Judgment;Summary — ECLI:EU:C:2020:767
Date: 2020-10-01
Language of the case: Latvian
Court formation: Third Chamber
Subject matter: Economic, social and territorial cohesion;European Social Fund (ESF);European Regional Development Fund (ERDF);Cohesion Fund
Procedure: Reference for a preliminary ruling
Origin: Latvia

Translation C-743/18 — 1 
Case C-743/18 
Request for a preliminary ruling 
Date lodged: 
20 November 2018 
Referring court: 
Rēzeknes tiesa (Latvia) 
Date of the decision to refer: 
20 November 2018 
Applicant: 
SIA ‘Elme Messer Metalurgs’ 
Defendant: 
Latvijas Investīciju un attīstības aģentūra (Investment and 
Development Agency of Latvia) 
… 
[…] 
20 November 2018 
JUDGMENT 
Rēzeknes tiesa (Rēzekne City Court) (Latvia) 
[…] [Composition of the referring court] 
[…] 
is hearing a civil action which concerns a claim brought by ‘Elme Messer 
Metalurgs’, a limited company of the Liepāja Special Economic Zone, against the 
Government agency ‘Latvijas Investīciju un attīstības aģentūra’ (Investment and 
Development Agency of Latvia) requesting that the notice terminating a contract 
be declared invalid, and which also concerns a counterclaim by the Government 
agency against ‘Elme Messer Metalurgs’ seeking recovery of financial assistance 
which the former had granted to the latter. 
Background 
EN 
REQUEST FOR A PRELIMINARY RULING OF 20. 11. 2018 — CASE C-743/18 
 
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[1] The subject-matter of the dispute and the factual circumstances 
[1.1] The applicant, ‘Elme Messer Metalurgs’, a limited company from the 
Liepāja Special Economic Zone (‘LSEZ SIA “Elme Messer Metalurgs”’), brought 
an action before this court against the Investment and Development Agency of 
Latvia (‘LIAA’) requesting that the notice terminating the contract be declared 
invalid. 
[1.2.] On 7 April 2010, LIIA concluded with LSEZ SIA ‘Elme Messer Metalurgs’, 
the beneficiary of funding, a contract for the implementation of a project […] (‘the 
contract’), in which the public limited company. ‘Liepājas Metalurgs’ (‘AS 
“Liepājas Metalurgs”’) was also involved. The contract granted co-financing from 
the European Regional Development Fund for the project ‘High added value 
investment in the LSEZ SIA ‘Elme Messer Metalurgs’ plant’. In essence, the 
project was aimed at creating a new production unit for industrial gases (oxygen 
(O2), nitrogen (N2)), [Or. 2] which are necessary in industry, inter alia, the 
metallurgy industry, as part of the operation of the ‘Liepājas Metalurgs’ 
production plant. The project was begun on 7 April 2010 and was supposed to be 
completed by 6 December 2012. 
Initially the project was carried out successfully. In order to meet the conditions 
for obtaining financial assistance and to ensure that the implementation of the 
project would be high quality, the applicant bought the necessary production 
equipment from its manufacturer, which was then installed, the necessary experts 
were recruited and trained and the production unit began operating. To achieve 
this, the applicant invested a sum of EUR 12 283 579.00 from its own funds, as 
well as the co-financing granted, in connection with the contract, by the European 
Regional Development Fund, which amounted to EUR 2 212 511.14. 
On 3 January 2013, the applicant submitted a final performance report on the 
project, which it later added to on 7 February 2013, requesting that the final 
payment be transferred to it, in accordance with the contract, for an amount of 
EUR 737 488.86. 
[1.3.] Because AS ‘Liepājas Metalurgs’ began to have cash-flow problems in 
early 2013, the applicant raised concerns about its possible inability to fulfil its 
obligations under the contract, which would result in a breach of contract, since 
the execution of the commitments set out in its business plan was directly 
dependent on the commercial activity of the third party, namely AS ‘Liepājas 
Metalurgs’. Consequently, in a letter dated 28 July 2014 as part of its lengthy 
correspondence with the applicant, the defendant demanded that the applicant 
supply documents containing information about the implementation of the project, 
indicating that it might terminate the contract. On 12 November 2013, it was 
announced that insolvency proceedings had been started against AS ‘Liepājas 
Metalurgs’. The metallurgy plant belonging to ‘Liepājas Metalurgs’ was acquired 
by the public limited company ‘KVV Liepājas Metalurgs’, which re-started  
operation of the gas production unit, and as a result the applicant was able to 
ELME MESSER METALURGS 
 
3 
resume its economic activity, informing the defendant of this and proposing 
business restructuring options. However, on 31 March 2016 the defendant sent a 
letter to the applicant in which, having pointed out the problem with the ‘Liepājas 
Metalurgs’ plant, it notified the applicant of the unilateral termination of the 
contract, on the ground that, during the course of implementation of the project, 
the defendant had noted serious breaches, namely substantial departures from the 
applicant’s commitments set out in its business plan. 
