Strasbourg, 7 September 2004

Dear Dr. G.,

On 28 October 2002, you lodged, acting on behalf of Global Electronic Finance Management S.A., a complaint against the European Commission. This complaint concerned Contract no. IST-1999-12274 relating to a project called “Financial Internet Working Group”. You requested that this complaint should be treated confidentially.

On 12 November 2002, the Ombudsman forwarded the complaint to the President of the European Commission.

On 26 November 2002 and 23 December 2002, you sent the Ombudsman further information (copies of a letter that you had received from and of a letter your lawyers had addressed to the Commission) in relation this complaint.

The Commission sent its opinion on 5 March 2003. The Ombudsman forwarded it to you on 6 March 2003 with an invitation to make observations, which you sent on 28 April 2003.

On 27 May 2003, I wrote to the Commission in order to invite it to comment on a further allegation you had raised. I also asked the Commission to allow me to have access to its file and to take the testimony of Mr Thierry Van der Pyl of its services.

On 10 June 2003, you sent me a copy of a letter that you had received from the Commission.

On 8 July 2003, my services inspected the Commission’s file. The following day, they took the testimony of Mr Van der Pyl.

The Commission sent its opinion on the further allegation on 10 July 2003. I forwarded it to you on 15 July 2003 with an invitation to make observations. On the same occasion, I forwarded to you a copy of the report on the inspection of the file that had been carried out on 8 July 2003. A copy of this report was also sent to the Commission on 9 July 2003.

On 17 July 2003, you sent me a copy of a letter that you had addressed to the Commission.

On 23 August 2003, you sent me observations on the Commission’s opinion on your further allegation.

A transcript of the testimony of Mr Van der Pyl was sent to you and to the Commission on 26 August 2003.

On 1 September 2003, you sent me observations on the testimony of Mr Van der Pyl.

On 29 October 2003, I submitted a proposal for a friendly solution to the Commission. You were informed accordingly in a letter sent the same day.

The Commission sent its opinion on this proposal on 23 December 2003 (in French) and on 8 January 2004 (in English). I forwarded this opinion to you on 8 and 14 January 2004 for your observations which you sent on 9 February 2004.

On 11 March 2004, I addressed a draft recommendation to the Commission. You were informed accordingly in a letter sent the same day.

On the occasion of a telephone conversation with my services of 15 March 2004, you pointed out that your complaint no longer needed to be treated confidentially and that you accepted that the draft recommendation could be published on my website.

The Commission sent its detailed opinion on the draft recommendation on 18 June 2004. I forwarded it to you on 23 June 2004 for your observations which you sent on 26 July 2004.

I am writing now to let you know the results of the inquiries that have been made.

 

THE COMPLAINT

The complainant, a company based in Brussels, submitted a project (the "IST project") called “Financial Internet Working Group” to the European Commission with a view to obtaining financial assistance under the specific programme for research, technological development and demonstration on a user-friendly information society (1998-2002), the so-called “IST Programme”. On 23 November 1999, the Commission informed the complainant that the project had been favourably evaluated and that a contract should be drawn up. Contract no. IST-1999-12274 (the "IST contract") was signed by the Commission on 3 May 2000. The project was (further to amendments made to the "IST contract") to run from June 2000 until September 2002, and the Community was to provide financial assistance of up to nearly EUR 450 000. According to the "IST contract", no advance payment was to be made by the Commission. The parties agreed that the "IST contract" was to be governed by Belgian law and that the Court of First Instance (and, in the case of an appeal, the Court of Justice of the European Communities) should have sole jurisdiction to hear any disputes concerning the "IST contract".

According to Article 8 of the "IST contract", the General Conditions set out in Annex II are an integral part of the contract.

On 21 May 2001, the complainant submitted cost statement no. 1 for the period from July 2000 until April 2001 to the Commission. On 10 August 2001, the Commission informed the complainant that this statement had been accepted and that the full amount that had been requested (EUR 96 525) would be paid to the complainant. The payment was made on 20 August 2001.

Cost statement no. 2 for the period from May until October 2001 was submitted to the Commission on 28 February 2002. On 8 April 2002, the Commission informed the complainant that this statement had also been accepted and that the full amount that had been requested EUR 112 229) would be paid to the complainant. The amount was paid on 11 April 2002.

On 27 May 2002, the complainant submitted cost statement no. 3 for the period from November 2001 until April 2002 to the Commission. On 24 September 2002, the Commission informed the complainant that the costs claimed had been accepted for an amount of EUR 137 674 (out of EUR 138 831 that had been demanded). The Commission noted, however, that due to a recovery order that had been issued for an amount of EUR 273 516 for project EP 26069 FIWG (the "Esprit project"), “no further payments will be made to [the complainant] for the moment as the Commission reserves the right to retain any further payment until the Court of First Instance has pronounced itself on [the complainant’s] position and the Commission’s position as to the recovery”.

On 30 September 2002, the complainant’s lawyers wrote to the Commission in order to call upon it to review its position. However, the Commission refused to do so.

According to the complainant, the reasons given by the Commission for blocking the payment were unrelated to the present project. The dispute regarding the "Esprit project" had resulted from a disagreement between the Commission and the complainant concerning the recommendations of Financial Audit for the project. The recovery order concerning this project had been forwarded to the complainant on 11 July 2001. On 13 February 2002, the complainant had brought an action (case T-29/02) challenging the recovery order, which was currently pending before the Court of First Instance.

