Don’t Spill the Beer, Good Sir!

This time a topic which may be of interest not only to connoisseurs of EU funds, but also lovers of the golden beverage;). I recently came across a very interesting (not yet final) decision of the Provincial Administrative Court in Warsaw V SA/Wa 1499/15. Why beer in the title? Well, the case concerned a project implemented by a brewery under Measure 6.1 of the Innovative Economy Operational Programme – Passport to export – aimed at promoting export activity of enterprises. As it turned out, following an audit of the implementation of the beneficiary’s project, it was found that „the subject of export of the brewery are alcoholic beers, mainly dark beers, and to a lesser extent light beers, with alcohol content from 4% to 18%.”. The disclosure of these revelations caused PARP, which is a party to the subsidy agreement, to call on the beneficiary to return the subsidy, indicating that there was a breach of (and here a long name) § 1 section 3a point 2 of the Regulation of the Minister of Regional Development of 7 April 2008 on granting financial aid by the Polish Agency for Enterprise Development under the Operational Programme Innovative Economy. 2007-2013. In short, this provision excludes the possibility of co-financing projects relating to the production or marketing of alcoholic beverages.

How did it happen?
The beneficiary did not return the funds voluntarily, and after the administrative proceedings for reimbursement ended, he filed a complaint with the administrative court challenging the decision ordering the reimbursement. In the proceedings, the beneficiary’s main argument was that it was the institution that had been negligent – in assessing the project it had all the information about the subject of the project – including what would be exported. Therefore, when assessing the project, it could and should have immediately verified whether the activity covered by the project is not among the prohibited activities.
Both PARP (the party to the agreement and the authority of first instance) and the Minister of Infrastructure and Development (the authority of second instance) recognised that by the very submission of the application for co-financing and the submission of the statement on the compliance of projects with the law, the applicant somehow „forced” the granting of co-financing. In the court’s view, however, the authorities completely disregarded the fundamental issue, which is that the submission of the application and the signing of the said declaration did not and does not ex lege result in the award of a grant. The application must first undergo a formal and substantive appraisal, in the framework of which it is examined by at least two appraisers, and in the framework of the formal appraisal, the appraisers should have verified whether the subject of the project concerns activities excluded from the possibility of receiving support. In the event of a positive finding, the application is already subject to rejection at this stage. Therefore, the court found that at the stage of formal assessment of the application, the authority was grossly negligent in determining whether the activity conducted by the applicant could be co-financed from the OP IE funds. The court pointed out that in the applications for co-financing, the brewery clearly indicated that it was a beer producer and that the funds granted under the OPIE co-financing would be earmarked for the development of export of its products, i.e. beers.

A horse is as you see it…
Moreover, the Court, in the context of the authorities’ arguments that the evaluators could not establish what the subject of the project would be on the basis of the Polish Classification of Activities alone, also took the rightful trouble to define the etymology of the word „beer”.

According to the court, it is therefore impossible to assume that the evaluator did not know what would be exported and marketed under the project. „In its applications, the brewery clearly indicated that it was a beer producer and that the funds granted under the OPIE co-financing would be used to develop the export of its products, i.e. beers.”

Ignorance of beer harms…
In the final analysis, the court stated that due to the gross negligence of the officials assessing the project, it is not justified to burden the beneficiary with negative consequences. In doing so, it referred to Article 70(2) of Regulation 1083/20006 according to which: „where amounts unduly paid to a beneficiary cannot be recovered, the Member State shall be responsible for reimbursing the amounts lost to the general budget of the European Union when it is established that the loss has been incurred as a result of its fault or negligence.” In the court’s view, the above provision also applies to situations where recovery is impossible because it would lead to damage to a bona fide beneficiary who has already disbursed the funds.
The above view is in line with that current of case law (largely of the ordinary courts) which recognises the vital importance of the obligations placed on an authority. Without prejudging whether, in the particular circumstances of the case, Article 70(2) of Regulation 1083/2006 would in fact apply (all the more so as the judgment is not yet final), in my view the court has correctly decoded the legal norm contained in Article 70(2). As I have pointed out in several previous posts, rigour regarding repayment of funds is not always justified – especially when there is significant negligence on the part of the awarding authorities and at the same time the beneficiary is acting in good faith. Moreover, this is also the position presented in the decisions of the European Commission and the Court of Justice of the European Union.
In my opinion, the validity of this view is also supported by an important practical argument – namely, the impact on the activities of institutions involved in the implementation of EU programmes. For if it were to be assumed that beneficiaries are always solely responsible for irregularities (and this regardless of their good faith), then activities of the authorities such as project assessment, project audits, as well as the positions formulated by the authorities (e.g. with regard to compliance with the durability principle, the incentive effect, the status of the enterprise) would have to be regarded as devoid of any legal significance. Such an approach would not only be unjustified, but could even prove detrimental to the national budget – leading to – as a consequence of their essentially complete exemption from responsibility – a decline in the quality of the work of institutions involved in the implementation of EU programmes and thus a significant reduction in the quality of implemented projects. Conversely, the co-responsibility of the institutions for the implemented operations (especially for the correctness of the project evaluations and the subsequently formulated positions) should ensure a minimum level of standards in the administration of public funds and the implementation of operations co-financed from the EU budget.