About (seemingly) hopeless cases – a few words about saving subsidies

In practice, the implementation of a project financed by European funds never proceeds exactly according to the scenario specified in the application documentation. There are always some deviations, even minor ones, from the plan set out in the application. This is not surprising, as there are so many variables in a project that it is difficult to expect that the predictions and forecasts set out in the application will be fully met, for example, that all planned expenses will cost exactly as much as we assumed. In this context, the question arises as to how to react and whether anything can be done at all when certain irregularities are detected during the implementation of the project.

It turns out that even if there is a risk of the subsidy being returned, there is no hopeless situation. This was confirmed by the judgment of the Supreme Court I CSK 878/14 announced a few weeks ago, dismissing the institution’s claim for the return of the subsidy. As follows from the oral grounds for the decision, the Supreme Court once again pointed out that in the case of projects implemented with European funds, extreme rigor requiring the return of all funds even in the event of minor irregularities is unjustified. It should be added that the dispute concerned the achievement of an indicator related to the number of jobs created, which was one of several indicators for this project. As the court pointed out, it cannot be the case that a breach of part of a contract for EU co-financing results in the loss of the entire grant – this rigor should only apply to the unperformed part of the contract, and in this case, the creation of new jobs accounted for only 20% of the co-financed task.

This view summarizes the line of reasoning that has been developing for some time in the common courts and the Supreme Court, which pays particular attention to the proportionality of sanctions related to the repayment of funding in the event of certain breaches in the performance of a contract. In the article entitled “European funding in the case law of the Supreme Court and common courts,” I analyzed a number of rulings in which the courts indicated that the obligations of an institution that is a party to a funding agreement do not end with the transfer of funds, but also include active cooperation in its implementation. Furthermore, in certain cases, it was noted that general principles such as contractual loyalty, social coexistence, and the assessment of claims for reimbursement by institutions through the prism of abuse of subjective rights may be applied to co-financing agreements.

What conclusions can be drawn from these rulings for beneficiaries and the institutions themselves? First and foremost, despite the apparent rigour of EU contracts, a certain degree of common sense is needed when assessing contractual obligations and the consequences of their non-fulfilment. Draconian sanctions in the form of withdrawal of all funding in cases of minor infringements were quite common in the previous programming period. From the point of view of the institutions, however, the key factor should be whether the project ultimately contributed to the achievement of the public objective set in the program. Even serious breaches concerning the failure to achieve the so-called incentive effect, the incorrect determination of the status of enterprises or the violation of the prohibition of fundamental modification of the project should, in my opinion, be assessed taking into account the principle of proportionality, which of course does not apply to cases where certain information has been deliberately concealed from the institution. If an institution approves a specific project, cooperates with the beneficiary in its implementation, monitors the project, recognizing within the scope of its activities that it is being implemented correctly, and then, at the end of its implementation, finds that – despite the achievement of the public objective of the project – there is a breach (which it should have detected earlier) justifying the repayment of the entire grant, then at first glance such a claim would have to be considered unfair.

In this context, I would like to point to several examples of judgments concerning cases that would seem hopeless at first glance, involving violations of key principles of fund law and state aid law, but which ended happily for the beneficiaries.

Violation of the so-called incentive effect is one of the most serious irregularities that institutions may detect during the implementation of a contract. As a brief introduction, the incentive effect is an institution defined, inter alia, in Article 6 of Regulation 651/2014, the essence of which boils down to the assumption that a project cannot start before an application for support has been submitted. Public funds should be directed to operations which would never have been carried out without such support or would have been carried out to a limited extent – in other words, support from public funds should provide an incentive to carry out projects that are also profitable from a public point of view. In order to simplify the analysis of the incentive effect of aid directed at SMEs, it was assumed that if work on a project began after the application for support was submitted, the incentive effect was fulfilled (the so-called formal incentive effect). It is precisely this concept of the start of work on a project that raises many doubts, both on the part of beneficiaries and the institutions themselves. How can it be determined whether specific work actually relates to a given project? It may be the case that the beneficiary, when undertaking specific activities, wanted to implement the project in a different form than that specified in the application for funding – as indicated above, the incentive effect also occurs when the transfer of public funds results in an increase in the scale of the project.