The complainant stressed that the recommendations of Financial Audit, which included the intention to recover funds from the complainant, had been well known to the parties at the time of the award of the "IST contract". It added that prior to the start of the "IST project", it had sought specific clarifications on this subject. On 27 July 2000, the complainant wrote to the Commission to point out that it had received the final audit report for the "Esprit project" and that it would respond to this report in due course. The complainant noted, however, that it was "already clear that these conclusions are bound to materially affect" the conduct of the "IST project". It added that it had asked for a meeting with the Commission officials in charge of the project "[t]o discuss potential implications for [the IST project]". This meeting took place on 21 August 2000. On the Commission’s side, Mr T. Van der Pyl (head of unit) and Mr Roy (deputy head of unit) took part. The complainant was represented by Dr. G., its managing director. According to the complainant, the Commission officials had explicitly stated on this occasion that there would be no connection between the two projects and that the Commission would not attempt the recovery of the amounts claimed by the auditors under the "Esprit project" from the payments to be made under the “IST project”. The complainant pointed out that this assurance had been confirmed by the subsequent actions of the Commission, i.e. the payments for the first two cost statements. Both of these payments had been made after the recovery order regarding the "Esprit project" had been communicated to the complainant (on 11 July 2001), and the second payment had been made after the complainant had submitted its case to the Court of First Instance. This sequence of events clearly demonstrated, in the complainant’s view, that the Commission had explicitly and formally separated the two projects.

The complainant alleged that the Commission had acted arbitrarily and unilaterally, had abused its position of power and had not acted in good faith. It took the view that by withholding the payment, the Commission had deliberately sought to put the complainant in financial jeopardy. The complainant claimed that the Commission should immediately pay the sums approved under cost statement no. 3 and confirm that there was no contractual linkage between the IST project and the Esprit project.

THE INQUIRY

The Commission’s opinion

In its opinion, the Commission made the following comments:

Background

On 21 August 1997, the complainant signed a contract (the "Esprit contract") with the Commission under the Esprit programme. The duration of the project was 24 months, beginning on 4 July 1997.

In June 1999, the Commission carried out a financial audit for the “Esprit contract”, the results of which were sent to the complainant on 18 July 2000. The audit showed that the complainant had overcharged its own total costs submitted to the Commission by 372 %.

On 11 July 2001, the Commission sent the complainant a recovery order for the amount of EUR 273 516 relating to the "Esprit project".

On 1 March 2002(1), the complainant lodged an appeal concerning the "Esprit contract" (Case T-29/02) with the Court of First Instance based on Article 238 of the EC Treaty, with a view to obtaining payment of EUR 40 693 and challenging the recovery order of EUR 273 516.

On 11 September 2002, the complainant was placed in “category 4” of the “early warning system” of the Commission: “beneficiaries who are the subject of recovery orders issued by the Commission which exceed a certain amount and on which payment is significantly overdue” (Commission Communication SEC(97)1562/2 of 30 July 1997).

On 24 September 2002, the Commission informed the complainant that payment of the amounts relating to the third cost statement for the "IST contract" was suspended until the ruling of the Court of First Instance in Case T-29/02.

In reply to a letter dated 30 September 2002 from the complainant’s lawyers contesting the suspension of payment, the Commission confirmed that payments had been suspended. The relevant paragraph is worded as follows: “The Commission, in application of the general principle of the protection of European Community interests, withheld the amount due to the contractor [the complainant] ("IST project" 12274) pending the issue of the litigation on the open recovery ("Esprit project" 26069). Consequently, ‘The Commission may decide to proceed with the reimbursement of sums owed to the Community by way of set-off against sums of any kind due to the contractor concerned’, Art. 3.4, last § of the Annex II of the IST contract.”

Complaint

The Commission did not dispute that payment of the third cost statement was suspended for reasons unrelated to the performance of work under the "IST contract".

However, Article 3 (4), last paragraph of the General Conditions set out in Annex II to the "IST contract" specifically provided: “The Commission may decide to set off sums to be reimbursed to the Community against sums of any kind due to the contractor concerned.”(2) The words “of any kind” would serve no useful purpose if they were interpreted as being restricted to the IST contract alone. On the contrary, the article should be interpreted as being applicable to any situation not necessarily linked to the contract itself which, of course, meets the requirements of a set-off (claim or debt which is certain, of a fixed amount and due).

The complainant’s argument that during the meeting on 21 August 2000, the Commission had declared that no connection would be made between the "Esprit" and the "IST contracts", including a set-off, could not be accepted by the Commission. The Commission could not in fact have made such a declaration, which would have been contrary to the "IST contract", which specifically authorises a set-off in Article 3 (4), last paragraph, of Annex II to the contract. It could not have amended the terms of the contract on the basis of a simple verbal statement without this being duly recorded in writing and included in a report and subsequently formalised in an amendment to the contract.

The complainant argued that by making the first two payments under the IST contract, the Commission had wished to confirm implicitly that there would be no set-off between the "IST contract" and the "Esprit contract". It should be stressed, however, that the Commission had felt it necessary to take measures to protect the Community’s financial interests from the start of the "IST project" because of the problems arising from the "Esprit contract". Thus the Commission had considered it appropriate not to make any advance payment to the complainant under the "IST contract". The main reason for the suspension of payment was the risk that the complainant’s financial position might jeopardise effective recovery in the highly probable event that the Court should rule in the Commission’s favour.

Conclusion

The Commission did not think it had changed its position suddenly and with no valid reason. It actually suspended payment because of the need to ensure the protection of the Community’s financial interests. The Commission respected the provisions of the "IST contract", since the latter, authorising a set-off, a fortiori and implicitly also authorised the temporary and preventive suspension of payment with a view to set-off. It considered that it had not acted arbitrarily and unilaterally since it had applied the provisions of the "IST contract" of which the complainant had been aware. If the outcome of the litigation before the Court were to be favourable to the complainant, the Commission could award interest for late payment on the amounts suspended under the "IST contract".

