Reports of Cases. JUDGMENT OF THE GENERAL COURT (Fourth Chamber) 14 July 2016 *

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1 Reports of Cases JUDGMENT OF THE GENERAL COURT (Fourth Chamber) 14 July 2016 * (EAGGF, EAGF and EAFRD Expenditure excluded from financing Flat rate financial correction Cross compliance Minimum requirements for good agricultural and environmental condition Standards Article 5(1) of and Annex IV to Regulation (EC) No 1782/2003 Article 6(1) of and Annex III to Regulation (EC) No 73/2009) In Case T-661/14, Republic of Latvia, represented by I. Kalniņš and D. Pelše, acting as Agents, v European Commission, represented by A. Sauka and D. Triantafyllou, acting as Agents, applicant, defendant, APPLICATION under Article 263 TFEU for annulment of Commission Implementing Decision 2014/458/EU of 9 July 2014 on excluding from European Union financing certain expenditure incurred by the Member States under the Guarantee Section of the European Agricultural Guidance and Guarantee Fund (EAGGF), under the European Agricultural Guarantee Fund (EAGF) and under the European Agricultural Fund for Rural Development (EAFRD) (OJ 2014 L 205, p. 62), in so far as that decision excludes from EU financing certain expenditure of the Republic of Latvia, amounting to EUR , on grounds of non-compliance with EU rules, THE GENERAL COURT (Fourth Chamber), composed of M. Jaeger, President, M. Prek and V. Kreuschitz (Rapporteur), Judges, Registrar: S. Bukšek Tomac, Administrator, having regard to the written procedure and further to the hearing on 27 January 2016, gives the following EN * Language of the case: Latvian. ECLI:EU:T:2016:412 1

2 Judgment Background to the dispute 1 In the context of a clearance inspection pursuant to Article 31 of Council Regulation (EC) No 1290/2005 of 21 June 2005 on the financing of the common agricultural policy (OJ 2005 L 209, p. 1), the European Commission informed the Republic of Latvia, by letter of 26 November 2010, that it had found weaknesses by reference to the EU rules, in particular in the context of cross compliance, failure to implement certain standards laid down in Annex IV to Council Regulation (EC) No 1782/2003 of 29 September 2003 establishing common rules for direct support schemes under the common agricultural policy and establishing certain support schemes for farmers and amending Regulations (EEC) No 2019/93, (EC) No 1452/2001, (EC) No 1453/2001, (EC) No 1454/2001, (EC) 1868/94, (EC) No 1251/1999, (EC) No 1254/1999, (EC) No 1673/2000, (EEC) No 2358/71 and (EC) No 2529/2001 (OJ 2003 L 270, p. 1), and in Annex III to Council Regulation (EC) No 73/2009 of 19 January 2009 establishing common rules for direct support schemes for farmers under the common agricultural policy and establishing certain support schemes for farmers, amending Regulations (EC) No 1290/2005, (EC) No 247/2006, (EC) No 378/2007 and repealing Regulation (EC) No 1782/2002 (OJ 2009 L 30, p. 16). According to the Commission, those weaknesses related to the following standards and reporting years: Minimum soil cover, in 2008 and 2009; Crop rotation, in 2008; Minimum livestock stocking rates and/or appropriate regimes, in 2008; Retention of landscape features, in 2008 and By letter of 27 January 2011 to the Commission, the Latvian authorities explained that the standards Crop rotations and Minimum livestock stocking rates and/or appropriate regimes had not been defined as minimum requirements in Latvia. In accordance with Annex III to Regulation No 73/2009, entitled Good agricultural and environmental condition referred to in Article 6, those standards continued to be optional after 1 January 2009 and were not implemented. As regards the standard Minimum soil cover, the Latvian authorities stated that, since 2010, it had been implemented, on the recommendation of a working group composed of experts and organised by the Commission, by means of the requirement that an improvement system under the responsibility of the farmer was maintained on agricultural plots, ensuring the water regulation of the soil. 3 By letter of 23 July 2012, the Commission, in accordance with Article 11(1) of Commission Regulation (EC) No 885/2006 of 21 June 2006 laying down detailed rules for the application of Council Regulation (EC) No 1290/2005 as regards the accreditation of paying agencies and other bodies and the clearance of the accounts of the EAGF and of the EAFRD (OJ 2006 L 171, p. 90), invited the Latvian authorities to a bilateral meeting. In that letter, the Commission maintained its position that the standards Crop rotations and Minimum livestock stocking rates and/or appropriate regimes were to be introduced for claim year 2008, but had not been. As regards the implementation of the standard Minimum soil cover, the Commission pointed out that the explanation provided by the Latvian authorities related only to the water regulation of the soil. Thus, that standard was introduced only for claim year Last, the Commission pointed to the lack of additional clarification concerning the standard Retention of landscape features and concluded that that standard was not applied for claim years 2008 and The bilateral meeting took place on 20 September By letter of 6 November 2012, the Latvian authorities explained to the Commission that certain standards were not essential in the national context and that their implementation made no sense. In addition, they pointed out, in particular, that the Court of Auditors of the European Union, in its Special Report No 8/2008, Is cross compliance an effective policy?, had stated that the objectives of cross compliance were neither specifically defined, nor measurable, nor achievable, nor relevant, nor timed. 2 ECLI:EU:T:2016:412

