Dear Mr S.,

On 14 November 2000, you lodged a complaint with the European Ombudsman on behalf of the consultancy firm, "National Economic Research Associates" (NERA), against the European Commission. Your complaint concerned the refusal of the Czech Ministry of Finances to pay 104,000 € for part of the tasks your firm carried out for a Phare contract, allegedly following instructions from the Commission services responsible for the implementation of the Phare programme in the Czech Republic (Phare Prague), on the grounds that certain amendments to the original contract had not been properly notified.

On 29 November 2000, I forwarded the complaint to the President of the European Commission. I received the Commission's opinion on 2 March 2001. I forwarded it to you with an invitation to make observations. On 25 April 2001, I received your observations on the Commission's opinion. You wrote to me on 2 November 2001 asking for information on the Ombudsman's inquiry. On 14 November 2001, I requested further information from the Commission. I received the second opinion from the institution on 10 January 2002, which I forwarded to you, with a further invitation to make observations. On 13 February 2002, you sent me your observations.

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

THE COMPLAINT

According to the complainant, the facts were as follows:

The complainant works as a Senior Advisor in the National Economic Research Associates Inc (NERA), an international economic consultancy specialised in regulatory and competition issues. On 4 September 1998, NERA was awarded a contract for the development of new legislation in the field of energy regulation in the Czech Republic (contract No. CZ9703/0102/0301/0008) to be financed by the Phare programme, through the Czech Ministry of Finance (MoF). The contract was established on 2 November 1998 between NERA and MoF, as Contractor and Contracting Authority, respectively, for the benefit of the Czech Ministry of Industry and Trade (MIT).

As laid down in the contract, NERA was to provide the services described in the Terms of Reference (Annex A), using the personnel listed in the Breakdown of Prices (Annex D). The total amount to be paid was not to exceed 484,892 ECUs. Payments would be made by MoF, using the funds granted by Phare Prague, provided that the services had been performed to the satisfaction of MIT. Proper implementation of the project was to be monitored through a review group or steering committee made up by representatives from NERA and the Czech government (MIT, MoF). The complainant was required to prepare and submit to all parties concerned a monthly progress report to describe work developments.

Towards the end of 1998, MIT supported by the representatives of Phare Prague, Messrs Stephen Collins and Roman Gadea, expressed its concern for the inadequate structure of the project. At a meeting of the project’s review group in November 1998, it was requested that a higher proportion of local legal experts be employed. In the Spring of 1999, and as a result of the changes requested by the Czech authorities on the format and contents of the project (VZZ-type draft)(1), the complainant reported to the Review Group of 27 January 1999 that a reallocation of resources appeared necessary. MIT and Phare Prague endorsed these proposed changes. The situation was acknowledged by the complainant in a letter of 22 March 1999 to both, MIT and to Phare Prague, and implied a reallocation of tasks, including an increase in local expertise and a parallel diminution of the tasks initially assigned to NERA. They did not involve, however, any extra expense beyond the price agreed in the contract.

In the complainant's view, the reallocation of personnel inputs and the completion of the tasks were carried out in the understanding that the requests by MIT and Phare Prague had created a mutual legal obligation between the client and the funding agency. Even though Article 15 (3) of the contract required that amendments to it be agreed in writing only, there was insufficient time for any such addendum to be prepared and approved before further work was to be conducted.

The complainant explained that it was the parties' intention that such an addendum be drafted once the final project had been attained. In the course of a meeting on 27 July 1999, and with the project already completed, the complainant pointed out that MIT had agreed that an addendum to the contract should be submitted, so that the changes in the allocation of work for the project could be reflected. The proposed addendum was subsequently presented to the Czech authorities and to Phare Prague on 26 August, and 9 September 1999. The addendum did not exceed the specified budget but simply amended the hours spent by various personnel.

On 15 September 1999, the contract addendum proposed by the complainant was rejected by Phare Prague allegedly on the grounds that it did not correspond to Phare rules. The complainant pointed out that, at the time, they were unaware of the content of the rules Phare was referring to.

On 28 September 1999, MoF expressed the same opinion. It suggested, however, an alternative solution whereby the Contracting authority would submit a further addendum to Phare Prague on NERA's behalf, together with an explanatory note. MoF set forth the addendum on 14 October 1999. This initiative was rejected by Phare Prague at the end of December 1999 on the grounds that it involved the approval of retroactive changes to the original contract.

As a result of this situation, the complainant's invoice for the last segment of the project (invoice No. L1276) for an amount of 104,000 EUR was rejected by the Commission and still remains outstanding.

