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

JUDGMENT OF THE COURT (Fifth Chamber)

27 April 1999 (1)

(Arbitration clause - Breach of contract)

In Case C-69/97,

Commission of the European Communities, represented by Paolo Stancanelli, of its Legal Service, and Jean-Francis Pasquier, a national civil servant on secondment to that service, acting as Agents, assisted by Alberto Dal Ferro, of the Vicenza Bar, 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

SNUA Srl, a company incorporated in Pordenone, Italy, represented by Andrea Guarino, of the Rome Bar, and Ezio Trampus, of the Trieste Bar, with an address for service in Luxembourg at the Chambers of Alain Lorang, 51 Rue Albert 1^er,

defendant,

APPLICATION by the Commission of the European Communities under Article 181 of the EC Treaty for an order requiring SNUA Srl, first, to reimburse an advance payment of ECU 195 397 made by the Commission for the completion of an integrated system for the collection and recycling of solid waste at a private

plant, together with interest at the rate of ECU 43.09 per day of late payment from 1 April 1988 and, second, to pay the Commission the sum of ECU 60 000 by way of compensation for the damage suffered,

THE COURT (Fifth Chamber),

composed of: J.-P. Puissochet (Rapporteur), President of the Chamber, P. Jann, C. Gulmann, D.A.O. Edward and L. Sevón, Judges,

Advocate General: A. La Pergola,

Registrar: H.A. Rühl, Principal Administrator,

having regard to the Report for the Hearing,

after hearing oral argument from the parties at the hearing on 25 June 1998,

after hearing the Opinion of the Advocate General at the sitting on 15 October 1998,

gives the following

Judgment

1. By application lodged at the Registry of the Court on 18 February 1997, the Commission of the European Communities applied to the Court under an arbitration clause, in accordance with Article 181 of the EC Treaty, claiming that SNUA Srl (hereinafter 'SNUA') should be ordered, first, to reimburse an advance payment of ECU 195 397 made by the Commission for the completion of an integrated system for the collection and recycling of solid waste at a private plant, together with interest at the rate of ECU 43.09 per day of late payment from 1 April 1988 and, second, to pay the Commission the sum of ECU 60 000 by way of compensation for the damage suffered.

2. On 8 January 1988 the European Economic Community, represented by the Commission, entered into Contract No BM 441/86 with SNUA (hereinafter 'the Contract') under Council Regulation (EEC) No 3640/85 of 20 December 1985 on the promotion, by financial support, of demonstration projects and industrial pilot projects in the energy field (OJ 1985 L 350, p. 29). In return for financial assistance from the Community, SNUA undertook, under the terms of the Contract, to carry out a programme of work between June 1987 and August 1988 as described in an annex to the Contract.

3. In the event of SNUA being unable to begin the work on the date provided for, it was required under Clause 4.3.1 of the Contract to give the Commission at least two weeks' prior notice and to propose a new date which the Commission had 30 days to accept or reject. If the date was rejected, the Contract was terminated automatically and the advances received had to be repaid.

4. Under Clause 4.3.2 of the Contract, SNUA was also required - within three months of signature of the Contract, and thereafter every six months - to submit progress reports to the Commission containing statements of expenditure.

5. Clause 8 provided: 'the Commission may unilaterally terminate the contract in the event of the contractor's non-performance of any of its obligations thereunder, in particular if it fails to comply with the stipulations made in Clause 4.3 thereof; termination shall take effect on expiry of a period of one month after notice has been served by registered letter with acknowledgment of receipt, where non-performance persists'. Clause 8 further provided that, in those circumstances, 'the contractor shall immediately repay to the Commission any amounts advanced by way of financial assistance, together with interest payable from the date of receipt of such funding. Interest shall be payable at the European Investment Bank's rate applicable as at the date of the Commission's decision on the award of funding for the project.'

6. Under Clause 13 of the Contract, the contracting parties agreed 'to refer to the Court of Justice of the European Communities all disputes concerning the validity, interpretation or application of the Contract'. Clause 14 provided that the contract was to be governed by Italian law.

