of little importance that the defect only became apparent upon a later inspection, since taking the opposite view would result in the general public having to bear the consequences of the manufacturer's failure to fulfil its contractual obligations to deliver the product as specified and that is not the purpose of the refund scheme, which is intended solely to enable Community products to be exported where this course would not otherwise be financially viable for the exporter.

Parties

In Case C-235/97,

French Republic, represented by Kareen Rispal-Bellanger, Head of Subdirectorate in the Legal Affairs Directorate at the Ministry of Foreign Affairs, and Frédéric Pascal, Chargé de Mission in the same Directorate, acting as Agents, with an address for service in Luxembourg at the French Embassy, 8 B Boulevard Joseph II,

applicant,

v

Commission of the European Communities, represented by Xavier Lewis, of its Legal Service, acting as Agent, with an address for service in Luxembourg at the office of Carlos Gómez de la Cruz, of its Legal Service, Wagner Centre, Kirchberg,

defendant,

APPLICATION for partial annulment of Commission Decision 97/333/EEC of 23 April 1997 on the clearance of the accounts presented by the Member States in respect of the expenditure for 1993 of the Guarantee Section of the European Agricultural Guidance and Guarantee Fund (EAGGF),

THE COURT

(Fifth Chamber),

composed of: J.-P. Puissochet, President of the Chamber, J.C. Moitinho de Almeida, C. Gulmann, D.A.O. Edward and M. Wathelet (Rapporteur), Judges,

Advocate General: S. Alber,

Registrar: R. Grass,

having regard to the report of the Judge-Rapporteur,

after hearing the Opinion of the Advocate General at the sitting on 16 July 1998,

gives the following

Judgment

Grounds

1 By application lodged at the Court Registry on 27 June 1997, the French Republic brought an action under the first paragraph of Article 173 of the EC Treaty for the annulment in part of Commission Decision 97/333/EC of 23 April 1997 on the clearance of the accounts presented by the Member States in respect of the expenditure for 1993 of the Guarantee Section of the European Agricultural Guidance and Guarantee Fund (EAGGF) (OJ 1997 L 139, p. 30, hereinafter `the contested decision'), in so far as it refused to charge to the EAGGF, first, FF 103 286 730 in respect of intervention measures for public storage of cereals and, secondly, an export refund of FF 720 720 in respect of processed cheese.

The correction in respect of intervention measures for public storage of cereals

2 Under Article 7 of Regulation (EEC) No 2727/75 of the Council of 29 October 1975 on the common organisation of the market in cereals (OJ 1975 L 281, p. 1), the intervention agencies are obliged to buy in cereals which are offered to them, provided that the offers comply with conditions in particular in respect of quality and quantity.

3 Commission Regulation (EEC) No 689/92 of 19 March 1992 fixing the procedure and conditions for the taking-over of cereals by intervention agencies (OJ 1992 L 74, p. 18) requires in particular that:

- the cereals be sound, fair and of marketable quality, free from abnormal smell and live pests and that they meet minimum quality requirements (Article 2);

- all offers for intervention contain the name of the offerer, the cereal offered, the place of storage, the intervention centre to which the offer relates and the quantity, main characteristics and harvesting year (Article 3(1));

- takeover by the intervention agency take place when the quantity and standards have been established for the entire lot in respect of the goods delivered to the intervention store (Article 3(4));

- the quality characteristic be established on the basis of a representative sample (Article 3(5));

- the quantity may be established on the basis of the stock records in respect of goods taken over in the store (Article 3(6));

- a takeover note be issued by the intervention agency in respect of each offer (Article 3(8));

- the intervention agency check the quality of the stored product at least once a year (Article 5).