3 6 On 30 January 2013, the Commission sent the Latvian authorities the minutes of the bilateral meeting, containing a summary of the additional information which they had provided in their letter of 6 November On 25 February 2013, the Commission sent a minute in Latvian in which it requested additional information. The Latvian authorities provided that information on 25 April On 11 November 2013, the Commission sent the Latvian authorities its proposal to exclude a total amount of EUR from EU financing because of failure to implement the standards at issue, including failure to apply controls and sanctions in respect of the minimum administrative requirements. In that letter, the Commission, in particular, stated the following: To summarise, the [Commission] maintains that four out of 10 GAEC standards [referring to good agricultural and environmental conditions ] were not defined during claim year 2008 and that two out of eight GAEC standards were not defined during claim year The Latvian authorities submitted an estimate of the potential risk for the Funds for certain claim years. The [Commission] is unable to accept that estimate, however, because it has no assurance that the sums thus defined correspond to the entire risk for the Fund. In addition, that estimate does not take account of the loss of deterrent effect owing to the failure to apply controls and sanctions. 8 On 20 December 2013, the Latvian authorities submitted a request to the Conciliation Body, setting out the reasons why in their view the Commission had failed to comply with the relevant provisions of Regulations No 1782/2003 and No 73/ By letter of 27 January 2014, the Conciliation Body rejected the request as inadmissible on the grounds that the financial corrections at issue were below EUR 1 million and that the request did not raise a point of principle having formed the subject matter of the bilateral procedure. 10 By letter of 3 March 2014, the Commission informed the Republic of Latvia of the amounts which it proposed to exclude from EU financing, amounting to a total of EUR The Republic of Latvia was then sent the Summary Report, dated 5 May and bearing the reference D(2014) ANN2-EN/FR, on the results of the Commission s inspections in the context of the conformity clearance pursuant to Article 7(4) of [Council] Regulation (EC) No 1258/1999 [of 17 May 1999 on the financing of the common agricultural policy (OJ 1999 L 160, p. 103)] and Article 31 of Regulation No 1290/2005 ( the summary report ). 12 The relevant grounds on which the financial corrections at issue were made are set out on pages 98 and 105 of the summary report, where it is stated that Member States must on the basis of Article 6(1) of Regulation No 73/2009 and Article 5(1) of Regulation No 1782/2003 set up provisions for all the standards listed in Annex III and Annex IV, respectively, to those regulations, except in justified cases. 13 As regards claim year 2008, the summary report states that four out of 10 standards had been neither defined nor controlled, namely the standards Crop rotations, Minimum livestock stocking rates, Minimum soil cover and Retention of landscape features. The Commission also referred to 106 cases of incorrect calculation of sanctions. According to document AGRI of 9 June 2006, entitled Commission Communication on how the Commission intends in the context of the EAGGF-Guarantee clearance procedure to handle shortcomings in the context of cross-compliance control systems implemented by Member States ( document AGRI ), it awarded a flat-rate correction of 5% for the weaknesses identified in key controls for claim year As regards the weaknesses found in this case in relation to the standards for good agricultural and environmental condition ( the GAEC standards ), the Commission observed that those weaknesses in themselves justified a flat-rate correction of 5% for the whole population of farmers subject to cross-compliance. The calculation of the amount provided by the Latvian authorities for the 106 cases of incorrect calculations was considered to be covered by the 5% flat rate correction for claim year ECLI:EU:T:2016:412 3

4 14 As regards claim year 2009, the summary report states that two out of eight standards had been neither defined nor controlled, namely the standards Minimum soil cover and Retention of landscape features. In addition, the summary report found other weakness in the sanctions relating to Statutory Management Requirements (SMR) 4 and 7. The Commission considered that, although key control weaknesses had been identified for claim year 2009, since improvements had been introduced in the cross-compliance control system in Latvia, the risk to the European Agricultural Guidance and Guarantee Fund (EAGGF), Guarantee section, the European Agricultural Guarantee Fund (EAGF) and the European Agricultural Fund for Rural Development (EAFRD) (together the Funds ) was lower for that year than for claim year 2008 and that the weaknesses established justified a flat rate correction of 2% for claim year The calculations provided by the Latvian authorities in respect of the amounts in relation to the deficiencies in sanctions for SMRs 4 and 7 were considered to be covered by the rate of 2%. 15 On 9 July 2014, the Commission adopted, on the basis of Article 7(4) of Regulation No 1258/1999 and Article 31 of Regulation No 1290/2005, Implementing Decision 2014/458/EU on excluding from European Union financing certain expenditure incurred by the Member States under the Funds (OJ 2014 L 205, p. 62; the contested decision ). By that decision, the Commission excluded, for the years 2009 to 2012, certain expenditure of the Republic of Latvia, amounting to EUR , which had been incurred by the accredited paying agency of the Republic of Latvia, in the light of the establishment of the requirements of cross-compliance, on the ground that it did not comply with the EU rules. 16 The contested decision was notified to the Republic of Latvia on 11 July 2014 and published in the Official Journal of the European Union on 12 July 2014 (OJ 2014 L 205, p. 62). 17 Article 1 of the contested decision provides that the expenditure itemised in the annex to that decision incurred by the Member States accredited paying agencies and declared under the Funds is to be excluded from European Union financing because it does not comply with EU rules. The flat rate financial corrections applied to the Republic of Latvia 2 or 5%, depending on the case are set out on pages 69, 70, 73 and 74 of that annex. Procedure and forms of order sought 18 By application lodged at the Court Registry on 11 September 2014, the Republic of Latvia brought the present action. 19 On hearing the report of the Judge-Rapporteur, the Court (Fourth Chamber) decided to open the oral procedure. 20 In the context of the measures of organisation of procedure provided for in Article 89(3)(d) of its Rules of Procedure, the Court invited the Commission to produce document VI/5330/97 of 23 December 1997, entitled Commission Guidelines for the calculation of financial consequences when preparing the decision regarding the clearance of the accounts of EAGGF Guarantee ( document VI/5330/97 ). The Commission complied with that request within the prescribed period. 21 As one member of the Fourth Chamber was prevented from sitting, the President of the General Court designated himself to complete the Chamber. 22 The parties presented oral argument and answered the oral questions put by the Court at the hearing on 27 January ECLI:EU:T:2016:412