Meanwhile, the assessments of some institutions are surprising in their formalism – it is often the case that several years after the submission of an application, often at the stage of project completion or even during the durability period, the auditors of the completed project find that although the project was implemented correctly, but due to the fact that work began before the application was submitted, the beneficiary should be deprived of all funding. Such decisions should never be taken lightly. In this context, I would like to draw attention to an interesting case dealt with by the Court of Appeal in Krakow

The beneficiary, who subsequently claimed the outstanding funding in court, implemented a project involving, among other things, the purchase of machinery that was to significantly increase the competitiveness of his company. As it happened, the machinery purchased by the beneficiary under the project had previously been leased by him. In the opinion of the institution, this situation indicated a breach of the incentive effect. The court did not share this view, pointing out that the claimant, in implementing the project in question, had taken an economically sound decision to purchase a modified, previously leased machine. This decision contributed to the development of its business and was in line with the objectives of the operational program under which the purchase was made. The decision to purchase another machine available to it, which would have removed the validity of the defendant’s basic objection, had no economic justification. The court further pointed out that the defendant’s questioning of the purchase of the machine solely on the grounds that it had the same serial numbers as the previously leased machine, without explaining the circumstances, leads to the conclusion that it gives primacy to unjustified formalism over entrepreneurship and economic considerations. This undoubtedly constitutes a justified basis for claiming abuse of trust in a public institution which, instead of providing the expected support, places obstacles in the way of the development of entrepreneurship, which is in clear contradiction with the objectives of (…) the Regional Operational Program. As can be seen from the above example, the beneficiary did not purchase an identical machine to the one it had previously leased, but a modified machine which, importantly, enabled the project objective of increasing the competitiveness of the company to be achieved. The court rightly held that there was no loss of incentive in this case. It cannot be considered that the previous leasing of this machine by the beneficiary constituted the start of work on the project, since it required significant modification for the purposes of the project, becoming de facto a new device.

Another interesting ruling worth noting (although not yet final) is the judgment of the Provincial Administrative Court in Krakow. In this ruling, the court emphasized the importance of achieving project objectives and results. The court pointed out that the authority found that the expenses incurred by the applicant company for the implementation of the project were not in accordance with the principles of rationality, reliability, purposefulness, and economy, as they did not lead to the achievement of the project’s results and objectives. Therefore, it must first be correctly determined whether the objectives and results have been achieved and to what extent (which, in the opinion of the Court, was lacking in the present case, inter alia with regard to the development of the Cluster, innovation and increased competitiveness) in order to be able to assess, in accordance with the principles of logic and the provisions applicable in the present case, whether the expenditure was incurred in a rational, reliable, purposeful and economical manner. Therefore, since not all of the project’s objectives were quantifiable and measurable, e.g., the issue of innovation or increased competitiveness, the assessment of the institution that questioned this innovation at the project implementation stage should also have been based on the opinion of an external expert, However, the authority made its findings based solely on the findings of its employees contained in the post-audit report. I share the court’s view that this solution is not appropriate, because even if the auditors find that a specific project objective has not been achieved (which has not been expressed in the form of an easily measurable indicator, e.g., increased innovation, increased competitiveness, specific quality or functional parameters), the authority cannot rely solely on their opinion. Before imposing a financial correction, it should at least seek additional expert opinion, and if it is conducting proceedings in this regard for the recovery of funds, such opinion should meet the requirements set out in the Code of Administrative Procedure. In addition, in the case under review, the administrative court rightly pointed out that the assessment of the correctness of project implementation is not limited to a mechanical check of whether all project indicators have been achieved (which is also confirmed by the position presented in the Supreme Court judgment referred to at the beginning), but should consist in examining whether the objectives of the project – primarily those relevant to the operational program – have been achieved: in the Court’s opinion, the mere fact that the result indicators have not been achieved does not mean that all the objectives to which the applicant has committed itself have not been achieved.

As practice shows, even now some institutions take an orthodox approach to identified deficiencies in projects, justifying this by saying that the strictness of spending rules stems directly from EU regulations. Are they right? Not entirely, because it should be noted that the EU legislator itself has provided for the possibility of applying the principle of proportionality to the assessment of certain deficiencies related to the operations carried out. The very definition of irregularity (Article 2(36) of Regulation 1303/2013) indicates that, regardless of whether a breach of the rules has been established, it must be determined whether it has or could have had an impact on the EU budget. Furthermore, even if such an irregularity is found, the nature and gravity of the irregularity must be taken into account when imposing a financial correction (Article 143 of Regulation 1303/2013). In this context, the assessment of obligations under grant agreements through the prism of those rules of civil law which refer to loyal cooperation or abuse of a subjective right is fully in line with such principles of EU law as the principle of proportionality (Article 5(4) TEU), equity, and the principle of protection of legitimate expectations. Importantly, as practice shows, the application of these principles, including in the most recent case law of the Court of Justice, may lead to a reduction or even cancellation of the financial correction imposed by the European Commission on Member States. To sum up, it is worth recalling the opinion of the Court of Appeal in Lublin, in which the court ruled that the beneficiary’s three-month delay in completing the project due to specific reasons beyond its control did not entitle the institution to demand repayment of the grant. The court analyzed EU regulations, stating that the detailed and strict rules for granting, using, and returning wrongfully collected sums, as well as for monitoring their use, are mitigated by reference to the principles of proportionality, fairness, and good faith.

In summary, even in a seemingly hopeless situation, it is possible to save a subsidy. This should be remembered not only by beneficiaries, but above all by the institutions themselves. When applying the relevant provisions, this cannot be done without reflection, but the general principles laid down in both national and EU law must also be taken into account.