Court of Justice of the European Communities (including Court of First Instance Decisions)

JUDGMENT OF THE COURT (First Chamber)

3 December 1998 (1)

(Arbitration clause - Breach of contract)

In Case C-337/96,

Commission of the European Communities, represented by Thomas F. Cusack, Legal Adviser, acting as Agent, and Fergus Randolph, Barrister, with an address for service in Luxembourg at the office of Carlos Gómez de la Cruz, of its Legal Service, Wagner Centre, Kirchberg,

applicant,

v

Industrial Refuse & Coal Energy Ltd, a company incorporated under English law, whose registered office is at Oxted (United Kingdom), represented initially by Kanaar & Co., Solicitors,

defendant,

APPLICATION for the recovery of moneys advanced to the defendant by the Commission in the context of a demonstration project relating to the conversion of an existing refuse transfer station to electrical power generation from the preparation of raw urban refuse and a counterclaim for payment of the balance of the maximum subsidy contractually provided for and for damages,

THE COURT (First Chamber),

composed of: P. Jann (Rapporteur), President of the Chamber, D.A.O. Edward and M. Wathelet, Judges,

Advocate General: A. Saggio,

Registrar: R. Grass,

having regard to the report of the Judge-Rapporteur,

after hearing the Opinion of the Advocate General at the sitting on 14 July 1998,

gives the following

Judgment

1. By application lodged at the Court Registry on 14 October 1996, the Commission of the European Communities brought an action under Article 181 of the EC Treaty for payment by Industrial Refuse & Coal Energy Ltd (hereinafter 'IRACO') of ECU 242 234, together with default interest at the annual rate of 8.15% from 20 October 1993.

2. In its defence, IRACO raised a counterclaim against the Commission for payment of ECU 445 174 together with default interest at the annual rate of 8.15% from 23 August 1989, and for payment of ECU 1 000 000 by way of damages.

   The contract at issue

3. On 9 July 1987 the Community, represented by the Commission, entered into a contract with IRACO for the execution of a demonstration project for the conversion of an existing refuse transfer station to electrical power generation from the preparation of raw urban refuse. Under the terms of that contract, IRACO undertook to carry out the work necessary to complete the project by August 1989.

4. Under Article 3 of the contract the Commission granted financial assistance to IRACO equal to 26.2% of the actual cost of the project, exclusive of VAT, up to a maximum of ECU 636 612. Under paragraph 1(a) of Annex II to the contract, an advance of ECU 190 984 was to be paid within 60 days of the signing of the contract into an interest-bearing bank account opened for that purpose in the contractor's name. The advance and the interest were to be used solely for the project, and the interest earned on the advance was to be deducted from the balance of the financial support. Paragraph 1(c) of Annex II to the contract stated

   that the amounts paid as financial support were not definitively to become the property of the contractor until the final report and the statement of expenditure had been approved.

5. Under Article 6(1) of the contract, IRACO accepted sole liability for any loss, damage or injury suffered by it in, or in connection with, the performance of the contract.

6. Article 7 required any variation of or addition to the contract to be agreed in writing between the contracting parties.

7. Under Article 9, the contract could be terminated by either party at two months' notice, if it would serve no further purpose to continue with the work programme. If verification of the amounts paid by the Commission revealed that there had been an overpayment, the contractor was required immediately to repay the balance to the Commission, together with interest calculated from the date of completion or cessation of the work. That interest was to be paid at the rate set by the European Investment Bank in force on the date of the Commission's decision to fund the project.

8. Pursuant to Article 11 of the contract, certain information to be supplied by the contractor to the Commission concerning the project was confidential.

9. Under Article 13, the contracting parties agreed to refer to the Court of Justice all disputes concerning the validity, interpretation or application of the contract.

10. Article 14 provided that the contract was to be governed by English law.

    Facts

11. According to the documents before the Court, the Commission made two payments to IRACO on 18 August 1987 and 1 January 1988, to the value of ECU 190 984 and ECU 11 005 respectively.

