Once again, on the relationship between arbitral and judicial proceedings

A recent ruling of the Court of first instance of Rome (decision no. 4216 of 1 March 2016 of the III Civil Chamber of the Court of first instance of Rome, Italian text available here) goes trough the issue of the relationship between arbitral and judicial proceedings. In particular, the ruling considers whether it is possible to order the stay of proceedings pending in Court, while awaiting the decision in other proceedings pending before an Arbitral Tribunal. This is an issue I already analysed on this post.

This is a summary of the case decided by the Court of first instance of Rome.

Three companies, two from Taiwan (Powercom Co. Ltd and Sunpower Semiconductor Ltd) and one from Singapore (Yuraku Pte Ltd) set up a joint venture (a Singaporean company named Powercom Yuraku Pte Ltd) for the construction of photovoltaic plants in Europe.

In its turn, the company resulting from the joint venture (Powercom Yuraku Pte Ltd) set up a sub-holding in Luxembourg (Powercom Yuraku SA) and the latter set up eight special purpose vehicles in Italy, a vehicle for each photovoltaic plant to be built.

The relationship between the parties to the joint venture was regulated by two shareholders’ agreements: the first one entered into in May 2009, and the second one in October 2009. A dispute arose between the parties concerning the fulfilment of the obligations arising out of the shareholders’ agreement. This dispute was referred to an Arbitral Tribunal in Singapore.

While the arbitration proceedings were still pending in Singapore, Sunpower Semiconductor Ltd was granted eight injunction orders for the payment of the amounts allegedly owed by the special purpose vehicles to it, in its quality as seller of the photovoltaic panels.

The decision at hand was issued in the proceedings commenced by one of the eight special purpose vehicles in order to challenge the payment order (which is an ex parte order under Italian law).

During the proceedings, the special purpose vehicle, apart from disputing the merits of the claim, requested the Court to stay its proceedings (pursuant to Article 295 of the Italian Code of Civil Procedure and Article 7 of Law no. 218 of 31 May 1995) awaiting the decision of the Arbitral Tribunal in Singapore.

Indeed, among the provisions in the shareholders’ agreements, there was a condition precedent whereby the price of the photovoltaic panels (that is, the sums claimed by Sunpower Semiconductor Ltd) would become due only after the special purpose vehicles were granted loans by the banks. According to the special purpose vehicle, that condition had not been met due to a breach to the shareholders’ agreement on the part of Sunpower Semiconductor Ltd (that is, the claimant and alleged creditor in the Italian proceedings). Since the dispute concerning that breach was referred to the Arbitral Tribunal in Singapore, the special purpose vehicle requested the Court to stay its proceedings waiting for the decision of the Singaporean Arbitral Tribunal.

The Court of Rome came to the right conclusion that proceedings pending in Court cannot be stayed awaiting the decision of an Arbitral Tribunal.

Nonetheless, the reasoning of the ruling at hand is (partially) wrong.

The Court noted that Article 819/ter(2) of the Italian Code of Civil Procedure prevents the stay of judicial proceedings awaiting the decision of an Arbitral Tribunal. Indeed, this Article sets forth that “the provisions corresponding to Articles 44, 45, 48 (…) and 295 shall not be applicable to the relations between arbitration and judicial proceedings.” 

Nevertheless, the Court also referred to a previous ruling of the Supreme Court (decision no. 12124 of 9 June 2005 of the III Civil Chamber of the Supreme Court, Italian text available here) and added that “the nature of the relationship between two disputes, which requires the Court to order the stay of the proceedings pursuant to Article 295 of the Italian Code of Civil Procedure, only occurs when the first decision affects the ruling to be issued in the second procedure. That means that the first ruling is able to produce effects in relation to the right subject to the second dispute and therefore it may theoretically create a conflict between decisions. Consequently, the private nature of arbitration proceedings and of the decision arising out of these proceedings, excluding the risk of a conflict between decisions, also excludes that the Court may stay its proceedings awaiting the arbitral award.” 

In my opinion, this statement is wrong. After the reform of 2006, Italian law provides that “(…) the award shall have the same effects as a judgment rendered by the judicial authority” (Article 824/bis of the Italian Code of Civil Procedure). In other words, a conflict between decisions may happen.

Therefore, the only reason why proceedings in Court may not be stayed, pursuant to Article 295 of the Italian Code of Civil Procedure, awaiting an arbitral award is that the law expressly precludes that stay.

Another interesting point of the ruling of the Court of Rome concerns the applicability to its case of Article 7 of Law no. 218/1995. This provision governs the relationship between Italian and foreign Courts where the same disputes (or related actions) are pending. It provides that “when an objection is raised concerning the previous existence of  pending proceedings in a foreign Court between the same parties and involving the same cause of action, the Italian Court shall stay its proceedings if it considers that the foreign decision is able to be recognised in Italy (…)” (para. 1). This provision also states that “if the foreign proceedings deal with an issue key to the Italian proceedings, the Italian Court may stay its proceedings if it considers that the foreign decision is able to be recognised in Italy” (para. 3).

The Court of Rome ruled that the provision at hand (Article 7 of Law no. 218/1995) does not apply to the relations between Italian Courts and foreign Arbitral Tribunals. On the contrary, it only applies to the relations between Italian and foreign Courts, as the Supreme Court had already ruled (decision no. 20688 of 25 November 2009 of the I Civil Chamber of the Supreme Court, Italian text available here).

The Court of Rome is right.

Pursuant to Law no. 218/1995, the existence of Italian proceedings prevents the recognition of a foreign decision between the same parties and involving the same cause of action, if the Italian Court was first seised (Article 64(f)).

Conversely, if the foreign Courts were first seised, the Italian Court stays its proceedings, awaiting the decision to be issued abroad (Article 7).

On the contrary, on this very point, the 1958 New York Convention provides for a rather different rule. In fact, under the New York Convention, the existence of a dispute between the same parties and involving the same cause of action does not preclude the recognition of a foreign award (in this respect, see decision no. 671 of 21 January 2000 of the I Chamber of the Supreme Court, Italian text available here).

Therefore, proceedings in Court and arbitration proceedings (both domestic and international ones) proceed parallel, until the decision issued in a procedure becomes final and binding on the parties and therefore also in the other procedure. Taking into account the average duration of Court proceedings in Italy, it is likely that the Italian Court will be bound by the arbitral award.