CELEX: 61994CJ0114
Arbitration clause
Software development contract
Claim for payment of balance outstanding and for damages
Counterclaim for repayment of amounts paid on account

Grounds
1 By application lodged at the Court Registry on 15 April 1994, Intelligente systemen, Database toepassingen, Elektronische diensten BV (`IDE'), a company incorporated under Netherlands law, brought an action under Article 42 of the ECSC Treaty, Article 181 of the EC Treaty and Article 153 of the EAEC Treaty for an order that the Commission of the European Communities pay ECU 376 500, constituting the balance of the maximum Community contribution under the contract concluded on 31 January 1990 with that institution, together with ECU 37 650 by way of extrajudicial expenses and interest at the rate prescribed by law payable as from 31 May 1993, and make good the damage suffered by IDE as a result of the Commission's wrongful conduct in respect of the performance of that contract.
2 In its defence, lodged at the Court Registry on 7 July 1994, the Commission submitted a counterclaim for payment by IDE of the sum of ECU 533 456, being the total amount paid on account by it to IDE under the abovementioned contract, together with interest at the rate of 7.97% per annum.
The contract at issue
3 On 31 January 1990 the Commission entered into a contract with IDE which concerned the development by IDE of software in accordance with the specification in the technical annex attached to the contract.  The aim of that project, entitled `Domain Independent Intelligent Information and Services Network Interface' (`the Disnet Project'), was the development of a computer program consisting in an intelligent interface enabling uniform and user-friendly consultation of various kinds of information, and the setting up of a network giving access to interconnected electronic information sources.
4 By that contract, IDE undertook to develop the software (toolkit) in collaboration with the Netherlands research organization TNO and the University of Amsterdam.  The adaptation of the software to the specific needs of the information sources and the establishment of the network was to be carried out by a dozen organizations from various Member States, most of which owned agricultural activity databases.  IDE was also responsible for coordination between the participating undertakings.  According to the Commission, the development of the toolkit amounted to approximately one-third of the project's total budget, the remainder being intended for the completion and establishment of the network and the applications.  At the technical level, development of the network could only commence after an operational version of the toolkit was available to the owners of the databases.
5 Article 2 of the contract specified that the Disnet project was to be completed within 30 months following the date of commencement of work.
6 Article 3.1 of the contract required IDE to submit to the Commission, every six months, reports stating the progress of the work and the results obtained, together with statements of expenditure incurred during the preceding period.  Following the completion of the work, IDE was required, under Article 3.2, to demonstrate its successful completion on the premises of the Commission in Luxembourg, or at an alternative location acceptable to the Commission. Article 3.3 required IDE to supply the Commission, within two months of the completion of the work programme set out in the technical annex, with a final comprehensive report covering the whole project and accompanied by a consolidated statement of expenditure together with supporting documents.
7 Article 4 of the contract estimated the total costs of the project at ECU 2 349 400.  The maximum financial contribution of the Community was to be ECU 909 900, that is 38.74% of that cost.
8 Under Article 5.1 of the contract the Community was required to make an advance payment of 15% of the maximum financial contribution (that is ECU 136 485) within two months after the commencement of the project.  Payment was then to be by periodic instalments on the basis of statements of expenditure and following approval by the Commission of the progress reports.  Such instalments were to be considered merely as advances pending acceptance by the Commission of the finished product specified in the technical annex.  An amount corresponding to 20% of the total financial contribution was to be retained until after approval by the Commission of the product and of all the reports and the statements of expenditure.  Article 5.2 authorized the Commission, after notifying IDE thereof, to defer or modify the various payments if verifications revealed irregularities, in particular in the event of the work not being carried out in accordance with the programme in the technical annex or the statement of expenditure not corresponding to the work actually carried out or fundamentally deviating from the cost estimates.  If a satisfactory demonstration of the finished product did not take place after completion of the work, the Commission could request, pursuant to Article 5.3, full or partial repayment of the amounts already paid, together with interest on those amounts from the end of one month following the Commission's request.  The rate of interest then to be applied was to be the average over three months of the inter-bank rate for ECUs plus 2% on the first day of the month of the Commission's request.
