Made in accordance with Article 3(5) of the Statute of the European Ombudsman[1]

The background

1. In July 2008, the European Commission and Iceland signed a Framework Agreement (the "Framework Agreement") on the rules for granting EU financial assistance to Iceland under the Instrument of Pre-Accession Assistance (IPA), in light of Iceland's status as a candidate country to the EU.

2. In June 2012, the complainant, a non-governmental organisation (NGO) based in Iceland and active in the field of lifelong education, signed a grant contract (the "Contract") with the European Commission. The object of the Contract was to implement an action aimed at increasing the employability of low qualified workers, partly financed through the IPA. The duration of the Contract was 36 months, starting in September 2012.

3. In December 2013, the Commission informed the complainant that, as a consequence of Iceland's decision to put on hold the accession negotiations with the EU, no assistance under the IPA would be granted to that country and the Contract would thus be terminated. The Commission invited the complainant to take part in a consultation procedure in accordance with the Contract.

4. The complainant objected, arguing that the Contract was a private agreement between the Commission and itself, subject to Belgian law and independent of the political decisions of the Icelandic government. The complainant believed that it had duly complied with its obligations thus far, and that the termination would be unlawful. Following a meeting and several written exchanges, in February 2014 the Commission informed the complainant that it would terminate the Contract in two months. All eligible expenses incurred up to that point would be reimbursed.

5. The complainant is of the view that this decision is unlawful, unfair and taken in bad faith. It therefore complained to the European Ombudsman, while keeping the project running despite the lack of financing from the Commission. Given that the complainant does not reside in the European Union, the Ombudsman could not deal with the complaint directly. She decided, however, to investigate the concerns raised in this case by means of an own-initiative inquiry.

The inquiry

6. The Ombudsman opened an own-initiative inquiry into the allegation that the Commission wrongly terminated the Contract on the basis of the Icelandic authorities' decision to put the accession negotiations on hold, while at the same time failing to use the amicable settlement procedure provided for in the Contract. Linked to this allegation is the claim that the Commission should resume making the financial contributions due to the complainant under the Contract.

7. In the course of the inquiry, the Ombudsman received the opinion of the Commission on the complaint and, subsequently, the complainant's observations in response to that opinion. The Ombudsman's friendly solution proposal takes into account the arguments put forward by the parties.

Allegation of wrong termination and failure to use the amicable settlement procedure, and related claim

Arguments presented to the Ombudsman

8. The Commission's position is that the objective of the IPA, as stated in Article 1 of the IPA Framework Regulation[2], is “… to assist the countries listed in Annexes I and II in their progressive alignment with the standards and policies of the European Union, including where appropriate the acquis communautaire, with a view to membership”. The Contract was awarded for the implementation of a project selected on the basis of its relevance to the accession process in Iceland, as provided for in the Financing Agreement with Iceland. Consequently, the Commission, which has the responsibility of ensuring the efficient use of EU funds, concluded that the Contract no longer had a "raison d'être". The Commission added that, when announcing their intention to put the negotiations on hold, the Icelandic authorities also formally communicated to it that technical assistance and cooperation under the IPA would be inappropriate in this context.

9. In accordance with Article 12.1 of the general conditions of the Contract[3], the Commission then held a consultation with the complainant and four other NGOs in a similar situation. The Commission, moreover, believed that it had carried out the consultation properly and that this was clear from the fact that it had reached agreements with the other NGOs. The complainant, however, did not engage in consultation, and thus the Commission terminated the Contract after giving two months' notice, in accordance with the Contract.

10. To the above, the complainant responded that the Commission could not lawfully put an end to a private law agreement between two parties on the sole ground of a third party's conduct, if the agreement does not explicitly provide for this possibility. The Contract contained no clause allowing the Commission to terminate it in the event that the negotiations between Iceland and the EU were not successful. In addition, the IPA Framework Regulation sees membership of the EU as the aim of, and not the condition for, granting assistance. Thus, in the complainant's view, the Commission's conclusion that the Contract became devoid of purpose as a result of the negotiations being put on hold is unwarranted.

11. The complainant also said that, contrary to the Commission's statement, the Icelandic authorities explicitly requested the Commission to continue financing the ongoing projects despite the suspension of the negotiations. This is logical in view of Article 23 of the Framework Agreement between the Commission and Iceland[4]. The Icelandic government, in an official letter, expressed its rejection of the Commission's decision to suspend funding to the ongoing projects.

12. Moreover, the complainant stated that it had been willing to reach a fair solution with the Commission. However, from the first meeting it became clear that the Commission's consultation took for granted that the Contract would be terminated and that the consultation concerned only its phasing-out of the project. The complainant was unable to attend the second meeting, which was scheduled with only one day's notice. In any event, the complainant was unwilling to acknowledge that the Commission could unilaterally put an end to the Contract and merely consult on its phasing-out. The Commission's so-called consultation was a process "dictated by one party".