In summary, the complainant alleged that Phare Prague,

1) failed to inform him that any change to the contract had to be made through a contract addendum, which should have been previously approved by the Czech Ministry of Finances.

2) failed to include any reference to any possible change of the contract either in the Service contract itself or in the Phare General conditions.

3) acted unfairly and with abuse of power by directing the Czech Ministry of Finances to reject the payment of services provided by his firm to the Czech Ministry of Industry and Trade.

Accordingly, the complainant claimed that the Commission should authorise the payment of the remaining 104,000 EUR, as well as the interests on that sum, and the legal costs resulting from this dispute.

THE INQUIRY

The Commission's opinion

In its opinion, the Commission first gave some background information on the operation of the Phare programme, and the role of its different actors. The institution explained that the programme is implemented on a decentralised basis, which means that the Czech authorities were responsible for tendering, contracting and payments, whilst the Commission Delegation remained responsible only for the supervision of the process, having to endorse any dossier over 50 000 Euro prior to its implementation.

The institution explained that only the Central Financing and Contracting Unit (CFCU), based at the Czech Ministry of Finance (MoF), and the complainant were parties to the contract. The Commission Delegation in Prague therefore was not a part of it.

In respect of the complainant’s first and second allegations, the Commission pointed out that Article 15 of the contract clearly stipulated that any changes had to be confirmed in writing. This obligation was in line with the criteria laid down in Article 46 of the General Conditions of the contract (Annex E), which was an integral part of the original contract. As for the complainant’s third allegation, the Commission expressed its belief that its Delegation in Prague had not acted unfairly nor had it abused its power. On the contrary, it had acted in accordance with the terms of the contract.

The Commission stated that any potential modification of a contract had to be presented for approval in advance (prior to implementation) to the Delegation, via the CFCU, in writing as a side letter and/or an addendum depending on their significance. It stated further that in the case of an addendum, no action linked to the proposed adjustments could take place before the written and signed approval by the Delegation was granted. Any retrospective endorsement was strictly prohibited. The Commission pointed out that even if the Delegation representatives had been orally informed of proposed changes in the course of a meeting or otherwise, any changes to the relevant contract should have been formalised by an official endorsement in writing by the parties concerned before work was to be carried out.

The Commission explained that in the past and only in a few exceptional cases, it may have accepted addenda with minor modifications submitted a week or two late. Nevertheless, the existence of such exceptions could not justify NERA not following the rules. It pointed out that whereas some small leeway may have existed in the past, it was never on the scale that NERA requested: the addendum in question had been submitted over three months late and involved changes worth a substantial amount of money.

The Commission indicated that its Delegation had been aware that NERA proposed to re-allocate the budget. Still, it awaited a written request for amendment, as it was foreseen in the rules. It did not know, however, that changes had actually been carried out until it received the actual addendum, several months after it had been informed of the proposal. In contrast, the Czech MIT had certainly had timely knowledge of the changes, but apparently failed to insist on the adoption of an addendum before the work commenced.

The Commission concluded by stating that MIT was only the beneficiary institution and their acceptance and appreciation of NERA’s work had no bearing on the wording of Phare rules on contracting. MoF took the view that it could not pay the amount of 104.000 EUR because it involved work which was not included in the relevant contract and no corresponding variations to the contract had been legalised.

The complainant's observations

In his observations, the complainant repeated the arguments put forward in his complaint, and contested some of the statements made by the Commission in its opinion.

He agreed that the parties to the contract were NERA and the Czech MoF, although pointed out that Phare Prague had been thoroughly involved in the administration of the project at all times.

NERA admitted that Article 15 (3) of the Service Contract required all changes to the contract to be made in writing and signed by the parties. However, it underlined that there was insufficient time to prepare an addendum to the contract due to the deadline imposed by Phare Prague and MIT. The complainant insisted that during the meeting of 8 April 1999, Phare Prague had requested the reallocation of personnel resources, but did not indicate that an addendum to the service contract would be necessary before any work could be done.

He concluded by stating that NERA had acted, at all times, in good faith. At the request of Phare Prague, he stated, resources to the project had been reallocated despite the fact that this change resulted in a loss of revenue to NERA. The work had been completed within the strict timetable laid down by Phare Prague and MIT which meant that NERA was unable to produce the necessary contract addendum. The complainant believed that Phare Prague was seeking to rely on this formality to avoid paying him fees for work carried out on Phare's request.

FURTHER INQUIRIES

In view of the available information, the Ombudsman requested further details from the Commission concerning the allegations made by the complainant. In a letter dated 29 November 2001, the Ombudsman asked for the following information:

1 Did Phare Prague request at any time the modification of the project carried out by NERA? Did it suggest that NERA's personnel resources working in the project be reallocated?