4 Pursuant to Article 3(2) of Regulation (EEC) No 729/70 of the Council of 21 April 1970 on the financing of the common agricultural policy (OJ, English Special Edition 1970 (I), p. 218), the Council adopted Regulation (EEC) No 3492/90 of 27 November 1990 laying down the factors to be taken into consideration in the annual accounts for the financing of intervention measures in the form of public storage by the European Agricultural Guidance and Guarantee Fund, Guarantee Section (OJ 1990 L 337, p. 3). That regulation provides in particular, under the first paragraph of Article 3, that intervention agencies are to establish an inventory for each product which has been the subject of Community intervention. The rules for drawing up that inventory are laid down by Commission Regulation (EEC) No 618/90 of 14 March 1990 (OJ 1990 L 67, p. 21). The inspection procedure in respect of cereals with a view to drawing up an inventory is described in Annex III to that regulation. Articles 3 and 4 provide that verifications and on-the-spot checks of the inventory must be carried out by the intervention agency.

5 Following inspections in June and July 1993 to check the cereals stored in intervention in France, the Commission informed the French authorities by letter of 20 September 1993 that its staff had found eight areas in which the intervention management system was unsatisfactory. Those deficiencies related to

- quality checks on products on entry into storage;

- the identification of stocks in storage, in particular their differentiation from stocks stored under different arrangements;

- the late entry into the accounts of stock movements;

- the unavailability of accurate records of stocks held in each store on a particular date when checks were carried out;

- the unavailability at the head office of the physical inventories laid down in Community rules and of accounting records when checks were carried out;

- the unsatisfactory nature of stock records held by the storage bodies;

- the unsuitability of certain warehouses for intervention storage (impossibility of taking measurements, non-existent or dangerous gangways, open to the elements ...);

- the difficulty of reconciling plans with the actual measurements of warehouses.

6 In the same letter, the Commission stated that the results of its mission could give rise subsequently to financial consequences when clearing the 1993 accounts.

7 By letter of 8 April 1994, the Commission expressed its satisfaction with the improvements which the French authorities intended to put in place. After drawing the French authorities' attention to Chapter E of the memorandum appended to its letter, concerning the corrections, and to the final comments, it stated that no overall financial penalty would be imposed, in particular in view of the improvements made to the management system.

8 In Chapter E it confirmed, however, that stocks were missing, in circumstances contrary to Article 3(6) of Regulation No 689/92 in particular, for which the EAGGF should be reimbursed at the value provided for by Commission Regulation (EEC) No 3597/90 of 12 December 1990 on the accounting rules for intervention measures involving the buying-in, storage and sale of agricultural products by intervention agencies (OJ 1990 L 350, p. 43).

9 In conclusion, it was pointed out to the French authorities that:

`... according to persistent trade rumours, it would appear that stocked goods and market cereals are switched in particular upon the sale of stocks into intervention'.

The Commission went on: `If it should transpire that those rumours are founded, very severe financial corrections will be imposed and you will be requested to impose penalties on traders and/or on storage bodies.'

10 Following a further series of inspections of the public storage of cereals, carried out between 27 June and 1 July 1994, the Commission confirmed, in a letter of 16 November 1994, that in many cases the French authorities had not remedied the deficiencies in the running of the management system raised in 1993, namely:

- the delay in entering stocks into the accounts;

- certain inadequacies in checks;

- poor storage conditions and problems with the placing of signs;

- inadequate stock records.

11 In the first annex to that letter, the Commission stated that the rumours regarding the mixture of privately held cereals with cereals bought into intervention had been confirmed. In a second annex, which related to an inspection of intervention stocks in the Orléans area, it was stated that in the presence of representatives of the national administrative authorities the Commission's inspectors had found the quantity held in the silos to be greater than should normally have been stored. The Commission concluded that the prefinanced wheat had been mixed with the storage body's privately held wheat.

12 It therefore informed the national authorities that the financial corrections would be decided in the context of the clearance of accounts with effect from 1992. By letter of 18 August 1995, the Commission proposed a financial correction of 2% of the total expenditure on intervention by way of public storage by the EAGGF, that is to say FF 84 million.

13 The French authorities referred the matter to the Conciliation Body, which was created on the initiative of the Commission by Decision 94/442/EC of 1 July 1994 setting up a conciliation procedure in the context of the clearance of the accounts of the European Agricultural Guidance and Guarantee Fund (EAGGF), Guarantee Section (OJ 1994 L 182, p. 45), to try to reconcile the differing views.