5 23 The Republic of Latvia claims that the Court should: annul the contested decision in so far as it excludes from EU financing certain of its expenditure, amounting to a total of EUR euros; order the Commission to pay the costs. 24 The Commission contends that the Court should: dismiss the action as manifestly unfounded; order the Republic of Latvia to pay the costs. Law Summary of the pleas for annulment 25 In the context of its action, the Republic of Latvia raises two pleas in law. 26 By the first plea, the Republic of Latvia disputes the merits of the financial corrections at issue, which are based on the alleged failure to implement the GAEC standards. In that regard, it maintains that the Commission failed to have regard to the scope of Article 5(1) of Regulation No 1782/2003 and Article 6(1) of Regulation No 73/ By the second plea, the Republic of Latvia maintains, in essence, that when calculating the financial corrections at issue, the Commission breached, in particular, the principle of proportionality, and incorrectly applied Regulation No 1290/2005, document AGRI and document VI/5330/97. First plea, alleging infringement of Article 5(1) of Regulation No 1728/2003 and Article 6(1) of Regulation No 73/2009 Arguments of the parties 28 The Republic of Latvia claims that, although Member States are required, when defining the minimum requirements provided for in Regulation No 1782/2003, to comply with Annex IV to that regulation, that annex, by using general concepts and terms, leaves Member States a certain discretion when they actually define those requirements. That regulation merely lays down a general regulatory framework in which, under Article 5(1), Member States have a discretion to determine, in particular, the GAEC standards which are essential in the national context, taking into account the specific characteristics of the areas concerned. 29 The Republic of Latvia introduced the GAEC standards in 2008 and 2009, in accordance with Regulations No 1782/2003 and No 73/2009, taking account of its national context. In doing so, it also took into account the Commission s letter of 30 July 2007, which made clear that those standards were to be defined only in so far as they were important in that context. Likewise, in its letter of 26 November 2010, the Commission stated that Member States should draw up provisions for all the subjects and standards listed in Annex IV to Regulation No 1782/2003 and Annex III to Regulation No 73/2009, except where justified. The Commission adopted a similar position both in its Report of 29 March 2007 to the Council of the European Union on the application of the system of ECLI:EU:T:2016:412 5

6 cross-compliance (COM(2007) 147) and in its communication of 20 May 2008 on the health check of the reform of the common agricultural policy. The Republic of Latvia concludes that it was entitled to confine itself to introducing only the standards that were important in its national context. 30 The GAEC standards are compulsory only where the Member State finds that it is essential to implement them in the national context. In the absence of more specific criteria laid down in Regulation No 1782/2003, only the Member State is in a position, in the exercise of its discretion, to give concrete form to those standards in its legal system and to determine whether they are essential and thus compulsory for that purpose. In order to act in accordance with EU law, it is therefore sufficient that the Member State should fulfil its absolute obligation to implement the essential standards. In the present case, in order to analyse the relevant objectives and the problems to be resolved, the Republic of Latvia chose the standards that were the most appropriate, the most important and the most adapted to the specific characteristics of the Latvian territory. 31 First, as regards the requirement Protect soil through appropriate measures and the standards specified for that purpose, namely the standards Minimum soil cover, Minimum land management reflecting site-specific conditions and Retain terraces, the Republic of Latvia maintains that it chose the most effective standard taking into account the specific characteristics of the areas concerned. In the light of the specific situation of the Latvian agricultural land, in particular of the minimum area consisting of steep slopes and the fact that those lands are mainly used as permanent pastureland, it concluded that their management was less important in Latvia and that there was no need to introduce the standard Minimum soil cover. 32 Second, as regards the maintenance of soil organic matter levels through appropriate practices and the standards proposed for that purpose, namely the standards Arable stubble management and Crop rotations where applicable, the Republic of Latvia observes that it concluded that crop rotation should not be introduced as a separate requirement. Farmers traditionally rotate their crops as a means of managing the land and the crop diversification requirement is therefore already satisfied for 99.2% of arable land and the standard in question would apply only to an insignificant proportion of the area of arable land. In addition, the administrative costs, in particular those resulting from physical inspections, occasioned by the potential implementation of that standard would be relatively high and disproportionate in relation to the advantages gained. Last, the optional nature of the implementation of that standard is confirmed by the use of the words where applicable. 