The complainant's observations

In its observations on the Commission’s opinion, the complainant maintained its complaint and made the following further comments:

The Commission’s interpretation of Article 3 (4), last paragraph of Annex II to the "IST contract" was an overreaching extrapolation which was in manifest contradiction to the content of the article. Article 3 was entitled “The Community’s financial contribution” and described the procedures to be applied to the financial contribution of the Commission under the "IST contract". Article 3 (4), of which only the last subparagraph was quoted by the Commission, dealt with the situation set out in its first subparagraph:

“Where the total financial contribution due from the Community […] is less than the total amount of the payments referred to in paragraph 1, first subparagraph of this Article [which concerns the advance payment, periodic payments and final payment], the principal contractors concerned shall reimburse the difference, in Euro, within the time-limit set by the Commission in its request sent by registered letter with acknowledgement of receipt."

There could not be the slightest ambiguity that Article 3 (4) applied only and exclusively to the financial contribution of the Commission under the "IST project". The provision authorised the Commission to initiate a recovery for sums due to it under the "IST project", including set-off against any other payments (“sums of any kind”) due to the contractor by the Commission. However, the Commission explicitly and repeatedly recognised that under the "IST project", it owed payments to the complainant for costs effectively incurred and approved by the Commission. Thus, the provision quoted by the Commission referred to a hypothetical situation which did not occur in the present case and was simply not applicable.

The purpose of the meeting on 21 August 2000 had been to confirm that there was no linkage between the "IST project" on the one hand and, on the other hand, the "Esprit project", on which there was a substantive disagreement between the complainant and the Commission. In reply to a question from Dr. G. to confirm that payments under the "IST project" would not be affected by a potential recovery procedure under the "Esprit project", Mr Roy had stated that there would be no linkage between the two projects. If the complainant’s performance was to be in accordance with project objectives and Commission guidelines, then there would be no reason to withhold payments. According to the complainant, it was agreed to proceed with the project on that basis.

The complainant did not question the Commission’s right to place it in its early warning system. However, this placement was presumably related to the recovery order regarding the "Esprit project" sent on 11 July 2001. Following receipt of this order, sent by normal mail, the complainant had written to the Commission on 25 July 2001, requesting suspension of the repayment and a meeting to discuss and resolve outstanding issues related to the "Esprit project". The complainant never received a formal answer to this letter, which led it to submit its case to the Court of First Instance. On the other hand, the Commission had not pursued the recovery procedure. No registered letter or notice concerning the non-payment of the recovery order was ever received by the complainant. The “early warning” placement had been made three weeks before the final completion of the "IST project" and shortly before the contractual deadline for the payment of cost statement no. 3. This timing suggested that the main reason for the placement was to hastily establish an ad hoc justification for the suspension of the payment.

By withholding payments for work effectively performed, and for amounts which were significant for a small company such as the complainant, the Commission put the latter in a serious financial difficulty. This was in clear contradiction not only with the stated objectives of the Commission to support innovative high-tech SMEs, but even with the Commission Communication setting up the “early warning system” which recommended that “the commercial interests and the rights” of the companies concerned should be taken into account.

The complainant also pointed out that the Commission had in the meantime refused to pay the costs set out in cost statement no. 4 that had been submitted on 15 November 2002. According to the rules applicable to the contract, these costs should have been paid prior to 6 February 2003. Alternatively, the Commission ought to have informed the complainant of the reasons for not paying. In the complainant’s view, the Commission had thus chosen to ignore its contractual obligations under the "IST project". The complainant urged the Ombudsman to take account of this further development.

Further inquiries

After careful consideration of the Commission’s opinion and the complainant's observations, it appeared that further inquiries were necessary. By letter of 27 May 2003, the Ombudsman therefore asked the Commission to provide an opinion on the complainant’s further allegation according to which the Commission had, by omitting to pay the costs that had been claimed in cost statement no. 4, failed to comply with its contractual obligations. The Ombudsman also asked the Commission to comment on the complainant’s claim that the Commission should pay these costs. A copy of the complainant’s observations was forwarded to the Commission.

In the same letter, the Ombudsman asked the Commission to allow him to have access to its file and to take the testimony of Mr Van der Pyl.

Access to the file

On 8 July 2003, the Ombudsman’s services inspected the Commission’s file concerning the "IST contract". No minutes of the meeting of 21 August 2000 were found.

Taking of testimony

On 9 July 2003, the Ombudsman’s services took the testimony of Mr Van der Pyl. The witness made inter alia the following statements:

At the meeting of 21 August 2000, he and Mr Roy had told the complainant that the "Esprit project" was one project and the "IST project" another one. He had no recollection of any assurance that would have been given to the complainant and according to which the amounts due under the "Esprit contract" would not be recovered from the amounts to be paid back under the "IST contract". Otherwise he would have made a note in his notebook. The issues relating to recovery did not belong to his responsibilities. He would therefore never have made any assurances as to the way the recovery would be implemented. Neither he nor Mr Roy had ever committed themselves as to how matters would be handled in practice. That the complainant might have interpreted the discussion differently was another matter.

It was true that there were no minutes of the meeting. In retrospect, it would have been better to prepare such minutes. However, at the time he had considered the meeting to be a routine meeting with no particular significance.

The clause of the "IST contract" concerning set-off had not been discussed at the meeting. This provision was a new one which had been inserted in the "IST contract". No such provision had been included in the "Esprit contract".

The Commission’s further opinion

In its opinion on the further allegation and the further claim, the Commission made the following comments:

If the complainant’s views regarding set-offs were to be accepted, the fifth paragraph of Article 3 (4) of Annex II to the "IST contract" would be superfluous. The Commission was furthermore obliged to recover debts by way of set-off, pursuant to Article 73 of Council Regulation (EC, Euratom) No. 1605/2002 of 25 June 2002 on the Financial Regulation applicable to the general budget of the European Communities(3). According to this article, the “accounting officer shall recover amounts by offsetting them against equivalent claims that the Communities have on any debtor who himself/herself has a claim on the Communities that is certain, of a fixed amount and due.”

