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

JUDGMENT OF THE COURT (Sixth Chamber)

16 January 2001 (1)

(Arbitration clause - Non-performance of contract)

In Case C-41/98,

Commission of the European Communities, represented by E. de March, acting as Agent, and A. Dal Ferro, Avvocato, with an address for service in Luxembourg,

applicant,

v

Tecnologie Vetroresina SpA (TVR), established in Rome, Italy, represented by G. Merla, Avvocato,

defendant,

APPLICATION by the Commission under Article 181 of the EC Treaty (now Article 238 EC) for an order requiring Tecnologie Vetroresina SpA, first, to reimburse an advance payment of ECU 77 558.80 made by the Commission under Contract No BREU-0114-I (A), together with interest at the agreed rate from 1 February 1990, and, second, to pay damages of ECU 7 700 in respect of the harm sustained by the Commission,

THE COURT (Sixth Chamber),

composed of: C. Gulmann (Rapporteur), President of the Chamber, J.-P. Puissochet and R. Schintgen, Judges,

Advocate General: D. Ruiz-Jarabo Colomer,

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 11 May 2000,

after hearing the Opinion of the Advocate General at the sitting on 15 June 2000,

gives the following

Judgment

1. By application lodged at the Court Registry on 18 February 1998, the Commission of the European Communities brought an action under an arbitration clause, in accordance with Article 181 of the EC Treaty (now Article 238 EC), against Tecnologie Vetroresina SpA (hereinafter 'TVR) for an order that TVR, first, reimburse the sum of ECU 77 558.80 advanced by the Commission under Contract No BREU-0114-I (A) (hereinafter 'the contract), together with interest at the agreed rate, namely ECU 24.97 per day, from 1 February 1990, and, second, pay the sum of ECU 7 700 by way of damages in respect of the harm sustained by the Commission.

2. The contract was concluded on 21 December 1989 between the European Economic Community, represented by the Commission, and TVR, within the framework of the financial support granted on the basis of the specific research and technological development programme of the Community in the field of industrial manufacturing technologies and advanced materials applications (Brite/Euram) for 1989 to 1992 adopted by Council Decision 89/237/EEC of 14 March 1989 (OJ 1989 L 98, p. 18).

3. By that contract, which was concluded for a period of 36 months from 1 January 1990, TVR undertook, against payment of financial aid by the European Economic Community, to carry out the research project described in an annex to the contract.

4. In accordance with Articles 1(3) and 10(2) of the contract, TVR concluded two associated contracts with the Imperial College of Science and Technology and Medicine (hereinafter 'ICSTM) and DSM Limburg BV (hereinafter 'DSM) on 21 May 1990 and 30 May 1990 respectively, under which the latter were to carry out part of the project.

5. Pursuant to Article 3(2) of Annex II to the contract, the conclusion of associated contracts does not release TVR from its obligations and responsibilities to the Commission under the contract.

6. Pursuant to Article 6(1) of the contract and Article 6(1) of Annex II to the contract, TVR is required to submit to the Commission six-monthly progress reports and an interim report at the end of the first 15 months of the contract, within one month of the end of each period concerned. TVR is also required to submit to the Commission a final scientific report, within two months of the actual completion or cessation or termination of the work financed by the Commission.

7. According to Article 5(1) and (2) of the contract and Article 36(1) of Annex II thereto, TVR is to provide the Commission with annual cost statements, within one month of the end of each period concerned, and also with a consolidated cost statement within three months of the completion, cessation or termination of the work financed by the Commission. Article 5(4) of the contract provides that cost statements must also be sent to the Commission by each associated contractor, via TVR.

8. Pursuant to Article 4 of the contract, the Commission's total financial contribution is to take the form of an initial advance of ECU 460 000 followed by periodic payments within two months of approval of the six-monthly progress reports and cost statements. However, Article 39 of Annex II to the contract provides that cost statements may be subject to verification even after the Commission has reimbursed costs, for up to two years after the date of the termination or completion of the contract.

9. Article 8(2)(d) of Annex II to the contract specifies that the Commission may terminate the contract in the event of non-performance by one of the contractors of any of its obligations, unless there are reasonable and justifiable technical or economic grounds for such non-performance, after giving notice in writing by recorded delivery or registered post, where the contractor is still in breach of its obligations one month after the receipt thereof.

10. The first subparagraph of Article 8(4) of Annex II provides that, in the event of the application of Article 8(2)(d), the Commission may require the reimbursement of all or part of its financial contribution and is to have regard, to such extent as may be fairand reasonable, to the nature and results of the work undertaken and its use to the Commission.

