Who is at risk of corrections for failing to implement EU directives? – A few words about state responsibility for irregularities

In connection with the untimely implementation of the procurement directives (2014/24/EU and 2014/25/EU), there has been a lot of talk recently about possible legal consequences also for beneficiaries of EU funds. One of the possible consequences highlighted in the press was supposed to be the imposition of financial corrections on beneficiaries in connection with irregularities in procurements co-financed with EU funds, e.g. related to the fact that the so-called Single European Procurement Document would not be used in procurements awarded (contrary to the directives), which could result in legitimate claims of contractors against the ordering parties.

Indeed, should contracting authorities – beneficiaries of European funds – expect to face financial corrections in such cases? The above discussion is part of a broader problem concerning the issue of distribution of responsibility for irregularities in projects financed from European funds. In my opinion, the beneficiaries, by complying with the applicable provisions of the public procurement law (or any other national regulations) do not bear the risk of irregularities resulting from the failure to adapt these provisions to EU regulations. The consequences of such a situation, including liability for irregularities, are borne by the state. In my previous post I indicated that the basis for the liability for irregularities on the part of the institutions would be Article 70(2) of Regulation 1083/2006 and, for the current financial perspective, Article 122(2) of Regulation 1303/2013. According to these provisions, where amounts unduly paid to a beneficiary cannot be recovered and this is as a result of fault or negligence on the part of the Member State, the State concerned is responsible for reimbursing the amount in question to the Union budget.

In my view, untimely implementation of directives resulting in irregularities should be assessed as negligence on the part of the Member State justifying its sole responsibility. Furthermore, untimely implementation of directives or other failure to implement EU rules resulting in irregularities in the spending of EU budget funds may have even more far-reaching consequences for the state. Indeed, if the irregularity were found to be of a systemic nature, the European Commission could impose a financial correction on the entire programme – the consequences of which would be borne by the national budget (Article 31 of Commission Regulation 480/2014).

In this context, it is worthwhile to use concrete examples of cases in which state responsibility or state co-responsibility was the cause of the irregularity. In addition, it is worth looking at the argumentation of states used in such cases.

Prehistory – Deutsche Milchkontor
One of the first, already historic, cases concerning the reimbursement of funds from the EU budget is the Deutsche Milchkontor case, in which the Court of Justice examined the case of aid granted to fodder producers using skimmed milk powder and exporters of skimmed milk powder.
As it turned out, the chemical composition of the milk used by the beneficiaries of the aid and originating from one of the suppliers did not allow the product in question to be regarded as milk powder within the meaning of the EU regulations, while one of the conditions for granting aid was the use of skimmed milk powder. Significantly, the product supplied had the same properties as skimmed milk powder with the correct chemical composition (the detection of the irregularity required specialist tests, the beneficiaries of the aid were not in a position to detect it on their own).
In this judgment, which is very important for practice, the Court of Justice allowed for the possibility of waiving recovery of aid directly from the beneficiary, indicating that such waiver is justified by the principle of legal certainty and protection of legitimate expectations. It also indicated that the fact that the public administration knew or ought to have known (in connection with the supervision exercised over the dairy farmer) that the aid had been granted unduly may constitute a circumstance justifying a waiver of recovery. It is also a condition for waiving recovery that the same criteria are applied for both EU and national measures.

