C-41/98

OPINION OF MR RUIZ-JARABO — CASE C-41/98

O P I N I O N OF ADVOCATE GENERAL RUIZ-JARABO C O L O M E R delivered on 15 June 2000 1

1. By the present action under Article 181 automated equipment of production in of the EC Treaty (now Article 238 EC), the filament-winding.' Commission of the European Communi- ties, following a breach of contract which it alleges to have been committed by TVR- Tecnologie Vetroresina SpA ('the defen- dant' or 'TVR'), asks the Court to order the defendant to reimburse certain sums 3. The following clauses of the contract are and to pay compensation for loss and directly relevant to the proceedings: damage.

— The Commission's financial contribu- tion (up to a ceiling of ECU 1 161 150) was divided into an initial advance of ECU 460 000, followed by subsequent 7. According to the information before the periodic payments to be made in Court, TVR commenced work on 1 Janu- respect of the cost statements (Arti- ary 1990 and DSM on 30 March of the cle 4.1). same year. However, ICST was unable to hire the staff it needed to begin its share of the work until it signed an agreement with TVR on 21 May 1990.

4. Both parties were entitled to terminate the contract on any of the grounds set out in Article 8 of Annex II. Specifically, under subparagraph 2 (d) of that article, the 8. Other than this initial delay in perfor- Commission could terminate the contract mance of the contract, the first year of the in the event of non-performance by the project passed by without difficulties. For contractor, unless there were reasonable that reason, on 22 July 1991, the Commis- and justifiable technical or economic rea- sion transferred ECU 128 418.20 to TVR, sons, if the contractor was still in breach in accordance with the cost statement one month after receipt of notice in writing submitted by the defendant. from the Commission, sent by recorded delivery or registered post, requiring per- formance of those obligations.

9. On 13 November 1991, TVR produced a report for the period 1 January to 5. Under Article 12 of Annex II, the Court 31 October 1991. By letter dated 2 Decem- of Justice of the European Communities ber 1991, the Commission reminded TVR has sole jurisdiction to deal with any that each report was supposed to cover a dispute concerning the contract. Article 11 period of six months, while at the same of the contract stipulates that it is to be time drawing attention to the importance governed by Italian law. of the mid-term report.

13. On 25 March 1992, the Commission gave the defendant notice that it intended to terminate the contract under Arti- 17. TVR submitted the cost statements on cles 8.2(a) and 8.2(d) of Annex II. The 2 July 1992 and these were initially Commission stated that the letter marked accepted by the Commission. However, the commencement of the one month's on 23 March 1993, the Commission sent

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the defendant a final statement of costs I I I— The parties' claims which significantly reduced the figures for 1992. TVR rejected that statement in a letter dated 29 March 1993, but the Com- mission none the less demanded repayment of ECU 109 444.80, representing the dif- 22. The Commission claims that the Court ference between the sums already paid to should order the defendant: the defendant and the approved costs.

18. On 13 August 1993, the Commission instructed Ernst & Young to carry out an — To repay ECU 77 558.80, together audit of TVR's accounts. relating to the with interest from 1 February 1990 contract. until payment is made in full;

19. After receiving the results of this audit, the Commission notified TVR, on 6 June — To pay ECU 7 700, or such other 1995, that it had decided to reduce the sum amount as the Court may deem equi- it required the defendant to repay to ECU table, by way of compensation for 77 558.80. damage;

The Commission goes on to refer to the — Order the Commission to pay the costs. case-law of the Corte Suprema di Cassa- zione concerning Article 1453 of the Italian Civil Code on the termination of contracts. The Commission claims that, according to that case-law, there is no requirement that the intention to terminate a contract for non-performance be expressly formulated in an action before the court, since such an intention may be inferred from other claims IV — Admissibility of the action 3 — The defence erroneously cites Article 1958. Article 1458 of the Italian Civil Code provides: 'Termination of the contract on the ground that it has been breached shall have retroactive effect vis-à-vis the parties, except in the case of contracts whose performance is continuous or periodic, where termination shall not affect activities already per- formed. Termination, even where it has been expressly agreed, shall not adversely affect the rights acquired by third 24. TVR claims that the action should be parties, save as regards the effects of the lodging of the declared inadmissible because, as Italian action for termination of the contract.'