14 In its intermediate report of 15 December 1995, the Conciliation Body observed that the French authorities did not deny the essential findings of the EAGGF inspectors, although there remained differences as to the accuracy or the interpretation of certain findings (point 5). It concluded that the hearings it had held had not enabled it to ascertain whether the changes introduced by the French authorities met the Commission's requirements. It had gained the clear impression that the Commission had reconsidered its previous conclusions in late 1994, judging them too lenient, and now took the view that the improvements made by the French Republic after the 1993 visit justified reducing the financial correction applicable to 1992, but not abandoning a penalty altogether.

15 In view of those factors, the Conciliation Body made the following determination:

`It is certainly to be regretted that the Commission should give the impression of having retrospectively gone back on its original conclusions, which, here again, can only serve to corroborate the relevant Member State's observations as to the uncertainty of the clearance procedure. Moreover, the Commission's observations and conclusions would indeed be more solidly founded if they were based on a thorough examination of the system in France.

Nevertheless, the French authorities do not, essentially, deny that they should have modified significantly their previous procedure in order to meet the Commission's requirements and that the Community inspections have identified various irregularities, which the French authorities have admitted and penalised.'

16 In its final report of 26 January 1996, the Conciliation Body, after referring to its intermediate report, concluded that the financial correction advocated by the Commission staff was not unjustified.

17 That correction of 2% was adhered to in Commission Decision 96/311/EC of 10 April 1996 on the clearance of the accounts presented by the Member States in respect of the expenditure for 1992 of the Guarantee Section of the European Agricultural Guidance and Guarantee Fund and in respect of certain expenditure for 1993 (OJ 1996 L 117, p. 19). That decision was the subject of an action which was dismissed by the Court in its judgment in Case C-232/96 France v Commission [1998] ECR I-5699.

18 As regards 1993, the Commission, by letter of 9 February 1996, proposed a financial correction to the French authorities of 2% of the expenditure incurred in respect of technical costs, financial charges and other costs amounting to FF 103 million.

19 The letter also indicated that the French authorities had informed the Commission that certain stocks missing when the inspection took place had been put on sale. As it was not possible to sell missing stock, the Commission requested the French Republic to inform the EAGGF of the quantity sold, the value thereof and the year during which the sales were declared to enable a correction to be made when the accounts for the relevant year were cleared.

20 In their reply of 27 February 1996, the French authorities did not provide any specific information in that regard. In addition, they indicated that they opposed a further correction in the cereals storage sector.

21 The French authorities referred the matter to the Conciliation Body, which observed that the arguments put forward were identical to those advanced when it considered the matter in 1992 and, in its final report of 5 December 1996, maintained its previous observations and conclusions.

22 The Commission stated at paragraph 4.5.1.1.3 of the Summary Report of 15 April 1997 on the results of inspections concerning the clearance of the EAGGF Guarantee Section accounts for 1993 that:

`On notification of these findings the French authorities took action to improve their procedures. The fact remains, however, that the inadequacies of the system put EAGGF funds at significant risk during the 1992/93 and 1993/94 marketing years'.

23 The Commission identified several persistent weaknesses during 1993 (p. 113):

- delays in booking stocks

- some inadequacy in surveillance

- inadequacy of storage conditions and inadequate signs identifying intervention stocks

- absence of plans

- inadequate stock records.

24 The contested decision applied the financial correction of 2%.

25 In support of its claim for annulment, the French Government relies on three pleas in law, alleging that the national management and control system was in accordance with Community legislation and that there has been a breach of the principles of legal certainty and proportionality.

Conformity of the national management and control system with Community legislation

26 The French Government submits that the national system for the management and control of the quantities and quality of cereals delivered into intervention during the 1993 financial year met the requirements laid down by Community legislation.

27 In France, all storage facilities are subject to technical approval. They are recorded in a technical storage register maintained by the Office National Interprofessionnel des Céréales (hereinafter `the ONIC'). Since it possesses no storage facilities of its own, the ONIC relies on service providers with which it enters into storage contracts.