During the meeting on 21 August 2000, it was confirmed that the two projects ("Esprit" and "IST") were governed by separate contracts and that, in the context of the results of the audit regarding the "Esprit project", the results of the new project and the associated costs would be evaluated fairly and impartially. This did not mean that the Commission expressly stated that no offsetting would take place between the two projects.

Contrary to the complainant’s contention, the Commission’s decision to suspend payments did not contravene Commission Communication SEC(97)1562/2 of 30 July 1997. This Communication did not refer to the issue of whether, after signature of a contract, any decision on suspension of payment or set-off had to take account of the commercial interests and rights of the beneficiaries.

In its letter of 25 July 2001 informing the Commission of its objections to the recovery order in relation to the "Esprit project", the complainant had stated that the matter had been passed on to its lawyers. In a letter dated 26 July 2001, the complainant’s lawyers had reiterated the demand that the recovery order should be suspended. Following this letter, telephone conversations had taken place between the complainant’s lawyers and the Commission. The latter had confirmed once again that the results of the audit had not been called in question and had refused to organise a meeting with the lawyers. In a letter dated 9 August 2001, the complainant’s lawyers had stated that the recovery order had been contested by its client via an application to the Court of First Instance(4). On 30 August 2001, the Commission had acknowledged receipt of the letters of 26 July 2001 and 9 August 2001. It should be emphasised that the Commission had only suspended the ‘reminder procedure’ for the recovery order because the complainant refused to comply and because of the actions taken by the complainant’s lawyers.

Contrary to the complainant’s contention, it had been informed about the suspension of the payment relating to cost statement no. 4. In its letter of 24 September 2002, the Commission had pointed out that “no further payments” would be made for the moment. Following the complainant’s request for payment for cost statement no. 4, the Commission confirmed this in a letter sent on 3 June 2003(5).

The complainant’s observations

In its observations on the Commission’s second opinion and on the testimony, the complainant made the following comments:

The Commission’s second opinion further underscored the confusion between a “temporary suspension” and a “set-off”. In its letter of 28 September 2002 and in all subsequent correspondence, including the Commission’s second opinion, the Commission stated that its decision to withhold payment was a temporary suspension. However, the Commission’s second opinion also referred several times to a set-off. In any case, no set-off procedure was ever properly communicated to the complainant.

Under the applicable contract law, which is Belgian law, suspension (“exceptio non adimpleti contractus”) is only permitted in case of non-performance by the other party of a reciprocal obligation, i.e. an obligation arising out of the same contract or other legal relationship. Anticipating a set-off is not a sufficient ground for suspension of payments: if the obligations are not reciprocal, either the conditions for a set-off are met, and there is an automatic set-off, or the conditions are not met, and no suspension is allowed. In this case, the Commission explicitly recognised that the conditions were not met, to the extent that the claim of the Commission arising out of the "Esprit project" was litigated, at the initiative of the complainant, before the Court of First Instance.

According to the Commission, it had been confirmed during the meeting on 21 August 2000 that the two projects ("Esprit" and "IST") were governed by separate contracts and that the results of the new project and the associated costs would be evaluated fairly and impartially. These statements corresponded to the complainant’s recollection. In the complainant’s view, these statements were clear and unambiguous.

In a letter of 29 July 2003 concerning cost statement no. 4, the Commission informed the complainant that costs amounting to EUR 81 693 had been accepted.

Regulation No. 1605/2002 was mentioned for the first time in the Commission’s second opinion. Given that the regulation entered into force on 1 January 2003, it was not yet applicable when the Commission refused payment of cost statement no. 3 in September 2002.

Directive 2000/35/EC of the European Parliament and of the Council of 29 June 2000 on combating late payment in commercial transactions(6) made the penalty interest the key instrument in combating late payments. In application of this, the complainant’s lawyers had asked the Commission, in their letter of 30 September 2002, to pay interest on sums due(7).

The Commission was withholding the payments for an officially approved sum of EUR 219 367. To affirm that the absence of these payments did not put a small company such as the complainant in a difficult financial position was hypocritical.

The complainant concluded by submitting that there was no legal or contractual provision that justified the Commission’s decision to withhold or suspend the payment.

The meeting on 21 August 2000 had not been a routine project start-up meeting. Routine meetings on projects did not involve the head of unit and his deputy. The "IST project" officer at the time, Mr M., had not been invited to the meeting.

THE OMBUDSMAN'S EFFORTS TO ACHIEVE A FRIENDLY SOLUTION

After careful consideration of the opinion, the observations and the results of his further inquiries, the Ombudsman was not satisfied that the Commission had responded adequately to all the complainant's allegations.

The proposal for a friendly solution

Article 3 (5) of the Statute of the Ombudsman(8) directs the Ombudsman to seek, as far as possible, a solution with the institution concerned to eliminate the instance of maladministration and satisfy the complaint.

The Ombudsman therefore made the following proposal for a friendly solution to the Commission:

The European Commission could reconsider its refusal to pay the costs the complainant claimed in its cost statements nos 3 and 4.

This proposal was based on the Ombudsman’s preliminary conclusion that the Commission had not established that it was entitled to withhold payments.

The Commission’s opinion

In its opinion submitted in December 2003, the Commission made the following comments:

The last (fifth) paragraph of Article 3 (4) of Annex II to the "IST contract" permitted to set off sums “of any kind” that were due to the contractor against a claim under the contract in question. That was the reason why this provision was included in the rules relating to the Community contribution and to the arrangements for the reimbursement and recovery of sums received under the contract. Furthermore, if the possibility of setting off claims were to be limited to reciprocal claims under the same contract, it would in practice never happen, as in the case of most subsidy agreements it was only the Commission which in general was a debtor to participants.