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which, although different in purpose, con- similar plea of inadmissibility after con- tain an implied application for termina- firming the validity of the Commission's tion. 4 The Commission states that the unilateral termination of a contract. 7 In the Corte Suprema di Cassazione has held, in light of that case-law, it is appropriate to particular, that the intention to terminate a examine whether, in the present case, the contract may be contained by implication contract between the Commission and in an action whereby one of the parties to TVR was automatically terminated on the the contract seeks an order that the other ground of non-performance by the defen- party, who is in default, is to reimburse the dant. sums he was paid when the contract was signed. 5

7 — That is not the only case in which the Court has adjudicated on a claim for reimbursement of sums paid and for 6 compensation for damage brought by the Commission, 26. In Commission v SNUA, to which I despite the fact that the latter had failed to seek a prior shall refer later, the Court dismissed a declaration that the contract had been terminated on the ground of non-performance by the other party: see Case C-334/97 Commission v Comune di Montario al Vomano [1999] ECR I-3387 and Case C-65/97 Commission v Cascina Laura and Garibaldi [1999] ECR I-1017. 4 —Judgment of the Corte Suprema di Cassazione of 1 5July 8 — Article 1456 provides: 'The parties to the contract may 1980, No 4591. expressly agree that the contract will be terminated if a 5 — Judgments of the Corte Suprema di Cassazione of 4 October specified obligation has not been performed in accordance 1976, No 3217; of 15 July 1980, No 4591; and of 22 Feb- with the rules set out. If such a situation arises, the contract ruary 1992, No 1908. will be terminated automatically when the interested party notifies the other that he intends to invoke the termination 6 — Case C-69/97 Commission v SNUA [1999] ECR I-2363. clause.'

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breach of a specified obligation. According 31. Nevertheless, I believe that, pursuant to to the case-law of the Corte Suprema di the case-law of the Court of Justice, the Cassazione, two conditions must be satis- contract between the Commission and fied in order for one party to be entitled to TVR can be exempted from the require- terminate the contract unilaterally by rely- ment that the obligation whose breach ing upon a termination clause: the clause in could lead to unilateral termination must question must be valid and responsibility be specified. for the breach must be attributable to the other party.

30. So, in the light of the case-law of the Corte Suprema di Cassazione, the termina- tion clause in the contract between the Commission and TVR could be regarded as a stylistic clause. In fact, as I have already 33. None the less, the defendant contended pointed out, the Commission reserved the that, as the Commission had acknowl- right to terminate the contract if the edged, the breach of contract was due to contractor breached any of its obligations. force majeure, with the consequence that it could not incur any blame and that an express termination clause which was sub- 9 — By way of example, see the judgements of the Corte ject to the condition that one of the parties Suprema di Cassazione of 23 May 1985, No 3119 (Rep. Giur. it., Obbligazioni e contratti, 393) and of 2 June should be held responsible for non-perfor- 1990, No 5169 (Rep. Giur. it., Obbligazioni e contratti, 447). The views of Italian civil lawyers appear to be in harmony on this point; see, for example, Mosco, L., La risoluzione del contratto per inadempimento, Casa editrice Don. Eugenio Jovene, Naples, 1950, pp. 196-201, and 10 — Emphasis added. Clause 4.3 of the contract dealt with the Sacco, R. and De Nova, G., Trattato di diritto civile, Unione periodic reports which the contractor undertook to send to Tipografico — Editrice Torinese, Turin, p. 624. the Commission.