28 Under those contracts, storage bodies are liable in particular where there are found to be goods outside the scope of the contract or where the quality of the cereals is not identical with that recorded on entry into storage. Failure to observe the obligations provided for entails financial penalties in addition to the reimbursement of the storage aid wrongly paid; they are imposed systematically and are a deterrent intended to prevent misappropriation of goods or failure to monitor the stored cereals properly.

29 According to the French Government the inspection when the products were put into storage covered both the quantities being put into storage and the quality of the cereals, gauged on the basis of representative samples of the batches. There has always been inspection at the time of delivery. The ONIC is generally represented by the storage body at the time of delivery. However, where the storage body and the supplier are interdependent, the ONIC calls on the services of a monitoring company.

30 Even if there was in some cases delay in entering data into the accounts, that does not in any way call into question the reliability of the declarations since transactions (entry into and removal from storage) are tracked daily. It has therefore always been possible to produce an accurate list of stocks in each warehouse at the time of the inspections by comparing the entries and removals recorded in the most recent declarations.

31 In addition, in 1993 the risk of circumvention of Community rules on public storage of cereals was taken into account.

32 In order to ensure that public storage was being undertaken properly, the French authorities implemented measures not provided for under Community rules, in particular requiring storage agencies to affix signs stating how much storage capacity they were renting to the ONIC.

33 It is clear from the reports drawn up at the time of the inspections carried out by the Commission that storage conditions were satisfactory. Whilst they make mention of some wholly insignificant incidents (such as dead birds and insulation panels being found on the stored cereals), those incidents do not show that the conditions in which the goods were stored were unsatisfactory since the EAGGF inspectors did not make any reservations on that point.

34 In that regard, the financial audit report of the paying bodies for the 1993 and 1994 financial years carried out by Ernst and Young at the Commission's request concludes as follows:

`Variances are properly followed up. The reconciliations of the quantities of cereals on the annual clearance statements for 1993 and 1994 with those on the computer print-outs from the ONIC's management system are accurate' (paragraph 7.3.5 of Annex 7 to the audit report).

`The quantity control inspections carried out by the ONIC are clearly of a good standard: they are frequent, supported by a defined procedure, systematic, and intermediate inspections are unannounced. They enable the ONIC to form a reliable view of the information provided by the storage bodies. In addition, as a result of the fact that information is compiled manually, which is undoubtedly a lengthy and tedious process, the ONIC's management system enables detailed information to be available on the amount of cereals in storage with each storage body at any given time' (paragraph 7.4 of Annex 7 of the audit report).

35 The French Government points out that the main analyses and conclusions in the audit report demonstrate the effectiveness of the inspection, inventory and storage system put into place by the ONIC's management system, enabling inter alia details of the stocks of cereals held by each storage body to be ascertained at any given time. It is clear from the report that one of the main criticisms levelled by the Commission, relating to quantity control at the storage bodies, is wholly without foundation.

36 The French Government denies that the Commission's remarks contained, in particular, in the memorandum appended to its letter of 20 September 1993, lead to the conclusion that there were failings which exposed the EAGGF to the risk of loss.

37 A number of the Commission's comments concerned requirements not provided for by the legislation in force. Thus, nothing in Community law requires stocks to be entered in real time using the computer system of the intervention agency's head office. The same is true of the systematic placing of signs in storage areas. Finally, there is no Community provision specifying the conditions under which storage organisations' stock records are to be kept.

38 First of all it must be observed that it is settled case-law that the Commission is only permitted to charge to the EAGGF sums paid in accordance with the rules laid down in the various sectors of agricultural production, leaving the Member States to bear the burden of any other sum paid, and in particular any amounts which the national authorities wrongly believed themselves authorised to pay in the context of the common organisation of the markets (Case 11/76 Netherlands v Commission [1979] ECR 245, paragraph 8; Case 18/76 Germany v Commission [1979] ECR 343, paragraph 7, and Case C-48/91 Netherlands v Commission [1993] ECR I-5611, paragraph 14).