7. On 26 January 1988 the Commission made a payment of ECU 195 397 to SNUA, representing an advance of 30% of the maximum Community contribution to the project.

8. It is common ground that SNUA did not carry out any work in return for that payment until 7 December 1994, that is, almost seven years after the Contract was signed.

9. In the meantime, the Commission served notice on SNUA four times seeking confirmation that work had begun, and informing it that the Contract would otherewise be terminated automatically: notice was served on 15 March 1989 setting a deadline of 10 April 1989; on 12 July 1990 setting a deadline of 30 September 1990; on 10 July 1991 setting a deadline of 15 August 1991; and lastly, on 18 September 1991, requiring that the project be put into operation by 31 December 1991, failing which the Contract would be terminated on that date. It was not until 5 November 1992 that the Commission, having received no reply from SNUA following the last notice, informed it that the Contract had been terminated and that reimbursement of the advance was due.

10. SNUA for its part thrice requested extensions of the deadline, namely on 6 March 1989, 24 September 1990 and 22 August 1991, pointing out on each occasion that it was not responsible for the delay and that it was, rather, due to 'strong local opposition' to the site initially chosen for the project, which could be overcome only by means of a decision of the autonomous region of Friuli-Venezia-Giulia granting permission for work to commence. The decision enabling the project to be implemented at a different site from that initially anticipated was not taken until 15 July 1993.

11. After the Commission had terminated the Contract automatically, SNUA failed to respond to the demands for reimbursement of the advance served on it on 25 January 1994, 2 June 1994 and 15 February 1995.

    Termination of the Contract

12. The Commission claims that under Clause 8 of the Contract, termination took effect on 31 December 1991 since SNUA had not, despite several extensions of time, fulfilled its obligations under Clause 4.3 though it had been put on notice to do so in the proper way. The fact that the deadline for commencement of the works was repeatedly extended so as to enable SNUA to deal with an obstacle beyond its control did not mean the Commission had waived its right to rely on the automatic termination clause - quite the reverse, the clause having been referred to in each of the letters sent to SNUA.

13. SNUA contends first of all that the provision in Clause 8 of the Contract is purely stylistic as regards its effect on termination under Italian law since, under Article 1456 of the Italian Civil Code as interpreted by the Corte Suprema di Cassazione, automatic termination can occur only where express provision has been made for it by the parties for non-performance of a specified obligation. Clause 8, which is worded in general terms, and which, as stated at paragraph 5 of this judgment, concerns non-performance 'of any of [the contractor's] obligations, in particular if it fails to comply with the stipulations made in Clause 4.3', does not satisfy that criterion.

14. Second, SNUA points out that it cannot incur blame in respect of circumstances over which it was unable to exercise any control. In that connection, it relies on the fact that the Friuli-Venezia-Giulia autonomous region had confirmed that the company's diligence was not in issue since the delay was the result of local political opposition to the project which ultimately forced the authorities to opt for a new site. The Commission itself acknowledged that as this was a case involving force majeure no fault could be ascribed to SNUA, and that an express termination clause which was subject to the condition that one of the parties should be held responsible for non-performance could not in any event be relied upon against it.

15. According to SNUA, the Contract could therefore be terminated only in accordance with the procedure set out in Articles 1453 and 1454 of the Italian Civil Code. The notices served by the Commission on SNUA could not, on that basis, operate to terminate the Contract unless a specific application for termination had been made to the court to enable it to assess whether the period granted to the defaulting party was sufficient and to determine the extent and seriousness of the breach. It was also for the Commission, in that context, to establish the defaulting party's liability.

16. Since no formal application for termination of the Contract was made, SNUA considers that the Commission cannot claim reimbursement of the sums paid, one of the consequences of termination.

17. It must be observed in that connection that, since the Commission's right to terminate the Contract unilaterally is based on the combined provisions of Clauses 4.3 and 8 thereof, the outcome of the dispute depends on the legal effects attributed to those clauses.