9 Article 6.1 stated that IDE had technical and financial responsibility for the project.  If other undertakings were to participate in carrying out that project, IDE was to ensure that the Community contribution was shared according to the participation of each organization.  Article 6.2 allowed sub-contracting, on condition that the drafts of all sub-contracts were approved by the Commission. According to Article 6.3, IDE was required to keep the Commission informed of any incident likely to prejudice the performance of the contract.  Article 6.4 required IDE to supply the Commission without delay with any information which the latter requested in order to carry out technical and financial checks to verify that the work was carried out.  If necessary, such checks could be carried out on the spot.
10 Under Article 8 of the contract IDE was to be solely liable for any damage suffered by it or caused by it to third parties in the course of performance of the contract.
11 Article 9 authorized the parties to vary or to supplement the contract.
12 In the event of non-performance by IDE of one or more of its obligations under the contract, the Commission could, under Article 10, serve notice of this on IDE by registered post with acknowledgement of service.  If, after one month, IDE had not complied with such notice, the Commission could without further formality terminate the contract.  It could also be terminated where in order to obtain the subsidy the contractor made false statements and could properly be held responsible for such statements.  In both cases, the contractor was to repay immediately to the Commission the amount of the subsidies received by it, together with the interest referred to in Article 5.3.
13 Article 14 specified that the annexes were an integral part of the contract, Annex I containing a technical description of the project and Annex III relating to the statements of expenditure.
14 According to Article 16, the contract was exclusively governed by the law of the Grand Duchy of Luxembourg and the Court of Justice of the European Communities was to have sole jurisdiction to settle any dispute between the contracting parties.
Facts
15 The documents before the Court show that the date for commencement of the Disnet project was set at 15 March 1990.  According to the provisions of the contract, the work should thus have been completed on 15 September 1992.
16 According to the first six-monthly progress report, the programme was being carried out as provided in the contract although, according to the Commission, a number of IDE's partners expressed certain unease because the composition of the consortium was unstable and IDE had not paid to organizations collaborating on the project their share of the Community contribution.
17 Following an inspection in October 1991, an expert appointed by the Commission found in his report of 3 December 1991 that the project did not meet the specifications of the contract and he recommended that the Commission should suspend its financial support.
18 In May 1992 the Commission ordered a financial audit of the project.  According to the accountants' report of 22 June 1992, IDE had, without seeking the Commission's approval, sub-contracted part of the work to Hungarian undertakings.  The report, which covered the first 18 months of the project, also revealed doubtful accounting and unreliable statements of expenditure.  For that reason it proposed to reduce by 34% the expenditure declared by IDE.
19 In March and April 1992 the Commission invited IDE to a meeting in Luxembourg in order to discuss those problems. Following that meeting, the technical annex to the contract was amended.  In its correspondence with IDE the Commission also mentioned the changes in the composition of the consortium, the delay in delivering certain products and various technical failures.
20 On 12 February 1993 IDE and the Commission agreed to extend the duration of the contract by six months, that is to say until 15 March 1993.
21 On 11 March 1993 the Commission received from IDE three diskettes labelled `Disnet final beta release 3' together with a number of documents.
22 In a letter dated 30 April 1993 the Commission declared that the product delivered did not meet the specifications in the technical annex.  It pointed out, furthermore, that IDE had still not paid contributions to its ever-changing partners and stated that it would not insist on a demonstration of the finished product.  By way of an amicable settlement, the Commission proposed to limit its contribution to 75% of the maximum amount under the contract (ECU 682 425) and not to pay the remainder due within that limit (ECU 148 969) until IDE had lodged the final report and a consolidated statement of expenditure and proved that it had fulfilled all its contractual and financial obligations in respect of all its existing and former partners.  IDE rejected that proposal on 31 May 1993.
23 By letter of 17 June 1993 the Commission, in reliance on the terms of the contract, requested IDE to demonstrate before an evaluation panel that the product was duly completed.  IDE expressed reservations on account of the fact that the Commission had initially made it known that it did not insist on a demonstration of the results of the Disnet project.
24 The evaluation panel was composed of two Commission officials who had not taken part in the Disnet project and an expert.  They were joined by two observers, one acting on behalf of the Commission and the other on behalf of IDE.
