How can I defend myself against the reduction or return of a subsidy?

We very often handle legal services for clients in the area of subsidy cuts. Obtaining a subsidy is a complicated process, but its shortening or complete loss is becoming more and more common recently. It always works the same way. An audit, audit findings and then a notice to shorten the grant and not pay the rest of it, or alternatively a direct call for repayment of 25%-100%. Is there a defence?

Author of the article: ARROWS (Mgr. Antonín Hajdušek, LL.M., office@arws.cz, +420 245 007 740)

This article was written in 2018. If you are looking for up-to-date information on this topic, please do not hesitate to contact us at office@arws.cz or by phone at +420 245 007 740. We will be happy to advise you.

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Yes, it is possible to defend yourself and we have specialists for that. We have been dealing with this issue for a really long time.

Subsidies in general can be provided under several legal titles, one of which is, of course, the Subsidy Agreement. This is logically of a public law nature and therefore has different characteristics from private law contracts. Based on the constant case law of the Supreme Administrative Court of the Czech Republic, it is established that agreements on the provision of a contribution co-financed from public sources have the character of so-called public law contracts sui genesis[1] .

It is important that the setting of the Agreement is a matter for the provider of the subsidy and its content is not in fact influenced by the beneficiary. It is therefore the responsibility of the grant provider to set precise and clear rules, as a kind of "contra proeferentem" analogy applies here.

An important judgment of the Supreme Administrative Court of 11 November 2010, No 1 Afs 77/2010 - 81 (published under No 2243/2011 Coll. of the Supreme Administrative Court), which states that 'the characteristic of a public law contract concluded between an administrative authority exercising public administration, on the one hand, and a private person, on the other hand, which, however, imposes obligations in the field of public law (with the possibility of disposing of funds from the public budget), must be its unambiguity. [...] It is unacceptable for disputes or ambiguities in the wording of a public law contract to have the effect of making the position of the 'weaker' party, i.e. the claimant as a private party, more difficult."

The constant decision-making practice of the Supreme Administrative Court therefore establishes that ambiguity and vagueness of the terms of a subsidy can never be to the detriment of the recipient of the subsidy as the 'weaker' party. Often, the conditions for reimbursement of the subsidy are very vaguely defined in the grant agreement, and it is not infrequently the case that cumulative conditions are set for the reduction, but the provider makes the reduction even if only one of them is not met. This is obviously a bad practice in view of the above.

Another area is the amount of the correction, where a correction of 100 % is set for the slightest breach of the terms of the grant agreement. In this area, the Supreme Administrative Court provides guidance on how to proceed in similar cases, including in terms of assessing the seriousness of the breach of contract. In its judgment of 31 March 2014, no. 2 Afs 49/2013-34, the Supreme Administrative Court addressed the question of whether it is correct to conclude that when considering the levy to the state budget, the tax administrator should assess the seriousness of the identified deficiencies in relation to the amount of the levy, or whether the mere fact that the deficiencies occurred results in a full levy.

We can reduce the amount of the subsidy correction to 0%

Here, the Supreme Administrative Court came to the clear conclusion that it does not follow directly from the Financial Regulation Act that the amount of the breach of budgetary discipline under Article 44a(4)(c) must always be understood as the entire subsidy granted. In another judgment, the Court again dealt with a case where the recipient of a subsidy had deviated from the established subsidy conditions when making advances, and held that the basis for a levy of a punitive nature cannot be a mere formal finding of the issue of advance invoices, without examining the actual handling of the funds.

The Supreme Administrative Court also considered the case of late repayment of unspent state budget funds and held that the wording of Article 44(2) of the Act on Budgetary Rules makes clear the legislator's intention to levy a levy on the state budget in the same amount as the breach of budgetary discipline, i.e. the intention to take into account, when determining the amount of the levy, the part of the funds that were spent in accordance with the agreed or established conditions. [2]

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Already in this judgment, the Court of Justice distinguished this case from another decision[3] in which, on the contrary, a levy was prescribed in a case where the recipient of a subsidy had breached the terms of the subsidy to a significant extent and throughout the period of its use, and where the full amount of the levy was justified.

According to the Supreme Court, in determining the amount of the correction, it is necessary to consider:

• the circumstances of the specific breach of budgetary discipline and at the same time
• be based on the principle of proportionality between the gravity of the breach and the amount of the levy imposed for it.

It is therefore true that for each specific breach of the rules, it is necessary to consider whether there is a reason to 'reimburse' the subsidy and, more importantly, in what amount. Not every infringement gives rise to an obligation for the beneficiary to reimburse 100 % of the subsidy.

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• [1] See, for example, judgments of 19 August 2010, No 2 As 52/2010-59, 28 April 2011, No 1 As 22/2011-64, published under No 2343/2011 Coll. of the SAC, or 17 January 2013, No 7 As 173/2012-44, all available at www.nssoud.cz.
• [2] In the judgment of 11 June 2009, no. 7 Afs 107/2008-100.
• [3] In the judgment of 29 August 2008, no. 5 Afs 70/2007-50.