A recent judgment of the European Court of Justice (ECJ) has confirmed that it is not just breaches of EU procurement rules that may provide grounds for requiring a recipient of European Regional Development Fund (ERDF) grant aid to repay a proportion of the funding received – breaches of national procurement requirements may similarly result in so-called "claw back".[1]
Further, any repayments required to correct for future effects of the breach may be determined under the rules in place at the time the repayment is ordered - even where those rules came into force after the breach occurred.
Background
Two Romanian local authorities received grant aid from the ERDF in the 2007-13 funding round, one for road repairs and the other for refurbishment and modernisation of a school. The value of the contracts awarded for these projects were below the thresholds for application of EU public procurement rules, but the Romanian government sought to claw back a sum equal to 5% of their value, on the basis that they had been awarded in breach of Romanian public procurement law.
Legal Framework
Funding under the 2007-2013 ERDF funding round was awarded under Regulation 1083/2006, which permitted claw back of funding where there was an "irregularity". The term "irregularity" was defined to cover an infringement of a provision of EU law that has or would prejudice the EU general budget by charging an unjustified item of expenditure. That definition was amended for the 2014 – 2020 funding round - the current definition (in Regulation 1303/2013) expressly covers breaches of national law, as well as of EU law.
The Romanian Government relied on national provisions which came into force in 2011, after the public contracts had been entered into, to make the 5% claw back. The previous provisions, in force at the time the contracts were awarded, had not specified the levels of claw back to be imposed to correct for the effects of irregularities.
The judgment
The ECJ pointed out that the purpose of Regulation 1083/2006 was to ensure that ERDF funding is properly used and that the financial interests of the EU are safeguarded. Given that context, the ECJ held that the term "irregularity" in Regulation 1083/2006 must be interpreted as covering not only any breach of EU law, but also any breach of national law provisions which contribute to ensuring that EU law relating to the management of projects financed by EU funds is properly applied. It pointed to the amended definition in the current provisions, which specifically refers to national law, to confirm its approach.
As a result, the ECJ concluded that a breach of national provisions may be an "irregularity" if the breach has, or would have, the effect of prejudicing the EU's general budget by charging an unjustified item of expenditure. Member states must, where appropriate, make necessary financial corrections (i.e. claw backs) and ensure that the operations in question comply with all the rules applicable at both EU and national level.
The ECJ also held that, when looking forward to correct for any future effects of irregularities that have occurred under previous rules, member states may apply the rules as they stand at the time the claw back is imposed, rather than those applying at an earlier point (such as when the ERDF grant aid was awarded or when contracts were procured).
Comment
This case is a further reminder and warning for recipients of EU funding of the possible consequences of failing to observe all relevant requirements under EU and national procurement law when awarding contracts for projects benefitting from that funding.
Grant recipients also need to be mindful that it may not be possible at the time of preparing for and running the procurement to assess the full financial risk of not running a compliant procedure. If some of the grant aid is eventually clawed back, the level of claw back for the element correcting for any ongoing (future) effects of the irregularity may be determined under rules unknown at the time of the procurement in question. This makes it all the more important to ensure that it is conducted in accordance with all relevant requirements.
[1] Cases C-260/14 and C-261/14 Judetul Neamt and Judetul Bacau v Ministerul Dezvoltarii Regionale si Administratiei Publice
Tier 1 ranked for Public Procurement in Chambers UK
