Assignment of the arbitration agreement

Italian Courts set forth peculiar rules concerning the assignment of the arbitration agreement in case of assignment of credit. In this respect, a recent decision issued by the Court of first instance of Milan (Court of first instance of Milan, VII Civil Chamber, decision no. 8379 of 5 July 2016, Italian text available here) is worth a mention.

The case decided by the Court of Milan is particularly complex.  Therefore, the following outline is only focused on certain issues of the case; that is to say, those concerning the assignment of the arbitration agreement.

Two companies set up a joint-venture, won a tender for works and eventually set up a special purpose vehicle (a limited liability consortium).

The consortium bought certain goods to be used for the works. The purchase agreement contained an arbitration clause, which reads as follows: “Any dispute concerning the construction and/or performance of this contract shall be settled by an Arbitration Tribunal, whose decision shall be issued according to the law (…).” The obligations of the purchaser (the consortium) were secured by a guarantee issued by one of its members. Thereafter, a third party – the claimant – issued a further guarantee.

The purchaser (the consortium) breached its obligations, and the seller demanded the claimant to pay the guaranteed amount. The claimant did so and was eventually subrogated to the seller’s rights vis-à-vis the purchaser.

In the meantime, the purchaser went bankrupt. Therefore, the claimant brought proceedings against the parent company of the consortium, which in fact under Italian law is jointly and severally liable with it (Article 13(2) of Law no. 109 of 11 February 1994 and Article 96 of Presidential Decree no. 554 of 21 December 1999). 

The claimant was granted a payment order (which under Italian law is an ex parte order). The defendant appealed to the payment order and objected, among other things, to the jurisdiction of the State Courts because of the stipulation of the above-mentioned arbitration clause.

Italian Courts, as said, set forth peculiar rules concerning the assignment of the arbitration clause in case of assignment of credit. The assignee is not entitled to enforce the arbitration clause (that is to say, he cannot commence arbitration proceedings against the obligor); however, the obligor may object to the jurisdiction of State Courts, if the assignee commences litigation in Court.

In other words, any procedural choice made by the assignee would face a procedural objection raised by the obligor.

The Supreme Court sitting en banc, on the one hand, ruled that the assignee of a credit arising out of a contract containing an arbitration clause cannot object to the jurisdiction of State Courts: “Since (…) the assignment of contract under Articles 1406 ff. of Italian Civil Code does not entail (according to the prevailing case law) the assignment of the arbitration clause contained therein, a fortiori the arbitration clause is not assigned in the case of assignment of a credit arising out of a contract containing it. Indeed, the assignment of credit, which could be agreed even without the consent of the obligor (Article 1260(1) of Italian Civil Code), has narrower effects than the assignment of contract, as it only concerns the assignor’s credit under the contract and does not entail the assignment of the whole contract nor of other contractual rights and obligations (…) Accordingly, in case of assignment of a credit arising out of a contract including an arbitration clause, the assignee does not become a party to that clause, which in fact stands as a separate contract, and therefore it cannot enforce the arbitration clause against the obligor” (Supreme Court sitting en banc, decision no. 12616 of 17 December 1998, n. 12616, Italian text available here). 

On the other hand, the Supreme Court sitting en banc stated that the obligor may object to the jurisdiction of State Courts: “The above-mentioned doctrine is not disputed by the case law of this Court, whereby in case of assignment of a credit arising out of a contract containing an arbitration clause, the obligor is entitled to object to the jurisdiction of State Courts (…). Indeed, that case law does not deal with the case of the assignee: it deals with the case of the obligor, and its aim is not to deprive the obligor of its right to arbitrate. In fact, that case law found that: ‘otherwise, the obligor would be deprived of his right to arbitrate by virtue of an agreement to which he is not a party, that is to say, the assignment agreement entered into by the assignee and the assignor.’ The arbitration agreement is not assigned to the assignee: as already stated, he cannot enforce the arbitration clause, due to the fact that it stands as a separate contract. Nonetheless, it is settled case law (and the scholars agree) that the assignment cannot deprive the obligor of his objections. Therefore, he is entitled to raise vis-à-vis the assignee all the objection he could have raised vis-à-vis the assignor. (…) As a consequence, the obligor may object to the jurisdiction of State Courts due to the stipulation of an arbitration clause in the contract he entered into with the assignor” (Supreme Court sitting en banc, decision no. 12616 of 17 December 1998; that doctrine was subsequently upheld by the Supreme Court in a number of decisions: Supreme Court, II Civil Chamber, decision no. 24681 of 21 November 2006, Italian text available here; Supreme Court, VI Civil Chamber, decision no. 29261 of 28 December 2011, Italian text available here; Supreme Court, I Civil Chamber, decision no. 13893 of 19 September 2003, n. 13893, Italian text available here; and Supreme Court, I Civil Chamber, decision no. 6809 of 21 March 2007, Italian text available here).

The Court of Milan also confirmed that doctrine, since in the decision at hand it ruled that: “although the assignee of a credit arising out of a contract containing an arbitration clause does not become a party to that clause and therefore cannot enforce the arbitration clause against the obligor, the latter may enforce that clause against the former.” 

The objection raised by the obligor was therefore upheld by the Court of Milan which stated that the jurisdiction rested with the Arbitral Tribunal.

The above outlined doctrine of circulation of the arbitration agreement has been subject to criticism, both in terms of its theoretical foundations and in terms of its consequences. Nevertheless, such a doctrine do exist, and it is upheld by the Supreme Court as well as by lower Courts (for instance, by the Court of first instance of Modena, in its decision no. 807 of 23 May 2013, Italian text available here on the website of Giurisprudenza Modenese; and by the Court of Rimini, in its decision of 17 December 2015, Italian text available here on the website of Il Caso). Moreover, it is unlikely that it would be repealed, also because the (sporadic) divergent case law does not state an alternative doctrine (in this respect, for instance, see Supreme Court, I Civil Chamber, decision no. 17531 of 1 September 2004, Italian text available here).

In this framework, might the Court of Milan have reached a different solution? There is an issue with which the decision does not deal. Indeed, the defendant was not the obligor. It was a third party, jointly and severally liable with the obligor. Is that third party allowed to object to the jurisdiction of State Courts, because of the stipulation of an arbitration clause in the contract entered into by the assignor and the obligor?