13. All in all, the complainant considered that the Commission abused its position as the stronger party to the Contract and breached the Contract. The Commission continues to abuse its position by withholding payments for projects carried out prior to the termination letter; this makes the complainant's situation extremely difficult.

The Ombudsman's preliminary assessment leading to the friendly solution proposal

14. It is a basic principle of contract law, be it national or international, private or public, that agreements freely entered into are the law governing the relationship between the parties and need to be executed in good faith. In short, agreements must be kept (pacta sunt servanda). This is possibly the oldest basic principle of civil and international law and, in all likelihood, the most widely known and accepted.

15. Two contractual layers coexist in the case under examination. The first layer is made up of the agreements between the Commission and the Icelandic authorities (the Framework Agreement and the Financing Agreement); and the second, of the Contract between the Commission and the complainant. It is clear that, without the first layer, the second would not exist: the Contract was signed precisely in order to honour the obligations that the EU undertook towards Iceland, in particular, the obligation to financially assist Iceland in its "progressive alignment with the standards and policies of the European Union."[5]

16. However, as of the day it was signed, the Contract became the law governing the relationship between the Commission and the complainant, under the terms and conditions stipulated in it. Article 1(2) of the special conditions to the Contract sets out that the Commission's financial support will be granted "on the terms and conditions set out in this Contract, which consists of these special conditions and the annexes, which the Beneficiary hereby declares it has noted and accepted" (emphasis added). It is therefore clear that the parties saw the special conditions and the annexes as the only applicable provisions to their bilateral relationship. This is even clearer from Article 7 of the special conditions, which refers to "Other conditions applying to the Action" and which contains only technical provisions on interim reports and eligible costs.

17. The Ombudsman understands that the Commission might have intended to make the implementation of the Contract conditional on the continuation or outcome of the accession negotiations. However, contractual obligations cannot arise from intentions but from the conscious, informed and freely expressed will of both parties to the contract. Having carefully analysed all the documents mentioned in Article 1(2) of the special conditions, the Ombudsman has found nothing to suggest that the complainant ever "noted and accepted" such an intention, that is to say, that the parties ever agreed to that condition.

18. Taking into account that, in practice, EU-financed grants for external actions are based on the Commission's standard general conditions, that the special conditions are tailored to each specific case by its services, and that the Commission is, in any event, the stronger party in such agreements, the Commission could have very easily drafted the Contract so as to ensure that the duration of its obligations under the Contract would not be longer than the duration of those arising from the Framework Agreement with Iceland.

19. On the contrary, everything in the Contract seems to point to the Contract's having been signed, at least by the complainant, as a self-contained agreement, whose purpose is to financially support the action entitled: "Increasing employability of low qualified workers through the development of a skills recognition system in adult education"[6]. Annex I to the Contract describes that action in detail, and explicitly states that the action's overall objective is to improve the employability of the low-qualified workforce in Iceland, while its specific purpose is to increase the efficiency of adult education for this category of workers. Nowhere is it stated that this purpose is valid or worth pursuing only as long as the Icelandic government and the Commission (actively) continue the accession negotiations.

20. Even if the Contract ought to be interpreted in light of the broader context in which it was signed and of which both parties were aware, the Commission's position is still not warranted.

21. First of all, the purpose of the IPA assistance, as described in the preamble to the IPA Framework Regulation, is to assist candidate and potential candidate countries with a view to membership[7]. The Framework Agreement between the Commission and Iceland also refers to cooperation and assistance with a view to Iceland becoming a Member State[8]. This wording, together with the fact that the assistance may also be given to potential candidate countries, shows that the objective of actually becoming a member of the EU need not be immediate or entirely certain. As the Icelandic Ministry of Foreign Affairs rightly pointed out in its letter of protest to the Commission concerning the termination of the Contract, Iceland has not terminated the accession negotiations, but merely put them on hold. At the time the facts arose, Iceland remained a candidate country falling under the provisions of the IPA Framework Regulation.

22. It is therefore clear that the Commission's contention that the Contract could no longer be implemented effectively, and its subsequent decision to terminate it on this ground based on Article 12 are, as the Icelandic Ministry of Foreign Affairs put it, "untimely and in want of foundation in facts." The Contract could still be implemented. It could still achieve its objectives, described in paragraph 19 above. It could still contribute to the overall goal of the context in which it was signed, that is to say, bringing Iceland more into line with EU law "with a view to membership".

