BACKGROUND

1. Towards the end of 2020, the complainant was awarded a grant under the EU-funded Horizon 2020 programme aimed at supporting innovation in small and medium-sized enterprises (SMEs), which the complainant was at the time. The Executive Agency for Small and Medium-sized Enterprises (EASME) was responsible for managing grants under the programme, for which only SMEs were eligible.

2. In 2021, the complainant was bought by another company, losing its status as an SME. Following this, in May 2021, it informed EASME about its change of status.

3. EASME asked the complainant to formally submit the information in the dedicated online portal, which the complainant did at the end of June 2021.

4. Before doing so, the complainant asked about the consequences of its loss of SME status, stating its view that it considered it should still be eligible for the grant. The complainant took the view that it could continue to receive the grant despite no longer being an SME. It stated that it intended to continue to work on the project according to plan.

5. EASME replied that a beneficiary that ceases to be an SME can continue to be recognised as an SME if it ceased to be an SME through ‘natural growth’, but not if it ceased to be an SME due to takeover by, or merger with, another company. In such circumstances, the grant agreement would normally be terminated.

6. At the end of July 2021, EASME confirmed to the complainant in the dedicated online portal that the change of status had been formally recorded.

7. The complainant continued to work on the project.

8. In early October 2021, the complainant informed EASME that it had not received any more formal requests concerning the grant, and asked for advice on the next step. It pointed out that, in the meantime, it had received the regular requests for progress reports, and stated that it was responding to these in line with its obligations. It appeared that those regular progress reports had been sent to the complainant automatically from the dedicated online portal.

9. EASME immediately replied stating that the “formal procedure for termination of the grant was launched a while ago and you should receive a notification via the [IT] portal soon”. It added that “Due to an IT bug this was not taken into account and your regular reporting period was activated. Please disregard this activity and do not initiate your periodic reporting. Once the IT issue is solved, the reporting period module will become inactive.”

10. EASME indicated that the complainant would shortly receive the notification about the termination procedure, and that it would have the possibility to upload its observations on it in the online portal. EASME would examine any such observations and subsequently send the complainant its final decision. If negative, the dedicated IT system would launch a report module to allow the complainant to claim the eligible costs.

11. At the end of November 2021, EASME formally informed the complainant of its intention to terminate the grant agreement in light of the complainant no longer being an SME. The complainant submitted its observations a few days later.

12. In January 2022, EASME informed the complainant of its final decision to terminate the contract. The complainant exchanged correspondence with EASME on possible redress mechanisms, during which EASME indicated that the complainant could challenge the decision only through the Court.

13. The complainant then turned to the European Ombudsman.

The inquiry

14. The Ombudsman opened an inquiry into the decision to terminate the grant agreement and how EASME had managed the process to terminate the grant.

15. In the course of the inquiry, the technical and financial aspects of the project were closed.

EASME’s view that the contract should be terminated

Arguments of the parties

16. EASME considered that, once the complainant was no longer an SME, it had to terminate the grant agreement. To support its position, it referred to:

The Horizon 2020 Regulation[1]:

 “1. Only SMEs may apply for calls for proposals issued under the dedicated SME instrument [...]. They may cooperate with other companies, and with research organisations or universities.

2. Once a company has been validated as an SME, that legal status shall be assumed to prevail for the entire duration of the project, even in cases where the company, due to its growth, later exceeds the ceilings of the SME definition.”

The main provision of the grant agreement[2]:

“The EASME may terminate the Agreement if: (a) not applicable; (b) a change to the beneficiary’s legal, financial, technical, organisational or ownership situation is likely to substantially affect or delay the implementation of the action or calls into question the decision to award the grant.”

17. EASME considered, in summary, that the eligibility conditions must be met during the whole duration of the project, not only at the time of the evaluation and award of the grant. It emphasised that, according to the Horizon 2020 Regulation, only SMEs are eligible for grants under the relevant programme (which are referred to as ‘SME instrument actions’). The loss of SME status therefore calls into question the basis of the grant. EASME considered that this position is in line with one of the main objectives of the SME Recommendation[3], which is to ensure that support measures are granted only to those companies that genuinely need them. EASME also stated that the relevant Frequently Asked Questions[4] and the user guide[5] explain that exceptions to the requirement for SME status apply only in the cases where an entity loses its SME status due to growth resulting from “economic developments or economic conjuncture” (natural growth), and not when a company ceases to be an SME due to a takeover by, or merger with, another company.

18. The complainant took the view that the applicable rules provide for an assumption that, once a grant has been awarded to an SME, the SME status is - for the purpose of the grant agreement in question - in legal terms maintained throughout the project, and that hence there was no legal basis for terminating its grant agreement. The complainant also argued that the fact that it lost SME status during the project could not be a ‘change’ that would allow, under the grant agreement, for its termination. In its view, the provision in the grant agreement aimed to address instances where subsequently emerging information show that information provided about SME status at the time of the grant application was misleading or wrong, or information about intended imminent changes had been withheld.

