On 11 November 2015, the European Court of Justice (“ECJ“) ruled in case C-505/14 (Klausner Holz) that national judges should, in certain circumstances, set aside a final judgment establishing the validity of a contract if the enforcement of the contract amounts to illegal State aid. In particular, the ECJ held that if the final judgment did not address any of the State aid characteristics and was left intact this would undermine European law because it prevents a finding of State aid. This recent ruling means that obtaining a final judgment (also known as res judicata or as gezag van gewijsde in the Netherlands) is not always conclusive for parties conducting business with government entities.
The Forestry Administration of the Land Nordrhein-Westfalen (“FAL“) entered into an agreement to sell fixed quantities of wood to Klausner Holz Group between 2007 and 2014. The FAL agreed to refrain from selling at prices lower than those set out in the agreement, which was also supplemented by a framework sales contract (“contracts“).
Shortly after the agreement was implemented, difficulties arose between the parties. The FAL supplied wood to Klausner Holz between 2007 and 2008, but it failed to supply the amount of wood in accordance with the contracts. Klausner Holz experienced financial difficulties in 2008, which resulted in occasional late payments. Eventually, in 2009, the FAL rescinded the contracts and stopped supplying wood. Klausner Holz issued proceedings in which a declaratory judgment was made, ruling that the contracts should remain in force. After an unsuccessful appeal by the FAL, this judgment became final.
Klausner Holz then issued further proceedings, seeking damages in the sum of EUR 54 million and an order for the FAL to adhere to its contractual obligation to supply wood. Ultimately, however, the Court agreed with FAL’s argument that enforcement of the contracts would amount to State aid. As the principle ofres judicata under German law prevents a departure from the judgment reached in the first proceedings, the Court requested a preliminary ruling from the ECJ on how to solve the conflict between the principle ofres judicata and requirements to prevent the implementation of illegal State aid.
The judgment of the ECJ
First, the ECJ reiterated settled case law that obliges Member States to refrain from implementing measures that may amount to illegal State aid until the European Commission has issued a final decision on the compatibility of the aid with the internal market ( “standstill obligation“), to which national judges are bound.
Secondly, the ECJ pointed out that the first German judgment (i) did not concern whether enforcement of the contracts qualified as State aid, and (ii) was primarily aimed at assessing whether the contracts remained in force, despite the fact the FAL had rescinded them. The ECJ also emphasized that national judges should interpret national law in conformity with European law. The ECJ however acknowledged that interpretation of national law is subject to certain limitations and cannot be used in a way that contradicts its core meaning. The referring Court maintained that German law prevented it from overruling a final (national) judgment despite its possible contradiction with European law.
According to the ECJ, national judges should take into account the principle of effectiveness, which ensures the effective application of European law. Given the circumstances in the case, the judgment concluded that the principle of res judicata was contrary to the principle of effectiveness. As a consequence, the referring Court was bound to apply the State aid rules, which prohibited the enforcement of the contracts.
It is important to note that in other situations the ECJ has ruled that European law does not always require judges to set aside final judgments at a national level. For example, the case of C-69/14 (Târșia) established that European law does not require a revision of the final judgment if it is found to be incompatible with an interpretation of European law upheld by the ECJ after the date on which the judgment became final.
This preliminary ruling illustrates how government entities can avoid contractual obligations by invoking State aid rules. If the final judgment does not explicitly address State aid, it cannot provide full legal certainty for the parties because this may be a reason to depart from the judgment at a later stage. This is relevant since State aid rules are often invoked by the government. Only a few months ago, for instance, the District Court of North Holland ruled that the sale of land by a private party to a municipality constituted State aid. The municipality had issued the proceedings with the purpose of seeking a declaratory judgment that the sale amounted to State aid.
In light of this development, parties concluding contracts with government entities should consider protecting themselves by including contractual provisions in case State aid rules are raised. Depending on the circumstances it is for example advisable to include a provision in the contract that obliges the government entity to notify the European Commission so it can assess whether the State aid is compatible with the internal market to help ensure enforcement of the contract.