Compensation for Damage

Compensation for Damage - Untitled design 10

Introduction

On 28 September 2023, the Court of Justice, in case C-320/21 P, Ryanair v European Commission, delivered its first judgment in a series of appeals brought by Ryanair challenging the dismissal by the General Court of its action in multiple cases seeking the annulment of various Commission decisions authorising aid to airlines during the covid-19 pandemic.

Both before the General Court and the Court of Justice, Ryanair had questioned the extent to which Member States could limit the number of aid beneficiaries. Ryanair’s arguments were novel and addressed fundamental aspects of State aid law. None was successful.

In the present case, Ryanair appealed against the judgment of the General Court in case T-379/20, Ryanair v Commission, concerning State aid granted by Sweden to SAS to compensate it for the damage that it suffered as a result of the restrictions of air travel in 2020. The aid was authorised of the Commission in case SA.57061. At the same time, Denmark granted similar aid to SAS, which was also approved by the Commission in case SA.56795. Ryanair appealed against that Commission decision too [T-378/20, Ryanair v Commission]. The General Court rejected that appeal to which led to case C-321/21 P. The Court of Justice upheld the judgment of the General Court on the same day as case C-320/21 P.

During the pandemic SAS received also other State aid. In April 2020, the Commission approved, on the basis of Article 107(3)(b), State aid granted by Sweden [SA.56812] in the form of loan guarantees for airlines licensed in Sweden in order to secure the uninterrupted connectivity within Sweden and between Sweden and the rest of the world.

The present case concerns another state guarantee granted by Sweden only to SAS on a revolving credit facility of up to EUR 137 million because SAS was having difficulties in securing loans from credit institutions. This aid was approved on the basis of Article 107(2)(b) TFEU. A special feature of the aid was that it was granted prospectively to cover also future damage caused by flight cancellation. The approval of the Commission was conditional on ex post control by Sweden to prevent over-compensation.

May aid be limited to compensation of a single undertaking?

Ryanair contended that aid under Article 107(2)(b) TFEU ought not to be limited to a single undertaking that was a victim of covid-19. Competitors of that victim – i.e. the SAS – also suffered damage.

The Court of Justice, first, recalled established case law on the interpretation and application of Article 107(2)(b). See, for example, case C-346/03, Atzeni. In that case the Court of Justice rejected Italian arguments about the cause of the damage suffered by farmers because adverse economic conditions and high interest rates were not a natural disaster or exceptional occurrence.

Since Article 107(2)(b) is a derogation from the prohibition of State aid, it must be interpreted strictly. According to the Court of Justice “(22) that does not mean that the terms used to define the derogation must be construed in such a way as to deprive it of its intended effect, since a derogation must be construed in a manner consistent with the objectives that it pursues”.

The Court considered that it was “(23) no way apparent from the wording of Article 107(2)(b) TFEU, read in the light of the objective of that provision, that only aid granted to all the undertakings affected by the damage caused, in particular, by an exceptional occurrence may be declared to be compatible with the internal market within the meaning of that provision. Even if it is granted only to one undertaking, aid may, as appropriate, be intended to make good that damage and, in full compliance with EU law, fulfil the objective expressly referred to in that provision.”

Indeed, Article 107(2)(b) does not require that compensation be granted to all victims. The Court went on to state that “(24) the objective pursued by Article 107(2)(b) TFEU, which is to compensate for the disadvantages caused directly by an exceptional occurrence, does not mean that a Member State cannot, without that being dictated by a desire to favour one undertaking over its competitors, choose, for objective reasons, to grant only a single undertaking the benefit of a measure adopted under that provision.”

Two statements in paragraph 24 need to be noted. First, the Court considered that favouring one undertaking over its competitors was not acceptable. But, it did not explain how the favour was to be identified or its existence established or how it could be distinguished from the act of simply granting aid to a single victim. Second, Member States could, nevertheless, limit the compensation for “objective reasons”. But, it also did not explain what such reasons may be.

According to the Court, “(25) a contrary interpretation of Article 107(2)(b) TFEU would deprive that provision of much of its effectiveness. If that provision only allowed a Member State the option of granting aid to all the victims of an exceptional occurrence without being able to reserve that aid to a limited number of undertakings, or even just one, Member States would often be deterred from making use of that option because of the costs involved in the grant,

in such circumstances, of significant aid to all undertakings that suffered damage coming under its authority.”

This interpretation raises an important question. How did the Court know that “Member States would often be deterred”? This is an empirical issue. Is there evidence of Member States being deterred from compensating all victims of natural disasters or exceptional occurrences because of budgetary constraints? And, does it happen “often”? The point is that in interpreting the meaning of Article 107(2)(b), the Court relied on extraneous factors that may not have reflected the actual situation in Member States.

