The background to the complaint

1. The complainant is a company which builds, among other things, water storage tanks. On 9 June 2008, in the context of a EuropeAid project financed by the European Development Fund ('EDF'), the complainant concluded a contract with the Ministry of Finance and Economic Planning ('the Contracting Authority') for the supply and installation of pre-fabricated water storage tanks in a third country ("the country"). The contract was endorsed for financing from the EDF by the Head of the Delegation of the European Commission (now the EU Delegation, and hereinafter 'the Delegation') in the country. The Contracting Authority acted as the National Authorising Officer ('NAO') of the EDF. The contract contained several annexes, including one dealing with the General and Special Conditions.

2. The subject of the contract was the supply and installation of pre-fabricated water storage tanks in 39 towns in the central and western parts of the country. The amount of the contract, as amended by Addendum n° 1 of September 2008, was EUR 2 506 198.25. The contract performance period was 18 months from the date of signature of the contract (until 8 December 2009). The Contracting Authority ordered the supplies in three subsequent Order Letters ('OLs') which set out the performance deadlines:

- By virtue of OL 1 (as amended), the Contracting Authority ordered the installation of 23 water storage tanks (worth EUR 1 376 283.24). OL 1 provided for a performance period of 12 months from the date of signature of the OL by both parties (7 July 2008), that is until 7 July 2009.

- By means of OL 2 (as amended), the Contracting Authority ordered the installation of 15 water storage tanks (worth EUR 883 940.42). OL 2 provided for a performance period of 10 months from the date of signature of the OL by both parties (30 January 2009), that is until 30 November 2009.

- OL 3 concerned the installation of 4 water storage tanks (worth EUR 230 905.97). OL 3, signed on 29 June 2009, provided for a performance period of 5.3 months, expiring on 8 December 2009.

3. The contract was supervised by the "AT" Consortium (hereinafter the 'Consortium') with which the Contracting Authority had already signed a technical assistance contract on 16 January 2007, in order to ensure technical assistance to the small towns' water supply and sanitation project in Central and Western regions of the country. The Consortium had to supervise and monitor the execution of the contract concluded between the complainant and the Contracting Authority.

4. From the outset, the project sustained various delays, most of which - according to the complainant - were due to external factors. These delays were discussed in a meeting held on 22 May 2009 between the complainant, the Contracting Authority, the project manager (the Community Water & Sanitation Agency, 'CWSA')[2], the Consortium and the Delegation. The Consortium subsequently sent a letter to the complainant on 23 May 2009, asking it to explain in detail how it planned to organise the project, and to provide a detailed timetable of activities.

5. In a report of January 2010, the Consortium stated that the performance of all three OLs was significantly behind schedule. In October 2010[3], the Consortium drew up a report entitled "Contract Performance Evaluation" in which it analysed the execution of the contract and the external factors that could have justified, even partially, some of the delays. Its conclusions were as follows:

- In respect of the delay of 9 months for OL 1 (where the period of performance increased from 12 to 21 months), no valid justification could be found, and the delay was entirely attributable to the complainant's poor management. The Consortium therefore recommended to the Contracting Authority that it apply the maximum penalty of 10 % of the OL value.

- In respect of the delay of 6 months for OL 2, it was considered that the complainant was fully responsible for a delay of 2 months, and that the other 4 months could be justified by external factors, such as delays at customs (complex and time-consuming clearing processes at the port) and consequent delays. The Consortium therefore recommended to the Contracting Authority that it apply a penalty for 2 months' delay, or that it waive such penalty and consider that the complainant was already adequately sanctioned under OL 1);

- For the 4.5 months' delay incurred in respect of OL 3, the complainant was considered responsible for only one month's delay, since the external factors which gave rise to the delay incurred in respect of OL 2 equally affected OL 3. The delay in the execution of OL 3 had not created any delay or inconvenience for other contractors or the project as a whole. The Consortium therefore recommended to the Contracting Authority that it apply a penalty for 1 month's delay or that it waive the penalty considering that the delay in respect of OL 3 did not cause any delay or damage to the project as a whole.  

6. On 14 December 2010, a meeting to discuss the delays and the liquidated damages was held between the Delegation, the Contracting Authority, CWSA, the Consortium and the complainant. The complainant was invited to provide proof of the alleged external factors responsible for the delays, with a view to eventually reducing the amount of the liquidated damages.