25 The demonstration took place on 20 July 1993.  The software demonstrated was that sent to the Commission on 11 March 1993.  However, it appears from the evaluation panel's report of 30 July 1993, drawn up by the two Commission officials, that a more recent version, submitted by IDE after the expiry of the contract, was also examined.
26 It appears from that report and from the report dated 2 August 1993, drawn up by the observer appointed by the Commission, that, regardless of which of the two versions of the project was to be considered the definitive version, the software presented by IDE was defective.  Thus, the toolkit met only between 50% and 75% of the specifications in the technical annex to the contract and the network part of the Disnet project was missing.  The third member of the evaluation panel concurred with the findings of the report of 30 July 1993. The observer appointed by IDE did not submit a report.
27 On 7 September 1993 the Commission sent the evaluation panel's report to IDE.  In a covering letter it observed that IDE had failed to fulfil its obligations under the specifications in the technical annex to the contract, that the final report, received on 17 May 1993, was unsatisfactory, that the statement of expenditure covering the fifth half-yearly period was not in conformity with the contract and that it had not received either the statement of expenditure for the sixth half-year or the documents necessary for evaluating the total cost of the project. The Commission indicated that it would not make any further payments and that it envisaged recovering the sums already paid.
28 On 15 and 27 September 1993 IDE informed the Commission of its reservations as to the findings of the evaluation panel's report, insisting that the demonstration had taken place under particularly difficult circumstances and challenging a number of the technical evaluations contained therein.
29 By letter dated 29 June 1994 the Commission claimed from IDE repayment of ECU 533 456, which corresponded to the total contributions paid up to January 1993.
IDE's action
30 In support of its action IDE claims essentially, first, that it fulfilled its obligation to produce software which complied with the specifications in the technical annex to the contract and that it did not infringe any of its provisions.  Secondly, the refusal by the Commission to pay to it the whole of the maximum Community subsidy provided for constituted a breach of the Commission's contractual obligations which caused IDE considerable harm, in the form, in particular, of such serious financial difficulties that it had been constrained to sell a building and a number of company motor cars at depressed prices and to lay off staff.  As a result, the undertaking's activities had stagnated and its reputation had been affected.
31 The Commission contends that the Court should dismiss IDE's action on the ground that it not only delivered a product which did not meet the agreed technical specifications, as may be concluded from the evaluation panel's report, but also infringed Articles 3.3, 6.1, 6.2 and 6.3 of the contract by failing to send to the Commission a comprehensive final report and a statement of expenditure together with supporting documents, by failing to send in good time an operational version of the Disnet software to other participants who thus found themselves unable to commence their own tasks, by not informing the Commission of the constant changes in the composition of the consortium, by not paying the share of the Community subsidy due to its partners and by sub-contracting to third parties certain tasks covered by the contract without seeking the Commission's approval beforehand.  Furthermore, it appears from Article 8 of the contract that the Commission is not liable for the damage which IDE claims to have suffered and in respect of which it has not, moreover, adduced any evidence.
Compliance of the product delivered by IDE with the terms of the contract
32 In order to determine whether the product delivered by IDE at the expiry of the period agreed between the parties complies with the terms of the contract, it should be noted that, under Article 1 thereof, the applicant undertook to produce the product more particularly described in the technical annex.
33 In return, the Commission undertook to pay IDE a certain sum by way of subsidy for the completion by that firm of a project consisting in the development of the Disnet software.
34 In order to enable the Commission to verify during the performance of the contract that the contractor was carrying out his work correctly and that the project was progressing in accordance with the programme set out in the technical annex, the contract required IDE to fulfil a number of additional obligations designed to keep that institution informed of the progress of the work, of expenses incurred and of any event likely to affect the outcome of the project.  IDE was thus required, in particular, to submit to the Commission periodic reports on the progress of work, supplemented by a statement of expenditure incurred during the preceding period, to seek the Commission's approval for draft sub-contracts and to keep that institution informed of any incident likely to jeopardize the proper performance of the contract.
35 Upon completion of the work, IDE is required, under Article 3.2 of the contract, to carry out a demonstration of the product establishing that the project has been successfully completed.
36 It follows that IDE undertook, under that contract, to perform a principal obligation of result, namely completion of a product which had to present the characteristics specified in the contract and in its technical annex.
