Procurement/Subsidy Law: Even Unintentional Violations of Subsidy Conditions Lead to Revocation of Subsidy Notices

Recipients of grants from EU-funded rural development programs must pay careful attention to compliance with the terms of grant notices. This includes providing the grantor with complete information on the award of the services to be financed with the money. Even if only inadvertently incomplete information is provided, this can lead to the revocation of already approved funding. This is the finding in a decision by the German Federal Administrative Court (Bundesverwaltungsgericht – BVerwG) dated January 4, 2022 (Ref.: 3 B 14.21).

The case

The decision of the Federal Administrative Court is based on the following facts: The grantor, a public authority, granted the recipient, an agricultural business, a non-repayable subsidy of up to € 369,566 as project funding for the construction of three steel silos for the storage of 9,000 tons of grain and an intake silo with the necessary technical equipment. The subsidies came from an EU-funded program to promote development measures in rural areas. One of the conditions of the subsidy was that the farm had to award contracts for the project only to competent and capable bidders on competitive terms. As far as possible, at least three comparable offers were to be obtained. In the event of a breach of this requirement, the grant notice contained the right of revocation of the grant. The company began implementing the project and, not long before the end of the subsidy period, submitted the application to pay out a subsidy of € 287,796. The grant authority reviewed the application and found several violations of the grant conditions. Among other things, one of the bids for concrete and reinforced concrete work was initially the most favorable of three offers, before the agricultural company obtained an even more favorable offer following negotiations with the two other, initially not successful bidders. The grant recipient had not submitted the initially lowest bid with the documentation for consideration of the payment application. The grantor decided that the grant should be rejected in its entirety because the grantee had failed to submit the information required for the audit. Therefore, the agency revoked the grant award, refused to disburse the funds, and assessed costs for the revocation.

The decision

The agricultural company defended itself against this by filing a lawsuit with the administrative court. It argued, among other things, that the funding authority had not suffered any damage as result of the submission of incomplete documents. Moreover, the documents had only been submitted incompletely by mistake. Although the Administrative Court overturned the decision to revoke the grant application and the costs, it upheld the decision not to pay out the grant. The grant recipient filed an appeal against this decision. The Federal Administrative Court dismissed the appeal. It pointed out that financial damage is not a prerequisite of Article 35 (6) sentence 1 of Regulation (EU) 640/2014, which is decisive for the decision of the grantor, to reject or withdraw a grant. Rather, it is sufficient that false evidence was submitted to receive grant funds or that it was neglected to provide the information required for the review of use. Moreover, it is obvious that damage can occur if a subsidy is paid out despite a breach of Union rules. The Federal Administrative Court further explained that it also does not matter whether the required information was not provided deliberately or out of carelessness. Even negligent behavior, i.e. "disregarding the care required within the procedure", is sufficient.

The consequences

The decision of the Federal Administrative Court clearly demonstrates that recipients of state subsidies must strictly observe the conditions under which they granted the subsidies and carefully handle the funds given to them. In rural areas, major investments by private companies depend on being supported by government grants. These subsidies are taken for granted when calculating the investment and are often even firmly budgeted for. The sums of money regularly come from rural development programs financed with EU funds. If grant recipients must inform the grantors about the use of the funds, they are well advised not to withhold any information from them. Therefore, as a precaution, they should also provide them with information on the use of funds that they themselves consider unimportant; indeed, the authority's assessment may be different. This goes hand in hand with carefully documenting the awarding of contracts financed from these funds. Only if this documentation is presented in full to the grantor, including information on any multiple rounds of negotiations that may have been conducted, can grant recipients assume that they have fully informed the authority in this respect. Otherwise, they risk that subsidies will not be disbursed or will even be reclaimed - which can lead to considerable financial burdens for a company. For this reason, before sending information to the authority, it should always be checked whether the information is complete or still needs to be supplemented.