[1.4.] The applicant claims that the defendant’s use of its contractual right to 
unilaterally terminate the contract is contrary to the principle of ‘good faith’ under 
Article 1 of the Civillikums (‘the Civil Code’), because the applicant has not 
breached the contractual obligations and given that it is not disputed that the 
applicant has used the financial assistance, amounting to EUR 2 212 511.14, for 
the purpose of tasks associated with the implementation of the project, which is 
also recognised by the defendant itself. Recalling the findings and conclusions of 
the Court of Justice in its judgment of 21 June 2007 in the case […] C-158/06 
Stichting ROM — projecten v Staatssekretaris van Economische Zaken –– 
according to which recovery from an economic operator of financial assistance is 
contrary to the principle of legal certainty (protection of legitimate expectations), 
provided that the good faith of the beneficiary of that financial assistance [Or. 3] 
is established, which is for the court of the Member State in question to ascertain –
– the applicant submits that that there is a legal basis for declaring invalid the 
notice issued by LIAA on 31 March 2016 terminating the contract unilaterally. 
According to the applicant, the financial state of another legal person, in this case 
AS ‘Liepājas Metalurgs’, cannot constitute a breach by the applicant of its 
obligations under the contract, because that is a situation over which the applicant 
has no influence.  
The applicant points out that, when it approved the project, the defendant was 
aware of the direct link between the project and the need to ensure the operation 
of AS ‘Liepājas Metalurgs’, given that the applicant was responsible for supplying 
industrial gases to the plant, without which the plant would not have been able to 
operate. Therefore the commercial activity of the applicant in relation to the 
project was almost wholly dependent on the activity of ‘Liepājas Metalurgs’. 
It is important to note that the parties concerned were fully aware that in 
November 2008 the Latvian State guaranteed a loan to AS ‘Liepājas Metalurgs’, 
concerning an estimated amount of EUR 160 000 000; therefore, taking into 
account the fact that prior to the issue of this State guarantee there was a thorough 
assessment of  the commitments by the Finanšu ministrija (Ministry of Finance) 
and the Valsts kase (State Treasury), none of the parties, even exercising the 
utmost caution, could have predicted that the financial state of that plant could 
deteriorate to the point of insolvency.  
The defendant conducted an inspection at the site of the project on 26 February 
2013 and also on 19 May 2015, and concluded that all of the equipment which had 
REQUEST FOR A PRELIMINARY RULING OF 20. 11. 2018 — CASE C-743/18 
 
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been installed was in working condition, and consequently, that the applicant was 
ready to start supplying industrial gases to the ‘Liepājas Metalurgs’ plant. 
[1.5.] In its defence and when submitting its counterclaim, LIIA, the defendant, 
stated that it disputes the action, relying on recital 61 of Council Regulation 
No 1083/2006 [of 11 July 2006] laying down general provisions on the European 
Regional Development Fund, the European Social Fund and the Cohesion Fund 
and repealing Regulation (EC) No 1260/1999, which states that, in order to ensure 
the effectiveness, fairness and sustainable impact of the intervention of the Funds, 
the Member States are obliged to provide a legislative framework which ensures 
that the investments are long-lasting. Accordingly, Point 17.1 of Ministru kabineta 
noteikumi Nr. 200 ‘Noteikumi par darbības programmas “Uzņēmējdarbība un 
inovācijas” papildinājuma 2.1.2.4. aktivitātes “Augstas pievienotās vērtības 
investīcijas” projektu iesniegumu atlases pirmo kārtu’ (Cabinet Regulation 
No 200 ‘Regulations on the first stage of project application selection in the 
activity “High added value investments” in Annex 2.1.2.4 of the operational 
programme “Entrepreneurship and Innovations”’) which regulate the activity 
concerned, provides that,  for reasons of effectiveness, the following are 
considered eligible; ‘expenditure relating to the purchase of new equipment (and 
plant) which are directly linked to the process of production or the provision of 
services in the sector in which the project is to be implemented […]’. 