23. Second, the Commission and the Icelandic authorities had already agreed on what would happen should—for whatever reason—their Framework Agreement be terminated. In such a case, any assistance being provided would continue to be provided until the completion of the project in question[9]. The Commission argued that this is an irrelevant consideration as this provision is not applicable because the Framework Agreement is still in force. Such an argument is disingenuous and sidesteps the essential point that, precisely because the Framework Agreement is in force, the Commission is even more so obliged  to maintain the financial assistance being provided. It would indeed be ironic if a party to a contract were to commit itself to fulfil its obligations only in the event of the contract being terminated, but not while it is on-going or suspended.

24. In fact, the correspondence between the Commission and the Icelandic authorities concerning the suspension of the negotiations shows that Iceland was convinced that the financing of existing projects would continue. It also appears that, for quite some time, this was also the Commission's position; indeed, the Icelandic authorities thanked it in a letter for its "willingness to allow projects already underway to run their course".

25. The Ombudsman considers that the legal and contractual context in which the Commission and the complainant interacted did not allow the Commission to unilaterally abandon its financing obligations towards the complainant.

26. Nor does the Ombudsman share the Commission's view that the complainant failed to cooperate with it in good faith in seeking a solution to the impasse through consultations. It is clear from the file that the only solution the Commission ever envisaged in the consultation talks was to phase out the ongoing projects in Iceland, including the complainant's. To the extent that the Commission left no real room for discussions as regards the possibility to "effectively implement the Contract", and thus the need to terminate the projects, and given that there was no legal basis for the Commission to terminate them, the Ombudsman doubts whether that process can be considered "consultation" for the purpose of Article 12(1) of the Contract. The fact that other NGOs in similar situations reached an agreement with the Commission is a matter of their free will and choice, and can certainly not bind the complainant or be used to challenge the reasons for its position.

27. In any event, it is not the legal context alone which prevented the Commission from acting the way it did. Contracts create not only legal obligations, but also moral and social ones, especially when entered into by public authorities. By the time the complainant was made aware that the Contract would be terminated because of the suspension of the negotiations, almost half of the duration of the Contract had elapsed. It is perfectly reasonable to assume that, in that time, legitimate hopes were raised—in the complainant's social partners, its employees and, most importantly, the final beneficiaries—that the envisaged project would be completed.

28. The Commission is perfectly aware that accession negotiations are not a linear, smooth and predictable process. This process depends on countless political, social and democratic variables and, as a consequence, is hardly ever completed in a short time. It seems at the very least unfair, if not even abusive, to place the whole burden of the uncertainty of such a process, which is conducted between the Commission and national authorities, on the shoulders of a small NGO which has no say in that process. It is also unfair to expect that the financial costs of the political impasse in the negotiations should be borne by the intended final beneficiaries, that is to say, some of the most disadvantaged persons in Iceland. In this case, regardless of any legal or legalistic considerations, it is simply not enough for the Commission to cover only the costs incurred by the date of termination and walk away from the remaining losses.

29. In light of the above, the Ombudsman makes the preliminary finding that in this case the Commission's conduct was in breach of the Contract and unfair, thus causing damage to the complainant, other interested parties and the Commission's own reputation in a candidate country. This constituted an instance of maladministration. She therefore makes a corresponding proposal for a friendly solution below, in accordance with Article 3(5) of the Statute of the European Ombudsman.

30. In addition, the Ombudsman notes the statement of the complainant, made during this inquiry, that the Commission has not paid it the amounts due for actions carried out prior to the purported termination of the Contract. The Ombudsman expects the Commission to take a position on this statement and, should it be accurate, to take immediate action in order to settle the outstanding amounts.

The proposal for a friendly solution

Taking into account the above findings, the Ombudsman proposes that the Commission reconsider its position with a view to making all of the financial contributions that are due under the terms of the Contract until its completion.

 

Emily O'Reilly
European Ombudsman
4/11/2014

 

[1] Decision of the European Parliament of 9 March 1994 on the regulations and general conditions governing the performance of the Ombudsman's duties (94/262/ECSC, EC, Euratom), OJ 1994 L 113, p. 15.

[2] Council Regulation (EC) No 1085/2006 establishing an Instrument for Pre-Accession Assistance (OJ 2006 L 210, p. 82) as subsequently amended by Regulation (EU) 540/2010 and Regulation (EU) 153/2012.

[3] "If a party believes that the Contract can no longer be executed effectively or appropriately, it shall consult the other party. Failing agreement on a solution, either party may terminate the Contract by serving two months' written notice, without being required to pay compensation".

[4] Paragraph 2: "On termination of this Framework Agreement, any assistance still in the course of execution shall be carried out to its completion ..."

[5] Article 3(1) of the Framework Agreement.

[6] Article 1(1) of the special conditions to the Contract.

[7] Paragraphs 12 and 13 of the Preamble and Article 1 of the IPA Framework Regulation.

[8] Article 3(1) of the Framework Agreement.

[9] Article 23 (2) of the Framework Agreement.