The Ombudsman’s assessment

19.  In a case such as this one, the Ombudsman may examine whether the EU body in question acted in line with the legal provisions of the contract and other applicable legal provisions, as well as the principles of good administration. The Ombudsman’s role is not to mediate in contractual disputes.

20. In this case, the relevant provisions concerning SME status that were referred to by the Commission are not entirely clear. The wording “shall be assumed to prevail” in the relevant Article of the Horizon 2020 Regulation does not appear to establish a specific and separate legal rule. If it did intend to establish that an SME should always continue to be recognised as such also following the award of the grant, it is difficult to see that the second part of the provision would be necessary, as its purpose would be adequately achieved through the first part of the provision. The Ombudsman therefore cannot exclude the possibility that the overall purpose of the Article was to introduce the stated exception in cases of ‘natural growth’.[6]

21. In circumstances such as these, it is good practice to interpret the legal provisions with a particular emphasis on the purpose of the policy and legal framework in question. This is what EASME appears to have done in this case. As such, the Ombudsman finds how EASME interpreted the relevant provisions on the requirement for SME status to be reasonable.

22. There is also a lack of clarity in the relevant provision in the grant agreement, which states that the institution may terminate the agreement if “a change to the beneficiary's legal, financial, technical, organisational or ownership situation [...] calls into question the decision to award the grant” (emphasis added).

23. It is not clear why this provision does not more expressly and specifically state that the grant agreement may be terminated if the beneficiary no longer has the features that allowed it to be awarded the grant in the first place.

24. Despite this lack of clarity, the Ombudsman does not find it unreasonable that EASME relied on this provision to terminate the grant agreement. The purpose of the provision in the grant agreement is to enable EASME to terminate the agreement. The key point in the provision is that a “change to” certain aspects of the beneficiary in question has occurred. A “change” must be understood as a situation that evolves from one thing to another, and cannot be read as referring to the situation when the grant was awarded.

25. Based on the above, the Ombudsman finds that EASME’s decision to terminate the grant agreement does not amount to maladministration.

26. However, the Ombudsman makes a suggestion at the end of her decision, to encourage EASME to consider introducing clearer wording in the text of the grant agreement.

How EASME handled the change in the complainant’s status

The Ombudsman’s assessment

27. According to the Charter of Fundamental Rights, EU bodies should deal with matters “within a reasonable time”.[7]

28. It is clear that there were issues with both the timing of how EASME handled the decision to terminate the grant agreement and how it communicated this.

29. The fact that the complainant has lost its status as an SME is undisputed. From the moment the complainant informed EASME about this, it would appear that there was no doubt for EASME that the grant agreement would have to be terminated.

30. The complainant informed EASME at an early stage that it had serious doubts regarding the legal basis for terminating the agreement, and that it would continue to work on the project.

31. In response to the Ombudsman’s question why it took EASME several months to communicate to the complainant its formal intention to terminate the grant agreement, EASME stated that this was because there were “several verification steps” involved.

32. The Ombudsman’s inquiry showed that, from the date the complainant formally reported the change in the online portal, it took EASME three months to launch the grant termination procedure. After that, it took it another two months to formally inform the complainant of its intention to terminate the contract. This does not appear to be a “reasonable time” to deal with such a procedure.

33. A situation in which an institution expects that it will have to terminate a grant agreement is particularly serious. Such a situation must be handled with utmost care, which includes all the required technical, financial and legal checks. However, doing so should not take a disproportionate amount of time.

34. As mentioned above, EASME appears to have considered from the outset that it would have to terminate the grant agreement and that this was legally straightforward. Against this background, and as the complainant made it clear that it intended to continue working on the project and hence would continue to incur costs, EASME should have sought to deal with the procedure as quickly as possible. According to the applicable procedure, before the final decision to terminate the agreement was to be taken, there was a preliminary stage by which EASME informed the complainant of its intention to terminate the grant agreement. This preliminary stage did not involve any significant risks and, given EASME’s position was clear, this step should have been taken swiftly. EASME did so only at the end of November.

35. There appears to be no reasonable explanation why EASME took such a long time to handle the termination of the grant agreement, and in particular why it took such a long time to launch the termination procedure. This delay amounts to maladministration by EASME.

36. The Ombudsman sees no value in making a related recommendation, since there is no way to rectify this delay. However, the Ombudsman will make suggestions with a view to preventing a similar situation occurring in the future.

37. It is regrettable that the complainant continued to work on the project, and hence incurred further costs that ultimately were not covered under the grant. However, as noted above, EASME’s decision to terminate the contract does not appear to have been unlawful. This means that the question of whether the complainant should be compensated for the costs incurred can be examined only in light of general principles, rather than based on any legal entitlement.