33 Third, as regards the obligation to Ensure a minimum level of maintenance and avoid the deterioration of habitats and the standards proposed for that purpose, namely Minimum livestock stocking rates and/or appropriate regimes, Protection of permanent pasture, Avoiding the encroachment of unwanted vegetation on agricultural land and Maintenance of olive groves and vines in good vegetative condition, the Republic of Latvia submits that it concluded that the separate implementation of the standard relating to the retention of landscape features and that concerning livestock stocking rates was not essential. It maintains that the standard Minimum livestock rate and/or appropriate regimes is not important in the context of cross-compliance, since it applies to only a small proportion of farms and agricultural land. In addition, its objective, namely the retention of permanent pasture, is achieved in Latvia by the implementation of the requirement arising under a national standard, in fact point 24.4 of Ministerial Regulation No 269. The implementation of that standard would be contrary to the objectives of that ministerial regulation and would have a negative impact on compliance with the requirement to protect permanent pasture. Accordingly, the Republic of Latvia used its power, under Regulation No 1782/2003, which enables it to define a different appropriate regime in order to maintain permanent pasture. Last, the standards Crop rotations, Minimum soil cover and Retention of landscape features are not important in the national context, while the objectives of the standard Minimum livestock stocking rates and/or appropriate regime would likewise have been achieved by defining an appropriate regime, namely the minimum mowing conditions. 6 ECLI:EU:T:2016:412

7 34 Fourth, the Republic of Latvia recalls the importance of the actual resolution of the problems described in Annex IV to Regulation No 1782/2003, which would not be guaranteed solely by the implementation of the standards in question, as they have to be carried out. It is precisely the national authorities, who are familiar with the national context, that are best placed to achieve the objectives of Regulation No 1782/2003 in the most effective manner possible. That means in accordance with the rationale of the derogation provided for in Article 5(1) of that regulation that Member States must be able to introduce only some of the standards laid down therein. 35 The Republic of Latvia concludes that it resolved the problems identified in Annex IV of Regulation No 1782/2003 by achieving the objectives set out in that annex and evaluating and determining, for each of those problems, in accordance with the national context, the most appropriate and most effective standards among those proposed by that regulation. 36 The Republic of Latvia adds that it was only on 15 September 2009 that the Commission confirmed that all the standards defined in Annex IV to Regulation No 1782/2003 were compulsory. In addition, it is clear from the correspondence between the Commission and the Latvian authorities that, as regards certain GAEC standards implemented in Latvia, the Commission had considered that they were to be applied, whereas for others, including the standard Retain terraces, it had confirmed the Republic of Latvia s opposite position. The Republic of Latvia concluded, for even stronger reasons, that the application of all the standards was not compulsory. That inconsistent approach on the Commission s part to the application of Regulation No 1782/2003 is also contrary to the principle of protection of legitimate expectations. The fact that the Commission took no action until September 2009 with regard to the Latvian standards introduced in 2008 and 2009 shows that the Republic of Latvia was entitled to have a legitimate expectation that until that date it had acted in accordance with EU law. 37 Having regard to the foregoing, the Republic of Latvia maintains that it did not infringe Regulations No 1782/2003 and No 73/2009 and that the Commission had no legal basis on which to apply a financial correction to it. 38 The Commission contends that Regulation No 1782/2003 does not confer any discretion on Member States as regards the choice of the standards laid down in Annex IV to that regulation. The standards referred to in that annex were all required to be implemented, with the exception of those which served no purpose in the national context, which, moreover, the Commission had already pointed out in its report of 29 March 2007 on cross-compliance. In entrusting Member States with the task of defining those minimum requirements the EU legislature gave them the opportunity to take account of the regional differences in their territories when implementing the GAEC standards laid down in Annex IV, but did not confer on them the right to decide that certain parts of those standards should not be applied at all. The Commission observes that its initial proposal of 21 January 2003 for a Council Regulation establishing common rules for direct support schemes under the common agricultural policy and support schemes for producers of certain crops (COM(2003) 23 final) did not impose an obligation on Member States to ensure that all agricultural land was maintained in good agricultural and environmental condition, as that obligation is based on a choice made by the EU legislature during the legislative procedure. It observes that in other Member States, such as Estonia, Malta and the Netherlands, a number of GAEC standards implemented in 2009 applied to a relatively small part of agricultural land. In addition, the Commission maintains that its position regarding the standard Retain terraces is based on a consistent interpretation of Article 5(1) of Regulation No 1782/2003, namely that the GAEC standards which are wholly inapplicable in the national context are also not to be implemented. In fact, one of the geographical characteristics of Latvia is the absence of terraces in nature, so that there is no need to implement that standard. ECLI:EU:T:2016:412 7

