An expensive mistake by an advisor?

I have already discussed the complex relationship between institutions and applicants/beneficiaries on many occasions on my blog. This time it is time to devote a few words to the third side of the coin, which is now present in almost every grant – namely the advisors preparing the applications.

EU funds are obviously an important factor for the development of the country and their absorption in Poland has resulted in a number of, mostly positive phenomena. One of the more interesting ones is the development of the market for consultancy in the preparation of grant applications, which is now basically an independent branch of business consultancy. Companies at the forefront of consultancy have their own departments specialised in grants. In addition to hundreds of small players, there are also quite large companies on the market, mainly involved in advising entrepreneurs on obtaining grants.
Such a large market also means a lot of competition. In fact, it is now standard practice to offer consultancy services on the basis of a success fee, which is sometimes the only remuneration of the consultant. Some actors try to make money on applicants by selling a range of other products, e.g. funding promises, project settlements, etc., in the process.

The relationship between advisors and beneficiaries, due to the subject matter of the services provided, carries quite significant risks for both parties. Clients of advisors entrust the latter with the success of projects sometimes estimated at multi-million amounts, while advisors undertake to prepare application documentation in such a way as to give entrepreneurs the best chances in competitions. Of course, none of the advisers guarantees a 100% chance of success of the application (and if they do, it may be worthwhile for such an adviser to take an interest in three-letter services), however, by providing services, the adviser undertakes to exercise professional diligence so that the application receives the highest possible assessment.

Costly mistake
Sometimes, however, an adviser makes a mistake, and a glaring one at that. How much can this mistake cost? As recent court decisions have shown, potentially even many millions. Indeed, the adviser’s error may be what stands between the applicant and the grant they were hoping for, and therefore the applicant could potentially even claim from the adviser an amount equivalent to the grant they would have received.

When claiming damages from an adviser for failure to obtain a grant for reasons beyond the applicant’s control, three circumstances would have to be proven: the negligence of the adviser, the damage, and the adequate causal link between the damage and the unlawful act.

The first element appears in many situations to be quite easy to prove, as the adviser’s error in drawing up the application is usually an expression of his negligence – at most we can discuss whether in the specific circumstances of the case it is an expression of gross negligence or some other form of failure to exercise due care, which may also occur in the case of particularly complex matters in the applications.

The approach to the performance of obligations by the advisor was described by the Regional Court in Poznań in its judgment. The court pointed out that in relation to the advisor dealing professionally with the preparation of the application, the criteria of diligence are stricter, which means that most of the mistakes made by the advisor can be considered serious or gross.

The court also noted what happened in the adviser’s company after the mistake was made, and there was a lot going on – in particular, internal procedures were changed and also the double-eye principle was introduced. As the court rightly pointed out: 'For a professional should be required and unquestionably can be expected that the prepared application will be checked at least several times in all possible respects, if necessary also by several employees independently of each other so that possible errors can be more easily noticed. In the present case, the lack of observance of elementary 'precautionary’ procedures, i.e. the lack of proper verification of the prepared application, as if taking advantage of the fact that the claimant has no knowledge of the procedure of preparing applications for funding, errors resulting from negligence directly caused the rejection of the claimant’s application due to the failure to observe formal requirements. This means that liability should be attributed to the defendant for improper performance of the contract, and therefore it should be considered that as a result of the defendant’s actions, an event occurred to which legal norms bind the obligation to compensate for damage.

Damage or just the hope of subsidies?
The problem arises with the premise of damage. Is the damage only the expenses incurred by the applicant for the preparation of the documentation for possible legal remedies, or can the applicant also claim the subsidy he was counting on possibly future profits from the investment?

The answer is not easy. In the literature on the subject, there are views (e.g. Jakub Ostałowski in Commentary to the Implementation Act, edited by Rafał Poździk – incidentally, I recommend reading this commentary, because its authors do not run away, as often happens, from taking a stand on a large part of the problems related to implementation) that the damage in the situation of failure to obtain a grant may be only expenditure incurred in preparing an application, because it is not known whether, even if the beneficiary had received a grant, he would have implemented the agreement at all. It is also pointed out that receiving a grant is connected with incurring specific expenses by the beneficiary, which would mean a simultaneous depletion of assets. The authors refer here to the concept of the so-called negative contractual interest. I do not share these views – in my opinion, in such a situation, the damage may also be at least the value of the grant, which the applicant did not obtain for reasons attributable to the institution or the adviser. Such damage may be the lost benefit of the applicant, who had a legitimate right to count on the conclusion of the agreement (assuming that the grant application was properly prepared) and thus, with its proper implementation, the 'entry’ into his assets of a value equivalent to the grant. Proving such damage requires, first of all, proving a high degree of probability of receiving the grant and also signing the agreement, which means that if a negative assessment of the project took place at the stage of, for example, formal assessment, then in the course of court proceedings it would be necessary to prove that the project had a real chance to pass subsequent stages of assessment as well.