38. The Ombudsman cannot exclude that an excessive delay in concluding a procedure such as the one in this case could be a cause for proposing to the institution concerned that it wholly or partly covers the costs incurred. However, according to EU administrative law, it is difficult to establish a right to compensation.

39. In this case, EASME informed the complainant at an early stage that it considered the complainant was no longer eligible to benefit from the grant agreement. While it clearly took an excessive amount of time for EASME to formally inform the complainant of its intention to terminate the agreement, the information provided was of a reasonably official nature. There is no evidence that EASME encouraged the complainant to continue to work on the project.[8]

40. On the basis of the above, the Ombudsman does not find that EASME has a duty to cover the further costs incurred by the complainant, wholly or partly.

41. However, it is clear that there was a series of regrettable communication issues, which contributed to the decision by the complainant to continue to work on the project unnecessarily.

42. In situations where EASME believes it is obliged to terminate a grant agreement, EASME has a duty of care to provide clear and accurate information in a timely manner to the grant recipients concerned. This is all the more important in situations such as that in this case, where the complainant indicated it intended to continue working on the project.

43. However, it appears that EASME does not have any clear policy or guidelines on how to communicate with grant recipients in situations where it believes that it will have to terminate a grant agreement.

44. Based on the correspondence reviewed by the Ombudsman inquiry team, EASME does not appear to have provided any advice to the complainant, for example regarding whether or not it should continue to work on the project. EASME also did not give the complainant any indication as to when it could expect to receive the final decision on the grant agreement.

45. Furthermore, it appears that, even after the grant termination procedure had been launched, the complainant continued to receive automated messages from the dedicated IT system requesting progress reports. While EASME acknowledged that this was due to a technical ”bug”, this exacerbated the communication problems at a crucial phase in the procedure. The Ombudsman will make a suggestion to EASME to prevent similar incidents.

46. Finally, the Ombudsman notes, in the final decision terminating the grant agreement, EASME failed to inform the complainant that, in addition to going to court, it could turn to the European Ombudsman. This was at odds with the obligation[9] on EU bodies to provide information about the available means of redress when issuing negative administrative decisions. The Ombudsman will make a related suggestion for improvement.

Conclusions

Based on the inquiry, the Ombudsman closes this case with the following conclusion:

There was no maladministration in EASME’s decision to terminate the grant agreement.

There was maladministration in how EASME handled the termination of the grant agreement, notably the delay involved and communication issues.

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

Suggestions for improvement

1. EASME should draw up guidelines for handling situations where a change during a project will most likely lead to the termination of the grant agreement. These guidelines should include indicative timeframes to ensure the procedure is handled within a reasonable time, notably that EASME informs the beneficiary as swiftly as possible of its intention to terminate the grant agreement. The guidelines should also cover what information to provide grant recipients regarding their work on the project, notably whether this should be discontinued or suspended. The guidelines should also cover the conduct of meetings that take place in relation to the ongoing or imminent termination procedures, notably the need to keep records of such meetings in the relevant file.

2. EASME should ensure that all negative decisions concerning grant agreements inform beneficiaries about all potential redress mechanisms, including the right to turn to the Ombudsman and when to turn to the Ombudsman as opposed to taking legal action.

3. EASME should review whether the provisions in grant agreements concerning possible termination could be drafted in a clearer manner.

 

Emily O'Reilly
European Ombudsman

Strasbourg, 23/06/2023

 

[1] Article 53 of Regulation 1290/2013 laying down the rules for participation and dissemination in "Horizon 2020 - the Framework Programme for Research and Innovation (2014-2020)",

https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32013R1290

[2] Article 50.3.1.

[3] Recommendation 2003/361/EC of 6 May 2003 concerning the definition of micro, small and medium-sized enterprise https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32003H0361

[4] See Frequently Asked Question 28, eic-faq-20200131.pdf (archive-it.org). https://wayback.archive-it.org/12090/20210412153524/https:/ec.europa.eu/easme/sites/easme-site/files/eic-faq-20200131.pdf

[5] User guide to the SME definition - Publications Office of the EU

https://op.europa.eu/en/publication-detail/-/publication/79c0ce87-f4dc-11e6-8a35-01aa75ed71a1

[6] The matter appears not to have been interpreted by the EU Court.

[7] Article 41 of the Charter of Fundamental Rights of the EU: https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex%3A12016P%2FTXT  

[8] The correspondence indicates that a meeting took place between the complainant and the project officer on 2 June 2021. However, there is no record of the content of that meeting.

[9] As set out in Article 19 of the European Code on Good Administrative Behaviour (https://www.ombudsman.europa.eu/en/publication/en/3510) and Part 3 of the European Commission’s Code of Good Administrative Behaviour (https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX%3A02000Q3614-20111116&from=EN#page=13)