12. By letter of 20 November 1987, IRACO informed the Commission that the initial project site had been abandoned and that, in consequence, completion of the project might be delayed by several months.

13. By letter of 29 November 1988, the Commission agreed that the date for completion of the project could be put back from August 1989 to September 1990. That postponement was made conditional, however, on IRACO finding a suitable site, approved by the competent local authorities, within six months of receipt of the letter.

14. By letter of 23 August 1989, the Commission noted that a suitable site had still not been found and informed IRACO that it was terminating the contract in accordance with Article 9 thereof. IRACO was requested to provide a financial report with a detailed statement of all expenditure incurred in connection with the project up to 15 December 1988, and to specify the sum of interest accrued on the account into which the advance had been paid. The report was to be sent to the Commission before 30 September 1989.

15. By letter of 18 October 1989, the Commission stated that the termination of the contract was not attributable to the adoption of Council Directive 89/369/EEC of 8 June 1989 on the prevention of air pollution from new municipal waste incineration plants (OJ 1989 L 163, p. 32; hereinafter 'the Directive'), which had not yet been implemented in the Member States.

16. On 23 November 1990, following an exchange of correspondence, IRACO sent the Commission a letter enclosing financial documents justifying its expenses and the amounts used in accordance with the conditions for the grant of funding.

17. The Commission found IRACO's figures unacceptable and decided to have an on-the-spot audit carried out. By letter to IRACO of 4 August 1993, the Commission communicated the results of that audit, according to which IRACO had to reimburse the Commission the sum of ECU 242 234. The letter also stipulated that reimbursement had to be made within two months of the date of receipt of the letter.

18. By letter of 18 August 1993, IRACO claimed payment from the Commission of ECU 636 612 by way of compensation for additional work, loss of profit and damages.

19. IRACO acknowledged receipt on 20 October 1993 of a debit note from the Commission accountant.

20. When IRACO failed to pay the amount claimed, the Commission brought this action.

    Procedure before the Court

21. The Commission's application was registered at the Court on 14 October 1996.

22. By application lodged at the Court Registry on 12 December 1996, IRACO applied for legal aid pursuant to Article 76 of the Rules of Procedure.

23. That application was rejected by order of the Court of 3 February 1997.

24. On 10 March 1997 IRACO lodged a document entitled 'Defence and Counterclaim' at the Court Registry.

25. By application lodged at the Court Registry on 15 May 1997, the Commission requested, pursuant to Articles 91(1) and 94(1) of the Rules of Procedure, that that document be declared inadmissible and that the Court give a judgment by default on the action brought by the Commission, upholding its claims.

26. By order of 23 September 1997 the Court rejected those requests.

    Substance

27. The Commission argues that it terminated the contract pursuant to Article 9 thereof; that IRACO acknowledged that the contract had been terminated in accordance with that provision; that an audit carried out by independent experts disclosed that IRACO owed the Commission ECU 242 234; and that the Commission had formally requested reimbursement of that sum. The Commission concludes that it is contractually entitled to payment of the amount claimed.

28. According to the Commission, that sum is made up of ECU 191 438 plus ECU 50 796 by way of interest applied at the rate of 8.15% pursuant to Article 9 of the contract. The Commission also requests payment of default interest from 20 October 1993, the date on which IRACO is deemed to have received the debit note.

29. IRACO pleads by way of defence and counterclaim that the Commission rendered the contract invalid by entering into discussions with the competent United Kingdom authorities with a view to the adoption of a more stringent directive on environmental protection, affecting the incineration of municipal solid waste and the combustion of refuse-derived fuels.

30. The resulting directive set standards for the protection of the environment which the project provided for under the contract failed to satisfy. IRACO maintains that the Commission thus rendered the contract 'technically unlawful' and breached its obligation to keep IRACO informed of the consultations between the Commission and the United Kingdom authorities which had compromised completion of the project.

31. IRACO states that in view of the amendments to the applicable legislation, it had been obliged to invest time and a considerable amount of money in striving to bring the project into conformity with the new requirements.