37 More specifically, it is clear from the contract and the technical annex that IDE undertook to complete within the agreed time-limit a computer program which, as specified in the title of the project, had to consist in an intelligent interface enabling uniform and user-friendly consultation of various kinds of information, and of a network giving access to interconnected electronic information sources.
38 According to the original version, and also to the version as amended in 1992 by written agreement between the two parties, of the technical annex attached to the contract and forming, according to Article 14, an integral part thereof, the final product to be delivered by IDE falls to be divided into two separate parts, namely (i) the Disnet software toolkit, which consists in the development of the interface capable of running under DOS, Windows 3 and Unix and (ii) a network to be set up by adapting that software to the specific requirements of the information sources in question as well as the applications to be put in place on the basis of the Disnet interface by a number of participating organizations.  Under the terms of the contract IDE assumes the technical and financial responsibility for the project and is required to coordinate the work carried out by the participating organizations.
39 The technical annex states that the product which IDE undertook to produce must be `marketable', which means, as the Advocate General observed at points 89 to 91 of his Opinion, that the product must be endowed with characteristics such that it is technically ready and sufficiently attractive to be capable of being sold and exploited on the market.
40 It is clear, moreover, from a comparison between the original version of the technical annex, according to which a `natural language' component using limited syntax and vocabulary was to be offered as an extra, and the version amended by written agreement of the parties in which the words `as extras' and the relevant explanatory note were deleted, that the final product must contain such a `natural language' component.
41 However, in the report lodged by them on 30 July 1993, the two Commission officials who had attended the demonstration of the product delivered by IDE found that the product did not comply with all the specifications set out in the technical annex.  Thus, according to the report, the toolkit software met only between 50% and 75% of the required technical specifications.  It met only a limited number of the objectives pursued by the contract, particularly as regards the knowledge base and the natural language component of the interface and, in those circumstances, did not constitute a completed and marketable product, the delivered product being unstable and requiring subsequent improvement.  Furthermore, according to the report, the aspect of the project relating to the network and the domain-specific applications was missing.  The report pointed out that those findings applied to both the version of the product delivered by IDE on 11 March 1993 and to a more recent version, made ready by IDE after the contract expired and also examined during the demonstration.
42 The third member of the panel evaluating the demonstration of IDE's product approved the report's conclusions, as is apparent from a letter sent on 30 July 1993 by the other two members to the Commission official responsible for the supervision of the Disnet project and produced by IDE as an annex to its application.
43 In the report which he lodged on 2 August 1993 the observer appointed by the Commission to attend the demonstration made similar criticisms with regard to the product delivered by IDE.
44 IDE's observer present at the demonstration did not submit a report.
45 IDE first of all casts doubt on the independence and objectivity of that evaluation panel on the ground that it was appointed by the Commission and was composed of two of its officials and of an expert paid by that institution. Accordingly, IDE requests a new experts' report.
46 In this regard, it should first be observed that the contract does not determine the body before which the demonstration of the successful completion of the final product is to be carried out.
47 By entering into the contract with the Commission, IDE, however, necessarily accepted the principle of a demonstration of the product which, under Article 3.2, was to take place on the premises of the Commission in Luxembourg, or at an alternative location acceptable to that institution, and it thus gave its agreement that the Commission should adjudge whether the product complied with the requirements set forth in the contract.
48 Even supposing that the Commission had appointed all the members of the evaluation panel, an issue which remains in dispute between the parties, it is not open to IDE to charge the Commission with having thereby acted in breach of its contractual obligations, since the matter is not governed by any provision of the contract.
49 In the second place, it is not disputed that the two Commission officials were not involved with the Disnet project before being appointed as members of the evaluation panel.
50 In the third place, it should be pointed out that IDE has expressly acknowledged having approved the composition of the evaluation panel.
51 Finally, it must be stated that, besides the three members of the panel, two observers attended the demonstration, one on behalf of the Commission and the other on behalf of IDE.  The conclusions of the Commission's observer's report entirely confirmed those of the evaluation panel's report, whereas IDE's observer did not lodge a report at all.
52 It follows that, in the event, IDE voluntarily subjected itself to the assessments of the evaluation panel. Nor, moreover, has it established that the members of the panel did not act impartially.
