Dear Mr J.,
On 7 May 1998 you lodged a complaint in the French language with the European Ombudsman. You acted on behalf of SYSTEMS EUROPE S.A. (hereafter SE). It concerned the cancellation of contract SEM/03/608/010 signed in the framework of an Electricity Support Program for Syria backed by the European Commission (Tender reference IB/0028).
On 24 June 1998, I forwarded the complaint to the President of the European Commission. The European Commission sent its opinion on 28 September 1998 which I forwarded to you with an invitation to make observations, if you so wished. I received your observations on 3 November 1998. I asked the Commission to provide me with additional information on three occasions, 14 December 1998, 20 May 1999 and 29 October 1999. These additional opinions were forwarded to you and you handed in additional observations on 16 March 1999, 17 September 1999 and 17 February 2000. On 25 April 2000, you informed me that you would be ready to receive my decision in English.
I am writing now to let you know the result of the inquiries that have been made.

THE COMPLAINT

The complainant, SYSTEMS EUROPE S.A. (hereafter SE), was awarded a supply contract SEM/03/608/010 signed in the framework of an Electricity Support Program for Syria backed by the European Commission (Tender reference IB/0028). This contract was signed by SE and the Syrian Government on 11 September 1997 and was endorsed by the Commission's Delegation in Syria (hereafter the Delegation) on 18 September 1997.
On 20 October 1997, the Delegation informed SE that Directorate General 1B (hereafter DG 1B) of the Commission was not able to approve the contract at that stage. SE should not proceed with the work until receipt of such approval. The company decided not to suspend the work for the following reasons:
- SE had already begun the work and mobilised important human resources.
- The time schedule was particularly tight (the various stages of the project had to be finished respectively 4, 5 and 6 months after the beginning of the contract).
- A cessation of the work would have had considerable drawback.
- Possible flaws in the tender procedure should have been known by the Commission before the endorsement of the contract.
On 12 January 1998, the Delegation informed SE in writing that the Commission could not approve the funding of the contract and that it would ask the Syrian authorities to cancel it. This was done on 19 January 1998. However, according to the contract, an important part of the work had to be finished by that date. SE put forward that the Commission gave no reasons for the cancellation request.
Further to SE's request for explanations a Commission official explained that SE did not bear any responsibility in the circumstances which led to the cancellation. Apparently this situation stemmed from internal errors within the Institution. The Commission assured that the quality of SE's work was not in question and that the company would remain included in the list of potential suppliers.
Having suffered considerable financial losses and given the dramatic consequences on its professional image, SE unsuccessfully attempted to obtain compensation and therefore lodged a complaint with the European Ombudsman.
The complainant made the following allegations:
1 SE alleged that the European Commission refused to finance a contract although it had been unconditionally endorsed by the Commission's Delegation in Syria.
2 SE alleged that it was not informed of the reasons for the Commission's request to cancel the contract, nor had SE been given the opportunity to defend itself.
3 SE alleged that the Commission refused to bear any responsibility for the cancellation of the contract and refused to pay damages to SE.

THE INQUIRY

The Commission's opinion
The opinion of the European Commission on the complaint was in summary the following:
The call for tenders was launched by a Syrian authority in the framework of a financial protocol signed between Syria and the EEC. Before financing a contract the Commission carries out controls over the tender procedure.
The Commission found that the present tender procedure was vitiated by major irregularities. The only two applicants (ÉLECTRICITÉ DE FRANCE and SE) participated in the Syrian project as consultants. Given that they were likely to have participated in the design of the call for tenders, the Commission suspected a conflict of interests.
Furthermore, the report made by the Syrian authorities did not mention any price comparison. Finally, before and during the tender procedure SE had twice been called for negotiations with the Syrian authority, which in the Commission's view could indicate a conflict of interests.
Given these circumstances, the Commission informed the Syrian authorities that it would not be able to finance the contract. The Syrian authorities decided to cancel the contract, but could have financed it out of their own funds without the Union's help. Once the contract was cancelled, the managers of SE had been informed of the reasons for the cancellation request.
The Commission rejected any responsibility. It held that claims for damages should be directed to SE's co-contractor, namely the Syrian authority.
The complainant's observations
The European Ombudsman forwarded the European Commission's opinion to the complainant with an invitation to make observations. In his reply of 28 October 1998, SE put forward that the Commission's opinion contained legal and factual errors. The complainant's observations can be summarised as follows:
The contract was indeed signed between SE and the Syrian authority, but it had also been endorsed by the Delegation. The Commission was therefore a party to the contract and committed to financing it. Furthermore, the Syrian authority decided to cancel the contract on the Commission's express request and not, as falsely alleged by the Commission, out of its own sovereignty. Thus SE considered itself prejudiced by the Commission's unilateral decision to break its commitment.
The factual circumstances surrounding the tender procedure, considered as irregularities by the Commission, were all known to the Commission before the formal endorsement. Thus they did not invalidate the Commission's consent to grant its financial assistance.
SE was indeed a consultant in the programme, but never participated in the branch of the programme for which it was awarded the contract. Nor did SE meet the Syrian authority in charge of the tender to negotiate with it, but merely to provide technical information about its application.

