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EEA state aid rules as salvation for a municipality that forgot to get paid

Author: Tollef Otterdal Heggen, University of Bergen


1.     Introduction

On 8 August 2022, the EFTA Surveillance Authority (“ESA”) received a complaint alleging that Lørenskog Municipality (“the Municipality”) in Norway had granted unlawful state aid to Masserud Utvikling AS (“Masserud”). Curiously, the disgruntled complainant was none other than the Municipality. What sparked this act of repentance? This blog post examines the factual situation and applicable Norwegian law that gave rise to this unusual complaint (section 2), before looking at some of the arguments put forth against recovery of the alleged unlawful state aid (section 3). Finally, the post ends with some concluding remarks (section 4).


2.     Factual background for the complaint and applicable Norwegian law

2.1.  Limitation of the Municipality’s contractual claim for payment

On 27 January 2014, the Municipality entered into an agreement with Masserud concerning the sale of a property in Lørenskog for a price north of 8 million NOK (approximately 700 000 EURO). Pursuant to the contract, payment was due on 6 June 2017. However, the Municipality never sent an invoice, and Masserud never paid. When the Municipality realised this in early 2021, it sent several reminders to Masserud, which Masserud countered with a reference to the Norwegian Limitation Act. Paragraphs 2 and 3 of this Act stipulate a three-year limitation period for monetary claims, starting on the first date when the creditor could have demanded payment of the claim. As the Municipality could have demanded payment on 6 June 2017, the claim for payment pursuant to the contract became obsolete in June 2020. In other words, the Municipality could no longer demand payment for the property based on the contract, and had thus, in effect, given Masserud a property worth 8 million NOK for free.


On this background, the question of whether state aid rules could come to the Municipality’s rescue was raised. The question of whether the Municipality’s omission constitutes state aid is, for the most part, left aside here. Suffice to say that ESA has, in its decision to open a formal investigation, convincingly argued that the conditions for such classification are met.[1] In this blog post, I shall assume that this is correct, and rather turn to some questions related to the recovery of the aid. Some of the arguments put forth against the complaint are, nevertheless, examined in section 3.


2.2.  Revival of the Municipality’s contractual claim for payment in the form of a claim for recovery of unlawfully granted state aid

EEA rules on state aid are enforced not only by ESA, but also by relevant actors in the Member State concerned. In particular, national authorities that have granted unlawful aid are obligated to recover said aid on their own volition.[2] Such recovery is governed by applicable national law, as tempered by the principles of effectiveness and equivalence.[3] In Norway, the applicable law is the Norwegian State Aid Procedures Act. Paragraph 12 of the Act states that the grantor shall recover unlawfully granted state aid. Pursuant to § 13, claims for recovery of unlawfully granted state aid are subject to the provisions of the aforementioned Limitation Act. However, that paragraph also states that the limitation period for such claims does not start until the grantor has adopted a formal decision regarding the recovery of state aid. This indicates that a claim for recovery of unlawfully granted aid is separate from the underlying contractual claim in cases such as the one at hand, which is expressly confirmed in the preparatory works.[4] This seems natural, considering that a claim for recovery of aid unlawfully granted in the form of an omission to recover a contractual claim for payment within the applicable limitation period cannot logically co-exist with said contractual claim for payment. The claim for recovery of unlawfully granted state aid thus rises like a phoenix from the ashes of the obsolete contractual claim.


2.3.  Limitation of claims for recovery of unlawfully granted state aid

As already mentioned, the limitation period for this separate claim for recovery of unlawfully granted state aid does not start until the grantor has adopted a formal decision regarding the recovery of state aid. This rule was created in a judgment from the Norwegian Supreme Court in 2013, based on a rather strenuous interpretation of the Limitation Act § 3,[5] before it was adopted by the legislator in the aforementioned State Aid Procedures Act § 13.


The problem with this rule, is that it grants the creditor absolute dominion over the starting point for the limitation period, which effectively means that in most cases rules on limitation do not apply to grantors of unlawful state aid in Norwegian law. Naturally, this is highly unsatisfactory for beneficiaries. Applied to the case at hand, this rule means that the Municipality’s claim for recovery of unlawfully granted state aid does not exist yet, as the Municipality has not adopted a formal decision regarding recovery. This entails that while the contractual claim for payment is obsolete due to limitation, the limitation period for the claim for recovery of unlawfully granted state aid has not even started yet. The Municipality’s view of being precluded by Norwegian limitation rules from recovering the unlawful aid on their own accord is therefore incorrect.[6]


This does not, however, necessarily mean that the Municipality can recover the unlawfully granted aid on its own accord. To preclude the grantor from complete dominion over limitation and preclusion, the State Aid Procedures Act § 14 states that the grantor cannot adopt decisions regarding recovery of state aid later than three years after the aid in question was granted. If this rule applies to the case at hand, the Municipality lost the possibility to adopt a decision regarding recovery in June 2023, three years after the limitation of the contractual claim in June 2020. Considering that the State Aid Procedures Act entered into force on 1 January 2023, and that neither the law nor the preparatory works specify whether it applies to grants that took place before this, it is unclear if § 14 of the Act precludes the Municipality from recovering the contested aid.


