Advocate General Wathelet has issued his opinion in the Eesti Pagar preliminary ruling,  which if followed could have significant implications for Member States, national authorities and beneficiaries of State aid. Wathelet’s opinion is of particular interest as judgments on the existence and test for incentive effect are rare and the incentive effect is an essential element required for an aid measure to benefit from the General Block Exemption Regulation (GBER). It remains to be seen if the CJEU will follow the opinion in its judgment, expected later this year or in 2019.
The case concerns aid awarded by the Estonian Foundation for development of business (EAS) in 2009 to Eesti Pagar for the purposes of purchasing a bread production line. EAS deemed this aid to be within Article 8(2) of the then applicable GBER as the proposed aid incentivized Eesti Pager to invest in a project that they would not otherwise have undertaken, i.e., the aid had an incentive effect.
In January 2014, Estonia attempted to recover the aid on the grounds that it had been unaware of earlier financial contracts entered into in relation to the production line. Although not mentioned in Wathelet’s opinion, the aid recovery followed an inspection of the Eesti Pagar project by EAS. There is no evidence that there was any other motivation on the part of EAS to recover the money than this new assessment of the facts. The Estonian authorities argued that since Eesti Pagar had already entered into leasing agreements in relation to the production line before it applied for aid, the aid did not have an incentive effect. Eesti Pagar disputed this in the Estonian courts, arguing that they had been encouraged to sign the “preliminary” agreements by EAS before receiving the aid and that they had acquired the legitimate expectation that the aid had been granted in a manner compliant with the GBER.
The Estonian Court of Appeal referred five questions to the CJEU, asking: (i) how national authorities should assess when a project or activity starts for the purposes of Article 8(2) of the GBER; (ii) if Member States are obliged to recover unlawful aid even if the Commission has not adopted a corresponding decision; (iii) whether the granting of aid by a national authority engenders a legitimate expectation on the part of the beneficiaries; (iv) what limitation period applies to the recovery of unlawful aid by a Member State; and (v) whether a Member State is obligated to demand interest from the beneficiary of the unlawful aid.
National Authority Assessment
Under the common assessment framework and the then-applicable GBER, aid is only compatible if it has an incentive effect—i.e., it advances a desirable policy objective that would not happen without the aid (in the Eesti Pagar case, the development of small and medium-sized enterprises). Pursuant to Article 8(2) of the GBER, aid could only have an incentive effect if an application for the aid is submitted before work on the project or activity has started. The accepted position is that work on a project or activity starts when construction work begins or contracts have been concluded. The Advocate General asserted that on the basis of the Commission’s Regional Aid Guidelines, a firm contractual commitment can be conclusive proof of the beginning of a project. However, an economic analysis on a case-by-case basis regarding the nature of the contractual commitments is necessary. This expands the accepted position, as it requires national authorities to carry out a factual analysis of the contractual terms and circumstances at the time of the application for aid in order to ascertain whether the aid had an incentive effect. If EAS did advise Eesti Pagar to sign the agreements prior to its State aid application, then this should also be taken into account. If Eesti Pagar had agreed that a condition precedent to completing the purchase agreement was that its request for State aid is accepted, then the signing of such a purchase agreement would not necessarily constitute the start of the project. Consequently, a broader assessment of the facts could mean that the aid did still have an incentive effect at the time Eesti Pagar applied for it, even though they had already signed certain legally binding agreements.
Member States’ Recovery Obligation Where No European Commission Decision
It is settled law that Member States are obligated to recover aid, together with interest, where the Commission makes a recovery decision. However, the CJEU does not appear to have had the opportunity before to consider if this obligation on Member States extends to situations where no such recovery decision has been made.
The Advocate General concluded that such an obligation exists on the basis of the principle of loyal cooperation in Article 4 of the Treaty on the Functioning of the European Union (TFEU), as long as the beneficiary has been given proof of the illegality of the aid rather than the national authority just possessing a “mere doubt” as to its legality. The Advocate General gave the surprising view that this “proof” of illegality could be demonstrated by the national authority on its own initiative or by a competitor of the beneficiary. This is an expansive view of proof given that a national authority (other than a national court) has no jurisdiction under the Treaty to determine if State aid is present or not, and a competitor even less so. The Advocate General did not, however, reason that this means the limitation period for the Member State to recover the aid should be extended to match that of the Commission—the four-year limitation period still applies. Despite this limitation, the Advocate General’s assertion that Member States on their own initiative—and without Commission oversight—can take steps to reclaim aid that they assess as illegal will have significant consequences for the legal certainty of State aid beneficiaries, especially, for example, when a new Government comes to power that may disapprove of the spending decisions of its predecessor.
Guidance for Beneficiaries of State Aid
In “exceptional circumstances,” a beneficiary of illegal State aid may rely on legitimate expectations that the aid was granted to them in a legally compliant manner in order to avoid having to repay the aid to their Member State. For legitimate expectations to exist, the aid must have been granted in accordance with Article 108 of the TFEU: the Member State must have notified the Commission of the aid (beneficiaries cannot notify aid), unless exempted by regulation (this is now effectively limited to the GBER).
Due to the unequivocal and mandatory nature of the obligations set out in Article 108, as well as the fact that it is part of the founding treaties of the EU, EU courts have held that it is the beneficiary’s responsibility to ensure that the Article 108 procedure has been complied with prior to receiving State aid. A “diligent” beneficiary should “normally” be able to determine whether due procedure has been followed. This aligns with the rule that under usual circumstances, it is the responsibility of the beneficiary to satisfy itself of the legality of the State aid being bestowed upon it. This rule is an attempt to step around the structural injustice in State aid law in that it is the Member State which commits the wrongdoing in granting unlawful aid, yet it is beneficiary that bears the consequences.
Indeed, even in cases where the Commission has decided that the aid was compatible with the internal market, the aid beneficiaries have been ordered to remedy the consequences of the unlawful aid. It could be questioned how this fits with the aim of the GBER regime to provide legal certainty for beneficiaries and to reduce the administrative burden on Member States and their granting authorities. It follows that, as was the case in Eesti Pagar, if the Commission has not made a decision to approve the State aid (due to the fact that it was not notified because of a belief that it was subject to the GBER exemption), a reasonable beneficiary cannot be sure as to the lawfulness of the aid, and so it remains liable to refund it.
Wathelet applied previous case law to re-emphasize that a “forward-looking” and “wise” company in Eesti Pagar’s situation should have checked for compliance with Article 108 of the TFEU and Article 8(2) of the GBER at the time of its application for aid. This responsibility applies even if the national authority had illegally granted the aid in the first place, and so its repayment, potentially at the discretion of the national authority years later, would appear “to be contrary to good faith.” Wathelet’s reasoning means that regardless of whether the Commission is notified of the aid, beneficiaries should be aware that Member States may review and recover the aid.
The lesson for companies is analogous to caveat emptor: either conduct a thorough self-assessment of the procedure prior to receiving State aid and contemplate refusing the aid if there is doubt as to its legality, or run the risk of a national authority (even if just on the basis of a different assessment of the facts underlying an application for aid) or the Commission clawing back the aid within four or 10 years respectively.