You will be satisfied – does the beneficiary guarantee the implementation of the project?

Those who struggle with the implementation of EU projects often find themselves up against the wall when the research carried out does not lead to the desired results, or the technologies and equipment purchased and implemented do not translate into a measurable increase in their business. Often, the lack of business effects of a project also occurs in soft projects (e.g. problems with recruiting participants seen especially in the covid period). Unfortunately for the beneficiaries, the lack of these effects is not only a detriment to themselves, but also a reason for the institutions to demand the return of the grant.

Project effects, such as commercialisation of research, achievement of a certain level of income, increase in employment of a given group among participants of training, are also result indicators in many EU projects. Institutions consider them to be guaranteed – and if they are not achieved, they usually demand the return of even the entire amount received. Moreover, in many rulings of administrative courts , the mere finding that the purpose of the project has not been achieved is tantamount to assuming that there has been an irregularity justifying the demand for 100% of the funds.

In the jurisprudence of administrative courts the view is often reproduced as dogma that a contract for co-financing is a contract for results, and from this a conclusion is drawn that the beneficiary is often obliged to return the entire co-financing regardless of the reasons for not achieving the indicators.

Such a view, in my opinion, is not only unfair but, above all, inconsistent with the definition of irregularity in the General Regulation. Why?

Well, it omits a whole catalogue of causes that may cause the project’s objectives not to be met, and over which the beneficiary has no influence.

What events and behaviours can lead to the conclusion that the beneficiary is not responsible for the infringement? For example, those caused by the action of the institution itself. Where there is significant negligence on the part of the awarding authorities, and at the same time the beneficiary acts in good faith and could not have prevented the deficiencies identified, it cannot be concluded automatically that the condition of the beneficiary’s act or omission is fulfilled and therefore that an irregularity has occurred.

According to the General Regulation, an irregularity means any infringement of applicable law resulting from an act or omission by an economic operator which has, or would have, a prejudicial effect on the Union budget by charging unjustified expenditure to it. As can be seen from the definition of irregularity, an essential element in establishing an irregularity is that the infringement is found to have been committed by an act or omission of the beneficiary. Thus, the issue of the beneficiary’s behaviour in the implementation of the project remains an important element of the findings. This issue, meanwhile, in the vast majority of rulings by administrative courts, is treated in a negligible way and assumed in advance. There is a breach of regulations, e.g. failure to achieve indicators = the beneficiary is responsible for it.

Meanwhile, as Advocate General Eleanor Sharpstone points out:

’However, by including in the definition of irregularity the phrase „arising out of an act or omission by the operator”, the legislature has imposed the condition that the infringement in question must be capable of being linked to an act or omission by the operator himself.

(…) Consequently, it does not seem to me that an infringement can be considered to be the result of an act or omission attributable to an economic operator if its ultimate cause lies in external circumstances over which that economic operator has no control, such as the insolvency of its sole trading partner.

This will only be different if, despite the existence of such external circumstances, the infringement can nevertheless be substantially linked to the operator’s conduct – for example, if he has not exercised due diligence to avoid the consequences of those circumstances. In such a situation, the infringement is in fact due to the operator’s conduct (his act or omission) rather than to external circumstances as such.

The Advocate General points out that a situation in which a beneficiary of ERDF funding is unable to achieve its forecast level of turnover in the period relevant to the assessment because its sole partner ceases to exist or becomes insolvent during that period does not constitute an act or omission of an economic operator within the meaning of Article 2(7) of Regulation No 1083/2006 if:

1. this situation could not have been reasonably foreseen by the beneficiary at the time of conclusion of the agreement granting the funding;
2. the beneficiary did not act negligently in allowing the situation to occur; and
3. the beneficiary could not have remedied the situation and fulfilled its obligations in relation to that assistance, even if it had taken all appropriate and reasonable measures.

The Implementation Act (Article 26(10)) stipulates that in the case where an individual irregularity results directly from an act or omission of a competent state institution or body, the expenditure shall be corrected by reducing the expenditure included in the declaration of expenditure and in the payment application and annual statement of expenditure, submitted to the European Commission, by an amount corresponding to the estimated value of the financial correction resulting from this irregularity.

For example, a positive assessment of a project is considered to be behaviour of an institution, for which responsibility cannot be passed on to the beneficiary, in accordance with the above-mentioned provision. If the institution has approved the project and the manner of its implementation specified in the application for co-financing, it cannot later, in an arbitrary manner, deviate from this assessment.