39 Whilst it is for the Commission to prove that there has been a breach of Community rules, it is for the Member State to demonstrate, if appropriate, that the Commission erred as to the financial consequences to be put into effect as a result (see to that effect Case 49/83 Luxembourg v Commission [1984] ECR 2931, paragraph 30).

40 In this connection, it must first of all be observed that, according to the statements of the Conciliation Body relating to the 1992 financial year, the French authorities do not deny that they should have significantly modified their procedures in order to meet the Commission's requirements and that the Community inspections identified various irregularities, which the French authorities have admitted and penalised (see paragraph 15 above). Furthermore, in its final report of 5 December 1996, the Conciliation Body maintained its earlier observations and conclusions in respect of the 1993 financial year (see paragraph 21 above).

41 Second, it is apparent from Annex 2 to the Commission's letter of 16 November 1994 that, when its representatives carried out their inspection visit in June 1994, they found that prefinanced wheat had been mixed with the storage body's privately held wheat (see paragraph 11 above).

42 Third, it is clear from a letter addressed to the French Republic by the Commission on 13 June 1997 that the Commission's staff pointed out in 1994, 1995 and 1996 that the defects they had previously identified in the French system for inspecting and storing cereals, such as the fact that no representative of the ONIC was present at delivery, the weaknesses in the annual inventory and the inadequate checking of data, continued to exist.

43 Fourth, the French Government acknowledged in its reply that it was possible that certain rules had not been complied with in practice.

44 Finally, no argument can be advanced on the basis that some of the Commission's complaints related to requirements not expressly laid down by the Community rules.

45 Article 8(1) of Regulation No 729/70, which defines the principles according to which the Community and the Member States are to ensure the implementation of Community decisions on agricultural intervention financed by the EAGGF and combat fraud and irregularities in relation to those operations (see Joined Cases 146/81, 192/81 and 193/81 BayWa [1982] ECR 1503, paragraph 13), imposes on the Member States the obligation to take the measures necessary to satisfy themselves that the transactions financed by the EAGGF are actually carried out and are executed correctly, to prevent and deal with irregularities and to recover sums lost as a result of irregularities or negligence, even if the specific Community act does not expressly provide for the adoption of particular supervisory measures (see Case C-8/88 Germany v Commission [1990] ECR I-2321, paragraphs 16 and 17).

46 In view of those considerations, the first plea in law must be rejected.

The principle of legal certainty

47 By its second plea in law, the French Government alleges that the Commission breached the principle of legal certainty by going back, on account of `persistent trade rumours ... that stocked goods and market cereals are switched in particular upon the sale of stocks into intervention', on the undertaking it had given in its letter of 8 April 1994 not to impose any financial consequences in the context of the clearance of accounts.

48 The Commission denies having given any undertaking to the French authorities to the effect that the deficiencies found in the control system would not give rise to any financial correction whatever. According to the Commission, the possibility of a financial correction had been expressly raised in the correspondence with the French authorities.

49 Without its being necessary to consider whether an alleged undertaking given by the Commission after the end of the financial year at issue not to impose an overall financial penalty is capable of permitting a Member State to escape the financial consequences of its failure to comply with its obligations under Community agricultural legislation, it need only be observed that, as is evident from paragraphs 7 to 9 of this judgment, that undertaking was, in any event, given subject to the proviso that cereal bought into intervention should not prove to have been replaced by privately-held cereal. The decision to impose a correction was in fact taken after Commission staff had discovered substitutions in the presence of representatives of the national authorities and following an inquiry, as is clear from the Commission's letter of 16 November 1994.

50 In view of those considerations, the second plea in law must be rejected.

The principle of proportionality

51 In the alternative, the French Government claims that the contested decision was contrary to the principle of proportionality. In its view, the correction could not, in any event, be applied in respect of budget item 10-13, which concerns losses in stocks sold, which were fully offset in accordance with the procedure laid down by Regulation No 3597/90.

52 In that connection, it need only be observed that the Commission was able to establish not only that intervention stocks were in fact missing but more generally that monitoring was inadequate. That showed that more stocks could be missing and thus that there was a risk of additional losses which could not be made good in accordance with Regulation No 3597/90.