11. The second subparagraph of Article 8(4) to Annex II provides that interest may be payable from the date on which payments were received by the contractor at the rate applied by the European Monetary Cooperation Fund for its operations in ecus increased by 2 percentage points, such rate being published in the Official Journal of the European Communities for the first working day of each month.

12. Article 12 of Annex II to the contract provides that the Court of Justice is to have jurisdiction in respect of any dispute concerning the contract, which, pursuant to Article 11 of the contract, is to be governed by Italian law.

13. On 21 December 1989, the Commission paid TVR an advance of ECU 460 000.

14. On 22 July 1991, the Commission, notwithstanding the initial delay in carrying out the project owing to internal problems at the ICSTM, paid TVR the sum of ECU 128 418.20 on the basis of the accounts submitted in respect of the period 1 January to 31 December 1990.

15. On 13 November 1991, TVR submitted a progress report to the Commission in respect of the period 1 January to 31 October 1991.

16. By letter of 2 December 1991, the Commission informed TVR that the third six-monthly report should have covered the period 1 January to 30 June 1991. It also reminded TVR that it must not neglect the interim report.

17. By letter of 20 January 1992, the Commission informed TVR that although the date for submission of the interim report had been deferred to September 1991 owing to the problems that had arisen in the initial stage of the project, that report had still not been submitted. It therefore called upon TVR to take the necessary steps forthwith in order to ensure that the project did not encounter serious scientific and financial problems.

18. The Commission noted that there were delays in submitting the periodic progress reports referred to in Article 6(1) of the contract and, by letter of 23 January 1992, requested TVR to send those reports as soon as possible; it reminded TVR that, pursuant to Article 8(2)(d) of Annex II to the contract, it was entitled to terminate the contract in the event of non-performance by a contractor of its contractual obligations.

19. On 30 January 1992, TVR sent the Commission a series of documents, including the interim report.

20. The Commission instructed an external expert, Professor Goedel, to check the work completed by TVR. In his memorandum of assessment of 6 February 1992, Professor Goedel expressed a negative view of the results thus far obtained.

21. By letter of 25 March 1992, the Commission informed TVR that it intended to terminate the contract, owing, in particular, to the complete lack of coordination between the contractors, the unwarranted delays in completing the work and the fact that no results were reported in the mid-term assessment meeting.

22. In its letter to the Commission of 15 April 1992, TVR maintained that the conditions for termination of the contract were not satisfied. In particular, it claimed that it had carried out its research in accordance with the revised timetable.

23. By letter of 10 June 1992, the Commission requested TVR to submit the consolidated cost statements drawn up by all the associated contractors in respect of 1991 and the period 1 January to 31 May 1992, for which no payment had yet been made. It reminded TVR that, pursuant to Article 8(2)(d) of Annex II to the contract, Article 8(4) of that annex would become applicable should it fail to comply with that request.

24. In September 1992, the Commission, inter alia, approved the cost statement which TVR had submitted on 2 July 1992. However, on 23 March 1993 the Commission sent TVR a financial statement significantly reducing the amounts in respect of the period 1 January to 31 May 1992 indicated in that cost statement. In spite of TVR's protests, the Commission claimed reimbursement of the sum of ECU 109 444.80, representing the difference between the sums already paid to TVR and half the costs approved, since, pursuant to Article 3(2) of the contract, the Commission was responsible for 50% of the allowable costs.

25. In August 1993, the Commission instructed Reconta Ernst & Young to carry out an audit of the project in question for the period 1 January 1990 to 31 December 1992. The auditor's report drawn up on 8 September 1994 concluded that, with certain exceptions, the costs taken into account by TVR were correct in the light of the accounting rules and the terms of the contract. The labour costs shown were even lower than those actually incurred.

26. By letter of 6 June 1995, the Commission informed TVR that it was reducing the amount to be reimbursed to ECU 77 558.80.

27. TVR has not made any reimbursement.

    Admissibility

28. TVR claims that the Commission's claim for reimbursement in part of the advance, together with interest at the agreed rate, and for damages, is inadmissible. The Commission has not requested the Court to make a preliminary finding that the contract is terminated for non-performance. The contract must therefore be regarded as still extant and as producing effects. The Commission cannot therefore take advantage of the restitutory effects of termination defined in Article 1458 of the CodiceCivile (hereinafter 'the Italian Civil Code), especially as its attempt to terminate the contract in accordance with the procedure provided for therein was unsuccessful.