Consequently [Or. 4], the defendant submits, relying on those provisions, that the 
aim of the legislature was to provide financial assistance to sustainable projects, 
which would ensure economic growth in the long-term. 
[1.6.] In carrying out an assessment of the final report submitted by the applicant, 
LIAA found that the applicant had not created 23 new jobs, as was expected as 
part of the project, and that the financial problems of the applicant’s sole business 
partner ‘Liepājas Metalurgs’ had become public knowledge, which raised 
concerns about (i) [achievement of] the project’s goal — which was to maintain 
production at no less than approximately 50.5 million m³ per year, as well as to 
ensure an average increase in turnover of at least 20% during the first two years 
following the completion of the project — and (ii) the possibility of not being able 
to ensure that the project would be long-lasting. Having regard to the foregoing 
circumstances, payment of the financial assistance was suspended in order to 
assess the implications of the financial problems of ‘Liepājas Metalurgs’ for 
implementation of the project. 
LIIA noted that AS ‘Liepājas Metalurgs’ had been declared the subject of 
insolvency proceedings on 13 November 2013 and that AS ‘KVV Liepājas 
Metalurgs’, the newly-formed entity which took on its commitments, had not been 
able to start fully-fledged economic activity, with the result that the applicant had 
not provided a continuous supply of gas to the ‘Liepājas Metalurgs’ plant since 
the end of 2013. 
A lengthy correspondence took place after the financial assistance was suspended 
concerning the scope of the contractual obligations and their effective 
ELME MESSER METALURGS 
 
5 
implementation, as well as potential solutions for successfully completing the 
project and achieving the objectives set. 
Taking into account the fact that the problems with ‘Liepājas Metalurgs’’ 
economic activity caused the applicant’s commercial activity to come to a 
standstill, and, moreover, that the defendant did not have any concrete evidence 
that those problems would be resolved in the short term, LIIA requested the 
Ministry of Finance, as the managing authority for European Union funds, to give 
its opinion on the option of terminating the contract in that specific situation. 
The Ministry of Finance requested that, before the defendant made a decision on 
payment of the financial assistance to the applicant, it should wait for the 
applicant to provide sufficient evidence that it would be able to continue its 
economic activity. After having requested the applicant to supply the necessary 
information, having assessed the effectiveness of the implementation of the 
project and the possibility of attaining the objectives set, and having come to the 
conclusion that the project expenditure did not constitute eligible expenditure, 
meaning that the financial assistance paid out to applicant under the terms of the 
contract had to be considered irregular expenditure, the defendant unilaterally 
terminated the contract on 31 March 2016 and notified the applicant of its 
decision. 
[1.7.] The defendant disagrees with the applicant’s assertion that LIAA 
unilaterally terminated the contract as a result of ‘Liepājas Metalurgs’ financial 
problems: in its submission the reason for terminating the contract was the fact 
that the applicant was not carrying out its economic activity with the equipment 
that it had purchased in the framework of the project, that it had not produced the 
goods it was supposed to and that it had repeatedly infringed the legislative 
provisions concerning the right of the beneficiary as regards receiving and 
retaining financial assistance. 
The defendant rejects the applicant’s argument that the financial problems of AS 
‘Liepājas Metalurgs’ and the interruption of its economic activity should be 
considered an unforeseen obstacle within the meaning of Article 1774 of the Civil 
Code, which the applicant could not have anticipated and prevented, and that, as a 
result, it did not have to fulfil its contractual obligations. 
[1.8.] The defendant maintains that the situation in the present case is covered by 
the concept of ‘irregularity’ within the meaning of Article 2(7) of Council 
Regulation No 1083/2006, which corresponds with the meaning of an irregularity 
under Point 2.1. of Ministru kabineta noteikumi Nr. 740 “Kārtība, kādā ziņo par 
Eiropas Savienības struktūrfondu un Kohēzijas fondu ieviešanā konstatētajām 
neatbilstībām, pieņem lēmumu par piešķirtā finansējuma izlietojumu un atgūt 
neatbilstošos izdevumus” (Cabinet Regulation No 740 on the ‘Procedures for 
reporting irregularities detected in the implementation of the European Union 
Structural Funds and Cohesion Fund, taking decisions on utilisation of the 
financing granted, and recovering irregular expenditure’), which consequently 
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permits the defendant to recover the funding in accordance with the procedures 
laid down in Cabinet Regulation No 740.  