7. The complainant provided evidence on 20 December 2010, and declared that the delays in question resulted in extra costs amounting to EUR 266 768.31, of which EUR 219 176.24 were due to external factors, and EUR 47 592.07 were attributable to the complainant.

8. Having analysed the information provided by the complainant, the Consortium concluded, on 12 January 2011, that the former had failed to convincingly prove that external factors had caused part of the delays affecting the three OLs.

9. On 13 January 2011, the Contracting Authority organised a meeting with CWSA, the Delegation and the Consortium. It appeared from the meeting that the complainant was not able to substantiate its statements that the delays were partially due to the global financial crisis and to related difficulties in obtaining pre-financing guarantees, to slower production cycles caused by the complainant's manufacturers and longer supply periods. As a result of this meeting, the Contracting Authority decided to impose the liquidated damages as had been previously discussed in the meeting of 14 December 2010, on the basis of the Consortium's report of October 2010.

10. On 5 May 2011, the Delegation informed the complainant that it had paid the outstanding amount due in respect of the project, whilst pointing out that the Contracting Authority had imposed the following liquidated damages in accordance with Article 21 ("Delays in performance") of the Special Conditions:

- a penalty of 10% of the value of OL 1 (EUR 137 628.32);

- a penalty of 6% of the value of OL2 (EUR 53 036.42);

- a penalty of 3 % of the value of OL3 (EUR 6 927.18).

11. The Delegation thus stated that the total liquidated damages were EUR 197 591.92. Given that the complainant was still entitled to a payment of EUR 249 080.23, the Delegation concluded that the resulting net payment due to the complainant was EUR 51 488.31.

12. On 6 June 2011, the complainant asked the Delegation to review its position, providing the following explanations.

13. As regards OL 1 (in respect of which a 10 % penalty was applied), the complainant pointed out that the delay of 296 days was caused by problems encountered i) in the engineering period, ii) in the fabrication of the tanks and their delivery to the site and iii) in the work on site:

With regard to point i), the complainant noted that, in a letter sent in September 2008, it had pointed out that it had to change the location of the water tanks because the villagers prevented it from starting work in the initial location, causing a delay of 99 days in the engineering work.

With regard to point ii), the complainant argued that the lack of tax exemptions generated a long clearing process with the customs authorities for all (10) shipments, causing an average delay of 120 days. The complainant stated that this issue was raised numerous times during the project, as early as in the monthly reports of September and December 2009, and in March, April, June, August and October 2010.

With regard to point iii), the two delays mentioned above led to a late start-up and mobilisation of the complainant's team, which, together with some exceptional circumstances (such as a conflict between two local communities about the installation of the water tanks), created a further delay of 18 days.

Thus, in the complainant's view, 237 days (99+120+18) out of the 296 by which OL 1 was delayed were not attributable to it but to external circumstances, and therefore, no penalty should have been applied.

14. As regards OL 3, the complainant stated that it completed the work in 8.5 months. This almost fell within the initially planned deadline of 8 months which, because of administrative constraints, was changed to 5.3 months in the contract.

15. The complainant further argued that there had been serious delays in the payment of several of its invoices (delays of 274, 244, 371 and 279 days). It stated that the non-fulfilment by the Delegation of its obligations for such a long period did not give it grounds to impose penalties on the complainant. The complainant mentioned again the extra costs it had incurred as a result of the delays, namely EUR 266 768.31 (of which EUR 219 176.24 were not attributable to it). Adding the liquidated damages to this amount resulted in additional costs of EUR 464 360.23. The complainant contended that this corresponded to 19% of the total contract amount, which was wholly disproportionate considering that it completed the contract satisfactorily and obtained the relevant acceptance certificate. The complainant thus requested that the liquidated damages would not be imposed.

16. By letter of 8 June 2011, the Delegation informed the complainant that the Contracting Authority's decision to impose liquidated damages had been taken in compliance with the relevant contractual provisions. The Delegation further stated that this position had also been recommended by CWSA and by the Consortium. It suggested to the complainant that it contact the Contracting Authority.

17. By letter of 30 June 2011, which was similar to its letter of 6 June 2011 to the Delegation, the complainant asked the Contracting Authority to review its position.