29. The Commission contends that its claim for reimbursement and damages is based on the termination of the contract pursuant to the voidability clause in Article 8(2)(d) of Annex II to the contract. In those circumstances, the application for a declaration that the contract is terminated is inherent in the claims for reimbursement of the financial contribution and for damages.

30. In that regard, it should be pointed out, first, that where the law or the contract provides that the parties may unilaterally terminate the contract for non-performance of a contractual obligation, any party to the contract who has relied on that provision may, where necessary, apply to the court for a declaration that the contract is automatically terminated (see, in that regard, judgments of the Corte Suprema di Cassazione (Supreme Court of Cassation) Italy of 12 December 1979, No 6489, Mass. Foro It. 1979, p. 1309, and 5 April 1990, No 2802, Mass. Foro It. 1990, p. 406).

31. Second, it should be observed that the Corte Suprema di Cassazione accepts that an unformulated claim may be regarded as being submitted by implication and as inherent in the application initiating the action, provided that it is necessarily linked to the subject-matter and basis of the action (see, in particular, judgment of the Corte Suprema di Cassazione of 14 June 1991, No 6727, Mass. Foro It. 1991, p. 582).

32. In the present case, the Commission states in its application that it relied on the termination clause referred to in Article 8(2)(d) of Annex II to the contract, owing to TVR's non-performance of the contract, and that TVR sent it a series of final documents, including the cost statements which, pursuant to the contract, should have been sent within three months of cessation of the work financed by the Commission. The Commission states that, as it did not approve all the amounts indicated by TVR, it requested the latter to reimburse in part the sums advanced under the contract. On that basis, the Commission requests the Court, in particular, to order TVR, pursuant to the first subparagraph of Article 8(4) of Annex II to the contract, to reimburse in part the amounts received by way of financial contribution.

33. As the Commission claims reimbursement in accordance with the first subparagraph of Article 8(4) of Annex II to the contract on the ground that the contract was, it contends, terminated following the implementation of the termination procedure provided for in Article 8(2)(d) of Annex II to the contract, its claim necessarily presupposes that the Court will declare that the contract was actually terminated.

34. It is therefore necessary to hold that in the present case the Commission has submitted by implication an application for a declaration that the contract was automatically terminated pursuant to the termination procedure.

35. It follows that the plea of inadmissibility cannot be upheld.

    Termination of the contract

36. The Commission maintains that it terminated the contract on the ground, in particular, that TVR had delayed considerably the completion of the work and had proved incapable of performing its role as principal contractor to a satisfactory standard. It states that it first gave TVR notice in writing to remedy the breach by letter of 23 January 1992, and then, when TVR failed to respond, it terminated the contract by registered letter of 25 March 1992. The Commission further states that even if the second letter should be regarded as actually constituting notice to remedy the breach, the contract was automatically terminated one month after that letter, in accordance with Article 8(2)(d) of Annex II to the contract and Articles 1454 and 1456 of the Italian Civil Code, and that, accordingly, there is no need to apply for a declaration that the contract had been terminated. At the hearing, the Commission abandoned its argument that the letter of 23 January 1992 constituted notice to remedy the breach and stated that the contract was automatically terminated when TVR failed to comply with the notice communicated by letter of 25 March 1992.

37. TVR replies that that letter giving notice to remedy the breach, to which it replied by letter of 15 April 1992 in which it disputed point by point the breaches alleged by the Commission, was not followed by a letter formally terminating the contract. As the contract has never been terminated by a formal declaration to that effect, the Court cannot declare that it has been terminated.

38. TVR's arguments cannot be upheld.

39. In that regard, it should be observed that the letter of 25 March 1992 giving notice to remedy the breach was, in any event, followed by a letter which clearly indicated that the Commission regarded the contract as terminated. By letter of 10 June 1992, the Commission reminded TVR that it had informed it by letter of 25 March 1992 of its decision to terminate the contract. The Commission also requested TVR to submit the consolidated cost statements of all the associated contractors in respect of the period 1 January 1991 to 31 May 1992. Pursuant to Article 5(2) and (4) of the contract, those statements were to be sent to the Commission within three months of the completion, cessation or termination of the work financed by the Commission.

40. Furthermore, it is clear from the case-file that, in spite of being given notice to remedy the breach on 25 March 1992, TVR did not succeed in carrying out within the one-month period specified in the notice certain work which, under the contract, should have already been completed. Thus, in its letter of 15 April 1992, referred to in paragraph 36 of the present judgment, TVR itself acknowledged that the construction of the prototype filament-winding equipment had still not been completed. Under the contract, that prototype should have been completed before the end of the 24th month of the contract, namely 31 December 1991. In that regard, a delay of several months in completing the principal objective of the contract must be regarded as a seriousbreach, especially as, contrary to Article 2(2) of the contract, TVR did not advise the Commission of that delay.