32. Furthermore, IRACO contends that the Commission is in breach of its contractual obligations. First, in breach of the obligation of confidentiality, it forewarned a

    third party to the contract, KTI Energy Inc., of the action which it proposed to take, and, second, it entered into a relationship damaging to IRACO's interests with Costain Ventures and the Midland Electricity Board concerning the possibility of a grant which was not part of the contract. At a meeting with those companies, a Commission official defamed the Managing Director of IRACO.

33. IRACO therefore seeks by way of counterclaim payment of financial compensation and damages by the Commission pursuant to Article 7 of the contract. It maintains that ECU 445 174 - the balance of the grant - constitutes fair reparation for the Commission's breach of contract. The amount it claims by way of reparation for the damage caused by the Commission to IRACO and to KTI Energy Ltd, in which IRACO held one-third of the capital and KTI Energy Inc. two-thirds, is ECU 1 000 000.

34. The Commission replies, first, that the Directive on which IRACO relies does not apply to the contract.

35. Next, with respect to its contacts with KTI Energy Inc., the Commission submits that its letter in reply to a request from KTI Energy Inc. stated simply that the latter could not take part in the project since a suitable site had not been found and the contract had therefore been terminated. The Commission adds that, assuming that the complaint against it is based on breach of the obligation of confidentiality, under Article 11 of the contract that obligation covered only certain information provided to the Commission by the defendant. The Commission maintains that there was therefore no breach of Article 11 of the contract.

36. Lastly, as regards its contacts with Costain Ventures and the Midland Electricity Board, the Commission points out that, as IRACO itself acknowledged, the alleged damage is linked to a project not connected with the contract at issue. Consequently, the Commission maintains that, pursuant to Article 13 of the contract, such matters cannot be covered by the present dispute.

37. Since IRACO relies on the same pleas in law and arguments to support both its defence and its counterclaim, the action brought by the Commission and the counterclaim should be considered together.

38. It is clear that since it would have served no further purpose to continue with the project, the Commission was entitled under Article 9 of the contract to terminate the contract on giving two months' notice.

39. It is stated in the documents before the Court that two years after the contract had been made, at a time when the project should already have been on the point of completion, IRACO had still not found a suitable site. Although the Commission agreed that the completion date could be put back, it made postponement subject to the express condition that IRACO find a suitable site within six months, a condition that IRACO failed to meet.

40. IRACO does not dispute that the Commission was entitled to terminate the contract under Article 9 thereof.

41. Termination of the contract, which the Commission intimated in a letter of 23 August 1989 and which took effect on 23 October 1989, entails an obligation on the part of the contractor immediately to repay the Commission any sum received in excess of the amount payable, together with interest calculated from the date of completion or cessation of the work.

42. IRACO cannot rely on breach by the Commission of its contractual obligations as a ground for failing to comply with its own obligation to reimburse.

43. As regards the plea concerning the Directive, IRACO had no reason to assume that the project would be affected by that measure.

44. On that point it should be noted, first, that IRACO was required to find a suitable project site even before the Directive was adopted.

45. Next, Article 2 of the Directive states that it applies solely to 'new municipal waste-incineration plants'. Those are defined in Articles 1(5) and 12 of the Directive, when read together, as plants for which authorisation to operate is granted as from 1 December 1990. Since the project covered by the contract at issue had to be completed in September 1990 at the latest, there is no way in which it could be subject to the rules laid down in the Directive.

46. Lastly, in so far as IRACO maintains that the Directive constitutes an amendment of the contract, founding on Article 7 of the contract, suffice it to note that the Directive, being a legal measure of general application adopted by the Council, cannot constitute an amendment to a contract, such as may be agreed on by the parties. According to the documents before the Court, the parties did not agree to any such amendment in the light of the Directive.