8 Findings of the Court Preliminary observations 39 In the context of the present plea, the question before the Court is whether Member States are under an absolute obligation to implement the standards laid down in Annex IV to Regulation No 1782/2003 and Annex III to Regulation No 73/2009. In order to answer that question, it is necessary, in accordance with settled case-law, to carry out a literal, contextual, teleological and historical interpretation of the provisions at issue. In that context, it must be borne in mind that EU legislation is drafted in various languages and that the different language versions are all equally authentic, which may require a comparison of the different language versions (see, to that effect, judgment of 11 December 2015, Finland v Commission, T-124/14, EU:T:2015:955, paragraphs 24 and 25 and the case-law cited). 40 On that point, it must be made clear at the outset that the provisions of Regulations No 1782/2003 and No 73/2009 are by their very nature, pursuant to the second paragraph of Article 288 TFEU, binding in their entirety and directly applicable in all the national legal orders and therefore, in principle, require no regulatory transposition in the strict sense at national level. Thus, the direct application of a regulation means that its entry into force and its application in favour of or against those subject to it are independent of any measure of reception into national law. The position is different, however, if the regulation in question leaves it to the Member States themselves to adopt the necessary legislative, regulatory, administrative and financial measures to ensure the effective application of the provisions of that regulation (see, to that effect, judgment of 14 June 2012, Association nationale d assistance aux frontières pour les étrangers, C-606/10, EU:C:2012:348, paragraph 72 and the case-law cited). It must be stated that that is the position in the present case (see paragraph 41 et seq. below) and, in principle, that position is not disputed by the parties. The literal interpretation 41 It should be borne in mind that Article 5(1) of Regulation No 1782/2003 is worded, in particular, as follows: Member States shall define minimum requirements for [GAEC] on the basis of the framework set up in Annex IV, taking into account the specific characteristics of the areas concerned, including soil and climatic condition, existing farming systems, land use, crop rotation, farming practices, and farm structures 42 The relevant part of Article 6(1) of Regulation No 73/2009 is worded in essentially the same way, apart from the fact that it refers to Annex III instead of to Annex IV. 43 The use of the verb define in the indicative indicates, especially in the English ( shall define ) and Portuguese ( devem definir ) versions, the existence of an obligation to establish minimum requirements for [GAEC] on the basis of the framework set up in Annex IV to Regulation No 1782/2003. As the Commission submits, the purpose of that obligation to define the requirements in question is that the Member State should adopt general rules establishing such minimum requirements, taking account of the standards set up in that annex. The Court of Justice has inferred that, while the Member States are bound, when defining those requirements, to comply with that annex, that annex, by using general concepts and terms, nevertheless leaves them a certain discretion with regard to the actual determination of those requirements (see, by analogy, judgment of 16 July 2009, Horvath, C-428/07, EU:C:2009:458, paragraphs 25 and 26). It follows that the obligation placed on Member States to define the relevant requirements by means of regulatory activity (i) means that they are under a duty to comply with all the standards laid down in Annex IV to Regulation No 1728/2003 and (ii) is closely linked to a certain discretion on the Member States part when 8 ECLI:EU:T:2016:412

9 actually defining those requirements on the basis of those standards, which are themselves based on general concepts and terms the actual implementation of which necessarily implies the existence of a discretion (see, by analogy, Opinion of Advocate General Trstenjak in Horvath, C-428/07, EU:C:2009:47, points 28 and 58). 44 However, it does not follow from either the wording of Article 5(1) of Regulation No 1782/2003 or the abovementioned case-law of the Court of Justice that the Member States are, where appropriate, authorised not to implement at all certain of the GAEC standards. In holding that Member States must comply with Annex IV when defining the minimum requirements for the GAEC standards, the Court of Justice merely recognised that that annex is binding in its entirety, including all the standards laid down therein, with no distinction being drawn between them, in particular according to their wording or their degree of precision. Given the lack of precision of Article 5(1) of that regulation on that point, it is necessary to refer to the wording of each of those standards taken individually in order to determine whether they are binding and the extent of the discretion left to the Member States as regards their determination and their actual implementation. That need to differentiate is confirmed by the fact that Article 5(1) of that regulation refers to the specific characteristics of the areas concerned, in respect of which that provision sets out only a non-exhaustive list of examples of relevant criteria ( including soil and climatic condition, existing farming systems, land use, crop rotation, farming practices, and farm structures ) intended to define the GAEC standards ( standards [which take] into account ), which is why those standards, such as crop rotation, are in part reproduced verbatim in Annex IV. 45 It is therefore necessary to ascertain for each of the GAEC standards at issue whether they imply a discretion on the part of the Member State as regards the need to implement them within the national legal order. 46 First, as regards the standard Minimum soil cover, it must be stated that there is nothing in the wording of that standard to support the conclusion that its implementation by the Member States is optional. In the light of the case-law cited in paragraph 43 above, it must therefore be recognised that that standard is binding in principle, without prejudice to whether the Member States are entitled to justify, where appropriate, its non-application (see paragraphs 64 to 66 below). That conclusion is indirectly confirmed by the fact that Annex III to Regulation No 73/2009, which replaced Annex IV to Regulation No 1782/2003, specifically classes Minimum soil cover among the Compulsory standards. 