In my opinion, there are no grounds for assuming that signing an agreement and receiving a grant does not fall within the logical chain of cause and effect of normal consequences of submitting a correct application for funding, and should be treated only as an opportunity to obtain benefits. This is not based, first of all, on the provisions of the Implementation Act, which eliminate discretion in signing agreements (despite a clever move by the legislator, who added the neat word „may” to the provisions on signing grant agreements in the new Implementation Act). It should still be assumed that if the project meets the criteria then the agreement must be signed – there is no room for any discretion of the authority here. Secondly, the mere fact that a grant agreement undoubtedly has an equivalent character and the „right” to the grant corresponds to certain obligations of the beneficiary does not in any way negate the normal consequence of signing a grant agreement in the form of entering into the property of the grant beneficiary in the event of proper implementation of the project. For this type of case, in my opinion, it is also important that the projects described by the beneficiaries in their applications are as specific as possible, both in terms of subject matter and budget. The organisers of competitions leave very little room for business flexibility by demanding detailed descriptions and business plans, and instead assessing their feasibility, rationality, etc. The organisers of the competitions do not want to be more specific. If, at the stage of competition evaluation, experts (either of institutions or advisor’s employees) considered such a highly detailed project feasible, then in the case of legal proceedings I am inclined to risk a thesis that the other party, i.e. the advisor or the institution, respectively, would have to work very hard to discredit an already positively evaluated (by the institution) or prepared (by the advisor) application.

Practice
There are so far few civil cases involving advisers, as well as institutions. In those that have been decided, however, there is a recurring theme of the difficult chain of causation between the adviser’s error and the failure to obtain funding. In this context, it is worth recalling the view of the Supreme Court which noted that: „the claimant company should have secured evidence which, if presented before the court, would have shown with a high degree of probability that the grant application had a real chance of being positively assessed on the merits and that there was a high probability that the grant would be awarded. The plaintiff merely asserted that if it had not been for the defendant’s deficiencies in preparing the application, the grant would have been awarded to the plaintiff company with a high probability bordering on certainty, and in the amount requested. Mere allegations, without demonstrating this probability, are not sufficient to accept the claim” (judgment of the Supreme Court, ref. no. II CSK 377/07).

The above view, formulated in a case in which the claim of the applicant (against its advisor) was dismissed, clearly indicates that proving damage in the form of lost funding is possible, but it is necessary to demonstrate a real chance of signing the agreement, e.g. by referring to the number of applications qualified for funding by the institution, the amount of the scoring criteria, or finally the quality of the project itself.

A similar reasoning was applied by the Regional Court in Bydgoszcz (ref. no. VIII GC 72/12), pointing out, when dismissing the claim of the would-be beneficiary against its advisor, that the claimant did not prove that it would have received the grant if the application had been drawn up correctly by the respondent. It is true that the claimant was not in a position to provide such evidence in full, as it is impossible to establish with certainty what number of points the claimant’s application would have received, what position it would have occupied on the list of entities qualified to receive a grant (including the supplementary or reserve list), and what the final decision of the Marshal’s Office would have been. However, in a case of this type, it should have been expected that the claimant would present materials that would make it probable – to a degree bordering on certainty – that a grant would be obtained. However, the plaintiff did not present evidence to show how many entities participating in the competition actually received a grant, how many entities were placed on a reserve list and how many people from this reserve list received grants at a later date.

The fact that the entire amount of the grant can be successfully claimed was demonstrated by a consultant from Poznań, who prepared the grant application badly. So badly, in fact, that the would-be beneficiary’s project was rejected already at the stage of formal assessment. The Regional Court in Poznań, in the above-cited judgment, awarded the advisor the entire amount of damages corresponding to the value of due co-financing, which the would-be beneficiary would have obtained, had his advisor not made a mistake.

In this case, the court also consulted an expert opinion, who confirmed that the plaintiff’s application would have obtained a number of points allowing it to qualify for funding, and thus would have obtained this funding. The above led the court to conclude that the claimant’s loss in this case was at least the equivalent of the grant.The expert’s opinion in the case, as well as the court’s analysis of the evidence, showed that if it had not been for the adviser’s error, the claimant would certainly have obtained the grant. In the court’s view, such a situation is a textbook example of lost benefits, and there was an adequate causal link between the adviser’s negligence and the failure to obtain the grant.

As practice shows, the responsibility of the adviser, as well as the responsibility of the institution for a faulty assessment of the application – at least on paper – does exist. However, it remains an open issue to pursue it effectively in court. Apart from a fair amount of determination and patience – such a process will also require the commitment of adequate financial resources from the dissatisfied would-be beneficiary.