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cause or origin. 36. To my mind, the same criteria used by the Court of Justice in relation to the requirement of responsibility for the breach The Court of Justice added: 'Whilst it is of contract may also be applied to the true that the case-law of the Corte Suprema requirement which Italian law imposes on di Cassazione requires that, in order to termination clauses, namely that the obli- bring express termination clauses which are gations to which they apply must be subject to Article 1456 of the Italian Civil specified. Code into effect, it must be possible to attribute responsibility for non-perfor- mance to the contractor in default, the fact remains that, under Article 1322 of the Code, the parties' right freely to determine 37. Therefore, it can be deemed that, by the terms of the Contract within the limits availing themselves of the principle of set by the law is recognised as forming part freedom of contract recognised in Arti- of the principle of freedom of contract. It cle 1322 of the Italian Civil Code, and does not therefore preclude the parties to a having regard to the particular nature of contract from deciding to insert therein a the relations between the Commission and termination clause which is not subject to the undertaking to which it makes a the condition that the contractor must be financial contribution, 12 the parties freely responsible for non-performance, by way of derogation from the usual format of contracts under Italian law.' 11 12 — In that regard, it is interesting to note the view of Professor Draetta, who argues that contracts between the Commu- nity and private individuals should be deemed interna- tional contracts, in respect of which Italian case-law allows the parties to agree that provisions, including compulsory provisions, of the national law of one of the parties, or of

In fact, the contract between the Commission and TVR, and particular nature of relations between the in particular Annexe II thereto, bears all the hallmarks of what is known in international commerce as a self- regulatory contract, in which the parties set out in detail the rules applying to performance and termination (termi- nation by default) of the contract (see Bianchi, M. and 11 — Commission v SNUA, cited in footnote 6 above, para- Saluzzo, D., ƒ contratti internazionali. Il Sole 24 Ore, graph 23. Milan, 1997).

13 — In mv Opinion in Case C-40/98 (ECR 2001, I-307, I-308) in which the Commission and TVR dispute the way in 40. It cannot be inferred from a literal which another research contract was carried out, I stated reading of the letter of 23 January 1992 that unilateral termination of that contract by the Com- mission could also be deemed to be valid under Arti- that the Commission was invoking the cle 1454 of the Italian Civil Code (see footnote 14 of my opinion). However, in the present case there is no evidence termination clause. To my mind, this letter that the requisite conditions have been satisfied. serves more as a warning to the defendant In particular, pursuant to the case-law of the Corte Suprema di Cassazione on Article 1454, the period within that the contract might be terminated which the defaulting party is to remedy the breach must be reasonable and must not in any event be less than fifteen owning to its undeniable delay in submit- days. As the Commission itself acknowledges, it would ting the periodic reports. The wide power have been impossible for TVR to remedy the breaches it was accused of — namely, delay in submitting the peri- which the Commission enjoys to terminate odic reports and mismanagement of the project — within the one-month period specified by the applicant. the contract unilaterally carries with it the Therefore, I conclude that in the present case unilateral termination of the contract could only have taken place obligation to state clearly that it intends to under the termination clause contained therein. exercise that power.

C. The defendant's breach of the contract Finally, the Commission stated: 'This letter should be interpreted as being the one month's notice required before termination on the grounds of Articles 8.2(b), 8.2(e), 8.2(f) and 8.2(g)'. 43. The applicant opened its letter of notice by stating that 'the Commission, according to Article 8, and more specifically para- graphs 8.2(a) and 8.2(b) of the model contract, [does] intend to terminate your contract after the Mid-Term Assessment meeting,' from which it may be inferred The latter reference is rather odd, since in that the ground for terminating the con- omitting paragraph (a) (which specifies a tract was not merely the fact that the notice period of two months) and including defendant had breached one of its obliga- paragraphs (e), (f) and (g), which govern other grounds for terminating the contract, it does not refer to the same contractual 14 — In its defence, TVR expressly accepts that the Commis- sion's letter of 25 March 1992 amounted to the notice required in the termination clause. However, the defendant goes back on that in the rejoinder, where it states that the letter does not meet the minimum requirements which 15 — The reasons were as follows: complete lack of coordina- tion among the partners; objectives still unclear; unjusti- Article 1454 of the Italian Civil Code lays down for a fied delays in completing activities; prime contractor's lack notice specifying a breach of contract: namely, that the of ability to manage industrial research activities; the notice must invite the other party to carry out a specified activities carried out to date (after two years of work) were activity within a given period, failing which the contract mainly concentrated on literature research and product will be terminated. Aside from the question of the development (full scale winding machine), the use of which admissibility of that allegation, which was made in the was still unclear (of no relevance in the current research rejoinder and contradicts what was stated in the defence, nor industrial use in the future); complete lack of plans for suffice it to say that it is Article 1456 of the Italian Civil exploitation, even in a preliminary form; complete mis- Code — dealing with express termination clauses — that understanding of scope, objectives and rules of the Brite- applies to the present case, and not Article 1454 (see EuRam programme; no results presented during the mid- footnote 13 above). term assessment meeting.

