Termination of the funding agreement may be signalled by the funding institution already during a project control, when reviewing a payment application or when assessing a project implementation report. The funding recipient may then receive a request to provide explanations, supplement the documentation or remedy the identified irregularities. If the funding recipient fails to respond within the prescribed period despite repeated requests, or if the explanations provided do not satisfy the institution, termination of the funding agreement may be the next step, accompanied by a demand for repayment of the funding already disbursed together with interest.
When does the risk of termination of a funding agreement arise?
The risk of termination arises when the funding institution concludes that the manner in which the project is being implemented breaches the funding conditions or that further implementation of the project in accordance with the funding agreement is at risk. This is often preceded by requests for explanations, requests to supplement documentation, submission of an updated schedule, or evidence of progress in the physical and financial implementation of the project.
The entire course of project implementation and the combined effect of several problems may be relevant. In one case considered by the Supreme Administrative Court, the funding institution referred, among other things, to a failure to supplement a payment application, failure to submit updated schedules, loss of a source of financing, withdrawal of some consortium members, lack of progress against the project schedule, and the absence of a realistic possibility of completing the project on time. These circumstances were treated as breaches of obligations arising from the funding agreement and as grounds for its termination.
The risk of termination of the funding agreement may therefore increase gradually. A single delay or a missing document may initially lead to a request from the funding institution or to the suspension of a payment. If the problems persist, the funding recipient fails to respond, or it becomes impossible to complete the project, the institution may ultimately decide to terminate the funding agreement.
Does every breach justify termination of a funding agreement?
The assessment depends on the terms of the funding agreement, but above all on the nature of the identified breach and the funding institution’s assessment of it. Funding agreements specify the circumstances in which the institution may terminate the agreement subject to a notice period or with immediate effect. It is therefore necessary to determine whether the act or omission attributed to the funding recipient actually falls within one of the grounds for termination provided for in the agreement.
The seriousness of the breach and its impact on further project implementation are also relevant. In one case, the Supreme Administrative Court upheld the termination of a funding agreement where the problems concerned, taken together, compliance with the project schedule, required documentation, sources of financing and physical progress, and the circumstances established in the case indicated a risk that the project would not be completed on time.
Although termination of the funding agreement is usually accompanied by a demand for repayment of the funding in full, it does not necessarily determine the final amount to be repaid. In another case, the Supreme Administrative Court held that, when seeking repayment of funding, the funding institution should take into account the proportionality rule applicable under the particular programme and the degree to which the project had been implemented. The grounds for terminating the funding agreement and the scope of the repayment demanded therefore require separate assessment.
A warning that the funding agreement may be terminated is an important stage
A warning that the funding agreement may be terminated is not the same as termination itself. It may appear in a post-control report, following verification of a payment application, or in a request for explanations. If the funding institution is already referring to specific grounds for termination, the issue concerns the continued validity of the funding agreement rather than merely the settlement of an individual item of expenditure.
At this stage, it is necessary to determine whether the funding institution has correctly reconstructed the course of the project, taken into account any approved modifications and assessed the actual extent to which the work has been completed. The explanations submitted and documents provided may affect whether the institution limits its action to challenging part of the expenditure or requiring the irregularity to be remedied, or proceeds to terminate the funding agreement. It should be remembered that the existence of an irregularity does not in itself determine whether termination of the funding agreement is justified. Nevertheless, it is at this stage that the funding recipient may still take action to reduce the risk of termination and a subsequent demand for repayment of funding.
The funding institution has terminated the funding agreement – what should be checked?
After receiving a notice of termination of the funding agreement, it is necessary to determine the contractual basis on which the funding institution relied and which circumstances it considered to constitute a breach of the funding recipient’s obligations. It is also important to establish whether the agreement was terminated subject to a notice period or with immediate effect, and the date from which the institution considers the termination to take effect.
The notice should be compared with the terms of the funding agreement, the course of project implementation and the earlier correspondence. It is necessary to verify whether the funding institution took account of approved project modifications, explanations previously submitted and the actual scope of the work completed. If termination of the agreement is accompanied by a demand for repayment of funding, the legal basis for the repayment and the amount claimed require a separate assessment.
Termination of funding agreements in projects financed under the Polish Recovery and Resilience Plan (KPO)
At the final settlement stage of projects funded under the KPO, disputes may arise concerning completion of the investment scope, deadlines, eligibility of expenditure or achievement of project indicators. If the circumstances identified correspond to grounds specified in the agreement, the funding institution or operator may terminate the agreement and demand repayment of funding already paid.
In practice, termination of the agreement may be preceded by an on-site inspection of the project. If representatives of the funding institution or operator conclude that a task has not been completed in accordance with the agreement, the findings made during the inspection may be used to justify termination and a demand for repayment of funding. In such a case, it is important to determine precisely what was examined during the inspection, which obligations arose from the agreement and whether the institution’s findings correspond to the actual scope of the work completed.
For projects funded under the KPO, the legal basis for repayment of funds is set out in Article 14ls of the Act on the Principles of Development Policy. The provision requires repayment, among other things, where funds have been used in breach of the procedures applicable to their use, including the provisions of the agreement under which the project received support.
For the funding recipient, it is therefore essential to determine whether the circumstances identified by the institution actually correspond to the contractual and statutory grounds for termination and repayment. The scope of the repayment demanded also requires separate assessment, particularly where the project has been completed to a substantial extent or some of its intended results have already been achieved.
How should you respond to termination of a funding agreement?
After receiving a notice terminating the funding agreement, the entire body of material on which the funding institution based its position should be analysed. This includes the funding agreement and its annexes, findings from project controls or on-site inspections, earlier requests and the funding recipient’s responses, approved project modifications, and documents confirming the scope of the work actually completed. Only then can it be determined whether the events identified by the institution actually occurred, whether they correspond to the contractual grounds for termination, and whether the institution took account of the full course of project implementation.
It is also necessary to prepare for possible proceedings concerning repayment of funding. Depending on the structure of the particular funding instrument, such proceedings may be administrative or civil in nature. In civil cases, the operator may pursue the amount claimed by bringing an action for payment. A demand for repayment may be served together with the notice terminating the agreement or at a later stage. The legal basis for the repayment claim, the amount demanded and the method of calculating interest then require separate assessment.
For more information about legal support for funding recipients in matters concerning project controls and repayment of funding, see: Project controls, financial corrections and repayment of funding.