Article 3 of Annex II appeared in all standard contracts entered into with a view to implementing indirect research activities under the 5th and in future the 6th framework programmes. It merely reflected Article 73 of the Financial Regulation (Regulation No. 1605/2002 of 25 June 2002).

In view of its duty to protect the Community’s financial interests and having regard to the principles of sound financial management referred to in Article 274 of the Treaty, the Commission preferred, as a precaution, to suspend the two payments under the “IST contract” in order to ensure recovery of the sums concerned in the event of a favourable outcome in case T-29/02.

This did not mean that it was not entitled to set off the amounts in the case in point. On the contrary, the Commission considered that the reciprocal claims here were certain, of a fixed amount and due, within the meaning of the Court’s judgment of 10 July 2003(9).

However, as the sum of EUR 273 000 claimed by the Commission under the “Esprit contract” was the subject of an appeal to the Court of First Instance, the Commission preferred to apply Article 3 (2) of Annex II of the “Esprit contract” which allowed it to take precautionary measures to protect its financial interests in the event of suspected fraud or irregularity and which read as follows:

“2. The Commission may, in the event of suspected fraud or serious financial irregularity on the part of a contractor, suspend payments and/or instruct the coordinator not to make any payment to such contractor. The latter shall remain bound by his contractual obligations.”

The decision to suspend payment was actually based on the conclusions of the audit report under the “Esprit contract”, which gave rise to the recovery order against the complainant. The Commission based its stance, quite legitimately, on the perception that the results of the audit were clear, and pointed to serious financial irregularities.

In the highly probable event of case T-29/02 being decided in the Commission’s favour, the complainant’s lack of financial strength could seriously jeopardise the Commission’s chances of recovering the sums due from the contractor. In this case, lifting the suspension of the two payments concerned, as requested by the Ombudsman, would certainly be detrimental to the financial interests of the Community.

The Commission could therefore only confirm its original position.

The complainant’s observations

In its observations, the complainant maintained its complaint and made the following further comments:

The judgment of the Court of Justice referred to by the Commission unequivocally validated the position the complainant had consistently pursued. The complainant had repeatedly and vigorously contested the claims the Commission had made under the “Esprit contract”. The Commission’s claims could thus not be regarded as being certain, of fixed amount and due, and therefore the conditions required for a set-off under Belgian law were not fulfilled.

The Commission’s reference to Article 3 (2) of the “Esprit contract” was a completely new claim. The provision cited by the Commission was only applicable within the “Esprit project”. Thus, if there had been a suspicion of fraud or irregularity under the “Esprit contract”, the Commission could have suspended payments under this contract. However, no payment under the “Esprit contract” had been suspended. The Commission’s new approach sought to recreate a link between the two projects, although the Commission had previously informed the complainant that the two projects would be dealt with separately. The alleged decision to base the suspension of payments due under the “IST contract” on Article 3 (2) of the “Esprit contract” was never communicated to the complainant or presented to the Ombudsman before December 2003.

There was a more basic problem with the Commission’s argument. The article quoted by the Commission was not part of the “Esprit contract”. Article 3 (2) of Annex II of the “Esprit contract” dealt with sub-contractors and had nothing to do with payments or their suspension(10). The article used by the Commission was part of the “IST contract”(11). This could not be a typographical error. The erroneous reference could only be construed as a deliberate attempt to mislead the Ombudsman by creating additional confusion between the two contracts. It should also be noted that Article 3 (2) of Annex II of the “IST contract” had never been mentioned in any correspondence to either the complainant or the Ombudsman.

The complainant concluded that the Commission’s response further illustrated the weakness of the Commission’s case and its persisting bad faith in dealing with the complainant. Therefore, the complainant respectfully requested the Ombudsman to make a final decision on this case.

THE OMBUDSMAN'S DRAFT RECOMMENDATION

The draft recommendation

On 11 March 2004, the Ombudsman addressed, in accordance with Article 3 (6) of his Statute, a draft recommendation(12) to the Commission. The draft recommendation was worded as follows:

The Commission should reconsider its refusal to pay the costs the complainant claimed in its cost statements nos 3 and 4.

The Commission's detailed opinion

In its detailed opinion, the Commission insisted that the last paragraph of Article 3 (4) of Annex II to the "IST contract"was applicable in the present case. The ratio legis of this contractual clause was, first of all, the need to protect the financial interests of the EU by providing the Commission with a genuine guarantee of payment. The Commission further argued that the principle of offsetting sums was now enshrined in and imposed by Article 73 of the Financial Regulation.

The Commission further argued that the right to offset its claim relating to the "Esprit contract" now derived from the new Financial Regulation and therefore directly from the Community legal order. It also submitted that the principles ensuing from the judgment in Case C-87/01 P allowed it to apply offsetting in the present case. In this context, the Commission argued that, on the basis of the new Financial Regulation, the concept of established certainty of a claim did not mean that the claim was uncontested but rather that it was not subject to any condition. In this context, the Commission pointed to Article 79 of the detailed rules for the implementation of the new Financial Regulation.

The Commission further submitted that the suspension of payments for which it had opted in the present case was advantageous to the complainant, since it would not take any action to enforce payment of its claim under the "Esprit contract" until the judgment in Case T-29/02 was rendered.

In the Commission's view, lifting the suspension of payments would certainly be detrimental to the financial interests of the EU, as the Commission did not have a reasonable expectation of being able to recover the sums due to it. However, as a compromise, the Commission could agree to annul its decision to suspend payments in exchange for a financial guarantee for the amount concerned. This would provide the Commission with a guarantee for the recovery of the sums due from the complainant in the event of a favourable outcome of Case T-29/02.

As regards Article 3 (2) of Annex II of the "IST contract", the Commission took the view that it was able to put forward new arguments to support its position. By referring to the said article, the Commission had wished to highlight the fact that the suspension of the payments concerned was provided for and permitted by the "IST contract" subject to certain conditions.

