Contesting the Ultimate Leverage to Enforce EU Law

By now it has become clear that Poland is not willing to discharge the definitive judicial penalties of over EUR 600 million which the European Court of Justice (ECJ) has ordered it to pay for failing to observe coercive interim measures. When the Commission announced it would proceed to set off the outstanding amounts against money due to Poland from the EU budget, the Polish government vowed to fight the recovery ‘with all legal means’. Recently, Poland has put its money where its mouth is. It has brought four cases before the General Court to challenge the recovery. These actions have thus far evaded closer scrutiny in the legal blogosphere. However, they contain a significant challenge to the EU’s powers to enforce judicial penalties against Member States, namely as regards recovery by offsetting. As the cases raise issues which may have repercussions beyond these proceedings, this post casts a closer look at Poland’s applications and analyses their potential broader significance.

Disregarding court orders, Polish style

At a European Council doorstep interview two years ago, the Polish Prime Minister Mateusz Morawiecki told reporters: ‘we have a very difficult situation linked to the wrong and so unjust ruling of the European Court of Justice’, referring to an interim order which required Poland to cease mining operations in the Turów brown coal mine. That order originated from an infringement case which Czechia had brought against Poland for environmental damage allegedly caused to the groundwater supply across the Czech border (for more on the ‘Turów mine’ case C-121/21 in this blog see here). In blatant disregard for the binding nature of the ECJ’s order and seemingly unconcerned by any rule-of-law implications, the Polish PM then assured the reporters that ‘we are of course not going to stop mining’. A couple of months later, on 20 September, the ECJ issued a second order in that case, imposing a daily penalty payment of EUR 500,000 on Poland for every continuing day of noncompliance with the initial order.

However, despite the daily accruing penalties Poland remained in noncompliance with the measures the ECJ had required. In the meantime, Czechia and Poland settled their dispute out of court. Consequently, the case was removed from the ECJ’s register on 4 February 2022, but until then the daily penalty payments had accumulated for 136 days, resulting in a grand total of close to EUR 70 million (the sums in this post are approximative calculations based on publicly available data). Judicial penalties such as these are final and, therefore, enforceable. Since Poland did not voluntarily transfer the sum to the EU, the Commission proceeded to collect the outstanding amount in accordance with the Financial Regulation and the Commission’s Recovery Decision. These stipulate, as a last-resort option in case of Member State recalcitrance, recovery by offsetting where the Commission deducts the amount of penalty payments, with interest, from money due to the Member State from the EU budget.

Insofar as no payment was forthcoming, the Commission sent between February and May 2022 letters to Poland informing it that it intended to proceed to recover the sums by set-off. Similar letters were sent between October 2022 and January 2023 in respect of penalties imposed in another infringement case relating to the independence and private life of Polish judges (the so-called ‘Muzzle Law’ case C-204/21). Also in this infringement procedure, the ECJ had imposed penalties in support of an interim order, which Poland ignored. The daily penalty was initially set at EUR 1 million by an order of 27 October 2021 and lowered, by a subsequent order of 21 April 2023, to EUR 500,000, which by the time of the final judgment on 5 June 2023 added up to a total penalty of close to EUR 570 million.

Commission’s recovery decisions challenged before General Court

Since then, Poland has brought four cases before the General Court challenging the Commission’s decisions to recover the unpaid penalty payments by offsetting. The first two applications, of 19 April and 25 May 2022, concern the Turów mine case. According to the notices of the cases T-200/22 and T-314/22 in the Official Journal, Poland seeks annulment of the Commission’s decisions alleging a ‘lack of competence on the part of the Commission’. It appears thus to be challenging, on the level of principle, the Commission’s powers to recover by offsetting financial penalties imposed on Member States in infringement proceedings. The actions rely on a reading of the Financial Regulation but possibly call for an analysis of the Commission’s budget implementation powers under the EU Treaties more generally. Moreover, Poland reproaches the Commission for not clearly explaining what the legal basis for the procedure for recovery by offsetting is.

By its third and fourth applications, lodged on 22 December 2022 and 23 March 2023, Poland further contests, according to the notices of the cases T-830/22 and T-156/23, the recovery by offsetting of penalty payments imposed in the ‘Muzzle Law’ case. In its application to have the Commission’s recovery measures annulled, Poland especially argues that the Commission has wrongly recovered sums beyond the date on which Poland repealed the contested national legislation.

The stakes of the litigation are high – not only financially, but also as regards the enforcement of EU law. Based on the notices in the Official Journal, it is however not possible to state conclusively whether the General Court will be required to rule on matters of principle. Insofar as Poland’s first two applications allege that the recovered amounts ‘ceased to exist’ pursuant to the settlement agreement it concluded with Czechia, their prospects of success appear bleak. The lawfulness of penalties imposed in support of interim measures cannot depend on any agreement between the parties but the penalties are rather justified by the public interest to ensure that all Member States observe the ECJ’s interim orders. Similarly, the third and fourth applications seem at first sight to hinge on the specificities of the litigation, namely whether the recovery was justified on the merits regarding a certain time period, rather than on an assessment of the legal basis of the Commission’s powers to recover sums by offsetting.

The bigger challenge: offsetting as ultimate leverage to enforce EU law

Poland’s claim that the Commission does not have the competence to recover judicially imposed penalties by offsetting is serious. Offsetting may seem like a technicality. In reality, however, it represents the EU’s ultimate leverage to guarantee the effectiveness of the infringement procedure and, by extension, the rule of law in the Union’s legal order against recalcitrant Member States. The EU has no enforcement agents of its own and cannot, therefore, collect unpaid payments by force. The financial penalties, the corollary of the infringement procedure, may be deprived of their rationale if they cannot be recovered effectively from recalcitrant Member States. Offsetting thus constitutes a last-resort mechanism to police Member States’ compliance with financial penalties imposed in the ECJ’s rulings.

In EU law, offsetting is not a novel issue. The Commission has exercised it not only against private parties, but also against the public authorities of Member States. Not a means of execution, strictly speaking, but rather a ‘method of extinguishing obligations equivalent to making a payment’ (as characterized by Advocate General Léger here), offsetting is part and parcel of the EU’s activities as a creditor. I have argued elsewhere in more detail that an out-of-court set-off of a definitive judicial penalty, imposed pursuant to Article 260 TFEU, against EU payments due to a Member State is to be viewed as a recovery operation intrinsic in the management of the EU budget. As such, the Commission’s process of recovering judicial penalties from Member States by offsetting is compatible with the EU Treaties, even though the ECJ is yet to definitively adjudicate on the issue in this context.

Finally, whether the General Court will deliver rulings of principle in these cases or in the future – the Commission’s recent activity suggests other cases may follow – it is worth emphasizing that any financial penalties imposed in the infringement procedure upon the Member States result from the deliberations of the ECJ. It stands to reason that, as in any national legal order, definitive court rulings must be enforceable. Under the EU Treaties, enforcement is primarily entrusted to the Commission. If the ECJ’s rulings are to be compulsory, and not for the Member States to simply disregard at will whenever inconvenient – or, to quote PM Morawiecki, ‘wrong and so unjust’ – it is imperative that the Commission is vested with sufficient powers to recover unpaid penalties, by offsetting when necessary. Against this background, the forthcoming judgments of the General Court and, if appealed, of the ECJ, will be ones to watch closely.