47 Second, as regards Crop rotation, where applicable, the use of the words where applicable implies in itself, in all the authentic language versions, recognition of the existence of a discretion on the part of Member States as regards the implementation of that standard. Those words indicate that it is only where the Member State recognises the relevance of such standards for its own agricultural land, taking into account the specific characteristics of the areas concerned, within the meaning of Article 5(1) of Regulation No 1782/2003, that it is required to implement them. That conclusion is indirectly supported by the fact that Annex III to Regulation No 73/2009 specifically classifies Crop rotation among the Optional standards. Nor is it contradicted by the express reference to Crop rotation in Article 5(1) and in recital 3 in fine of Regulation No 1782/2003, as that reference is only a part of a non-exhaustive ( including ) list of examples of relevant criteria for determining the definition of the standards, whether compulsory or not, set out in Annex IV (see paragraph 44 above). 48 Third, as regards the standard Minimum livestock stocking rates and/or appropriate regimes, it is already clear from its wording that there is no absolute obligation for the Member State to adopt rules concerning the minimum livestock stocking rates, but that that standard has an alternative possibility ( and/or ) to adopt another appropriate regime, a possibility which the Republic of Latvia emphasises in this instance. As stated in paragraph 47 above concerning Crop rotations, that interpretation is indirectly confirmed by Annex III to Regulation No 73/2009, which explicitly classifies Minimum livestock stocking rates and/or appropriate regimes among the Optional standards. ECLI:EU:T:2016:412 9

10 49 Fourth, as regards the standard Retention of landscape features, it is sufficient to refer to the considerations set out in paragraph 46 above to conclude that that standard is binding within the meaning of the case-law cited in paragraph 43 above, which is indirectly substantiated by the fact that it is explicitly classified as a Compulsory standard in Annex III to Regulation No 73/2009, without prejudice to whether the Member State is authorised to justify, where appropriate, its failure to implement it (see paragraphs 64 to 66 below). 50 The foregoing assessments apply mutatis mutandis to the literal interpretation of the first and second sentences of Article 6(1) of Regulation No 73/2009 and to the corresponding standards laid down in Annex III to that regulation. The first and second sentences of that provision are worded in essentially the same way. Furthermore, as stated in paragraphs 46 to 49 above, Annex III to that regulation expressly states that those standards are either compulsory or optional. 51 Accordingly, the literal interpretation of the provisions at issue indicates (i) that the Republic of Latvia was in principle authorised not to implement the standards Crop rotation and Minimum livestock stocking rate and (ii) that it was required to implement the standards Minimum soil cover and Retention of landscape features. The contextual and teleological interpretation 52 From the contextual and teleological aspect, it is necessary to take account of the objectives pursued by Article 5(1) of Regulation No 1782/2003, which are set out, in particular, in recital 3 of that regulation, in the light of which the former provision must be interpreted (see, to that effect and by analogy, judgments of 12 June 2014, Ascendi Beiras Litoral e Alta, Auto Estradas das Beiras Litoral e Alta, C-377/13, EU:C:2014:1754, paragraphs 48 and 49, and of 26 November 2015, Total Waste Recycling, C-487/14, EU:C:2015:780, paragraphs 38 and 39). That recital refers, in particular, to the objective of the GAEC standards, which is to avoid the abandonment of agricultural land and ensure that it is maintained in good agricultural and environmental condition. That objective is also apparent from Article 5(1) itself, in that it refers to the obligation imposed on Member States to define minimum requirements for [GAEC standards] on the basis of the framework set up in Annex IV, taking into account the specific characteristics of the areas concerned, including soil and climatic condition, existing farming systems, land use, crop rotation, farming practices, and farm structures. 53 That definition of the objectives pursued by the GAEC standards does not in itself provide a clear and precise indication of whether it is necessary to implement those standards, especially where the Member State considers that, having regard to the specific characteristics of the areas concerned, they are not a suitable means of pursuing the objective of maintaining agricultural land in good agricultural and environmental condition. 54 However, it is also apparent from recital 3 of Regulation No 1782/2003 that it is appropriate to establish a Community framework within which Member States may adopt standards taking account of the specific characteristics of the areas concerned. The use of the verb may or a similar expression in all the language versions of that recital might be taken to indicate recognition that Member States have a certain discretion as to the choice of standards which will be defined within that EU framework. In addition, it should be borne in mind that Article 5(1) of Regulation No 1782/2003, which lacks precision on that point, must be read in the light of recital 3 of that regulation (see paragraph 52 above). 55 Thus, it might indeed be inferred from recital 3 of Regulation No 1782/2003 that the Member State has a discretion that allows it to decide not to implement certain of the standards referred to in Annex IV to that regulation where it considers them irrelevant in its national context, or indeed inapplicable owing to the specific characteristics of the areas concerned, and therefore not suitable for achieving the objectives of that regulation. However, that reasoning is inconsistent with the clear 10 ECLI:EU:T:2016:412