FURTHER INQUIRIES

1. The Ombudsman asked the Commission to inform him whether it became aware of the alleged irregularities before the endorsement.
The Commission's additional opinion
The Commission repeated that it had never signed nor cancelled a contract with SE. The Delegation had considered that the conditions for a financial assistance were met. On 18 September 1997 it provisionally endorsed the contract though irregularities were suspected beforehand. Subsequently the file was transmitted for the final decision to DG 1B of the Commission. On 20 October 1997, SE was asked not to begin with the work before the final approval. Both SE and the Syrian authority were informed of DG 1B's refusal to finance the project on 12 January 1998.
The complainant's additional observations
SE was given the opportunity to comment on the Commission's additional opinion. SE put forward that SE had not been informed of the alleged provisional character of the Delegation's endorsement. It therefore believed in good faith that the Delegation had the power to commit the Commission. The lack of transparency in the sharing of responsibility in this kind of procedure had already been evidenced by the Court of Auditors in 1991(1). The Commission's endorsement produced legal effects towards SE, its withdrawal in turn created a situation which infringed the general principle of protection of good faith. Furthermore, the Commission took an act adversely affecting SE, but failed to motivate it and failed to give SE an opportunity to defend itself.
2. In order to clarify the decision making process in this case and to determine the actual decision making authority within the Commission, the Ombudsman asked the Commission for additional information as to the legal basis of the procedure followed. He also inquired about the delay in this procedure.
The Commission's additional opinion
The Commission informed the Ombudsman that in accordance with the EC Financial Regulation, Title IX, External Aid, it controlled the whole award procedure carried out by the local contractor (in this case PEGTE(2)). The agreement to fund a contract is materialised in the "endorsement" of it. The responsibility for making this decision is divided between the Delegation and the "Headquarters" in Brussels (i.e. DG 1B). In the present case, as laid down in DG 1B's Instructions of 30 September 1996(3), for supply contracts exceeding 137.000 Ecu, the endorsement should have been made by the Delegation after express authorisation by the "Headquarters". Actually the Delegation endorsed the contract before it transmitted the file to DG 1B/E2 in Brussels and before it received the authorisation from Brussels.
As to the delay in the procedure cited by the Ombudsman, the Commission repeated that SE had been warned not to proceed with the work one month after the endorsement of the contract. The length of time (4 months) for analysing such a complex case and deciding not to finance the contract was not considered as excessive by the Commission.
Finally, the Commission informed the Ombudsman that it "[contested] the complainant's arguments regarding its financial responsibility under the aspect of the protection of good faith and shall answer them eventually at the proper venue."
The complainant's additional observations
SE was informed of the Commission's additional opinion. It maintained its claim and declared that the refusal to finance the contract seemed arbitrary. SE sustained this allegation by mentioning that two companies in a similar situation were allowed to participate in a call for tenders under the same programme. Despite their prior involvement in the Syrian programme no conflict of interests had been suspected.
The Commission had refused to answer SE's arguments regarding its financial responsibility in the framework of the Ombudsman's inquiry. Thus the Ombudsman asked the Commission to reconsider its position or to inform him of the reasons for its refusal.
The Commission's final opinion
The Commission confirmed its position as to the complaint. It handed in a detailed explanation regarding the reasons which made DG 1B consider that there had been a conflict of interests. Furthermore it stressed that the companies which participated in a second call for tenders, contrary to SE's allegations, were in a substantially different situation.
The complainant's final observations
In its final observations, SE repeated that the Commission once again refused to answer its arguments as to its financial responsibility. SE also contested part of the explanations given by the Commission in its latest opinion.