53 The third plea must therefore be rejected.

The correction in respect of an export refund for processed cheese

54 Regulation (EEC) No 876/68 of the Council of 28 June 1968 (OJ, English Special Edition 1968 (I), p. 234) lays down general rules for granting export refunds on milk and milk products and criteria for fixing the amount of such refunds. Article 6 provides that the refund is to be paid upon proof that the products have been exported from the Community, and that they are of Community origin.

55 By Regulation (EEC) No 3665/87 of 27 November 1987 (OJ 1987 L 351, p. 1), the Commission laid down common detailed rules for the application of the system of export refunds on agricultural products.

56 Article 3 thereof provides:

`1. The day of export means the date on which the customs authority accepts the export declaration in which it is stated that a refund will be applied for.

...

4. The day of export shall be used to establish the quantity, nature and characteristics of the product exported.'

57 Article 5(1) provides:

`Payment of the differentiated or non-differentiated refund shall be conditional not only on the product having left the customs territory of the Community but also - save where it has perished in transit as a result of force majeure - on its having been imported into a non-member country and, where appropriate, into a specific non-member country within 12 months following the date of acceptance of the export declaration:

(a) where there is serious doubt as to the true destination of the product, or

(b) where ... it is possible that the product may be re-introduced into the Community.'

58 The final subparagraph of Article 5(1) adds:

`In addition, the competent authorities of the Member States may require that additional evidence be provided such as to satisfy them that the product has actually been placed on the market in the non-member country of import in the unaltered state.'

59 Article 13 provides:

`No refund shall be granted on products which are not of sound and fair marketable quality, or on products intended for human consumption whose characteristics or condition exclude or substantially impair their use for that purpose.'

60 Finally, Article 17, which relates to differentiated refunds, provides that the product must have been imported in the unaltered state into the non-member country and goes on to specify in Article 17(3) that:

`A product shall be considered to have been imported when it has been cleared through customs for release for consumption in the non-member country concerned.'

61 The cheese company Bel exported 14 256 boxes of `Vache qui rit' cheese to Saudi Arabia in the last quarter of 1988, weighing a total of 89 813 kg and having a market value of FF 883 700. It was entitled to refunds for those exports under Article 17 of Regulation (EEC) No 804/68 of the Council of 27 June 1968 on the common organisation of the market in milk and milk products (OJ, English Special Edition 1968 (I), p. 176).

62 On 20 June 1989, six months after shipment of the boxes, Bel issued a credit note to the buyer, Abbar and Zainy Cold Stores in Jedda, in the amount of USD 187 110.78, representing the invoice value of 12 148 boxes.

63 The buyer allegedly considered the texture of the cheese to be too soft having regard to the product's usual standards. Bel therefore decided to destroy the 12 148 boxes in the interests of preserving the product's brand image.

64 During an investigation carried out on 6 November 1991 pursuant to Council Regulation (EEC) No 4045/89 of 21 December 1989 on scrutiny by Member States of transactions forming part of the system of financing by the Guarantee Section of the European Agricultural Guidance and Guarantee Fund and repealing Directive 77/435/EEC (OJ 1989 L 388, p. 18), the French authorities found that

`The products from the group's Belgian factory were examined by the company's quality control staff. They formed the view that the manufacturing procedure had been inadequately monitored during some ten days of manufacture, which led to the withdrawal from sale of all the products affected'.

65 Following the destruction of the products, Bel received an export refund of FF 720 720.

66 By letters of 5 January, 3 April and 9 October 1995 the Commission informed the French authorities that a consignment of 76 500 kg of cheese was not eligible for intervention by reason of, firstly, the fact that it was of unsatisfactory quality from the time of manufacture and, second, the fact that it was not put on the market in the country of destination.

67 By letters of 16 January and 23 April 1996, the Commission informed the French Republic of its proposal to exclude from EAGGF funding the sum of FF 720 720, the amount representing the export refund granted in respect of the 76 500 kg of processed cheese.