18. On 10 January 2012, the Contracting Authority replied, pointing out that the matter had been discussed in several meetings in 2011 and that the complainant's remarks had already been taken into account in the calculation of the penalty, which could not be further reviewed. As regards the 4 alleged delays in payment, the Contracting Authority replied that the 90-day period for payment provided for in Article 35(1) of the General Conditions is calculated from the date of receipt of the invoice by the NAO, and not from the date of submission of the invoice by the contractor. It also pointed out that the records held by the NAO and the Delegation indicated that the invoices had been paid within 90 days and that there had been no delay in processing them. The Contracting Authority added that, although the water tank works were delayed, this project had been successfully completed to the satisfaction of all stakeholders.

19. On 3 February 2012, the complainant again wrote to the Contracting Authority, pointing out that even if the first payment had been made within 90 days, such a long period still affected the punctual completion of the project.

20. On 12 April 2012, the complainant sent a further letter to the Contracting Authority again requesting that the liquidated damages be reconsidered and that the penalties simply be cancelled.

21. On 5 December 2012, the Contracting Authority confirmed its position. On 11 June 2013, the complainant complained to the European Ombudsman.

The inquiry

22. The Ombudsman opened an inquiry into the complaint and identified the following allegation and claim:

The decision of the EU Delegation to endorse the decision to apply liquidated damages to the complainant for delays is unjust and unfair, since the delays were mostly due to external circumstances outside the complainant's control.

The EU Delegation should reconsider the decision to endorse the decision to apply liquidated damages.

23. In the course of the inquiry, the Ombudsman received the opinion of the Commission on the complaint and, subsequently, the comments of the complainant in response to the Commission's opinion. In conducting the inquiry, the Ombudsman has taken into account the arguments and opinions put forward by the parties.

Allegation that the imposition of liquidated damages was unjust and unfair

Arguments presented to the Ombudsman

24. In its opinion, the Commission explained that contracts financed by the EDF in the context of the EU's external actions are managed by the Commission in a decentralised manner: the companies involved have contractual relations with the (national) Contracting Authority (in this case, the Ministry of Finance) only, whereas the Commission acts as the financing body. The Commission's commitment towards the Contracting Authority is subject to the rights and obligations set out in the ACP[4]-EC Partnership Agreement ("the Cotonou Agreement") and the Financing Convention. The Commission thus stated that its involvement, in the context of the execution of contracts concluded by ACP States and financed by the EDF, is limited to verifying that the financing conditions have been respected and that the procedural rules have been complied with.

25. As regards delay penalties, Article 35(2)(c) of Annex IV to the Cotonou Agreement[5] provides that "[t]he National Authorising Officer shall, during the execution of operations and subject to the requirement to inform the Commission, decide on: (...) (c) imposition or remission of penalties for delay". This is also clearly stated in Articles 20-21 of the General Conditions of the contract which provide that it is the Contracting Authority which decides on the imposition of penalties for delay.

26. The Commission argued that, although, in this case, it was not a contractual party but simply the financing body, its mission was to ensure compliance with the applicable rules and procedures.

27. The Commission stated that it appeared from the exchanges between the parties that the complainant had not executed its contractual obligations as agreed and that the execution of every OL was delayed. The complainant did not contest this. The Commission stated that the delays - which started from the very beginning of the project - were discussed in many meetings and exchanges of correspondence between the Contracting Authority, CWSA, the Consortium and the Delegation. Despite the provisions of Article 20 of the General Conditions, the complainant never asked for an extension of the deadline for the performance of the contract, as had been pointed out by the Delegation in the meeting of 13 January 2011, before the decision on the liquidated damages was taken by the Contracting Authority.

28. The Commission stated that the complainant had many opportunities to explain the external causes which could have justified, at least partially, the delay. The justifications invoked by the complainant were examined, and those that were considered grounded were taken into consideration in the calculation of the liquidated damages. The Delegation participated in several meetings in which the delays and their possible justifications were discussed. It was only after numerous meetings had been held, much correspondence had been exchanged, and the complainant's justifications had been considered, that the Contracting Authority took its final decision.

29. In its observations, the complainant argued that the Contracting Authority could not have taken a decision which had not been approved by the Delegation. Moreover, it was the Delegation which, in its letter of 5 May 2011, first announced that liquidated damages would be imposed.