48. In the rejoinder, TVR refers to the case- law of the Corte Suprema di Cassazione on the termination of contracts for failure to comply with time-limits, according to 46. In an attempt to justify this, TVR which, in order for a time-limit to be of explains in the defence that there was a the essence — and for failure to comply with it to justify termination of the con- tract — expiry of that time-limit must 16 — Paragraph (e) deals with the situation where the contrac- have the effect that the other party no tor, in order to obtain the financial contribution from the Commission, makes false or incomplete statements; para- longer has an interest in the performance of graph (f) with the situation where the contractor fails to the contract. TVR states that in the present start the work on the date specified in the contract and the Commission does not accept the revised date proposed; case the Commission's interest in the com- and paragraph (g) with the situation where force majeure lasts for more than four months. pletion of the project did not cease to exist

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17 — Likewise, TVR included in the rejoinder a letter from the 53. The Commission bases its conclusion Commission to the independent expert, dated 6 January 1992 and copied to the defendant, informing him that the on two reports made by an independent mid-term assessment meeting had been scheduled for 4 February 1992. In TVR's view, that letter, which external expert, Professor Goedel of the conflicts with the ones of 20 and 23 January 1992 in which it was required to comply with a time-limit which University of Aachen. In the first of his the Commission had already agreed to extend, proves that reports, dated 4 February 1992, Professor the delays had been overcome and accepted. To my mind, aside from the fact that the submission of that document Goedel states: 'The results which were with the rejoinder was out of time, the letter does not in presented had a great delay (approximately any way justify the defendant's delay. First, when it informed the expert that '... the meeting for this project nine months). The parties should practise has been postponed and the revised date is 4 February 1992,' the Commission was not accepting TVR's delay but more interactive work. The reports present was merely adjusting to it. Second, I can find no what was planned to do, present the inconsistency between that letter and the letters of 20 and 23 January, since they deal with different matters. The first letter deals with the mid-term assessment meeting, while the other two deal with the mid-term report which TVR was required to submit. 18 — This requirement is discussed in point 48 of this opinion.

The Commission maintains that the second negative report was delivered verbally dur- ing the course of various meetings with its officials.

As regards the second negative report, the defendant, after questioning whether that

19 — There does not appear to be a written record of this second report. 20 — According to TVR, this is clear from the fact that it submitted the documents on 30 January 1992 and the mid- term assessment meeting tookplace on 2 February 1992, which means it would, in TVR's opinion, have been 57. In my view, it is not only permissible impossible for the expert to produce a negative, six-line, hand-written report dealing with documents several hun- but also desirable that, in research pro- dred pages long. grammes like the one at issue in the present

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case, the Commission should base itself on assessment of the results submitted at the the opinions of acknowledged experts in mid-term assessment meeting. order to assess the quality of the work carried out. However, it is also my view that the Commission cannot base itself on the contents of the second negative report allegedly made by Professor Goedel when, rather surprisingly, there is no written record of its contents. 61. For those reasons, I conclude that the Commission was entitled to terminate the contract under Article 8.2 (d) of Annex II thereto.

59. In the light of that report, and of the delays in submitting the periodic reports, I consider that the Commission was entitled 63. In its reply, the Commission states that to take the view that the project had lost its its aim in sending the notice was for the raison d'être and that it was therefore contract to be performed, in other words, necessary to suspend Community funding. for the activities provided for therein to be carried out. Clearly, those activities could only have been carried out in the short period of one month if they had already been at an advanced stage at the time the notice was sent, which was not the case in view of the lengthy delay which TVR had built up. The Commission believes that the 60. It must also be emphasised that, in any response sent by the defendant on 15 April event, under Article 4 of Annexe I to the 1992 is merely an attempt at an excuse and contract (Technical Provisions), the Com- has nothing whatever to do with the mission was entitled to terminate the performance of the contract which it had contract unilaterally, based on its own requested.