Nonetheless, the Court concluded that “(26) Article 107(2)(b) TFEU cannot be interpreted in the manner advocated by Ryanair without undermining the objective and effectiveness of that provision.”

The Court went on to reiterate that “(28) aid measures granted under Article 107(2)(b) TFEU which, although intended to make good damage suffered as a result of an exceptional occurrence, are, in fact, motivated by considerations that are arbitrary or unrelated to that objective, such as the wish to favour, for reasons not connected with that objective, a particular undertaking compared with its competitors, especially an undertaking which was already in difficulty before the occurrence of the event in question, cannot be held to be compatible with the internal market.”

Indeed, it is important that the damage that is compensated must have been caused by the exceptional occurrence and not by other events that may have predated that occurrence. Therefore, “(29) if, when examining the compatibility of an aid measure under Article 107(2)(b) TFEU, the Commission were to find, inter alia, that the selection of the beneficiary is not consistent with the objective of compensating for the disadvantages caused directly, inter alia, by an exceptional occurrence, referred to in that provision and that it thus does not genuinely reflect the concern to attain that objective, but other considerations unrelated to it, that measure cannot be declared compatible with the internal market on the basis of the derogation established by that provision.”

The Court concluded that “(31) contrary to what Ryanair suggests, the mere fact that aid under Article 107(2)(b) TFEU is granted to only one undertaking, as in the present case to SAS, from among a number of undertakings potentially adversely affected by the exceptional occurrence at issue, does not mean that that aid necessarily pursues other objectives to the exclusion of the one pursued by that provision or that it is granted arbitrarily.”

Did SAS benefit from multiple awards of State aid?

Ryanair claimed that SAS had also received State aid in the context of another aid scheme that Sweden adopted in order to address the impact of covid-19.

In response, the Court of Justice, first, clarified that “(49) the ‘concurrent application’ of Article 107(2)(b) TFEU, on which the measure at issue was based, and of Article 107(3)(b) TFEU, on which the Swedish aid scheme was based, the General Court does not in any way suggest that SAS benefited from those two separate aid measures. On the contrary, it is

apparent from paragraph 32 of the judgment under appeal that SAS was not able to benefit from both the measure at issue and the Swedish aid scheme. It is, moreover, common ground that it had not benefited from that aid scheme.”

“(50) By thus referring to the concurrent application of both those provisions, the General Court merely stated that it could not be ruled out that a number of aid measures might be adopted by a Member State on the basis of various derogations provided for in Article 107(2) or (3) TFEU in respect of the same event, as was the case here.”

“(51) As the General Court correctly noted in paragraph 34 of the judgment under appeal, an event such as the COVID-19 pandemic may be classified both as an ‘exceptional occurrence’ within the meaning of Article 107(2)(b) TFEU and as an event giving rise to a ‘serious disturbance in the economy’ within the meaning of Article 107(3)(b) TFEU.”

“(52) In those circumstances, as the General Court correctly found in paragraph 34 of the judgment under appeal, the TFEU does not preclude a concurrent application of those provisions, within the meaning indicated in paragraph 50 above, provided that the conditions of each of those provisions are met.”

Was the aid disproportional to the damage?

Ryanair alleged that the aid was not proportionate to the damage suffered by SAS as a result of the covid-19 pandemic.

The Court recalled that “(58) as regards Article 107(2)(b) TFEU, […], only disadvantages caused by natural disasters or exceptional occurrences may be compensated for under that provision.” And, “(59) the aid granted cannot exceed the losses incurred by its beneficiaries as a result of the event concerned”.

The Court proceeded to dismiss that allegation of Ryanair because it was “(60) not apparent from the judgment under appeal that, for the purposes of ascertaining whether, in the decision at issue, the Commission approved overcompensation of the damage actually suffered by SAS, the General Court applied such a test and that it thus had an impact on the outcome of that examination.”

In fact, “(62) the Commission had, first, identified the factors which were taken into consideration in order to quantify the damage, namely the loss in revenue, the avoided variable costs and the adjustment of the profit margin, as well as the period of time in which that damage could arise, and, second, had stated that the loss in revenue had to be determined by taking into account SAS’s total revenue, not just that from the carriage of passengers. In addition, the General Court stated that the Commission had taken note of the commitment by the Swedish authorities, first, to carry out a detailed and specific ex post quantification of the damage suffered by SAS and of the amount of aid which it ultimately received and, second, to ensure that SAS repaid any overcompensation of that damage.”