30. The complainant stated that the performance period for OL 3 was reduced, without any logical explanation, to 5.3 months, whereas the complainant had insisted that it should be 8 months. It argued that several containers were detained in the port facilities because of obstacles in the tax clearance procedures, which led to a delay of three months. Also, on 25 May 2009, the complainant wrote to the Consortium about problems encountered as a result of a conflict between two communities concerning the location of the water tanks, which created one month's delay.

31. The complainant did not agree with the Commission's position that it had been given several opportunities to provide justifications for the delays. It stated that it became aware that the Delegation considered that its explanations were not sufficiently justified or clear enough from i) the Consortium report entitled "Preliminary analysis of [the complainant's] justification of delays" of 12 January 2011, and ii) the minutes of the meeting of 13 January 2011, which were both communicated to it in the course of the Ombudsman's inquiry. Had these documents been communicated to it earlier, the complainant could have justified the delays better.

32. The complainant stated that the Consortium had prepared two reports on the delays, one in October 2010 and another in January 2011. Both these reports, which the complainant learnt of in the course of this inquiry, had concluded that a considerable part of the penalties for OL 2 and OL 3 could be waived, since they would in fact constitute a double sanction. This is because the delay incurred in respect of OL 1 had an impact on OL 2 and OL3.

33. The complainant also said that the fact that the work had been carried out to the complete satisfaction of all parties was not taken into account during the meeting of 13 January 2011.

34. The complainant concluded that, had the above factors been taken into account, the penalties for OL 2 and OL3 would not have been applied and the penalty for OL 1 would have been reduced to 5%, resulting in a total penalty of EUR 68 814.16, and payment to the complainant of EUR 180 266.07 instead of EUR 51 488.31.

The Ombudsman's assessment

35. The Ombudsman notes that, although the decision to impose liquidated damages on the complainant was formally taken by the Contracting Authority, namely the Ministry of Finance of the country, in his letter of 5 May 2011 to the complainant, the Head of the Finance & Contracts section of the Delegation stated that "I have endorsed and forwarded to the paying agent in Brussels, a payment order for the transfer of a total amount of € 51 488.31 ..." (emphasis added), and that this payment order took into consideration the imposition by the Contracting Authority of the liquidated damages. Thus, by endorsing the imposition of the liquidated damages, the Delegation agreed with the penalties applied.

36. The Ombudsman points out that, although the Commission did not have a contractual relationship with the complainant, this case concerns the behaviour of the Commission in a contractual dispute. The Ombudsman takes the view that, in cases concerning contractual disputes, she is justified in limiting her inquiry to the examination of whether the EU institution or body involved has provided her with a coherent and reasonable account of the legal basis for its actions and why it believes that its view of the contractual position is justified. If that is the case, the Ombudsman's conclusion would be that her inquiry has not revealed an instance of maladministration. That conclusion would not affect the right of the parties to have their contractual dispute examined and determined by a court.

37. In this case, the Ombudsman must determine whether the Commission has provided her with a coherent and reasonable explanation for its decision to endorse the liquidated damages. In order to assess, in particular, whether that decision was just and fair, the Ombudsman has to examine two questions. These are: first, whether, when faced with delays, the complainant asked for an extension of the period of performance of the contract in accordance with Article 20 of the General Conditions and, if so, whether the period of performance was extended and, second, whether the imposition of the liquidated damages for delays in the performance of the contract was in accordance with Article 21 of the General Conditions and Article 21 of the Special Conditions.

i) The extension or non-extension of the period of performance of the contract

38. As regards the first question, the Ombudsman notes that Article 20.1 of the General Conditions ("Extension of period of performance") provides that "[t]he supplier may request an extension of the period of performance if he is or will be delayed in completing the contract by any of the following causes [which include force majeure and causes which are not due to the supplier's default]". In that case, Article 20.2 provides that "[t]he supplier shall, within 15 days of becoming aware that delay may occur, notify the supervisor of his intention to make a request for extension of the period of performance to which he considers himself entitled, and shall within 60 days thereafter, except where otherwise agreed between the supplier and the supervisor, deliver to the supervisor full and detailed particulars of the request, in order that such request may be investigated at the time".