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68. For the reasons given, it is my view that 66. The Commission rejects the defendant's the contract between the Commission and contention. The appointment of a new TVR was automatically terminated under project director in February 1992, even the termination clause contained therein. though the latter was a well-known, highly- Pursuant to the case-law of the Court of qualified individual, could not rectify a Justice, to which I have already referred, situation which, by that time, had been the defendant's plea of inadmissibility irreparably impaired. With regard to the should be rejected, since, as the contract failure to terminate the contract formally, has already been terminated, the Commis- the Commission points out that, under sion is entitled to claim reimbursement of Articles 1454 and 1456 of the Italian Civil the sums it has paid and compensation for Code, termination took place automatically damage without first being required to and there was therefore no need for a bring a formal action for termination of declaration to that effect by the courts. the contract.

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V — Substance of the claim opinion, with the exception of certain accounting errors, 21 the costs submitted were in accordance with the ones contained in TVR's books and with the contract terms.

A. Reimbursement of part of the advance payment

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74. The Commission denies that there is whatsoever that the actual working time any such inconsistency. In that regard, it was 'exaggerated.' With reference to the cites Article 21.4 of Annex II to the con- technical review, TVR states that Professor tract, which provides: 'Subject to Article 39 Goedel did not deal with the question of of this Annex, periodic payments made working time. against cost statements shall be considered as advances until acceptance, in accordance with the procedure specified in Annex I, of the appropriate deliverable specified in Annex I, or, if no deliverables are specified, until acceptance of the final report.' In the Commission's view, that provision authorises it to claim reimbursement of 76. To begin with, TVR's claim, founded sums already paid if an audit performed in on an alleged inconsistency by the Com- accordance with Article 39 of Annex II to mission in initially accepting, and then later the contract reveals serious breaches. rejecting, the consolidated cost statement, should be dismissed. Article 39 of Annex II to the contract stipulates that cost state- ments may be subject to verification even after the Commission has reimbursed costs. Therefore, the defendant ought to have been aware that the Commission could, as indeed it did, carry out financial and technical audits and, where appropriate, The Commission states that it assessed require reimbursement of sums which did TVR's work on two levels: financial (Ernst not correspond to costs actually incurred. & Young) and technical (Professor Goe- del). It points out that the firm of auditors was only qualified to conduct a financial audit, which is not the same as a technical review. In other words, the auditors can evaluate the cost per person of an hour's work but they are not capable of establish- ing whether it is technically reasonable to 77. The Commission does not accept the devote ten hours to an activity that only following costs: 22 requires two hours. Thus the financial review needed to be accompanied by a technical review which, in this case, was carried out by Professor Goedel, whose findings were negative.

79. The Commission's claim gives rise to the difficulty of the burden of proof. Is the Commission freely entitled to reduce the amount of the costs claimed by TVR; and, — External assistance. Of if so, within what limits? ITL 26 481 050 claimed by TVR, the Commission rejects ITL 8 100 000, for which the auditors found no justifica- tion, and ITL 13 770 000 which, in the Commission's view, cannot be accepted under this heading. 80. In the light of the provisions of Annex II to the contract, the answer to the first question should be in the affirma- tive. In that regard, the first paragraph of Article 8.4 provides that '... the Commis- sion may require the reimbursement of all or part of its financial contribution and — Overheads. The Commission accepts shall have regard, to such extent as may be them in an amount equivalent to 25% fair and reasonable, to the nature and of the labour costs (at the suggestion of results of the work undertaken and its the auditors). Since, in the Commis- use, within the framework of a Community sion's view, the labour costs amount to RTD programme, to the Commission.' ITL 115 530 000, the overheads come Article 21.4, cited above, confirms that t o ITL 22 8 8 2 5 0 0 ( a n d n o t the Commission has that power. ITL 73 683 000, as declared by TVR).