The complainant's observations

In its observations, the complainant deplored the fact that the Commission had refused to accept the Ombudsman's draft recommendation. It submitted that the Court's judgment in Case C-87/01 P clearly showed that an out-of-court settlement between claims governed by two separate legal orders could only take effect in so far as it satisfied the requirements of both legal orders concerned. In its view, only the rules of Belgian law could be taken into account in the case of a set-off. The complainant submitted that the Community law rules quoted by the Commission were thus not relevant.

The complainant concluded by requesting that the Ombudsman should make a final decision based on his draft recommendation.

THE DECISION

1 Introductory remark

1.1 The original complaint concerned the Commission’s refusal to pay the costs that the complainant had claimed in its cost statement no. 3. During the course of the inquiry, the complainant requested the Ombudsman also to consider the Commission’s refusal to pay the costs that it had claimed in its cost statement no. 4 that it had meanwhile submitted to the Commission. The Ombudsman subsequently asked the Commission to provide an opinion on this issue.

1.2 From the opinion the Commission provided in reply to this request, it emerged that the Commission refused to pay the costs claimed in cost statement no. 4 for the same reasons for which it refused to pay the costs claimed in cost statement no. 3. There is therefore no need to distinguish between these two aspects in the following considerations.

2 Refusal to pay amounts accepted by the Commission under the IST contract

2.1 The complainant, a Belgian company, alleged that by refusing to pay the costs it had claimed in its cost statements nos 3 and 4, the Commission had acted arbitrarily and unilaterally, abused its position of power and not acted in good faith. It claimed that the Commission should immediately pay the sums approved under these two cost statements. These cost statements relate to a contract between the complainant and the Commission that the latter signed on 3 May 2000 (contract no. IST-1999-12274, the "IST contract").

2.2 The Commission did not dispute that the complainant was entitled to receive the relevant amounts (EUR 137 674 and EUR 81 693 respectively) under the "IST contract" and that the payments had been suspended for reasons unrelated to the performance of work under the "IST contract". It submitted, however, that the complaint was not founded since it had suspended payments because of the need to ensure the protection of the Community’s financial interests. The Commission pointed out that on 11 July 2001, it had issued a recovery order for an amount of EUR 273 516 in relation to another project (EP 26069 FIWG, the "Esprit project") which the complainant had carried out for the Commission. In its opinion, the Commission referred to Article 3 (4), last paragraph of the General Conditions set out in Annex II to the "IST contract" in order to justify its position. This provision entitles the Commission, under certain circumstances, to set off sums to be reimbursed to the Community against sums owed by the Community. The Commission took the view that it had respected the provisions of the IST contract, since the latter, authorising a set-off, a fortiori and implicitly also authorised the temporary and preventive suspension of payment with a view to set-off. It considered that it had not acted arbitrarily and unilaterally since it had applied the provisions of the "IST contract" of which the complainant had been aware. In its opinion on the Ombudsman’s proposal for a friendly solution, the Commission also invoked what it referred to as Article 3 (2) of the “Esprit contract”.

2.3 The present complaint concerns the obligations arising under a contract concluded between the Commission and the complainant.

2.4 According to Article 195 of the EC Treaty, the European Ombudsman is empowered to receive complaints "concerning instances of maladministration in the activities of the Community institutions or bodies". The Ombudsman considers that maladministration occurs when a public body fails to act in accordance with a rule or principle binding upon it(13). Maladministration may thus also be found when the fulfilment of obligations arising from contracts concluded by the institutions or bodies of the Communities is concerned.

2.5 However, the Ombudsman considers that the scope of the review that he can carry out in such cases is necessarily limited. In particular, the Ombudsman is of the view that he should not seek to determine whether there has been a breach of contract by either party, if the matter is in dispute. This question could be dealt with effectively only by a court of competent jurisdiction, which would have the possibility to hear the arguments of the parties concerning the relevant national law and to evaluate conflicting evidence on any disputed issues of fact.

2.6 The Ombudsman therefore takes the view that in cases concerning contractual disputes it is justified to limit his inquiry to examining whether the Community institution or body has provided him 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 will conclude that his inquiry has not revealed an instance of maladministration. This conclusion will not affect the right of the parties to have their contractual dispute examined and authoritatively settled by a court of competent jurisdiction.

2.7 In the present case, and on the basis of the evidence available to the Ombudsman, it cannot be said that the Commission has put forward an entirely coherent and reasonable account of the reasons for which it believes that its approach is correct.

2.8 The Ombudsman considers that the complainant’s basic allegation is that the Commission acted unlawfully when it withheld the relevant payments.

2.9 In this context, the Ombudsman agrees with the Commission’s argument that the latter’s actions should be guided by the need to ensure the protection of the European Communities’ financial interests. The Ombudsman considers, however, that where the Commission has entered into a contract, good administrative practice requires that the Commission’s actions also have to be in conformity with the rules applicable to this contract.

2.10 The Ombudsman notes that the Commission relies on Article 3 (4), last paragraph of the General Conditions set out in Annex II to the "IST contract". This provision is worded as follows: “The Commission may decide to set off sums to be reimbursed to the Community against sums of any kind due to the contractor concerned.” As the complainant points out, however, Article 3 is entitled “The Community’s financial contribution”, and the provisions of the first four subparagraphs of paragraph 4 of this article deal with the situation where a contractor has received sums under the contract concerned that are to be reimbursed or recovered. It is difficult to assume that the last subparagraph of paragraph 4 should, as the Commission urges, cover a completely different situation, i.e. that the contractor has received sums under another contract that are to be reimbursed or recovered. Despite the arguments put forward by the Commission in its opinion on the Ombudsman’s proposal for a friendly solution and in its opinion on the draft recommendation, the Ombudsman remains unconvinced that this provision is applicable in the present case. In its second opinion, the Commission referred to Article 73 of Council Regulation (EC, Euratom) No. 1605/2002 of 25 June 2002 on the Financial Regulation applicable to the general budget of the European Communities(14). This provision deals with the recovery of amounts by the Community by way of set-off. However, given that neither the refusal to pay cost statement no. 3 nor the refusal to pay cost statement no. 4 were justified with reference to this provision, the Ombudsman considers that there is no need to ascertain whether this provision would at all have been applicable in the present case.

