Arbitration and insolvency

In insolvency matters, Italian law does not favour arbitration. On the one hand, the vis attractiva concorsus principle pursuant to article 24(1) of the Italian Insolvency Law states that “the Court which opens the insolvency proceedings shall have jurisdiction on all the civil actions resulting from such proceedings.” On the other hand, Article 83/bis of the Italian Insolvency Law notes that “if a contract containing an arbitration clause is terminated in accordance with the provisions of this Section, the pending arbitration proceedings shall not continue.” The interaction between both Articles results in a significant reduction of the scope of the arbitrability of the disputes a party to which is subject to insolvency proceedings. And this reduction also interferes with the principle of separability of the arbitration clause.  Indeed, the explanatory memorandum to the decree introducing the comprehensive reform of the Italian Insolvency Law states that “(…) the already pending arbitration proceedings shall not continue if the contract containing the arbitration clause is terminated pursuant to the provisions of section IV. The purpose is to prevent that the arbitration proceedings survives the agreement, terminated as a consequence of the bankruptcy, which contained the arbitration clause.” 

A recent order of the Supreme Court sitting en banc (order no. 10800 of 26 May 2015, Italian text available here) concerns the relationship between arbitration (in the case at hand, international arbitration) and insolvency proceedings.

The case may be summarised as follows.

In 2007, an airline company and an airport management company entered into a service contract, which contained an arbitration clause. According to this clause, all disputes arising between the parties would have to be referred to arbitration under the rules of the London Court of International Arbitration (LCIA).

Once the agreement expired, the airport management company (in the meantime admitted to a pre-bankruptcy) requested, and was granted a European order for payment, issued by an Italian Court. However, the air transport company appealed the order, first of all, objecting to the jurisdiction of the Italian Courts, since the parties had agreed upon the referral of all their disputes to a foreign arbitration. During the appeal proceedings, the airport management companies went bankrupt. The proceedings were then reinstated and, finally, the air transport company referred the case to the Supreme Court, so as to have a final decision on the issue of jurisdiction.

The Supreme Court’s ruling is interesting under many points of view.

First of all, the Court analysed the objection raised by the bankruptcy’s receiver, whereby the arbitration clause at hand provided for the referral to an “arbitrato irrituale” (i.e., an alternative arbitration procedure which does not result in an enforceable award and does not give rise to jurisdictional issues).  To this respect, the Supreme Court held – following its own case law – that “international arbitration can only be arbitrato rituale” (i.e., the regular arbitration procedure resulting in an enforceable award), since “the distinction between arbitrato rituale and arbitrato irrituale, is well known to the existing law [as well as the Italian Code of Civil Procedure], but is rarely applied abroad.” 

Moreover, the Supreme Court used a strict construction of Article 83/bis of the Italian Insolvency Law. To this respect, the Court ruled that “(…) we cannot draw a general rule, whereby arbitration proceedings cannot continue, from Article 83/bis of the Insolvency Law. However, the opposite rule may also be drawn. Indeed, the above mentioned Article (…) states that the arbitration clause is terminated in the case governed by it (that of pending arbitration proceedings and the termination of the contract containing the arbitration clause pursuant to Article 72 of the Insolvency Law). On the basis of the same provision, we must conclude that, if the bankruptcy’s receiver avails himself of the rights arising out of the contract containing the arbitration clause, this clause is binding on him. Otherwise, the receiver would be allowed to terminate only certain clauses of the agreement, while claiming the fulfillment of other clauses of the same agreement (…).” The Supreme Court sitting en banc added, then, that “it does not matter that the agreement had expired and had not been renewed at the time of the appeal of the payment order. Indeed, the purpose of the arbitration clause is to settle the disputes arising out of the agreement, in accordance with the proceeding laid down therein.” 

Another interesting issue arose from the fact that in the LCIA arbitration proceedings the aviation company brought a counterclaim against the bankrupt company. In the opinion of the bankruptcy’s receiver, the Arbitral Tribunal did not have jurisdiction on that counterclaim (in fact, according to the decision no. 9070 of 6 June 2003 of the Supreme Court “the jurisdiction of the Arbitral Tribunal, arising from the arbitration clause, is in any case (…) prevented by the opening of the insolvency proceedings. Indeed, as a consequence thereof, the claims against the bankrupt debtor shall be determined by the Insolvency Court, which sole has jurisdiction on them.” )

In the ruling at hand, the Supreme Court partially weakened the principle of vis attractiva concursus and reaffirmed the Kompetenz-Kompetenz principle. More specifically, the Court stated: “this Court is prevented from deciding on the jurisdiction of the Arbitral Tribunal on the counterclaim (…) concerning the alleged credit towards the bankrupt debtor. Indeed, once excluded the jurisdiction of the Italian Courts, as a result of the arbitration clause which referred the dispute to a foreign Arbitral Tribunal, it is on the Arbitral Tribunal to determine the rules governing the arbitration procedure.” 

We will probably read another decision on this case, when the recognition of the LCIA award is sought in Italy.

The official abstract of the ruling at hand is less than clear-cut, not least because it focuses on a portion of the order, which does not represent the rationale of the decision. In any case, the official abstract is the following: “If an agreement stipulated before the opening of the insolvency procedure involving one of the parties thereto contains an arbitration clause (in the case at hand, an international arbitration clause), the office held by the Arbitral Tribunal is not subject to termination pursuant to Article 78 of Insolvency Law. Indeed, all the involved parties granted the Arbitral Tribunal with the relevant powers. This construction is indirectly confirmed by Article 83/bis of the Insolvency Law, which states that if arbitration proceedings may not continue because of the termination of the agreement containing the arbitration clause, it must be held that the clause is effective and binding if the bankruptcy’s receiver does not terminate the agreement containing it: indeed, the receiver is not allowed to only terminate certain clauses and at the same time claim the fulfillment of other clauses” (Supreme Court sitting en banc, order no. 10800 of 26 May 2015, official abstract no. 635360).