Relationship between arbitration and judicial proceedings

The relationship between arbitration and judicial proceedings was the topic of a ruling of the Italian Supreme Court (order no. 783 of 19 January 2016 of the III Civil Chamber, Italian text available here). In this ruling, the Supreme Court came to the right conclusion that it is not allowed to order the stay of proceedings pending before a Court while awaiting the decision in proceedings pending before an Arbitral Tribunal. However, the Supreme Court’s reasoning is not entirely correct. This is the reason why I would like to briefly discuss its ruling.

The case may be summarised as follows. Two lawsuits (a case concerning the dissolution of joint ownership and another one concerning the opposition to a payment order) were jointly heard by the Court of first instance. At the same time, other proceedings were pending before an Arbitral Tribunal. The subject matter of the arbitral proceedings cannot be grasped by reading the Supreme Court’s ruling; however the Court of first instance stated that the solution of the proceedings pending before it depends on the solution of the case pending before the Arbitral Tribunal.  Therefore, the Court of first instance ordered the stay of the judicial proceedings, according to Article 295 of the Italian Code of Civil Procedure.

The stay order has been appealed, pursuant to Article 42 of the Italian Code of Civil Procedure.

The appeal was accepted by the Supreme Court, which brought the parties back to the Court of first instance.

The Supreme Court referred to a precedent on this matter (decision no. 22380 of 1 October 2009, III Civil Chamber of the Italian Supreme Court).  The Supreme Court, in that case, ruled that Article 295 of the Italian Code of Civil Procedure does not apply to the relationship between arbitration and judicial proceedings, as per Article 819/ter of the Italian Code of Civil Procedure.

Such opinion is right. Article 819/ter(2) of the Italian Code of Civil Procedure states that “the provisions corresponding to Articles 44, 45, 48, 50 and 295 shall not be applicable to the relations between arbitration and judicial proceedings.”

The Italian Constitutional Court in its decision no. 223 of 19 July 2013 (Italian text available here) ruled that the above mentioned provision was constitutionally unlawful. More specifically, the Constitutional Court ruled that it was unlawful to exclude the application of Article 50 of the Italian Code of Civil Procedure to the relationship between arbitration and judicial proceedings. However, the inapplicability of Article 295 of the Italian Code of Civil Procedure (which governs the stay of proceedings) has never been questioned.

The lawmakers explicitly chose that arbitration and judicial proceedings will have to simultaneously continue. If the arbitration proceedings deal with a preliminary issue key to the judicial proceedings (as it happened in the case at hand), the Court may decide this issue without force of res judicata, unless the arbitral award has become final. In that case, which I believe more often happens (taking into account the average duration of Court proceedings in Italy), the Court will be bound by the decision of the Arbitral Tribunal.

The decision of the Supreme Court is right: therefore, where is its mistake?

The Supreme Court accepted the findings of the State Prosecutor. And the State Prosecutor’s reasoning was wrong.

Indeed, the State Prosecutor in his written submissions to the Supreme Court stated that: “the private nature of the arbitration proceedings excludes the possibility of any contrast between Court decision and arbitral award and, as a consequence, prevents the stay of proceedings pending before the Court.”

Nevertheless, Article 824/bis of the Italian Code of Civil Procedure states that “the award shall have the same effects as a judgment rendered by the judicial authority.” In other words, there is a risk of conflict between the Court decision and the arbitral award. Therefore, “the private nature of the arbitration proceedings” is not the reason why it is not allowed to stay proceedings pending before a Court awaiting the decision of the Arbitral Tribunal.  The reason is the law rule contained in Article 819/ter (2) of the Italian Code of Civil Procedure.