“(76) As regards the proportionality of an aid measure granted under Article 107(2)(b) TFEU in relation to the amount of the aid in question, […] that amount cannot exceed the losses

incurred by its beneficiary. Where, as in the present case, individual aid is involved, it follows that it is for the Commission to ascertain, when assessing the compatibility of the aid with the internal market, whether the beneficiary does not obtain an amount of aid exceeding the damage it actually suffered as a result of the exceptional occurrence in question.”

“(77) For the purposes of such an assessment concerning a particular airline, it is clearly irrelevant whether, or to what extent, other airlines have also suffered damage as a result of the same event.”

“(78) In addition, it is apparent from paragraphs 22 to 26 above that, […], Ryanair is wrong to claim that the General Court erred in law in deciding that the Member State concerned is not required to take into account all the damage caused by the exceptional occurrence in question or to grant all victims of that damage the benefit of the aid. The General Court was therefore right to hold, on the basis of those same considerations, […], that authorisation to grant aid solely to SAS was not conditional on the Commission demonstrating that the damage caused by that event was prejudicial only to that undertaking.”

Must the Commission take into account the competitive advantage conferred to a single beneficiary over its competitors?

Ryanair argued that compensatory aid granted to a single recipient – i.e. SAS – enabled that undertaking to enjoy an additional benefit to the offsetting of its losses. It also gained an advantage over its competitors who were damaged but not compensated.

The Court of Justice responded that “(84) contrary to what Ryanair maintains, […] the advantage which aid confers on its recipient does not include any economic benefit that the recipient might obtain through exploiting that advantage.” Indeed, the Court did reach this conclusion in its judgment in case C-164/15 P, Commission v Air Lingus.

“(85) Thus, in the case of the measure at issue, that is to say aid in the form of a guarantee, the amount of aid granted to SAS, which the Commission must take into account in order to determine whether there has been any overcompensation of the damage suffered by that airline as a result of the exceptional occurrence at issue, corresponds, in principle, as is apparent from the Commission Notice on the application of Articles [107] and [108 TFEU] to State aid in the form of guarantees (OJ 2008 C 155, p. 10) and as the General Court correctly pointed out in paragraph 54 of the judgment under appeal, to the difference in rates granted to SAS with or without the measure at issue on the date the decision at issue was adopted. By contrast, for the purposes of that determination, the Commission must not have regard to any advantage that SAS might have indirectly derived from it, such as the competitive advantage alleged by Ryanair.”

Was the purpose of the aid to compensate SAS or to preserve the connectivity of Sweden?

Ryanair contented that the granting of aid to a single undertaking was not sufficient to preserve the connectivity of Sweden.

The Court of Justice rejected this plea on the grounds that the purpose of the measure was to compensate SAS, not to support connectivity. “(95) It is expressly clear from recital 9 of the decision at issue, which appears in the section entitled ‘Objective of the measure’, that that objective is to ‘compensate SAS for damage suffered due to the cancellation or re-scheduling of its flights as a result of the imposition of travel restrictions linked to the COVID-19 outbreak’. On the other hand, as regards the preservation of Sweden’s ‘connectivity’, ‘intra-Scandinavian accessibility’ and the Swedish economy, those aspects are referred to in a different part of the decision at issue, that is to say, in the section entitled ‘Beneficiary’, which seeks only to describe the profile of the undertaking to which the measure at issue was addressed and not the objective of that measure.” “(96) The objective of the measure at issue, in the light of that decision, aside from compensating SAS in part for the damage arising from the COVID-19 pandemic, was not to preserve Sweden’s ‘connectivity’, ‘intra-Scandinavian accessibility’ or the Swedish economy.”

It is true that the Swedish government, in its notification to the Commission, described the significance of SAS without explicitly stating that it wanted to compensate SAS because it was important for the connectivity of the country. But for what other reason would it include that information in its notification if it did not want to stress the need to support SAS? Is it sufficient that the Court merely examines the formally stated objective of the aid and ignores the context?

Was the aid discriminatory?

Article 18 TFEU prohibits discrimination in any form, but “without prejudice to any special provisions” in Treaty. Ryanair argued that the granting of State aid to a single victim is discriminatory. The General Court acknowledged that all State aid is inherently discriminatory, because it is selective, and examined whether the discrimination was proportional to the objective of the aid. The Court of Justice assumed a different approach that did not acknowledge explicitly the inherent discriminatory element of State aid.

“(100) Ryanair alleges that the General Court, […], erred in law in the application of the principle of non-discrimination and, more specifically, the prohibition of discrimination on grounds of nationality laid down in the first paragraph of Article 18 TFEU.”