2.11 However, even if it were to be assumed that the Commission’s interpretation was correct, it should be remembered that the "IST contract" is governed by Belgian law. The Ombudsman does not dispose of sufficient information to determine which law is applicable to the claim the Commission derives from the "Esprit contract". However, this issue is of no relevance to the present dispute, given that the Court of Justice has clarified that an out-of-court set-off between claims governed by two separate legal orders can take effect only in so far as it satisfies the requirements of both legal orders concerned(15). Any set-off in the present case would thus have to be in conformity with Belgian law. The Community law provisions to which the Commission referred in its opinion on the draft recommendation are thus, as the complainant correctly observed, without relevance in this context.

2.12 Belgian law recognises three forms of set-off: set-off by agreement, judicial set-off and statutory set-off(16). Statutory set-off requires, in particular, that the two claims concerned are certain. A statutory set-off is precluded where the claim is the subject of a serious dispute(17). In a recent judgment, the Court of Justice came to the conclusion that the condition that the relevant claim must be certain “was clearly not satisfied” in the case to be decided by it, given that the contractor concerned had, “by various letters and at several meetings with the Commission’s services, disputed the very existence of the claim which the Commission claimed to have”(18). In the present case, the Commission itself noted that the complainant and its lawyers had demanded in several letters sent in July and August 2001 that the recovery order should be suspended. The Commission was also aware of the fact that the complainant intended to take its case to court and of the action that was introduced in February 2002 (Case T-29/02, pending before the Court of First Instance). In these circumstances, and considering the above-mentioned judgment of the Court of Justice, the Ombudsman considers that there are serious doubts as to whether the conditions requisite for a set-off by the Commission were fulfilled.

2.13 Even if it were to be assumed that the Commission had been entitled to proceed to a set-off in the present case, the fact remains that the Commission did not resort to such a possibility. Instead, the Commission informed the complainant that it had decided to withhold payments pending the outcome of the case before the Court of First Instance. In its observations on the Commission’s second opinion, the complainant has submitted what would appear to be strong arguments to show that such a withholding or retaining of payment is not allowed under Belgian law, the law of the contract, in the present case. Be that as it may, the Ombudsman considers that the Commission has in any event not explained on what basis its decision could be justified.

2.14 The only provision invoked by the Commission in the course of the present inquiry prior to the Ombudsman's proposal for a friendly solution was Article 3 (4), last paragraph of the General Conditions set out in Annex II to the "IST contract". However, and as discussed above, this provision only entitles the Commission, under certain circumstances, to proceed to a set-off. It does not allow the Commission simply to withhold or retain payments. The Ombudsman is not convinced by the Commission’s argument that this provision, authorising a set-off, a fortiori and implicitly also authorised the temporary and preventive suspension of payment with a view to set-off. A set-off extinguishes simultaneously two obligations existing mutually between two persons(19). If the Commission had proceeded to a set-off in the present case (always on the assumption that this would have been permissible under Belgian law), it would have recovered the debt it claims is due to it under the "Esprit project" (to the extent that it is covered by the sums due to the complainant under the "IST contract"). At the same time, its claim under the "Esprit contract" would have been extinguished (to the same extent). However, by proceeding as it did in the present case, i.e. by simply withholding payment under the "IST contract", the Commission both maintained its claim under the "Esprit contract" and retained the sums that were due to the complainant under the "IST contract". It would thus appear to have been in a more favourable position than it could have reached through a set-off. In these circumstances, the Ombudsman considers that there is no basis for an a fortiori argument.

2.15 In its opinion on the draft recommendation, the Commission argued that the suspension of payments for which it had opted in the present case was advantageous to the complainant, since it would not take any action to enforce payment of its claim under the "Esprit contract" until the judgment in Case T-29/02 was rendered. The Ombudsman is not convinced by this reasoning. In any event, the Commission's approach would have to be in conformity with the legal provisions applicable to the contract. The Ombudsman notes, however, that the Commission has not even tried to refute the complainant's view that such a withholding or retaining of payments is not allowed under Belgian law, the law of the contract.

2.16 In its opinion on the Ombudsman’s proposal for a friendly solution, the Commission invoked Article 3 (2) of the “Esprit contract”. As the Commission subsequently clarified, this has to be understood as referring to Article 3 (2) of Annex II of the "IST contract". The Ombudsman notes that this provision was not invoked by the Commission when it adopted its decisions to suspend the relevant payments. However, Article 253 of the EC Treaty provides that the decisions adopted by the institutions shall state the reasons on which they are based. According to the established case-law of the Community courts, the statement of reasons thus required must disclose in a clear and unequivocal fashion the reasoning followed by the institution which adopted the measure in question in such a way as to enable the persons concerned to ascertain the reasons for the measure and to enable the competent court to exercise its power of review(20). Given that the Commission did not invoke the said provision when adopting its decision to suspend payments, the Ombudsman takes the view that the legality of the Commission’s approach in the present case must therefore be considered in the light of the explanations provided by the Commission at the time when it decided to suspend payments under the “IST contract”. In any event, the complainant’s view that this provision would not be applicable in the present case does not appear to be unreasonable.