18. Where proceedings are brought before it pursuant to an arbitration clause, the Court must resolve the dispute on the basis of the national law applicable to the contract (see, in particular, Case 426/85 Commission v Zoubek [1986] ECR 4057, paragraph 4). In this case, as stated at paragraph 6 of this judgment, the applicable national law is Italian law.

19. Further, a document such as the Contract at issue must be interpreted in the light of its context. In that connection, the decision to grant funding to SNUA was made pursuant to Regulation No 3640/85 which provides, inter alia, at Article 7(2) that funding is to be granted in return for undertakings from the recipients, who must keep the Commission properly informed as to progress in fulfilling those undertakings.

20. In that context, it would seem that Clause 8 of the Contract is clearly intended to allow the Commission, on the basis of an objective criterion, unilaterally to dissolve the relationship with the contractor, in particular if the latter fails to perform the obligations set out in Clause 4.3.

21. Under Italian contract law, such a provision need not be considered invalid. Indeed, Article 1456 of the Italian Civil Code allows contracting parties expressly to agree that a contract is to be terminated automatically in the event of non-performance of a specified obligation. The requirement laid down by the Corte Suprema di Cassazione that the obligation must be specified in order for that provision to apply may be considered to be satisfied by the reference in Clause 8 to the obligations set out in Clause 4.3 of the Contract, which relates to the reports which the contractor must submit to the Commission under Article 7(2) of Regulation No 3640/85. Therefore, in the case of breach of the obligations set out in Clause 4.3,

    the fact that the Contract is subject to Italian law does not prevent Clause 8 from bringing the Contract to an end.

22. With reference to SNUA's argument that it cannot be held responsible for the non-performance of contractual obligations, it is apparent from Clause 8 of the Contract that it is not a prerequisite for automatic termination that the contractor should be at fault, only that certain contractual obligations should not have been performed, irrespective of the cause or origin of such non-performance.

23. Whilst it is true that the case-law of the Corte Suprema di Cassazione requires that, in order to bring express termination clauses which are subject to Article 1456 of the Italian Civil Code into effect, it must be possible to attribute responsibility for non-performance to the contractor in default, the fact remains that, under Article 1322 of the Code, the parties' right freely to determine the terms of the Contract within the limits set by the law is recognised as forming part of the principle of freedom of contract. It does not therefore preclude the parties to a contract from deciding to insert therein a termination clause which is not subject to the condition that the contractor must be responsible for non-performance, by way of derogation from the usual format of contracts under Italian law.

24. In this case, it is quite clear that the parties intended to make provision for specific methods of terminating the Contract given, inter alia, the particular nature of relations between the Community and the company in receipt of funding under Regulation No 3640/85 and the Commission's ability in practice to monitor implementation of the work schedule, which depends to a large degree on the reports which the contractor must submit to it under Clause 4.3.

25. The Commission was therefore justified in relying on Clause 8 to terminate the Contract automatically.

26. In that connection, the letter sent to SNUA by the Commission on 18 September 1991 fulfils the conditions set out in Clause 8 of the Contract and thus constitutes proper notice of termination, even though it does not refer expressly to Clause 8 and allows SNUA a period of more than one month to act.

    Reimbursement of the advance payment

27. Under Clause 8.3 of the Contract, SNUA is obliged to reimburse the advance paid, in the amount of ECU 195 397, which is uncontested.

    Interest

28. Under Clause 8.3 of the Contract, interest is payable from the date of receipt of the advance payment at the rate set by the European Investment Bank as at the date of the Commission's decision on the award of funding.

29. Consequently, the Commission considers that interest is payable from 1 April 1988. It observes that the decision to grant funding was taken on 11 November 1986 and that the rate of interest applicable at the time was 8.05%, so that the interest due amounts to ECU 43.09 per day of late payment until the date of final settlement.