“(102) It is therefore with regard to measures with such characteristics, in so far as they are liable to distort competition and affect trade between the Member States, that Article 107(1) TFEU lays down the principle that such measures are incompatible with the internal market.”

“(103) In particular, the requirement of selectivity arising from Article 107(1) TFEU presupposes that the Commission will establish that the economic advantage, understood in the broad sense, arising directly or indirectly from a particular measure specifically benefits one or more undertakings. It falls to the Commission to show, in particular, that the measure in question creates differences between undertakings which, with regard to the objective of the measure, are in a comparable situation. It is necessary therefore that the advantage be granted selectively and that it be liable to place certain undertakings in a more favourable situation than that of others”.

“(104) Where, as in the present case, the measure in question is envisaged as individual aid, the identification of the economic advantage is, in principle, sufficient to support the presumption that it is selective”.

“(106) In that regard, Article 107(2) and (3) TFEU provides for certain derogations from the principle, referred to in paragraph 102 above, that State aid is incompatible with the internal market. Accordingly, State aid granted for the purposes of and in accordance with the requirements laid down by those derogating provisions, notwithstanding the fact that it has the characteristics and produces the effects referred to in paragraph \101 above, is compatible or is capable of being declared compatible with the internal market.”

“(107) It follows that, unless those derogating provisions are to be deprived of all practical effect, State aid which is granted in accordance with those requirements, that is to say, for the purposes of an objective recognised therein and within the limits of what is necessary and proportionate to the achievement of that objective, cannot be held to be incompatible with the internal market having regard solely to the characteristics or effects, referred to in paragraph 101 above, which are inherent in any State aid, that is to say, inter alia, for reasons relating to whether the aid is selective or distorts competition”. “(108) Therefore, aid cannot be considered incompatible with the internal market for reasons that are solely linked to whether the aid is selective or distorts or threatens to distort competition.”

The conclusion of the Court follows correctly from its premise. If State aid is by definition selective and discriminatory, it cannot be found to be incompatible with the internal market simply on the grounds that it is selective and discriminatory. If that were the case, the second and third paragraphs of Article 107 would be impossible to apply. The real issue is not whether State aid is discriminatory. It is whether it is excessively discriminatory for the purpose of compensating damage. It seems to me that a narrowly defined compensatory measure that grants aid only to some but not all victims of a natural disaster or exceptional occurrence is discriminatory beyond the selectivity that is inherent in State aid. It is discriminatory in the context of Article 107(1) because it does not compensate all undertakings in all sectors that are damaged by events external to them. And, it is extra discriminatory in the context of Article 107(2)(b) because it does not compensate all undertakings in the same sector who compete with the aid beneficiary.

The Court of Justice also explained how Article 18 can be reconciled with Article 107.

“(109) The procedure provided for in Article 108 TFEU must never produce a result that is contrary to the specific provisions of the Treaty. Accordingly, State aid which, as such or by reason of some modalities thereof, contravenes provisions or general principles of EU law cannot be declared compatible with the internal market”.

“(110) However, as regards Article 18 TFEU specifically, it is settled case-law that that article is intended to apply independently only to situations governed by EU law in respect of which the TFEU lays down no specific prohibition of discrimination”.

“(111) Since, […], Article 107(2) and (3) TFEU provides for derogations from the principle, referred to in paragraph 1 of that article, that State aid is incompatible with the internal

market, and thus allows, in particular, differences in treatment between the undertakings, subject to fulfilment of the requirements laid down by those derogations, those derogations must be regarded, […], as ‘special provisions’ provided for in the Treaties, within the meaning of the first paragraph of Article 18 TFEU.”

SA.56812C-164/15 P, Commission v Air LingusC-164/15 P, Commission v Air Lingus

In the rest of the judgment, the Court considered several other pleas put forth by Ryanair concerning violation of the right of establishment [Article 49 TFEU], the right to provide services [Article 56 TFEU], of the obligation of the Commission to sufficiently explain its decision [Article 296 TFEU] and also violation of its procedural rights. All of them were rejected by the Court which, consequently, dismissed the appeal in its entirety.

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Phedon Nicolaides

Dr. Nicolaides was educated in the United States, the Netherlands and the United Kingdom. He has a PhD in Economics and a PhD in Law. He is professor at the University of Maastricht and the University of Nicosia. He has published extensively on European integration, competition policy and State aid. He is also on the editorial boards of several journals. Dr. Nicolaides has organised seminars and workshops in many different Member States, and has acted as consultant to several public authorities.

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