2.17 As to the second main issue raised by the complainant, and for the sake of completeness, the Ombudsman notes that after receiving the audit report for the "Esprit project", the complainant asked for a meeting with the Commission concerning the potential implications of this development for the "IST project". This meeting took place on 21 August 2000; both the head of unit and the deputy head of unit in charge of the project were present. According to the complainant, the Commission officials explicitly stated on this occasion that there would be no connection between the two projects and that the Commission would not attempt the recovery of the amounts claimed by the auditors under the "Esprit project" from the payments to be made under the "IST project". The complainant thus effectively argued that the statements of the Commission’s officials (and the Commission’s subsequent behaviour) created a legitimate expectation that the "IST project" would not be affected by the dispute concerning the "Esprit project". According to the case-law of the Community courts a legitimate expectation can only be assumed to exist if the administration has given “precise assurances”(21). In the light of his conclusions regarding the other aspects of the complaint (see 2.8 to 2.16 above), the Ombudsman considers that there is no need to take a position as to whether this condition is fulfilled in the complainant’s case.

2.18 For the same reasons, the Ombudsman takes the view that there is no need to consider the complainant’s contention that the Commission abused its position of power and did not act in good faith.

2.19 In view of the above, the Ombudsman takes the view that the Commission’s refusal to pay the costs the complainant claimed in its cost statements nos 3 and 4 is an instance of maladministration. A critical remark will be made in this regard.

3 Conclusion

3.1 On the basis of the Ombudsman's inquiries into this complaint, it is necessary to make the following critical remark:

Where the Commission has entered into a contract, good administrative practice requires that the Commission’s actions should be in conformity with the rules applicable to this contract. In the present case, the Commission has failed to explain on what basis it would have been entitled to suspend two payments (EUR 137 674 and EUR 81 693 respectively) due to the complainant. This is an instance of maladministration.

3.2 Article 3 (7) of the Statute of the European Ombudsman provides that after having made a draft recommendation and after having received the detailed opinion of the institution or body concerned, the Ombudsman shall send a report to the European Parliament and to the institution or body concerned.

3.3 In his Annual Report for 1998, the Ombudsman pointed out that the possibility for him to present a special report to the European Parliament was of inestimable value for his work. He added that special reports should therefore not be presented too frequently, but only in relation to important matters where the Parliament was able to take action in order to assist the Ombudsman(22). The Annual Report for 1998 was submitted to and approved by the European Parliament.

3.4 The Ombudsman notes that the present case concerns the duties of the European Commission in relation to a specific contract. He further notes that it is not apparent which action the European Parliament could take in order to assist the Ombudsman and the complainant in the present case. Given these circumstances, the Ombudsman concludes that it is not appropriate to submit a special report to the European Parliament.

3.5 The Ombudsman will therefore send a copy of this decision to the Commission and include a short summary in the annual report for 2004 that will be submitted to the European Parliament. The Ombudsman thus closes the case.

3.6 The President of the European Commission will also be informed of this decision.

Yours sincerely,

 

P. Nikiforos DIAMANDOUROS

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(1) The correct date is 13 February 2002 (cf. OJ 2002 no. C 118, p. 27).

(2) The wording provided in the Commission’s opinion (apparently a translation from the French) differs slightly from the text of the provision that was submitted to the Ombudsman by the complainant. The quotation is taken from the latter which appears to be the correct one.

(3) OJ 2002 no. L 248, p. 1.

(4) It should be noted that the letter of 9 August 2001 (a copy of which was submitted by the Commission) informs the Commission that the complainant ”will introduce” the case before the Court of First Instance.

(5) The reason given for withholding payment in the letter of 3 June 2003 is identical with the reason given for the earlier refusal to pay in the Commission’s letter of 24 September 2002.

(6) OJ 2000 L 200, p. 35.

(7) In this letter, the Commission had been asked to pay interest of 7 % per year, starting from 25 September 2002.

(8) Decision 94/262 of 9 March 1994 of the European Parliament on the Regulations and General Conditions Governing the Performance of the Ombudsman’s Duties, OJ 1994 L 113, p. 15.

(9)Judgment of the Court of Justice of 10 July 2003 in case C-87/01 P Commission v CEMR, paragraph 61.

(10) Excerpts from the relevant provisions were provided by the complainant as an enclosure to its observations.

(11) According to the text provided by the complainant, Article 3 (2) of Annex II of the ”IST contract” reads as follows: ”Where the Commission suspects fraud or serious financial irregularity on the part of a principal contractor, it may suspend payments and/or order the coordinator not to make any payment to that principal contractor. The latter shall remain bound by his contractual obligations.” As regards the textual differences between this text and the version quoted by the Commission see footnote 3 above.

(12) The draft recommendation is available on the Ombudsman's website (http://www.ombudsman.europa.eu/recommen/en/default.htm).

(13) See Annual Report 1997, pages 22 sequ.

(14) OJ 2002 L 248, p. 1.

(15) See the judgment of the Court of Justice of 10 July 2003 in case C-87/01 P Commission v CEMR, paragraph 61.

(16) Loc. cit., paragraph 44.

(17) Loc. cit., paragraph 54.

(18) Loc. cit., paragraph 63. The contractor in this case had also taken its case to court and had obtained a favourable judgment from a court of first instance in Belgium. The Commission had launched an appeal which was still pending at the time of the decision of the Court of Justice. The Court added that this fact ”confirms” that the contractor’s defence against the Commission was at least a serious one. The contractor’s success before the Belgian court would however not appear to have been the basis for the Court’s decision.

(19) Loc. cit., paragraph 59.

(20) See, for example, Case C-114/00 Spain v Commission [2002] ECR I- 7657 paragraph 62.

(21) Cf. Case T-113/96 Dubois et Fils v Council and Commission [1998] ECR II-125, paragraph 68.

(22) Annual Report for 1998, pages 27-28.