Claim for lost funding for an uncompleted project

A beneficiary who has signed a grant agreement may claim payment of that grant from the institution if the latter unlawfully refuses to pay it to him. Due to the implementation of a grant agreement and the specific nature of EU projects, a claim may take different forms – a claim for payment for a completed project, i.e. performance of the agreement by the institution, or a claim for damages for non-performance or undue performance of the agreement by the institution.

In the case of the first claim, the beneficiary should demonstrate that the claim for payment of a grant from the agreement has materialised, i.e. the prerequisites for payment of the grant instalment on the basis of submitted payment applications exist.

In the second case, the prerequisites of the claim for damages are: illegality of the institution’s action, damage to the beneficiary, adequate causal relationship between the illegality and the damage.

Why two possible claims? Well, projects are implemented under the co-financing formula – as a rule, co-financing is a refund, i.e. a return of a part of expenditure already incurred by the beneficiary. In order to demand payment of at least a part of co-financing, the beneficiary should first engage his/her funds himself/herself. At the same time, it follows from the principle of co-financing that neither the beneficiary nor the institution are obliged to cover all expenses in the project on their own. A claim for payment of a grant arises therefore in the case when the beneficiary fully or partially implements the project, or at least incurs the planned expenses.

To complicate the matter even more, we add the starting point of the institution’s illegal behaviour, which includes withholding payments in the project. Such withholding may take place either at the very end of the project’s life at the stage of the so-called final payment application – submitted after the project’s completion, during implementation – when part of the payment application has already been made, but the beneficiary has not yet applied for a part of the payment, or at the very beginning of the project – when no expenses have been incurred in the project.

It is this moment that decides what claims will be formulated by the beneficiary. If the project is completed he/she is entitled to claim payment directly from the contract, but if the project is interrupted in the middle or at the beginning of the life cycle the question arises whether the beneficiary has to complete the remaining part of the project entirely from his/her own resources in order to formulate an effective claim for payment of the grant. In my view, no.

In order to formulate a successful claim for payment of a grant, the beneficiary should demonstrate that the behaviour of the institution refusing to pay the grant was unlawful. As a rule, this will consist in refuting the institution’s argumentation justifying the withholding of payment, e.g. by demonstrating that the reasons for withholding were frivolous or invalid. The reasons for withholding payments can be very numerous and are generally related to the finding or suspicion of irregularities in projects. In a civil lawsuit, the beneficiary will have to refute these claims of the institution.

Interestingly, in such a situation it is possible, and occurs in practice, to conduct two parallel proceedings – an administrative one aimed at recovery of funds and a civil one aimed at their further payment to the beneficiary. Civil proceedings in this case will be closely related to the irregularity, as their findings will be directly aimed at establishing that there is no individual irregularity.

However, the finding of illegality is only one of the conditions for the effectiveness of this type of claim – another one is for the beneficiary to demonstrate the damage, which in this case is the value of the subsidy that the beneficiary would have obtained if the contract had been correctly implemented by the institution. There is most controversy around this issue. In principle, some refuse to allow the beneficiary to effectively prove the damage, indicating that we are not dealing here with a high chance of gaining advantage in the form of payment of a grant, but only with the so-called chance of gaining it – which is not subject to compensation with the so-called potential damage.

In my opinion, this argumentation is flawed and does not take into account an important factor – the project evaluation process. Co-financing is awarded to beneficiaries after going through the evaluation process described in the Implementation Act and in numerous programme documents of individual institutions. In the course of project evaluation, such aspects as project feasibility, cost-effectiveness, legitimacy of planned expenditure and rationality of the entire project budget are assessed. The assessment is carried out, inter alia, by experts appointed by individual institutions.

In my opinion, it is difficult to rationally claim that after obtaining a positive assessment of a project, the beneficiary has only a „chance” of successfully completing it. Putting forward such a thesis leads to relativising the significance of the project evaluation carried out. It is difficult to accept that the state acts not like a rational investor, but like a gambler playing roulette or a one-armed bandit.

Two approaches to the issue of damage in the case of non-implementation of a project can be distinguished in judicial decisions. The first, under which the courts consider that the grant not paid to the beneficiary may be treated as lost benefits, and the second, under which the courts condition the treatment of the grant as a lost benefit on the expenditure of funds for purchases indicated in the project and the performance of the project as such. Under this second approach, there is an argument that the amount of the grant as such cannot be treated as a loss because it does not take into account what the beneficiary has saved as a result of the non-implementation of the project and that the beneficiary has not made the relevant purchases in the project, which would only be subject to reimbursement.

In my opinion, both arguments are incorrect. As a rule, the subsidy received is used to cover specific property expenses in a given project. At the same time, in place of funds involved in the purchase of specific expenditure items, a specific fixed asset will enter the beneficiary’s property, the initial value of which corresponds to the value of the grant and own contribution. The carrying amount of the beneficiary’s property in such a situation will always increase, and at least by the amount corresponding to the value of the grant – even if it was immediately spent on specific purchases. In practice, as a rule, this amount reimburses expenses already incurred for assets, the value of which undoubtedly increases the value of the property of the given beneficiary. Therefore, it is not the case that, on balance, as a result of the non-implementation of the project, the beneficiary’s assets are, in principle, automatically increased by the savings, and therefore the amount of the grant should also be reduced. Besides, even if one were to assume that the „savings” have an impact on the claim being asserted, they certainly do not abolish it in its entirety in principle. Making such findings cannot be abstract.

The second argument, on the other hand, completely misses the essence of EU projects, which consist in co-financing projects that otherwise would never have been realised or would have been realised in a different shape and size. This argument also contradicts the essence of the „incentive effect” – one of the key conditions for the provision of aid, which in a material sense means that without the incentive of public funding, the private entity’s project would not have been undertaken at all. Not only is the beneficiary not obliged to carry out the project entirely with its own funds, but precisely carrying out such a project entirely on its own – without funding – would call into question whether the beneficiary has indeed met the condition of the incentive effect.

At the same time, this argument completely ignores the obligations which are incumbent on the institution providing the co-financing. Lack of timely payments in a project or their withholding constitutes a breach of the so-called principle of indivisibility of payments and directly affects the possibility of effective project implementation.

I have written more extensively about the problem of claiming lost funding in the case of a project that has not been completed in the Eastern European Journal of Transnational Relations (by the way, I also recommend other publications that have appeared in this issue that are very interesting from the perspective of EU projects).

Certainly, this issue will be discussed more than once more in the jurisprudence of the courts. It is worth watching how the Supreme Court will decide on a similar legal issue, but concerning subsidies for running non-public kindergartens. In Case III CZP 58/23, the Supreme Court is to answer the questions:

I. if the subsidy referred to in Article 90(2b) of the Act of 7 September 1991 on the educational system [in the legal state in force until 31 December 2016] is not paid in full, is the entity entitled to receive it entitled to a claim for payment of the missing part of the subsidy as performance or a claim for damages?

II. if it is assumed that the entity entitled to receive the subsidy is entitled to a claim for damages, how is the amount of the compensation due to it to be determined, in particular, should the above compensation correspond to the equivalent of the unpaid part of the subsidy irrespective of how it was spent or should it only be the equivalent of the expenditure incurred by the entitled entity in carrying out educational tasks not covered by the subsidy received?

At the same time, in my opinion, EU projects – due to, inter alia, the principle of co-financing and the requirement of an incentive effect – are different from projects subsidised under the Act on the Education System. The answer to legal questions by the Supreme Court in these cases will not necessarily unequivocally solve the problems of beneficiaries of EU funds.