11 wording of the GAEC standards referred to in paragraphs 46 and 49 above, which, according to the unambiguous intention of the EU legislature, must be complied with and implemented in any event. In addition, that reading is the only one that corresponds with the interpretation given by the Court of Justice, recalled in paragraph 43 above, according to which the Member States are required to comply with Annex IV to Regulation No 1782/2003 and therefore, in principle, with all the standards set out within that annex. 56 Consequently, a contextual and teleological interpretation tends to support the view that the provisions in question must be understood to mean that Article 5(1) of Regulation No 1782/2003 confers a discretion on Member States as regards the choice of certain of the GAEC standards, but not as regards those standards as a whole (see the case-law cited in paragraph 43 above). In fact, whether those standards are compulsory or not ultimately depends on their wording (see paragraphs 46 to 49 above). 57 That appraisal applies mutatis mutandis for the first sentence of Article 6(1) of Regulation No 73/2009, read with Annex III to that regulation, which expressly distinguishes between compulsory standards and optional standards (recital 4 of Regulation No 73/2009). The historical interpretation 58 As the Commission submits, in its initial proposal of 21 January 2003 for a Council Regulation establishing common rules for direct support schemes under the common agricultural policy and support schemes for producers of certain crops (COM(2003) 23 final), Article 5 merely provided that Member States shall define good agricultural conditions taking into account the framework set up in Annex IV. 59 In that regard, recital 3 of that proposal was worded as follows: In order to maintain land in good agricultural condition, standards should be established for a number of areas in which standards do not currently exist. Those standards should be based on good farming practices which may or may not have a basis in provisions of the Member States. It is therefore appropriate to establish a Community framework within which Member States may adopt standards taking account of the specific characteristics of the areas concerned, including soil and climatic conditions and existing farming systems (land use, crop rotation, farming practices) and farm structures. 60 The Commission is therefore correct to claim that that proposal did not impose any obligation on Member States to implement all the GAEC standards. In fact, Article 5 of that proposal did not mention minimum requirements, but only the fact that Member States were to define good agricultural conditions ; furthermore, recital 3 of that regulation, in the light of which Article 5 was to be interpreted, referred to a discretion on the part of the Member States concerning the choice of standards [which took] into account of the specific characteristics of the areas concerned, and only within a Community framework of standards. Furthermore, that recital already used the words Member States m[ight] adopt standards, which were retained, whatever the reason may have been, in the final version of recital 3 of Regulation No 1782/2003. That in itself indicates that, in the context of the final version of that regulation, the wording of which was substantially altered, those words are not necessarily intended to indicate that Member States have a discretion as regards the choice of the standards laid down in Annex IV (see paragraph 55 above). 61 It follows from those considerations that the historical interpretation also tends to confirm that Member States are, in principle, required to implement all the GAEC standards, with the exception of those whose wording indicates the contrary. ECLI:EU:T:2016:412 11

12 Conclusion 62 In the light of all of the foregoing observations, the Court considers that Article 5(1) of Regulation No 1782/2003, read with Annex IV to that regulation, must be interpreted as meaning that Member States are under an obligation in principle to implement, by adopting appropriate rules of general application, all the standards set out in that annex, with the exception, in particular, of the standards Crop rotation [where applicable] and Minimum livestock stocking rates and/or appropriate regimes. That appraisal applies mutatis mutandis and a fortiori to Article 6(1) of Regulation No 73/2009, read with Annex III to that regulation, which, in accordance with that interpretation, draws an explicit distinction between compulsory standards and optional standards. 63 It follows that the Commission erred in law in taking issue with the Republic of Latvia for not having implemented in 2008 the standards Crop rotation [where appropriate] and Minimum livestock stocking rates and/or appropriate regimes, without there being any need to ascertain whether the arguments which the Latvian authorities had put forward in order to justify the non-implementation of those standards are well founded. As regards, more specifically, the standard Minimum livestock stocking rates and/or appropriate regimes, it is sufficient to point out that the Latvian authorities explained, for that purpose, both during the bilateral clearance procedure and during the proceedings before the Court, the reasons why they had chosen a different appropriate regime (see paragraph 33 above). Moreover, it is not apparent from either the case file, or the contested decision, including the summary report, or from the Commission s written pleadings before the Court whether, and if so how, it assessed the characteristics of that other regime and whether or not it was an appropriate substitute for the Minimum livestock stocking rates ; the Commission merely claimed that the Republic of Latvia was in any event required to implement that standard at national level. 64 Furthermore, the Court considers that the Commission was entitled in principle to require the Latvian authorities to implement the standards Minimum soil cover and Retention of landscape features in 2008 and 2009, and the Republic of Latvia s objections to that obligation to implement those standards cannot therefore succeed. In that context, the Commission was not in any event required to accept the arguments put forward by the Republic of Latvia to justify a derogation from its obligation to implement those standards, as such justification could not be based on either the wording of Regulation No 1782/2003, or the case-law cited in paragraph 43 above, or on the that regulation s stated objectives of avoiding the abandonment of agricultural land and ensuring that it is maintained in good agricultural and environmental condition (recital 3 of Regulation No 1782/2003). 