41. It is clear, therefore, that the formal and substantive conditions on which the contract could be terminated were satisfied.

42. In the light of the foregoing, it must be held that the contract was terminated at the latest on the day on which TVR received the Commission's letter of 10 June 1992.

    Reimbursement of the advance

43. Under the first paragraph of Article 8(4) of Annex II to the contract, where the Commission terminates the contract on the ground of non-performance by a contractor of its obligations, it may require the reimbursement of all or part of its financial contribution and is to have regard, to such extent as may be fair and reasonable, to the nature and results of the work undertaken and its use to the Commission.

44. The Commission contends that, having regard to the supporting documents produced by TVR and to the auditor's report submitted by Reconta Ernst & Young, TVR must reimburse the sum of ECU 77 580.80. The Commission states that it evaluated the work carried out by TVR from two aspects: it instructed Reconta Ernst & Young to carry out a financial assessment and Professor Goedel to carry out a technical assessment. The auditors could only carry out a financial check, which is different from a technical assessment. In other words, in the course of an audit it is possible to evaluate the hourly labour cost per person, but not to determine whether it is technically reasonable to spend 10 hours on an operation which only requires two. It is for that reason that the financial assessment must be accompanied by a technical assessment, which, in the present case, was carried out by Professor Goedel, who reached a negative conclusion.

45. TVR claims that the Commission contradicts itself, since it first approved the consolidated cost statement and then claimed reimbursement of ECU 109 444.80. The inconsistency on the Commission's part is even more serious, since it subsequently reduced its claim for reimbursement to ECU 77 588.80, in spite of the results of the financial audit submitted by Reconta Ernst & Young, which shows that TVR owes at the most a sum of ITL 22 000 000. TVR also maintains that the Commission has adduced no evidence that the number of hours actually spent on the project was excessive. As regards the technical assessment, TVR states that in its opinion Professor Goedel did not address the question of hours of labour.

46. First of all, TVR's allegation that the Commission acted inconsistently in initially approving the consolidated cost statement and then refusing it must be rejected. Article 39 of Annex II to the contract provides that cost statements may be subject to verification even after the Commission has reimbursed costs, and that such verification may take place up to two years after the date of the termination or completion of thecontract. Where necessary, therefore, the Commission may amend its previous calculation of costs, within the period referred to above, which is precisely what it did in the present case.

47. Next, TVR's allegation that the Commission acted inconsistently in continuing to claim reimbursement of the sum of ECU 77 588.80, notwithstanding the results of the financial audit, must also be rejected. That financial audit consists essentially in checking that the costs invoiced correspond with those actually borne by the undertaking concerned as shown in its accounts. Thus, even supposing that the costs invoiced correspond exactly with those actually borne by the undertaking concerned, that does not in any way prejudge the technical examination of the appropriateness of the costs invoiced in the light of the services actually provided by that undertaking under the contract.

48. It therefore remains to ascertain whether there is any evidence in the case-file of such a kind as to call in question the entitlement to reimbursement on which the Commission relies.

49. In its interim report of 30 January 1992 and its letter of 15 April 1992, TVR indicated the state of progress of the work it was required to carry out under the contract. In its letter of 29 March 1993, it provided details of the costs incurred with reference to the various tasks referred to in the contract. In its letter of 6 June 1995, in which it amended its previous calculation of the reimbursable costs, the Commission itemised those costs in the same order as TVR.

50. However, it is clear from those documents that in each case where the Commission only partially recognised the costs recorded by TVR, either the relevant work had not been completed in accordance with the contract or the staff employed on the task exceeded the specified threshold. In the only case in which the Commission did not claim any reimbursement, the costs in question related to work which, under the contract, was to be carried out not by TVR but by one of its associated contractors, namely ICSTM.

51. It is clear, therefore, that the evidence in the case-file is not of such a kind as to call in question the entitlement to reimbursement on which the Commission relies.

52. The claim for reimbursement submitted by the Commission must therefore be upheld and the defendant must be ordered to reimburse the sum of ECU 77 558.80.

    Interest

53. The Commission also claims that TVR should be ordered to pay interest at the agreed rate on the sum of ECU 77 558.80 from 1 February 1990.

