Last updated April 2006

The EC model contract establishes various rights and obligations for contractors in FP6 projects. When contractors do not comply with these obligations, the Commission might claim a breach of contract.

If the Commission claims an infringement of contractual obligations, the applicable law for sanctions is determined by the choice of law clause of the contract. EC contracts designate Belgian or Luxembourg law as governing the contract (please see article 12 of the core contract). Contractors should check their contract with the Commission to identify the law applicable in their case.

The following is meant to give an overview on the sanctions foreseen by the underlying EC provisions1.

The European Commission will check any breach of obligations deriving from the EC contract, inter alia any "irregularity". An irregularity is any infringement of a provision of Community law or any breach of a contractual obligation resulting from an act or omission by a contractor which has, or would have, the effect of prejudicing the general budget of the European Communities or budgets managed by it through unjustified expenditure (article II.1.11 Annex II to the EC model contract)

Moreover, it will take action if a contractor violates fundamental ethical principles as referred to in the Rules for Participation.

In any of these cases, the Commission has the right to terminate the participation of the contractor2 concerned; If the consortium cannot provide satisfactory alternative solutions to make up for its breach, the Commission shall terminate the project. This option also includes the possibility of excluding the defaulting party from all other contracts it has entered into with the Commission. If contracts have not yet been signed, the defaulting contractor may be excluded from the evaluation or selection procedure.

The consequences of such exclusions are mainly financial:

In the event of terminations, and if the defaulting contractor has unduly received funds, the Commission will issue a recovery order requiring the defaulting contractor to reimburse the amount of Community contributions or ask it to transfer the amount due to the consortium. Details on the procedure are set out in the Financial Guidelines, Section 5.1.

To safeguard the Commission's financial interests, the contract provides for the possibility of collective financial responsibility within the consortium: If the defaulting contractor does not fulfil his obligation to reimburse the amount due to the Commission and is not a public body, international organisation or a contractor whose participation is guaranteed by a Member State or Associated State, the consortium may be obliged to pay the amount as a last option to recover the outstanding debt3.

Additionally, the provisions provide for the possibility of claiming liquidated damages from a contractor who has received an unjustified financial contribution from the Commission due to overstatement of expenditures. Penalties are regularly determined as a certain percentage of the overstatement. The principle of collective responsibility of the consortium does not apply in the case of liquidated damages.

Penalties can, moreover, be imposed in the event of a grave breach of contractual obligations or irregularities (e.g. failure to complete an audit) or upon contractors who have been found guilty of false declarations. Such penalties generally amount to 2% to 10% of the value of the financial contribution received from the Community by the defaulting contractor. In event of a repeated breach, the rate may rise to 4% to 20%.

The means of reimbursement, liquidated damages and financial penalties are also provided for in any other cases of overstated expenses, for example following regular audits, without necessarily involving the termination/exclusion of the contractor.

Apart from the above-mentioned sanctions, the Commission is entitled to apply further administrative or financial sanctions complying with the Financial Regulations with regard to defaulting contractors. Use might also be made of other civil remedies by the Community and/or other contractors of the project. Again, their implementation will be determined by the law applicable to the contract. Finally, contractors might face criminal proceedings brought by the authorities of Member States (for offences such as fraud, grave professional misconduct, corruption or other illegal activity) where legitimate.