53 That being so, the Court must consider itself sufficiently informed by the assessments which were drawn up by the experts who attended the demonstration of the Disnet software and have been placed on the file, so that IDE's claim seeking a new experts' report must be rejected.
54 IDE next claims that the demonstration of its product took place in extremely unfavourable conditions, which explains the negative conclusions arrived at by the evaluation panel.
55 That argument cannot be accepted.
56 IDE undertook in the present case to carry out a demonstration establishing that the project had been successfully completed.
57 It is apparent from a letter of 12 July 1993, annexed to the application, that IDE's lawyer proposed that that demonstration take place in Luxembourg at specified premises which, in its view, had the necessary infrastructure.  IDE also requested that someone of its choice should take part in the demonstration as an independent expert.  The Commission agreed to those proposals by letter of 14 July 1993.
58 A letter from the Commission, dated 16 July 1993, states that special technical facilities had been made available to IDE to enable it to conduct a proper demonstration of its product.
59 The parties agree in the present case that IDE had been authorized to install and test the Disnet software the day before the demonstration and that, on 20 July 1993, it gave its agreement for the demonstration to proceed.  The demonstration lasted five hours.
60 The evaluation panel's report points out that, at the start of the demonstration, certain technical problems were found to exist, but that IDE agreed to continue with the demonstration.  According to the report, those technical problems were not due to the site of the demonstration and the shortcomings of the Unix network available, as stated by IDE, but to the incompatibility of the product delivered by IDE.  The evaluation panel considered, however, that those problems were not such as to affect the reliability of the demonstration.
61 Finally, it is apparent from the evaluation report that the demonstration concerned not only the product delivered by IDE at the expiry of the contract, which had, moreover, been extended by six months beyond the time-limit initially provided for, but also a reworked version of the Disnet software, completed after the expiry of the extended contract.  However, the evaluation panel found that neither of those versions complied with the terms of the contract.
62 It must therefore be held that the Disnet project demonstration took place under proper conditions.
63 Finally, IDE maintains, first, that the budget made available to it by the Commission was not sufficient to complete the agreed project successfully, especially if account is taken of the completion of certain additional work which had not been provided for in the original contract, such as the `natural language' component, and, secondly, that the Disnet software is currently commercially successful on the market.
64 Those arguments cannot be accepted either.
65 First, the contract concluded by the parties is a contract for the provision of a subsidy under which the Community undertakes to make a maximum financial contribution, amounting to 38.74% of the actual cost of the work to be carried out by IDE together with its partners, the parties having estimated the total cost of the project at ECU 2 349 400.
66 Under the terms of the contract IDE is financially and technically responsible for the project and is responsible for coordinating the work of the participating organizations.  The product which it undertook to provide remains the property of the consortium which it leads.
67 Moreover, while the contract was being performed the parties agreed in writing, pursuant to Article 9, to amend it in certain particulars, with the result that, in addition to its being extended by six months, it was provided that the final product would include a `natural language' component using a limited syntax and vocabulary, whereas such a function was provided only as an extra in the original version of the technical annex.
68 In those circumstances, it is not open to IDE to complain that the Commission placed an inadequate budget at its disposal, when that undertaking freely embarked on a project for which it was entirely responsible, in full awareness of the amount of the subsidy that it could expect from the Community.
69 It should, furthermore, be noted that the present case is solely concerned with the question whether IDE did provide, before the expiry of the contract entered into between the parties, a product that was in conformity with the technical specifications, so that IDE's claim that Disnet is currently successful is, on any view, irrelevant.
70 In view of all the foregoing considerations, it must be concluded that IDE failed to comply with its principal obligation under the contract inasmuch as the software delivered on 11 March 1993 did not meet the technical specifications set out in the contract and that the reasons put forward to justify that breach of obligation cannot be accepted.
71 IDE is therefore not justified in demanding from the Commission full payment of the maximum Community contribution provided for in the contract.
72 That being so, there is no need to rule on the question whether IDE was in breach of other, ancillary, contractual obligations arising under the contract, as is claimed by the Commission.
73 The claim that the Commission should be ordered to pay ECU 37 650 by way of extrajudicial expenses must be rejected, since IDE has not shown that it actually incurred those expenses as a result of wrongful conduct on the part of the Commission.