68 The French Republic referred the matter to the Conciliation Body. In its final report of 8 November 1996, the Conciliation Body concluded that

`... it is unable to find a basis for conciliation in this case. It wishes to emphasise the importance of rapid clarification of the applicable Community provisions, in particular Articles 5 and 13 of Regulation No 3665/87'.

69 In the contested decision, the Commission corrected the sum of FF 720 720 on the grounds set out at paragraph 4.2.2.3 of the Summary Report on the basis that

- the product was not of marketable quality (see Article 13 of Regulation No 3665/87);

- the defect in quality was caused during manufacture, and consequently before export (see Article 3 of Regulation No 3665/87);

- the product was not put on the market in the country of destination (see Article 5 of Regulation No 3665/87).

70 In support of its application for annulment, the French Government claims that the export refund in respect of the processed cheese was made in accordance with the rules contained in Regulation No 3665/87. Therefore, the contested decision does not comply with Regulation No 729/70 and in particular Articles 2 and 3 thereof which provide that the EAGGF is to finance interventions intended to stabilise the agricultural markets where expenditure is undertaken by the competent national authorities in compliance with Community law.

71 The French Government puts forward two arguments in support of this sole plea.

72 First, the products were of sound and fair marketable quality on the day of export.

73 The importer only discovered that the cheese was of a softer texture than usual when he came to sell the products. According to the French Government, there was no evidence at the time when customs clearance was carried out by the Saudi authorities of any microbial or physical or chemical defect, or of any foreign body, or that the dates by which the products had to be used had passed.

74 Second, the cheese was in fact exported to Saudi Arabia within the meaning of Article 5 of Regulation No 3665/87.

75 The customs formalities for releasing the products for consumption were duly completed. The fact that the products were later destroyed does not alter the fact that they did effectively reach the Saudi market. Pursuant to Regulation No 3665/87, products must be deemed to have been put on the market as soon as the formalities for releasing them into free circulation are completed in the country of destination and the customer takes possession of the products.

76 So far as the sound and fair marketable quality of the products in question is concerned, in the absence of Community rules providing a definition thereof it is for the Member States themselves to adopt more precise provisions (see, to that effect, Case C-371/92 Ellinika Dimitriaka [1994] ECR I-2391, paragraph 23).

77 However, such national provisions may conflict with the general scheme of the applicable Community rules. In that connection, the ninth recital in the preamble to Regulation No 3665/87 provides that products in respect of which an export refund is applied for must be `of a quality such that they can be marketed on normal terms'.

78 On this point, it need only be observed that the French Government has acknowledged that the difference in quality compared to the usual texture of the product was due to a manufacturing defect, as was established by internal checks carried out by the manufacturer (see paragraph 64 of this judgment).

79 It is of little importance that the defect in the texture only became apparent upon inspection by the Saudi customer. On the day of export, the product in question had a latent defect, the result of which was that it was not of sound and fair marketable quality within the meaning of Article 13 of Regulation No 3665/87.

80 Taking the opposite view would result in the general public having to bear the consequences of the manufacturer's failure to fulfil its contractual obligations to deliver the product as specified. That is not the purpose of the refund scheme, which is intended solely to enable Community products to be exported where this course would not otherwise be financially viable for the exporter (see Case C-299/94 Anglo Irish Beef Processors International and Others [1996] ECR I-1925, paragraphs 21 and 22).

81 Since no refund is payable under Article 13 of Regulation No 3665/87 where the products are not of sound and fair marketable quality, it is not necessary to go on to examine whether the processed cheese in question was in fact imported into Saudi Arabia within the meaning of Article 5 of that regulation.

82 In view of those considerations, the application must be dismissed in its entirety.

Decision on costs

Costs

83 Under the first sentence of Article 69(2) of the Rules of Procedure, the unsuccessful party is to be ordered to pay the costs if they have been applied for in the successful party's pleadings. Since the French Republic has been unsuccessful, it must be ordered to pay the costs.

Operative part

On those grounds,

THE COURT

(Fifth Chamber)

hereby:

1. Dismisses the application;

2. Orders the French Republic to pay the costs.