65 In fact, even on the assumption that, according to the Member State concerned, the agricultural land or the areas in question already presented in themselves characteristics more or less in keeping with those objectives, thus making the GAEC standards unnecessary or their implementation disproportionate, that sole fact does not, in the light of the principle of legal certainty and the case-law cited in paragraph 40 above, release that Member State from its obligation to implement the relevant provisions of that regulation by adopting appropriate rules. The fact nonetheless remains that, in the exercise of the discretion which the general and imprecise terms characterising the GAEC standards leave it, the Member State is in a position to amend them and to give concrete form to them in such a way that they are adapted to the national context. On the other hand, it cannot completely decline to implement them. 66 In that regard, it should be pointed out that, notably in the summary report, the Commission emphasised that the GAEC standards at issue should be implemented by means of appropriate national rules, also on the ground that the national rules must allow controls and sanctions in the event of non-compliance. In addition, as regards the standards Minimum soil cover and Retention of landscape features, the Republic of Latvia has acknowledged that at least a very small part of its agricultural land was affected by those standards. However, in the light of the fundamental requirement for control and sanction, the Republic of Latvia could not rely on its alleged discretion or the principle of proportionality to justify a total failure to implement those standards. Thus, having 12 ECLI:EU:T:2016:412

13 regard to the case-law cited in paragraph 40 above, the Commission was entitled to insist on such an implementation of those standards, if only for the purposes of setting up a complete and effective control and sanction system. 67 Last, the Republic of Latvia cannot call that appraisal into question or rely on a breach of the principle of proportionality by claiming that the Commission had, in particular, agreed that it should not implement the standard retain terraces. Without prejudice to the considerations set out in paragraphs 65 and 66 above, given the complete absence of such terraces in Latvia, a control would not be necessary as regards the implementation of that standard. In any event, having regard to the exchanges of correspondence during the clearance procedure and the unambiguous positions to the contrary adopted by the Commission s services, the Latvian authorities cannot claim to have been given precise, unconditional and consistent assurances (see, to that effect, judgments of 18 June 2010, Luxembourg v Commission, T-549/08, EU:T:2010:244, paragraph 71, and of 27 September 2012, Applied Microengineering v Commission, T-387/09, EU:T:2012:501, paragraph 58 and the case-law cited) to the effect that the Commission accepted the non-implementation of the standards Minimum soil cover and Retention of landscape features. On the contrary, in the light of the case-law cited above, such acceptance would have been liable to arise from an administrative practice that was unfounded in law and could never give rise to legitimate expectations for those concerned, including for a Member State. It follows that, so far as those two GAEC standards are concerned, the Republic of Latvia had sought in vain to seek and provide justification for a derogation from its obligation to implement them, as the Commission was legally required to reject such a derogation. Thus, to that extent, the contested decision is not vitiated by illegality. 68 Accordingly, having regard to all of the foregoing considerations, the first plea must be upheld in that it relates to the standards Crop rotation [where appropriate] and Minimum livestock stocking rates and/or appropriate regimes, but must be rejected in that it relates to the standards Minimum soil cover and Preservation of Retention of landscape features. Second plea, alleging incorrect calculation of the financial corrections at issue Arguments of the parties 69 In the context of the second plea, the Republic of Latvia takes issue with the Commission for having applied an incorrect financial correction, the amount of which is inconsistent with the principle of proportionality. It maintains that it is apparent from document AGRI that financial corrections must be proportionate to the risk to the Funds and that that risk is to be evaluated on the basis of the risk of financial harm resulting from the failure to apply sanctions. However, the Commission did not specify in its numerous contacts with the Latvian authorities, in particular in its letters of 26 November 2010 (point 1.3) and 25 February 2013 (point 4), or in the summary report, the actual risk to the Funds. This Court has already held, in the judgment of 10 September 2008, France v Commission (T-370/05, EU:T:2008:328, paragraph 81), that it was necessary to appraise the real risk that the threshold of Community financing would be exceeded by the EAGGF and that, in that case, the risk of that threshold being exceeded was extremely low and therefore did not really exist. That, in the Republic of Latvia s submission, is the case here. Accordingly, the financial corrections at issue are unreasonable and disproportionate. 70 Furthermore, the Republic of Latvia maintains in essence that the Commission unlawfully applied the flat-rate approach, in spite of the fact that it was possible to evaluate the real risks caused by the failure to implement the GAEC standards. Document VI/5330/97 provides that flat-rate corrections may be contemplated only where the information supplied by the investigation does not enable the controller to evaluate the loss by extrapolation of the specific losses. On many occasions, in particular by letter of 6 November 2012, the Republic of Latvia provided all the necessary information, in particular on the number of farms potentially affected by the missing requirements in 2008 and 2009, ECLI:EU:T:2016:412 13