Compensation for the damage allegedly suffered by IDE
74 In its application IDE also claims damages to make good the loss it says it has suffered as a result of the Commission's breach of its contractual obligations in so far as it refused to pay IDE the full amount of the Community contribution provided for.
75 Such an action in contract could succeed only if three conditions were satisfied.  IDE would have to prove, first of all, that the Commission has not fulfilled its contractual obligations, next, that it has suffered damage and, finally, that there is a causal link between the Commission's conduct and that damage.
76 IDE has, however, adduced no evidence to show that the Commission has failed to fulfil its obligations under the contract.  It is, to the contrary, manifest that the reason for the Commission's refusal to pay the balance of the Community contribution was the fact that the product designed by IDE did not meet the specifications set out in the contract.
77 IDE has not, moreover, proved the existence of the damage it claims to have suffered.
78 On the basis of those findings alone it must be concluded that IDE's claim for damages is wholly unfounded.
79 IDE's action should be dismissed in its entirety.
The Commission's counterclaim
80 By its counterclaim the Commission seeks, pursuant to Article 5.3 of the contract, reimbursement of all the advances it has paid to IDE during the term of the contract, together with interest.
81 IDE contends that the counterclaim should be dismissed as inadmissible or, at the very least, as unfounded.
82 With regard to the admissibility of counterclaim, it should be borne in mind that the Court has consistently held that where its jurisdiction is based on an arbitration clause, that jurisdiction is conferred in derogation from the ordinary rules of law and must therefore be construed narrowly, so that the Court may hear and determine only claims arising from a contract which was concluded with the Community and which contains the arbitration clause or claims that are directly connected with the obligations arising from that contract (judgment in Case 426/85 Commission v Zoubek [1986] ECR 4057, paragraph 11).
83 That requirement is undeniably fulfilled in the present case, since Article 5.3 of the contract provides that, if a satisfactory demonstration of the product has not taken place after completion of the work, the Commission may request full or partial repayment of the advances together with interest on those amounts.
84 As regards the merits of the counterclaim, reference should be made to the terms of the contract concluded between the parties.
85 Under Article 1, IDE undertook to produce the product more particularly described in the technical annex.
86 Under Article 3.2, IDE was required, on the expiry of the contract, to carry out a demonstration establishing the successful completion of the project.
87 Under Article 5.1, the Community was to make its financial contribution by paying to IDE an advance of 15% of the amount of the maximum Community subsidy within two months from the launch of the project.  Periodic payments were then to be made by the Commission while the contract was being performed.  All those payments are expressly considered to be mere advances pending acceptance by the Commission of the finished product as described in the technical annex.
88 Article 5.3 provides that, in the absence of a demonstration establishing that the project has been successfully completed, the Commission may request full or partial repayment of the amounts paid as financial contribution together with interest on those amounts to run from the end of one month following the request. The rate of interest applied corresponds to the average over three months of the inter-bank rate for ECUs plus 2% on the first day of the month of the Commission's request.
89 In the present case, the members of the committee of experts which evaluated the demonstration of the software delivered by IDE were unanimous in their conclusion that the product did not meet the specifications set out in the contract.
90 It follows that in the present case all the requirements are satisfied for the Commission to be entitled to demand, on the basis of Article 5.3 of the contract, full repayment of the advances paid to IDE.
91 IDE should therefore be ordered to repay to the Commission, pursuant to the provisions of Article 5.3, ECU 533 456, which corresponds to the total advances paid by the institution to its co-contractor by way of Community subsidy, together with interest at 7.97% per annum, to run from the end of one month following the date on which the Commission called for repayment of the advances, that is to say as from 29 July 1994.
Decision on costs
Costs
92 Under Article 69(2) of the Rules of Procedure, the unsuccessful party is to be ordered to pay the costs. Since IDE has been unsuccessful, it must be ordered to pay the costs.
Operative part
On those grounds,
THE COURT
(Second Chamber)
hereby:
1. Dismisses the action brought by Intelligente systemen, Database toepassingen, Elektronische diensten BV (IDE);
2. Orders IDE to repay to the Commission ECU 533 456, together with interest at 7.97% per annum as from 29 July 1994;
3. Orders IDE to pay the costs.