Lithuania : Poland 1:0
Another very interesting case concerning a systemic irregularity is that of the Lithuanian Rural Development Programme, which was dealt with by the Court of First Instance. The case concerned a financial correction imposed on Lithuania by the European Commission as a result of the Commission’s finding of an irregularity consisting in a failure to ensure proper control of expenditure (insufficient control of fertiliser application and failure to inspect all parcels under the agri-environmental measure). In this case, Lithuania has taken the trouble to prove that the irregularity found did not have any impact, even potential, on the budget of the European Union. Indeed, an element of irregularity is, in addition to the infringement, the damage that such an infringement, even potentially, could have caused to the EU budget. As it turned out, Lithuania’s arguments were convincing enough for the Court of First Instance to annul the Commission’s decision imposing a financial correction on Lithuania. What arguments convinced the judges? Well, Lithuania pointed out that although the system implementing the programme did not indeed contain the control mechanism required by the Commission, the subsequent ex-post controls (the extent of which was in line with the Commission’s indications) carried out on a sample of 10 per cent of holdings did not find any infringement among the audited beneficiaries. In the Court’s view, this confirmed that, in practice, the lack of cross-cutting checks in line with the Union rules led to only a negligible financial risk for the Union budget. The above judgment is momentous not only in terms of potential State liability for irregularities, but also indicates that the view of the irrelevance of assessing whether a failure has even a potential impact on the Union budget is not accurate. This view is particularly well-established in the jurisprudence of administrative courts, which generally accept that, in principle, the issue of damage (which may be hypothetical in nature) is not subject to examination (e.g. NSA in its judgment of 6.8.2015). Meanwhile, as it turns out, the beneficiary not only may, but should even try to prove that, despite the misconduct, such a hypothetical loss to the EU budget did not occur.
For comparison, practically at the same time, the Court of First Instance also issued a judgment concerning systemic irregularities in the implementation of the Polish Rural Development Programme. These irregularities concerned the financing of so-called structural pensions, i.e. subsidies for early retirement of farmers. One of the Commission’s objections related to the fact that there was no check on whether the early retiree had carried out commercial farming in the period before the farm was transferred to the transferee. Poland, in its attempt to challenge the adjustment, took a different route to Lithuania, namely attempting to demonstrate in the proceedings that EU legislation did not in fact require (it was not a condition for granting support) that the retiring farmer had carried out commercial farming. However, this argumentation did not meet with the approval of the Court of First Instance, which found that EU legislation explicitly provides for prior commercial farming by the retiring farmer, so that Poland’s failure to control this state of affairs prior to the granting of the pension was likely to prejudice the EU budget. For these reasons, among others, the financial correction imposed for the irregularity found was upheld. I wonder how this case would have turned out if Poland, in addition to the arguments raised, had also tried to appeal, like Lithuania, to the results of the ex-post control….

Wrocław – procurement
For dessert, however, a case concerning a project implemented by the City of Wrocław under the Operational Programme Infrastructure and Environment. The case concerned irregularities in the tender for the contractor for the North Downtown Bypass in Wrocław. One of the conditions of participation in the procedure was that the contractor undertook to carry out a minimum of 25% of the works covered by the contract with its own forces. Centrum Unijnych Projektów Transportowych, which was a party to the contract for cofinancing, decided that the stipulation of the above requirement was incompatible with the principle of fair competition, and therefore imposed a financial correction of 5% of the amount of eligible costs on the beneficiary. Wrocław defended itself on the grounds that the then-current provisions of the Public Procurement Law (art. 36, para. 5) allowed for the possibility of limiting the entrustment of the contract to subcontractors. The institution, on the other hand, took the view that such a limitation was incompatible with Directive 2004/18.
In the course of the recovery proceedings pending before the WSA in Warsaw, the national court asked the CJEU whether such a limitation as that proposed by the City of Wrocław in the ToR was permissible in light of Article 25 of Directive 2004/18. In addition, the court asked whether the application of the above requirement results in such a breach of EU law as to justify the need for a financial correction?
The case is currently pending before the Court, but it is worth referring to the opinion of Advocate General Eleanor Sharpston in this case.

Summary
The view quoted above is crucial in the context of the concerns expressed about the untimely implementation of the procurement directives. In my opinion, in a situation in which it is the fault of the state that the directives are not implemented on time, entities which comply with the national regulations currently in force will not be able to be successfully accused of irregularities and thus be subject to financial corrections. A separate issue, however, is the question of the responsibility of the state itself for irregularities in contracts conducted on the basis of the „old” provisions of the PPL. In my opinion, in this case there are grounds for holding the state liable for the negative consequences resulting from failure to implement the directive. The basis for this is Article 122 para. 2 ak. 4 of Regulation 1303/2013: „where amounts unduly paid to a beneficiary cannot be recovered and this is as a result of fault or negligence on the part of a Member State, the Member State concerned shall be responsible for reimbursing the amount concerned to the Union budget”. Of course, such liability is conditional on a prior finding of an irregularity.

The above-cited judgments and the opinion of the Advocate General show that the beneficiaries of EU funds are not in a lost position in disputes with the institutions, and holding them solely responsible for irregularities will not always be justified. The state’s responsibility for the implementation of a project comes down not only to the disbursement of funds, but encompasses a much broader spectrum of duties, starting with the correct implementation of EU regulations, through active cooperation with the beneficiary in the implementation of the project, to the correct performance of control duties. Significantly, the case-law of courts, especially common courts, has long emphasised the principle of contractual loyalty, drawing attention to the – sometimes underestimated – role of institutions in project implementation. As the above views show, the burden of joint responsibility of institutions for the proper implementation of the project is also anchored in EU regulations.