THE DECISION

1 Refused financing of a contract despite its unconditional endorsement
1.1 SE alleged that the European Commission refused to finance a contract although it had been unconditionally endorsed by the Commission's Delegation in Syria.
1.2 The Commission objected that the contract could not be funded due to irregularities in the tender procedure.
1.3 In the course of the Ombudsman's inquiry, the Commission stated that the alleged irregularities which motivated the Commission's refusal to finance the contract were known before the endorsement. The Commission however claimed that the endorsement was provisional. Finally, in its third opinion, the Commission admitted that the Delegation failed to act in accordance with the applicable internal procedure.
1.4 The Ombudsman found that the contract endorsed by the Commission did not indicate that the Delegation's endorsement was provisional. A careful examination of the applicable internal procedure(4) handed in by the Commission, revealed that in this case it was DG IB-E/2's(5) responsibility to endorse the contract and not the Delegation's. The procedure does not foresee any possibility of a provisional endorsement.
1.5 During the inquiry, the Commission explained that the agreement to fund a contract is materialised in its endorsement. Nothing in the file indicates that the SE had knowledge of the Commission's internal endorsement procedure. Nor is there any indication that SE could have been aware of the Delegation's failure to comply with this procedure.
1.6 The Commission claimed that on 20 October 1997 SE had been asked by the Delegation not to proceed with the work until the formal decision by DG IB. However, it must be noted that this occurred while the contract had been signed on 11 September 1997 and endorsed on 18 September 1997 and once SE was bound by contractual obligations, in particular by short deadlines. SE was informed of the Commission's formal refusal to finance the contract only on 12 January 1998.
1.7 Principles of good administration require the institution to act consistently. In the present case, the Commission failed to apply its own internal procedure and although it had knowledge of alleged irregularities failed to carry out all the relevant controls before endorsing the contract. Nothing in the file indicates that the complainant should have been aware that the Commission had failed to carry out the correct endorsement procedure. SE could therefore legitimately have considered that it was in possession of a duly endorsed contract financed by the Commission. The Commission's acting therefore constitutes an instance of maladministration.
2 Failure to inform the complainant and to give it the opportunity to defend itself
2.1 SE alleged that it was not informed of the reasons for the Commission's request to cancel the contract, nor had SE been given the opportunity to defend itself.
2.2 According to the Commission, SE had been informed that the cancellation request originated in irregularities in the tender procedure.
2.3 The Ombudsman notes that the Commission, four months after the Delegation had endorsed the contract, informed SE that it would ask for its cancellation without giving any reasons for it. At that stage SE was informed that it bore no responsibility in the process that lead to this request for cancellation.
2.4 It appears that SE had only been informed of the actual reasons for the Commission's request to cancel the contract (i.e. possible conflict of interests) through the Ombudsman's investigation. Furthermore, although the Commission's refusal partially originated in SE's actions (i.e. alleged negotiations with the Syrian authority and conflict of interests), SE was not given the opportunity to defend itself.
2.5 It is good administrative behaviour to act fairly and to respect legitimate expectations raised by the Institution's acting. In the present case the Commission has had several direct contacts with SE. It acted as an interlocutor and thereby raised legitimate expectations of the complainant. SE could have expected to be informed of the actual reasons for the Commission's decision. Furthermore, as a matter of fairness, SE should have been given the opportunity to comment on the alleged irregularities originating from its actions. The fact that the Commission failed therein constitutes an instance of maladministration.
3 The Commission's financial liability
3.1 SE alleged that the Commission refused to bear any responsibility for the cancellation of the contract and refused to pay damages to SE. In the course of the Ombudsman's inquiry, the complainant raised several legal arguments relating to the Commission's financial liability stemming from the endorsement of the contract. The Commission twice omitted to enter the discussion on these points, and declared that it would "answer them eventually at the proper venue".
3.2 The Commission refused to enter the discussion on the complainant's arguments relating to the Commission's financial liability. The Commission therefore failed to provide the Ombudsman with a coherent and reasonable account of the legal basis for its actions and why it believes that its position concerning the issue of liability is justified. The Commission seems to indicate that it would be ready to present the relevant arguments before a court.
3.3 The Ombudsman therefore concludes by referring to the right of the parties to have their dispute examined and authoritatively settled by a Court of competent jurisdiction.
4 Conclusion
On the basis of the European Ombudsman's inquiries in this case, it appears necessary to make the following critical remarks:

Principles of good administration require the institution to act consistently. In the present case, the Commission failed to apply its own internal procedure and although it had knowledge of alleged irregularities failed to carry out all the relevant controls before endorsing the contract. Nothing in the file indicates that the complainant should have been aware that the Commission had failed to carry out the correct endorsement procedure. SE could therefore legitimately have considered that it was in possession of a duly endorsed contract financed by the Commission. The Commission's acting therefore constitutes an instance of maladministration.

It is good administrative behaviour to act fairly and to respect legitimate expectations raised by the Institution's acting. In the present case the Commission has had several direct contacts with SE. It acted as an interlocutor and thereby raised legitimate expectations of the complainant. SE could have expected to be informed of the actual reasons for the Commission's decision. Furthermore, as a matter of fairness, SE should have been given the opportunity to comment on the alleged irregularities originating from its actions. The fact that the Commission failed therein constitutes an instance of maladministration.

Given that in the course of the Ombudsman's investigations, the Commission refused to enter the discussion on its liability, the Ombudsman has decided to close the case with these critical remarks.
The President of the European Commission will also be informed of this decision.
Yours sincerely
Jacob SÖDERMAN

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(1) Court of Auditor's Special Report 3/91

(2) Public Establishment for Generation and Transmission of Electrical Energy (PEGTE)

(3) Note for Mr Anacoreta, Mr. Defraigne, Mr. Frossati, Mr Rhein, Heads of Unit and Heads of Delegation : "Service, works and supply contracts, including local purchases, on behalf of the recipient in the framework of financing or grant agreements." - 30 September 1996

(4) Annex XV - Supply Contracts - Value of the contract : over ECU 137 000 of the Note for Mr Anacoreta, Mr. Defraigne, Mr. Frossati, Mr Rhein, Heads of Unit and Heads of Delegation : "Service, works and supply contracts, including local purchases, on behalf of the recipient in the framework of financing or grant agreements." - 30 September 1996

(5) "Procedure (…) 7. Delegation sends assessment report with comments to Unit IB-E/2. 8. Unit IB-E/2 endorses the contract award. 9. Contract is signed by contracting authority then by successful bidder. (…)"