39. In the complainant's case, the overall period of performance of the contract was 18 months, from 9 June 2008 to 8 December 2009, and the specific periods of performance for each OL were: 7 July 2008 to 7 July 2009 for OL 1, 30 January 2009 to 30 November 2009 for OL 2, and 29 June 2009 to 8 December 2009 for OL 3. Thus, any request(s) for an extension of the period(s) of performance had to be made by the complainant within these periods.

40. The Ombudsman however notes that the complainant has produced only one document concerning delays which dates from before the end of the period of performance of the contract, namely its letter of 25 May 2009 addressed to the Consortium (which according to Article 1 of the Special Conditions acted as the supervisor's representative). In that letter, without referring to any of the three OLs, the complainant informed the Consortium that the work on the water tank foundations in the town of Ntom Bethleem had been interrupted for nearly four weeks, because materials had been confiscated by villagers who also threatened to physically attack the complainant's workers. The complainant concluded that "[w]e are grateful to the dispositions that you take to solve this problem and especially that you will take on the schedule of the work". Since the town referred to is one of the 23 towns mentioned in OL 1 (namely OL 1-23 NB-01), the delay concerned the execution of OL 1. The Ombudsman notes that, although the complainant referred to a delay of nearly 4 weeks, it did not inform the Consortium of its intention to request an extension of the period of performance. Nor, more importantly, did the complainant deliver to the Consortium full and detailed particulars of a request for an extension within 60 days of the dispatch of its letter of 25 May 2009. The Ombudsman further notes that all the other letters from the complainant to the Consortium or to the Delegation concerning delays date from after the termination of the contract on 8 December 2009. Therefore, in the absence of any request for an extension duly made before the expiry of the period of performance[6], the Ombudsman considers that the original period of performance for the three OLs remained unaffected. The Ombudsman will thus consider whether, on the basis of the end dates of each OL, the endorsed liquidated damages were in accordance with the contractual provisions and fair.

ii) The endorsement of the imposed liquidated damages

41. Article 21.1 of the General Conditions ("Delays in performance") provides that "[i]f the supplier fails to deliver any or all of the goods or perform the services within the time period(s) specified in the contract, the contracting authority shall, ... be entitled to liquidated damages for every day or part thereof which shall elapse between the end of the period specified for performance, or extended performance under Article 20, and the actual date of completion, at the rate and up to the maximum amount specified in the special conditions". According to Article 21 of the Special Conditions, "[t]he liquidated damages per calendar day shall be set at 1/1000 (one thousandth) of the value of the relevant Order Letter per day of delay, up to a maximum of 10% of the value of the Order Letter concerned" (emphasis added).

42. The Ombudsman notes that the liquidated damages endorsed by the Commission[7] take into account only the delays for which the complainant was considered fully responsible. No liquidated damages were imposed for the 4 (out of 6) months' delay in performance in respect of OL 2 and for the 3.5 (out of 4.5) months' delay in performance in respect of OL 3 which were considered to be due to external factors.

43. The envisaged application of liquidated damages was set out for the first time in the Consortium's report entitled "Contract Performance Evaluation" of October 2010. Although the complainant stated in its observations that it never received a copy of that report (or of the later report of 12 January 2011), the minutes of the meeting of 14 December 2010 - for which the complainant was present - mention that a copy of the report was sent to the complainant. The complainant certainly received a copy of the minutes of the meeting of 14 December 2010. The complainant thus cannot convincingly argue that it did not know exactly what was expected from it because it did not receive a copy of the reports. In fact, it was made clear to the complainant in the meeting of 14 December 2010 that it had to produce clear evidence in support of its claim that the delay was due to external causes which could then possibly be accepted as constituting mitigating factors leading to a further reduction in the amount of the liquidated damages. Moreover, Article 20.2 of the General Conditions also made clear how delays (and a corresponding request for an extension of the period of performance) needed to be justified.

44. In reply to the request made at the meeting of 14 December 2010, the complainant sent to the Consortium its letter of 20 December 2010, in which it drew up several tables with brief explanations for the delays in the relevant columns. The complainant concluded that, out of the total 533 days by which all three OLs were delayed, it was responsible for 38 days only. The rest were due to external factors.