2 If so, what was the time foreseen by Phare Prague for these changes to take effect?

3 Did NERA inform Phare Prague in writing of the proposed changes it intended to introduce among its personnel working in the project?

4 If so, what was the follow-up given by the Commission services to such written communication?

The Commission’s second opinion

In its second opinion, the Commission confirmed its previous statements, and replied to the questions put by the Ombudsman.

1. Request by Phare Prague: The Commission underscored that Phare Prague had not requested the modification of the project carried out by NERA. The Commission Delegation in Prague had never suggested either the modification to the contract or that funds be reallocated. However, the institution explained that its Delegation had been ready to examine a formal request by NERA for an addendum to the initial contract and could have approved it, if the properly justified addendum had been submitted on time and according to Phare rules.

2. Time for the implementation of changes: The Commission Delegation in Prague expected that, if some changes were to be required and approved by the beneficiary, they would have first to be formalised, in accordance with the contract and with Phare rules. In that respect, the Commission added that no specific timetable had been foreseen.

3. Information given to the Commission: The Commission pointed out that in September 1999 NERA had informally inform its services of the proposed changes, through a copy of the letter addressed to the Czech beneficiary. Since the Summer of 1999, the Commission Delegation in Prague had been indirectly informed about the intention of the complainant to propose some changes to the contract, but only in September 1999 did NERA formally request such changes.

The Commission described the chain of events which followed the complainant’s request. Thus, on 9 September 1999, NERA made this request to both the Czech CFCU and MIT with a copy to the Commission Delegation. On 15 September, MIT rejected this proposal and on 28 September 1999, the Czech CFCU made a very clear technical answer to NERA’s proposal, indicating the exact procedure to be followed. The above letter of the CFCU underlined the wrong interpretation made by NERA about the possibility to reallocate resources without prior authorisation, and warned that no retroactive modification of the contract could be accepted.

A new proposal was sent by the complainant on 11 October 1999 and was forwarded to the Commission Delegation in Prague for comments and/or approval on 14 October 1999. The Commission explained that, in the meantime, the proposed changes had been apparently carried out before its endorsement of the addendum had been obtained.

4. Follow-up: The Commission Delegation provided a detailed answer to the Czech CFCU on 28 December 1999, requesting additional elements of clarification and some changes to NERA’s proposal. The complainant sent a letter to the CFCU on 12 January 2000 which only partially met the above requirements, as was indicated in a written response by the Commission Delegation in Prague of 20 January 2000.

Even though, the Commission answered only in late December 1999 to the first proposal of addendum made by NERA, the Czech CFCU, in its letter of 28 September, had already warned NERA that the approval of this addendum could not be expected before November at the earliest. The Commission regretted the delay in answering, but expressed that this delay was not at the origin of the problem with the complainant.

The complainant’s observations on the Commission’s second opinion

In a letter dated 13 February 2002, the complainant expressed his disagreement with the arguments put forward by the Commission in each of the questions raised by the Ombudsman.

1. Request by Phare Prague: The complainant stressed that, contrary to what was sustained by the Commission, Phare Prague had specifically requested the reallocation of resources at the meeting held on 8 April 1999. This request was reflected in the terms of Mr Brychta’s letter of 20 April 1999, which had been copied to Messrs Collins and Gardea of Phare Prague. The Commission had failed to address the discussions at the 8 April meeting, and all the related communications.

The Commission referred to Mr Collins’ letter of 29 March 1999 as evidence that Phare Prague did not request the modification of the contract. However, Mr Collins’ letter only noted that Phare Prague was not prepared to increase the allocated budget. NERA did not claim to be entitled to more than the allocated budget.

2. Time for the implementation of changes: In view of the complainant, Phare Prague had requested that the contract be changed, as it was made clear to NERA by all the parties involved before, during and after the 8 April 1999 meeting. Phare Prague also conveyed the idea that these changes were extremely urgent, and therefore had to be carried out before 30 June 1999, which was the deadline for the production of the draft "VZZ". This aspect had been acknowledged in Mr Collins' letter of 29 March 1999.

For the complainant, it was clear to all parties concerned, including Phare Prague, that the reallocation would take place immediately, so that the project could be completed in time. This was clear from Mr Francis’ letter to Mr Brychta on 23 April 1999, which detailed all relevant reallocations of personnel. Mr Brychta was Director of the Energy Policy Department at the Phare Management Unit at MIT. The complainant believed that he should have been in regular contact with Phare Prague.