[1.9.] […] LIAA filed a counterclaim against LSEZ SIA ‘Elme Messer 
Metalurgs’, whereby it sought to recover from the latter the amount of 
EUR 2 212 511.14 in respect of the financial assistance paid by LIIA to it, as well 
as the default interest accrued over the period from 18 April 2016 to 14 February 
2017 for a total amount of EUR 670 390.53. 
[1.10.] The applicant disagrees with the defendant’s position as regards the 
interpretation of the relevant provisions, and submits that Council 
Regulation No 1083/2006, which states that an irregularity is ‘any infringement of 
a provision of Community law resulting from an act or omission by an economic 
operator’, cannot be applied in the present case, because the situation in which the 
applicant was unable to use the production unit as part of its economic activity has 
not occurred as a result of an act or omission by the applicant, but because the 
‘Liepājas Metalurgs’ plant had ceased to operate, which did not occur as a result 
of an act or omission by the applicant. The applicant refers to the public statement 
made by the Latvijas Republikas Ekonomikas ministrs (Minister for the Economy 
of the Republic of Latvia), according to which the problems that make it 
impossible for the applicant to use the production unit ‘Liepājas Metalurgs’ are 
the result of external circumstances. 
In the light of the foregoing, the applicant asks the court to make a reference to the 
Court of Justice of the European Union for a preliminary ruling. 
Law 
[2.] Reasons why the court entertains doubt as to the correct interpretation 
of EU law 
[2.1.] In the context of these civil proceedings [Or. 6][…], the referring court has 
doubts concerning the interpretation of the relevant provisions and therefore it 
considers it necessary to make a reference to the Court of Justice of the European 
Union for a preliminary ruling. 
The question at issue is whether a situation in which the beneficiary of financial 
assistance granted by the European Union is not able to achieve the expected 
turnover figures during the relevant period because of the cessation of activity or 
the insolvency of its sole partner or customer can be considered an act or an 
omission by the beneficiary which has the effect of prejudicing the general budget 
of the European Union, thus giving rise to an obligation for the beneficiary to 
compensate the loss, by refunding the full amount of financial assistance granted. 
[2.2.] According to the settled case-law of the Court of Justice, where a situation 
falls within the scope of a directive, national courts are obliged, when applying 
national law, to interpret the latter as far as possible in light of the wording and the 
ELME MESSER METALURGS 
 
7 
purpose of the directive concerned in order to achieve the result envisaged by it 
(see, for example, the judgment of 25 April 2013, Asociatia Accept, C-81/12, 
EU:C:2013:275, paragraph 71). 
Taking into account the fact that the outcome of the proceedings depends to a 
large extent on whether or not an ‘irregularity’ has occurred, as defined in 
Article 2(7) Council Regulation No 1083/2006 laying down general provisions on 
the European Regional Development Fund, the European Social Fund and the 
Cohesion Fund and repealing Regulation (EC) No 1260/1999, since provision to 
that effect is made in Point 2.1 of Cabinet Regulation No 740 on the ‘Procedures 
for reporting irregularities detected in the implementation of the European Union 
Structural Funds and Cohesion Fund, taking decisions on utilisation of the 
financing granted, and recovering irregular expenditure’, only if such an 
irregularity is found in the present case will the competent authority be able to 
decide whether to continue the financial assistance or to recover it, pursuant to 
Article 98(2) of Council Regulation No 1083/2006.  