47. As regards the plea that the contacts between the Commission and KTI Energy Inc. constituted a breach of the obligation of confidentiality, it should be noted that the Commission simply informed the latter that it could not take part in the project since a suitable site had not been found and the project would not therefore be completed. Bearing in mind that this statement was made to an undertaking which wished to be involved in the project in question and which the Commission could legitimately assume to be informed of the state of progress made, it cannot be regarded as a breach of confidentiality, even supposing that information as to the precise nature of the difficulties preventing IRACO from finding a suitable site was covered by such an obligation.

48. IRACO's plea concerning the allegedly defamatory conduct of a Commission official in respect of IRACO, is - as the Advocate General pointed out in paragraph 24 of his Opinion - inadmissible.

49. The Court's jurisdiction under an arbitration clause derogates from the ordinary rules of law and must therefore be interpreted restrictively. The Court may hear and determine only claims arising from a contract concluded with the Community which contains the arbitration clause or claims that are directly connected with the obligations arising from that contract (Case 426/85 Commission v Zoubek [1986] ECR 4057, paragraph 11).

50. However, it is clear from the statements made by the defendant itself that the contacts between the Commission and the third parties mentioned above had nothing to do with the contract, but concerned an application for funding in respect of a separate project.

51. Consequently, the action brought by the Commission is well founded, whilst the counterclaim lodged by IRACO is in part unfounded and in part inadmissible.

52. As regards the amount payable to the Commission by the defendant, it should be noted that IRACO does not contest the accuracy of the audit results. The Commission's claim for ECU 191 438 may therefore be upheld.

53. As regards the claim that ECU 50 796 should be paid by way of interest (the detailed calculation of which is appended to the Commission's letter of 4 August 1993), it should be noted that this covers the period from 18 August 1987, the day when the advance was paid, to 23 November 1990, the day when IRACO sent the financial report. The rate of interest of 8.15% was determined in accordance with Article 9 of the contract and represents the rate set by the European Investment Bank in force on the date of the Commission's decision to grant financial assistance.

54. However, Article 9 of the contract provides for interest to be paid only from the date of completion or cessation of the work, a date which the Commission has failed to specify.

55. Nevertheless, under Annex II to the contract, the interest accruing on the advance may be used solely for the purposes of the project and is to be deducted from the balance of the grant. Thus the parties had agreed that the interest accruing on the amount not deployed was not to pass to the contractor but to be repaid to the Commission.

56. Consequently, the claim for payment of interest in respect of the period from 18 August 1987 to 23 November 1990 is well founded. Since the defendant does not contest the rate of interest claimed by the Commission, it seems fair also to apply the rate of 8.15% provided for in Article 9 of the contract to interest based on

    Annex II to the contract. Accordingly, the amount of interest payable to the Commission is ECU 50 796.

57. Furthermore, the Commission's claim that IRACO should be ordered to pay default interest at the annual rate of 8.15% from 20 October 1993, the date on which IRACO received the debit note, should be upheld.

58. Since neither the terms of the contract nor English law, by which the contract is governed pursuant to Article 14 thereof, provide for capitalisation of interest in circumstances such as those of the present case, that interest is payable on the sum of ECU 191 438, that being the amount of the principal debt.

    Costs

59. Under Article 69(2) of the Rules of Procedure, the unsuccessful party is to be ordered to pay the costs. Since IRACO has been unsuccessful in its pleadings, it must be ordered to pay the costs.

On those grounds,

THE COURT (First Chamber)

hereby:

1. Orders Industrial Refuse & Coal Energy Ltd to reimburse to the Commission the sum of ECU 191 438, together with the sum of ECU 50 796 by way of interest in respect of the period from 18 August 1987 to 23 November 1990, together with interest at the annual rate of 8.15% from 20 October 1993 on the sum of ECU 191 438;

2. Dismisses the counterclaim lodged by Industrial Refuse & Coal Energy Ltd;

3. Orders Industrial Refuse & Coal Energy Ltd to pay the costs.

Jann Edward Wathelet

Delivered in open court in Luxembourg on 3 December 1998.

R. Grass P. Jann

Registrar President of the First Chamber

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1: Language of the case: English.