In the case where there is significant negligence on the part of the awarding authorities, and at the same time the beneficiary acts in good faith and could not have prevented the specified deficiencies, it cannot be concluded automatically that the condition of the beneficiary’s act or omission has been fulfilled, and thus that an irregularity has occurred. The reason for the occurrence of the infringement and, more precisely, the link between the infringement and the beneficiary’s behaviour, in the Author’s view, is of significance and it cannot be taken as an axiom that the beneficiary will be responsible for the failure every time.

Such a view is also supported by an important practical argument, namely the impact on the activities of institutions involved in the implementation of EU programmes. If it were to be assumed that beneficiaries are always solely responsible for irregularities, then activities of authorities such as project assessment, project audits, as well as positions formulated by authorities (e.g. with regard to sustainability, incentive effect, enterprise status) would have to be considered devoid of any legal significance. Such an approach would not only be unjustified, but could in the long run have negative consequences for the national and EU budgets, consequently leading to their complete exemption from responsibility and a decrease in the quality of the work of institutions involved in the implementation of EU programmes, thus significantly reducing the quality of implemented projects.

It is also difficult to recognise that the beneficiary should be held responsible every time for events beyond his control, such as changes in the economic or legal environment, which were beyond his control and could not have been prevented.

Interestingly, in the case of a Member State failing to achieve the indicators, the EU rules explicitly provide for the possibility to waive reimbursement.

Financial corrections against Member States should take into account, with due respect to the principle of proportionality, the level of absorption and external factors contributing to the non-achievement of targets.

Financial corrections should not be made if the failure to achieve the final objectives is due to:

• the impact of socio-economic or environmental factors,
• significant changes in the economic or environmental conditions in the Member State concerned, or
• for reasons of force majeure seriously affecting the implementation of these priorities.

In addition, result indicators should not be taken into account for the purposes of suspensions or financial corrections (Article 22(7) of Regulation 1303/2013).

Regulation 1303/2013 also provides for an exception to the situation of violation of the so-called principle of sustainability in the form of bankruptcy of the beneficiary resulting from non-fraudulent bankruptcy.

As noted by the NSA (II GSK 3449/15):

’In a situation where the risk of failing to comply with a condition for the award of a grant is unforeseeable, because it is the result of a defective action by the authorities of a Member State, the entitled entity cannot be burdened with such drastic consequences of using public funds contrary to the purpose specified in the grant agreement. Actions of state authorities in cases of the same entity which are different in terms of subject matter – but related in their consequences – and which in fact lead to a double „damage” to the entity, cannot be reconciled with the principles of legal certainty and security derived from the principle of a democratic state of law (Article 2 of the Constitution of the Republic of Poland).

It is also worth noting the jurisprudence of the CJEU relating to the Contingency Regulation. As the CJEU notes, the instruments set out in the Contingency Regulation may only be used if the infringement of the rules of the rule of law in a Member State affects or poses a serious risk of affecting – in a sufficiently direct manner – the sound financial management of the Union budget or the protection of the Union’s financial interests. The Court of Justice held that the expression 'sufficiently direct’ requires that the link between the infringement of the rules of the rule of law and the impact or risk on the Union budget must be 'actual’ or 'real’. This means that the procedure provided for in the Regulation should not be triggered for situations where the link is merely hypothetical, too uncertain or too vague. (CJEU judgment of 16.02.2022, Poland/Parliament and Council, C-157/21).

Expecting guaranteed results in projects involving research or the implementation of new innovative solutions contradicts their very essence. i Such an approach may lead to discouraging entrepreneurs from undertaking such projects, thus creating a deterrent effect from using funding.

Questioning the sense of research or implementation of innovations on the basis of their results also undermines the sense of project evaluation. Since the institution’s experts considered the research to be relevant and in line with the criteria of the competition, one cannot then – without simultaneously undermining the sense and purpose of the project evaluation procedure – question the essence of the research conducted.

It is also worth noting that an entrepreneur who does not implement the results of the research and will not effectively commercialise them is already, in a way, incurring a „penalty” – he is also investing his own funds in addition to public funds and the lack of success of the research is a real loss for him (?).

A grant awarded to an entrepreneur is not a privilege of any kind – by undertaking a project, the entrepreneur agrees to also commit his own resources to the project, which – if successful – also brings public benefits, e.g. in the form of meeting state indicators.

The alternative to grant-funded projects is a situation in which innovation and research are significantly reduced. After all, the state itself would not carry out the research and implementation it subsidises. It must therefore be assumed that the nature of the contractual relationship under the funding agreement also supports the recognition of the funding agreements as contracts of endeavour rather than contracts of result.