45. The Consortium assessed the above justifications provided by the complainant in its report entitled "Preliminary analysis of [the complainant's] justification of delays" dated 12 January 2011, and concluded that, at most, it could support the complainant in its request to waive a part of the penalties thereby generously interpreting the rules on penalties. On the basis of this assessment, the complainant's justifications for the delays incurred were discussed in a meeting held on 13 January 2011 between the Contracting Authority, the Delegation, the Consortium and CWSA. However, the Contracting Authority concluded that all possible mitigating factors had already been taken into account in the October 2010 report and that there was no reason to take into account additional ones. The meeting thus concluded that the liquidated damages would amount to 10% of the value of OL 1, 6% of the value of OL 2 and 3% of the value of OL 3. The conclusions of the meeting then served as a basis for the Delegation's letter of 5 May 2011 in which the liquidated damages were finally established and endorsed.

46. On the basis of above considerations and the evidence available in the file, the Ombudsman concludes that the Commission was correct in deciding that the imposition of the liquidated damages, as approved by the Delegation, was in accordance with the contractual provisions, and more particularly with Article 21 of the General Conditions and Article 21 of the Special Conditions.

47. Next, as regards the question whether the endorsement of the liquidated damages was in line with the principle of fairness, the Ombudsman notes that, although the project was delayed by 19.5 months in total, the liquidated damages corresponded to a delay of just 12 months. Thus, the complainant was not penalised for the entire period by which the project was delayed. The Ombudsman points out that in its correspondence with the Delegation and the Contracting Authority, the complainant relied on three main factors as a means to reduce further the amount of damages it was asked to pay for the delays incurred: (i) there had been delays in the payment of several of its invoices, (ii) it had already incurred extra costs as a result of the delays in question (of which EUR 219 176.24 were not attributable to it), and (iii) the performance period for OL 3 was 5.3 months instead of the 8 months envisaged initially. As regards point (i), the Ombudsman notes that the Contracting Authority had replied on 10 January 2012 that all invoices had been paid within 90 days and that there had been no delay in processing them. As regards point (ii), the Ombudsman notes that, in its report of 12 January 2011, the Consortium pointed out that the extra costs in question were attributed to the 9 months' delay allegedly caused by external factors, but the complainant had failed to establish that this delay had given rise to those costs. As regards point (iii), that is, the complainant's argument that the performance period for OL 3 was reduced from 8 to 5.3 months when the OL was signed, the Ombudsman points out that, had the complainant wished that the performance period be extended again from 5.3 to 8 months (in order not to incur liquidated damages), it could have made a request for an extension. However, as already stated, the complainant failed to do so. The Ombudsman therefore concludes that the endorsement by the Commission of the liquidated damages was fair.

48. On the basis of the foregoing, the Ombudsman concludes that the Commission has provided her with a coherent and reasonable explanation for considering that the endorsement of the liquidated damages was justified. As a result, there has been no maladministration by the Commission in this case.

Conclusion

On the basis of the inquiry into this complaint, the Ombudsman closes it with the following conclusion:

There was no maladministration by the Commission.

The complainant and the Commission will be informed of this decision.

 

Emily O'Reilly

Strasbourg, 09/03/2015

 

[1] Liquidated damages are penalties for late delivery.

[2] Whereas the Commission mentioned that Consortium AT was in charge of the supervision and the follow-up of the execution of the contract and that CWSA was the project manager, Article 1 ("Definitions") of the Special Conditions mentioned that CWSA was the project supervisor and that the AT Consortium was the project supervisor's representative.

[3] The parties often refer to this report as dating from November 2010. However, the report at the bottom of each page mentions "October 2010".

[4] African, Caribbean and Pacific Group of States.

[5] http://ec.europa.eu/europeaid/sites/devco/files/revised-cotonou-agreement-2005_en.pdf

[6] During the meeting held on 14 December 2010, the Delegation also pointed out that the complainant should have asked the Contracting Authority for extra time as soon as it anticipated a delay in the performance of the contract due to external factors.

[7] The liquidated damages were calculated on the basis of the recommendations made by the Consortium in its "Contract Performance Evaluation" of October 2010. The liquidated damages correspond to a penalty of 10% (namely the maximum possible, instead of 30 % corresponding to a 9-month delay) of the value of OL1 (EUR 137 628.32), a penalty of 6% (for two months' delay) of the value of OL2 (EUR 53 036.42), and a penalty of 3% (for 1 month's delay) of the value of OL3 (EUR 6 927.18).