54. TVR has submitted no argument on that point.

55. According to the second subparagraph of Article 8(4) of Annex II to the contract, in the event of termination of the contract by the Commission, the party in breach must reimburse not only the sums advanced by the Commission but also interest at the agreed rate on those sums from the date on which payments were received. The rate of interest applicable is the rate applied by the European Monetary Cooperation Fund for its operations in ecus, published on the first working day for each month, increased by 2 percentage points.

56. As it must make reimbursement to the Commission of the sum of ECU 77 558.80 representing its primary obligation, TVR must also discharge its secondary obligation by paying interest at the agreed rate on that sum from 1 February 1990, the date on which it accepts that it received the advance of ECU 460 000.

    Compensation for damage

57. Relying on Article 1453 of the Italian Civil Code, the Commission also claims that TVR should be ordered to pay the sum of ECU 7 700 by way of compensation for the damage which the Commission says it has sustained as a result of non-performance of the contract.

58. In that regard, it points out, first, that some of its officials spent a large number of hours monitoring the defendant's activities and requesting it on numerous occasions to comply with the time-limits for drawing up the scientific reports. Second, the Commission was obliged to employ the services of a firm of auditors in order to audit TVR's work. Third, the Commission was unable to enjoy the advantages provided for in Article 19 of Annex II to the contract and thus profit from the knowledge acquired through the research which it had funded or from the exploitation of the patents which might have been taken out on that occasion. Fourth, by entering into a contract with a party which did not honour its commitments, the Commission suffered a loss of credibility in the eyes of all those with a potential interest in entering into a contract with it.

59. TVR contends that the Commission has failed to show that it suffered the alleged loss.

60. First of all, it should be pointed out that, under Article 11 of the contract, the contract is to be governed by Italian law.

61. Even supposing that Article 1453 of the Italian Civil Code, which provides that a contractor is entitled to demand that the defaulting party compensate it for its loss, applies only where the contract is terminated by the court, the fact remains that, under Article 1218 of that code, any party who does not properly discharge his obligations is required to make good any consequent loss unless he can show that his failure to do so was due to force majeure.

62. It is therefore necessary to ascertain whether the Commission has succeeded in establishing that it actually sustained the harm alleged.

63. As regards the costs allegedly caused by the additional work which the Commission's officials were required to perform in administering the contract, it should be pointed out that the combined provisions of Article 4(3) of the contract and Article 8(2)(d) of Annex II thereto gave the Commission the right to take the appropriate steps in due time in consequence of the other party's failure to honour its contractual undertakings and to bring the contractual relationship to an end, in advance and unilaterally (see, in that regard, Case C-334/97 Commission v Montorio [1999] ECR I-3387, paragraph 53).

64. Since the Commission tolerated TVR's failure to honour its commitments for some time before terminating the contract, the additional costs of administering the contract during that period do not constitute harm attributable to TVR.

65. As regards the alleged harm represented by the auditor's fees, it is clear that the Commission did not at any time attempt to establish a link of cause to effect between TVR's conduct and the need for a financial audit. In those circumstances, the auditor's fees cannot in any event be attributed to TVR.

66. As regards the other heads of damage formulated by the Commission, it has adduced no specific and persuasive evidence to substantiate them.

67. The Commission's claim for damages must therefore be dismissed.

    Counterclaim

68. TVR requests the Court to declare that the Commission is required to perform the contract and therefore to order it to pay the sums necessary to complete the contract.

69. The Commission claims that as the contractual relationship was properly severed because TVR was in breach of its obligations thereunder, it no longer has any obligation towards TVR.

70. Since the Commission's action has been upheld, TVR's counterclaim must be dismissed.

71. Pursuant to Article 2(1) of Council Regulation (EC) No 1103/97 of 17 June 1997 on certain provisions relating to the introduction of the euro (OJ 1997 L 162, p. 1), the reference to the ecu must be replaced by a reference to the euro at a rate of one euro to one ecu.

    Costs

72. 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 the Commission has applied for costs and TVR has been essentially unsuccessful, TVR must be ordered to pay the costs.

On those grounds,

THE COURT (Sixth Chamber)

hereby:

1. Orders Vetroresina Spa (TVR) to pay the Commission of the European Communities the sum of EUR 77 558.80, together with interest at the agreed rate from 1 February 1990 until the debt is paid in full;

2. Dismisses the remainder of the application;

3. Dismisses Tecnologie Vetroresina SpA (TVR)'s counterclaim;

4. Orders Tecnologie Vetroresina SpA (TVR) to pay the costs.

Gulmann Puissochet Schintgen

Delivered in open court in Luxembourg on 16 January 2001.

R. Grass C. Gulmann

Registrar President of the Sixth Chamber

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1: Language of the case: Italian.