3. Information given to the Commission: The complainant contested the Commission’s view that it had only been informed of the changes introduced in the contract in September 1999. He referred to a number of instances in which the Commission had received indications of the proposed reallocation of resources, namely:

- the inception meeting on 23 November 1998;

- the January, March and April 1999 Monthly Progress Reports;

- the letter from the complainant to Mr Kacvinsky of MIT on 22 March 1999 copied to Mr Gardea of Phare Prague. Phare Prague had replied to this letter on 29 March 1999, even though it made no reference to the reallocation of resources, or to the need for a previous addendum to the original contract;

- the meeting held on 8 April 1999;

- the exchange between Mr Brychta of MIT (letter of 20 April 1999) and NERA (23 April 1999).

4. Follow-up: The complainant explained that despite all the indications mentioned above, Phare Prague did not comment or object to this correspondence and documentation. Having received the contract addendum submitted by the complainant, the institution’s reply of 28 December 1999 did not state that the addendum was a breach of the Phare rules or the Contract, but simply requested further clarification. As for the early warnings and friendly recommendations made by the Commission, the complainant pointed out that these statements were not supported by the documentation. He pointed out that following the 8 April meeting, there was no letter, fax, email, telephone call or other communication from Phare Prague in relation to a contract addendum until the Autumn of 1999.

THE DECISION

1 Information on formalities to change the contract, references to be included in the Service contract or in the Phare General conditions

1.1 The complainant alleges that Phare Prague failed to inform him that any change in the contract had to be made through a contract addendum, which should have been approved previously by the Czech Ministry of Finances (MoF). He also stated that Phare Prague failed to have any reference to the possible changes to the contract included either in the Service contract itself or in the Phare General conditions.

1.2 The Commission pointed out that the contract clearly stipulated in its Article 15 that any changes to it must have been confirmed in writing. This obligation was in line with the criteria laid down in Article 46 of the General Conditions (Annex E), which was an integral part of the original contract. The Commission also explained that the parties to the contract were the Central Contracting and Financing Unit (CFCU), based at the Czech Ministry of Finance (MoF), and the complainant (NERA). Thus, the Commission was not a contracting party, even though it remained responsible for the supervision of the process.

1.3 The complainant enclosed with his original complaint an extensive file with several documents. Section 3 of the file included the Phare Service Contract signed by the complainant on 2 November 1998(2), as well as six different annexes. The contract was established between the government of the Czech Republic, represented by its Ministry of Finance (MoF / CFCU) as the Contracting Authority, and the complainant (NERA) as the Contractor.

The contract was to be composed of the service contract and six annexes, which formed an integral part of it, as laid down in Art. 15 (1). Annex A contained the Terms of Reference. Annex E included the General Conditions for Service Contracts financed from Phare/Tacis funds. Annex D referred to the Breakdown of prices, and included the fees and allowances to be paid to the different parties and sub-contractors to the contract on the basis of their estimated time involvement in the project.

Art. 15 (3) of the service contract reads:

"Any amendment to this Contract must be agreed to in writing".

Art. 46 of Annex E to the Contract (General Conditions for Service Contracts financed from Phare/Tacis funds) states that:

"The provisions of the Contract and the annexes thereto may be amended or supplemented only by means of a supplementary agreement signed by each of the parties or their duly authorised representatives. All communications relating to the Contract shall be in writing".

1.4 The Ombudsman notes that, as laid down in Art. 1 (1) of the service contract,

"[...] the Contractor shall carry out the tasks described in the Terms of Reference (Annex A) [...] in accordance with the terms of this Contract and its Annexes".

The terms of the contract and its annexes stated in a clear and unambiguous way the formalities which were needed before any amendment to the original contract service could take effect. The complainant therefore should have known of these formal requirements and their implications, without having to be reminded of their content by the other party to the contract, or by the Commission services.

The Ombudsman therefore considers that there appears to be no maladministration as regards this aspect of the case.

2 The Commission's refusal to accept payment of part of the work undertaken by the complainant

2.1 The complainant has sustained that he modified the allocation of personnel resources included in Annex D of the service contract, following the request made by Phare Prague in the course of a meeting held on 8 April 1999. Because of the urgency of the work to be carried out, the complainant has asserted that he was unable to submit a contract addendum and await the Commission's approval. In his view, Phare Prague is relying on a formal issue to avoid paying for work he has carried out at Phare's request.

The complainant therefore alleges that the Commission acted unfairly and with abuse of power by directing the Czech Ministry of Finances (MoF) to reject the payment of services provided by the complainant's firm to the Czech Ministry of Industry and Trade (MIT). Accordingly, he claims that the Commission should authorise the payment of the remaining 104,000 EUR, as well as the interests on that sum, and the legal costs resulting from the dispute.