2.4.  ESA as a reluctant enforcer for Norwegian grantors of unlawful state aid

If § 14 of the State Aid Procedures Act does preclude Norwegian grantors from recovering unlawfully granted state aid, as it likely will at least in future cases, situations are created where grantors have no possibility of recovering aid on their own accord. ESA on the other hand, is subject to a limitation period of 10 years from the date when the unlawful aid was granted.[7] The same applies to the grantor under the applicable Norwegian legislation in cases where ESA has adopted a decision requiring recovery.[8] This creates a temptation for Norwegian grantors to complain to ESA about their own grants, thus circumventing Norwegian rules precluding them from recovering the contested aid on their own accord. ESA, who has no choice but to investigate such complaints, is thereby forced to spend time and resources investigating and adopting decisions regarding recovery of unlawful state aid which could otherwise have been recovered by the grantors themselves. ESA thus assumes the role as a reluctant enforcer for Norwegian grantors of unlawful state aid.


3.     A quick look at some of the arguments put forth against recovery

Masserud has put forth two arguments against the Municipality’s complaint. First, it argues that State aid rules should not apply to agreements entered into on market terms, which later become obsolete due to inaction from public bodies, as this would make the Norwegian Limitation Act ineffective.[9] As pointed out by ESA,[10] it is hard to see why this would be relevant for the interpretation of EEA state aid rules. Conversely, the effectiveness of EEA state aid rules is undoubtedly relevant for the interpretation of these rules. This effectiveness would obviously be compromised if public bodies could grant state aid outside the purview of EEA state aid rules by simply claiming that they “forgot” to demand payment. Masserud’s first argument is therefore not convincing.


In its response to the complaint, Norwegian State Authorities voiced their support for Masserud’s first argument.[11] It is somewhat surprising to see State authorities arguing against the recovery of funds which should have accrued to the public and thus financed public goods. It is even more surprising to see this view being substantiated with reference to the purpose and effectiveness of Norwegian limitation rules. Besides the Municipality’s lack of diligence, and perhaps Masserud’s lack of conscientiousness, the primary reason for the complaint case is the application of shorter deadlines to Norwegian grantors than those that apply to ESA – a solution proposed by none other than Norwegian State Authorities.


Masserud’s second argument is that recovery would breach the principles of legitimate expectations and legal certainty.[12] These principles, which are often applied in conjunction, can impose limits on recovery of unlawfully granted state aid. The principles have, however, been interpreted very restrictively by the EEA Courts.[13] Without going into detail, it seems clear that there are no “exceptional circumstances” in the form of “precise, unconditional and consistent assurances originating from authorised and reliable sources” suitable to give rise to a “legitimate expectation” for non-payment for Masserud in this case.[14] In general, I find it unlikely that purchasers of property can gain legitimate expectations to not have to pay anything for the property. Masserud’s second argument thus also seems unconvincing.


4.     Concluding remarks

In my view, the preceding analysis shows that Norwegian law regarding limitation and prescription of claims for recovery of unlawfully granted state aid is unnecessarily complicated, and that it leads to situations where Norwegian grantors must complain to ESA rather than simply recovering the aid themselves. This could be alleviated by amending the Norwegian State Aid Procedures Act and applying the limitation rule applicable to ESA to Norwegian grantors. Admittedly, applying a 10-year rule to Norwegian grantors would create a less foreseeable situation for beneficiaries. In my view, this would nevertheless be more appropriate and manageable than the system currently in force.

 


[1] See EFTA Surveillance Authority Decision No 173/23/COL of 6 December 2023 to open a formal investigation into the sale of a property in Lørenskog (Case 89161), available at: EUR-Lex - E2024C01232 - EN - EUR-Lex (europa.eu) (accessed 7 June 2024).

[2] The legal basis for this obligation under EEA law is Protocol 3 to the SCA Part I Article 1 (3) and Part II Article 3, interpreted in light of case C-349/17 Eesti Pagar AS [2019] ECLI:EU:C:2019:172 para. 92. This was accepted by the Norwegian Supreme Court in HR-2023-1807-A para. 73. Furthermore, this obligation is now enshrined in the Norwegian State Aid Procedures Act § 12.

[3] Protocol 3 to the SCA Part II Article 14 (3).

[5] HR-2013-2623-A. The rule was later confirmed in HR-2023-1807-A para. 47.

[7] Protocol 3 to the SCA Part II Article 15 (1) and (2).

[14] See, for instance, case T-207/10 Deutsche Telekom [2018] ECLI:EU:T:2018:786 paras. 40 and 46.

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