81. Neither the provisions referred to nor the rules of equity permit the view that the Commission's power in that regard is 78. Taking those reduction into account, completely unrestricted. To my mind, both the Commission concludes that the allow- parties to the contract are under an obliga- able costs for 1992 amount to ECU tion to give an adequate justification of 115 689.45, which, added to the costs for 1990 (ECU 128 418.20) and 1991 (ECU 266 744.75), makes a total of 23 — Due to an arithmetical error, the Commission states that ECU 510 852.40. Since the payments the allowable costs amount to ECU 510 862.40 and that the difference between this sum and the payments already already made to the defendant amount to made amounts to ECU 77 558.80.

82. Following that line of reasoning, the first matter to look at, based on the documents filed in the proceedings, is whether the defendant justified its costs sufficiently. — Finally, in TVR's letter dated 29 March 1993, in which it contests the Com- mission's closing financial statement, the number of hours worked and the costs incurred are set out under a series 83. The following correspondence deals of headings, but once again there is no with the costs incurred during the period information about the work underta- 1 January to 31 May 1992: ken. Furthermore, as the Commission points out, one of these headings is in any event unacceptable, since it refers to work which, according to Annex I to the contract, was to be undertaken by ICST. — In its reply to the Commission's notice of termination (letter of 15 April 1992), TVR enclosed a detailed work schedule for the six-month period from 1 April to 9 October 1992, giving details of the related expenditure. It is, however, only a work schedule and 84. The conclusion must be drawn that there is no record that it was actually there is no proof that the defendant justi- carried out. fied its costs calculations sufficiently and that, under the terms of the contract, the Commission was entitled to reduce the total balance in accordance with its own technical assessment.

— It appears that TVR attached its cost statement for the period at issue in these proceedings to the letter it sent to the Commission on 2 July 1992. The defendant, however, has not deemed it necessary to lodge that statement with 85. Therefore, I propose that the Court the Court. should allow the Commission's claim for

24— Pursuant to Article 2(1) of Council Regulation (EC) 26 — In response to a question I asked during the hearing, the No 1103/97 of 17 June 1997 on certain provisions relating defendant's representative indicated its agreement with the to the introduction of the euro (OJ 1997 L 162, p. 1), as Commission's interpretation that the second paragraph of regards the amount of the principal sum and the interest, Article 8.4 of Annex II to the contract provides for a fixed all references to the ECU must bé replaced by a reference rate of interest in the event of termination of the contract. to the euro at a rate of one euro to one ECU. Since the parties are in agreement on this point, there is no 25 — The Commission calculates that TVR received the advance need to analyse this question in any more detail, although I two months and nine days after the payment order (which believe that the wording of this clause could, perhaps, is dated 21 December 1989). allow a different interpretation.

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dant's activities and requesting it to amounts to ECU 7 700, although the Court comply with the time-limits laid down may calculate it differently using the option for submitting the periodic reports. 27 provided in Article 1226 of the Italian Civil Code, which provides that where the exact amount of the loss cannot be proved it is to be determined by the court according to equitable principles.

— The Commission was obliged to instruct a firm of auditors to undertake a financial review of TVR's work.

91. In my view, of all those heads of claim, which are disputed by the defendant, only — The Commission has been unable to the second, and possibly the third, should enjoy the possible advantages provided be upheld. The other two should be for in Article 19 of Annex II to the rejected, since: contract, concerning the exploitation of information or patents acquired as a result of the research it funded.

regarded as constituting damage dis- 93. By contrast, sufficient evidence has tinct from the burden of costs. 28 been provided of the expenditure (ECU 6 610) arising from the consultancy contract between the Commission and Ernst & Young to enable the total cost of this contractual relationship to be deter- mined. Nevertheless, due to the fact that in Case C-40/98, in which the same parties are contesting termination of another research contract, I have proposed that the Court order the defendant to reimburse (b) There can be no 'loss of credibility' vis- the Commission for the cost of the audit, à-vis third parties as a result of one and since Ernst & Young's invoice refers party to a contract, such as the one in jointly to the review of both contracts, it these proceedings, failing to fulfil all its follows that in the present case this claim obligations and causing the contract to by the Commission should be dismissed so be terminated. that it does not result in the latter's unjust enrichment.

VI — The counterclaim

— the costs of the proceedings.

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