2.2 The Commission has expressed the belief that its Delegation in Prague merely acted in accordance with the terms of the contract. It stated that any potential modification affecting the terms of the contract had to be presented in writing to the Delegation for approval, prior to implementation. The institution added that any retrospective endorsement was strictly prohibited.

The Commission has denied that Phare Prague suggested either the reason for a modification to the contract or that funds be reallocated. It pointed out that if, in the course of a meeting or otherwise, the Delegation representatives had been orally informed of proposed changes, these changes should have been formalised beforehand in writing.

2.3 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(3). 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.

2.4 However, the Ombudsman considers that the scope of the review that he can carry out in such cases is necessarily limited. 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.

2.5 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.

2.6 In this case, the outstanding factual dispute concerns whether the Commission services responsible for the implementation of the Phare programme in the Czech Republic (Phare Prague), formally requested that the complainant modify the terms of reference of the original contract, and if so, whether the legal position taken by the Commission not to pay for part of the tasks appears justified.

The Commission has insisted that it did not request or suggest the modification of the project. The complainant, on the contrary, contends that Phare Prague specifically asked for a reallocation of resources at the meeting held on 8 April 1999. He pointed out that the request was reflected in the terms of a letter from Mr Brychta of the Czech MIT dated 20 April 1999, which had been copied to Messrs Collins and Gardea of Phare Prague. He has also referred to a number of additional documents from which it could be understood that the Commission knew about the forthcoming changes in the contract.

2.7 Having reviewed all the available evidence, the Ombudsman has not been presented any written evidence which shows that the Commission requested a change in the terms of the original Service Contract.

From the numerous exchanges between the complainant, the Czech authorities and the Commission, there was a general agreement that the allocation of human resources set out in the original contract had to be modified if the project was to be completed in time(4). Nevertheless, no mention of a Commission's request for a change in the contract appears from the available evidence. Despite the reliance of the complainant on the terms of the 20 April 1999’s letter of Mr Brychta from the Czech MIT, which described the contents of a meeting chaired by the Commission on 8 April 1999, the wording of the document does not appear to demonstrate that a request by the Commission for contractual changes had been made(5).

2.8 In the absence of more conclusive evidence, the Ombudsman considers therefore that the complainant has not shown that the Commission was not entitled to take the stand that it did concerning the contractual aspects of the complainant's allegation. Thus, the Ombudsman concludes that the inquiry has not revealed an instance of maladministration as regards this aspect of the case.

This conclusion does not affect the complainant's right to begin legal proceedings before a court of competent jurisdiction. Such a court could authoritatively determine, applying the relevant national law, the complainant's contractual claims and whether the Commission's refusal to pay for work that the complainant carried out could result in the unjust enrichment of the Community.

3 Conclusion

On the basis of the European Ombudsman’s inquiries into this complaint, there appears to have been no maladministration by the European Commission. The Ombudsman therefore closes the case.

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

Yours sincerely,

 

Jacob SÖDERMAN

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(1) Vecoy Zamer Zakona ("VZZ"): outline piece of Czech legislation that is fully articulated with justifications for its key sections.

(2) Contract No. CZ9703/0102/0301/0008 - IB: Foundation of the Energy Sector Regulatory Institution(s).

(3) See Annual Report 1997, pages 22 et ss.

(4) See, Minutes of the inception meeting of 23 November 1998, par. 4, in fine : "Mr Poucet presented strongly a requirement of the RG on ensuring higher proportion of local legislative experts"; Monthly Progress Report up to end of December 1998, p. 2, par. 7: "The Review Group expressed the opinion that the resources on the project may have to be rebalanced to ensure adequate local legal expertise"; Monthly Progress Report January 1999, p. 1, section on "Reallocation of resources in the Project Team"; Monthly Progress Report March 1999, p. 1, par. 3: "we changed our approach to the project, as requested by MPO [MIT]. In particular, we divided the work [...] most of [it] being allocated to our Czech sub-contractors"; Monthly Progress Report April 1999, p.1, in fine : "We have reached provisional agreement with several of our subcontractors about reallocating some of the budget from NERA to them. We will be submitting a formal request to change the contract to reflect this in the near future".

(5) "A request for other documents (correspondence of the NERA company with local partners) was motivated by concerns for a successful progress of the project, especially from the view of the involvement of the Czech experts. These concerns proved to be justified during our common negotiations on April 8, 1999, and you yourself submitted in the mentioned negotiations large changes in the solution of the project with a strengthened involvement of the Czech experts"; letter from Mr Pavel Brychta, Director of Energy Policy Department to Mr S., NERA, dated 20 April 1999, for copy to Messrs Collins and Garden from Phare Prague.