[3.] Applicable Latvian law 
[3.1.] The termination of the contract concluded on 7 April 2010 between LIAA 
and LSEZ SIA ‘Elme Messer Metalurgs’, which was notified to the applicant on 
31 March 2016 by the defendant, is based on Point 16.1 of Cabinet Regulation 
No 200 ‘Regulations on the first stage of project application selection in the 
activity “High added value investments” in Annex 2.1.2.4 to the operational 
programme “Entrepreneurship and Innovations”’, which provides that: ‘Long-
term investments shall be eligible only if they are used in the place of performance 
of the project mentioned in the application and in the context of the economic 
activity of the beneficiary’. [Or. 7] 
[3.2.] […] Point 17.1 of that regulation states that ‘In the context of the activity, 
the following expenditure is considered eligible: expenditure relating to the 
purchase of new equipment (and plant) which are directly linked to the process of 
production or the provision of services in the sector in which the project is to be 
implemented and which have been entered in the financial statements in 
accordance with the legislation on accounting, which lays down and defines the 
accounting management of fixed assets and the presentation of information 
concerning fixed assets in the financial statements’. 
[3.3.] Point 1.8 of the ‘Conditions for obtaining financial assistance’, attached to 
the contract, makes reference to Point 2.1 of Cabinet Regulation No 740 on the 
‘Procedures for reporting irregularities detected in the implementation of the 
European Union Structural Funds and Cohesion Fund, taking decisions on 
utilisation of the financing granted, and recovering irregular expenditure’, which 
states that ‘an irregularity must be interpreted as any act which infringes any 
provision of Latvian or EU law’, which corresponds with Article 2(7) of Council 
Regulation (EC) No 1083/2006 of 11 July 2006 laying down general provisions 
REQUEST FOR A PRELIMINARY RULING OF 20. 11. 2018 — CASE C-743/18 
 
8  
on the European Regional Development Fund, the European Social Fund and the 
Cohesion Fund and repealing Regulation (EC) No 1260/1999.  
The defendant’s counterclaim is based on that provision, namely Point 2.1 of 
Cabinet Regulation No 740 referred to in the previous paragraph. 
[3.4.] Article 1774 of the Latvijas Republikas Civillikums (Civil Code of the 
Republic of Latvia) provides that ‘an accidental loss is not required to be 
compensated by anyone. Therefore, if an unforeseen obstacle prevents a person 
from performing an obligation that he has undertaken, that person shall be 
considered to have performed the obligation, unless he has accepted in a contract 
the risk of accidental loss.’ 
[4.] Applicable EU law 
[4.1.] Article 2(7) of Council Regulation (EC) No 1083/2006 of 11 July 2006 
laying down general provisions on the European Regional Development Fund, the 
European Social Fund and the Cohesion Fund and repealing Regulation (EC) 
No 1260/1999 provides that an ‘irregularity’ is ‘any infringement of a provision of 
Community law resulting from an act or omission by an economic operator which 
has, or would have, the effect of prejudicing the general budget of the European 
Union by charging an unjustified item of expenditure to the general budget’. 
[4.2.] Article 57(1) of Regulation No 1083/2006 provides that: 
‘(1) The Member State or managing authority shall ensure that an operation 
retains the contribution from the Funds only if that operation does not, within five 
years from the completion of the operation or three years from the completion of 
the operation in Member States which have exercised the option of reducing that 
time limit for the maintenance of an investment or jobs created by SMEs, undergo 
a substantial modification: (a) affecting its nature or its implementation conditions 
or giving to a firm or a public body an undue advantage; and (b) resulting either 
from a change in the nature of ownership of an item of infrastructure or the 
cessation of a productive activity’. 
[4.3.] Article 98(2) of Regulation No 1083/2006 provides that: ‘The Member State 
shall make the financial corrections required in connection with the individual or 
systemic irregularities detected in operations or operational programmes. The 
corrections made by a Member State shall consist of cancelling all or part of the 
public contribution to the operational programme. The Member State shall take 
into account the nature and gravity of the irregularities and the financial loss to the 
Funds’. 
[…] 
Operative part 
ELME MESSER METALURGS 
 
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In the light of the foregoing and pursuant to Article 267 of the Treaty on the 
Functioning of the European Union […], the court 
hereby 
refers the following question to the Court of Justice of the European Union for a 
preliminary ruling: 
‘Must Article 2(7) of Council Regulation No 1083/2006 be interpreted as meaning 
that a situation in which the beneficiary of funding is unable to achieve the 
expected level of turnover during the relevant period because, during that period, 
the business of its sole partner has been suspended or that partner has become 
insolvent to be considered an act or omission by an economic operator (the 
beneficiary of funding) which has, or would have, the effect of prejudicing the 
general budget of the European Union?’ 
Stays the proceedings pending the preliminary ruling of the Court of Justice of the 
European Union. 
[…]