30. Since SNUA has not challenged this point in any way and there is nothing in the documents before the Court to cast doubt on that assessment, the Commission's claim for payment of interest in the amount specified must be upheld.

31. As regards the amount of the principal sum and interest, the reference to ecus must, pursuant to Article 2(1) of Council Regulation No 1103/97/EC of 17 June 1997 on certain provisions relating to the introduction of the euro (OJ 1997 L 162, p. 1), be replaced by a reference to euros, at the rate of one euro to one ecu.

    Compensation for damage

32. Relying on Article 1453 of the Italian Civil Code, the Commission also claims that SNUA should be ordered to pay the sum of ECU 60 000 by way of compensation for the damage which the Commission is alleged to have suffered on account of the non-performance of the Contract, consisting in the unjustified immobilisation of Community funds which could have been used for other projects, waste of human resources and damage to its credibility.

33. SNUA contends that, since it was not at fault, it cannot be made liable.

34. The Commission challenges SNUA's contention that it was not at fault and claims that due care under the contract should at least have prompted SNUA to advise the Commission that there was a risk of non-performance.

35. It is appropriate to point out in that connection that where the Court's jurisdiction is based on an arbitration clause, it is restricted solely to hearing claims brought under the contract concluded with the Community or that are directly connected with the obligations arising from that contract (see Commission v Zoubek, cited above, paragraph 11).

36. The provision in Article 1453 of the Italian Civil Code, to the effect that a contracting party has the right to request the defaulting party to make good the damage in any event, applies, on its own wording, regardless of the procedure by which termination is effected. The Commission is therefore entitled to rely on that provision, which is applicable to the Contract by virtue of Clause 14.

37. In order to determine the merits of that claim, a distinction must be drawn between the period prior to termination of the Contract and the period subsequent thereto.

38. So far as concerns the first period, it was open to the Commission under the combined provisions of Clauses 4.3 and 8 of the Contract to draw the proper inferences in good time as to the consequences of the contractor's failure to honour its contractual undertakings and to terminate the contractual relationship early and unilaterally. In any event, the Commission itself points out that it was under no obligation to grant extensions of time. That being so, the Commission cannot expect the defendant to assume responsibility for damage which is the result of the former's own decisions or inaction.

39. So far as concerns the period following termination of the Contract, the situation is different by reason of the fact that the contractor was at fault in refusing to accede to the claims for reimbursement. However, as regards, first of all, the unwarranted immobilisation of Community funds, it should be noted that the default interest due from the defendant must have the effect of reversing any financial damage suffered by the Community on account of the delay in payment; second, so far as concerns the loss of funding suffered by other prospective contractors, the Commission cannot be allowed to rely on damage potentially suffered by third parties.

40. As regards the alleged misuse of Commission staff during the judicial stage of the dispute, it should be noted that the expenses incurred by the parties for the purpose of these proceedings are not, in any event, of such a nature that they may be regarded as constituting damage distinct from the burden of costs.

41. Lastly, as regards the other damage alleged, the Commission has failed to establish satisfactorily or with the requisite precision that such damage was in fact caused.

42. The Commission's claim for compensation must therefore be rejected.

    Costs

43. Under Article 69(2) of the Rules of Procedure, the unsuccessful party is to be ordered to pay the costs if they have been applied for in the successful party's pleadings. Since SNUA has been unsuccessful in its pleadings, it must be ordered to pay the costs.

On those grounds,

THE COURT (Fifth Chamber),

hereby:

1. Orders SNUA Srl to pay to the Commission of the European Communities the sum of EUR 195 397 together with interest at a rate of EUR 43.09 per day of late payment as from 1 April 1988 until final settlement of the debt;

2. Dismisses the remainder of the action;

3. Orders SNUA Srl to pay the costs.

PuissochetJann Gulmann EdwardSevón

Delivered in open court in Luxembourg on 27 April 1999.

R. Grass J.-P. Puissochet

Registrar President of the Fifth Chamber

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1: Language of the case: Italian.