Commercial arbitration practitioners sometimes face problems arising from the conduct of a party that, recalcitrant to see the dispute decided by the arbitrators as agreed, engages in conduct with the apparent intent to prevent or hinder and slow down, the arbitral proceedings.

The leading arbitral institutions are also aware of this and have included in their rules the admonition represented by the express provision that the parties must conduct themselves in good faith and fair dealing.

The subject has not, however, found particular attention in Italy.  For this reason, it seems appropriate to address it.

The first issue to be addressed relates to the nature of the arbitration agreement, i.e., the agreement between two or more parties, under which their disputes are referred to the decision of a private adjudicator, who exercises judicial power instead of the State Courts.

Some scholars say such an agreement would be a non-contractual transaction with procedural effects.  Others, on the other hand, recognise it as contractual in nature, although in some cases, they consider the issue to be merely nominalistic.

The approach that seems preferable is the one according to which the arbitration agreement is a contract having as its object the choice of a way to settle a dispute, thus producing procedural effects.

Indeed, this approach is fully compatible with Italian and overseas legal traditions.  It also considers specific significant law rules that would otherwise be ignored.

The definition in contractual terms of the arbitration agreement then leads to the direct application of the provisions contained in Title II of Book IV of the Italian Civil Code – particularly that of Art. 1375 of the Italian Civil Code.

On the other hand, the qualification of the arbitration agreement is irrelevant for the purposes of the application of Art. 1218 et seq. of the Italian Civil Code: whether it is contractual in nature or a non-contractual transaction with procedural effects, it is undisputed that it gives rise to obligations and, thus, to liability for non-performance.

If the arbitration agreement is that contract by which the parties undertake to submit their disputes to the decision of arbitrators, it is clear that it gives rise to a negative obligation: that of not referring, for the disputes covered by the agreement, to the State Courts, or in any event to a different body than the one provided for in the agreement.  At the same time, it also gives rise to a positive obligation: that of submitting such disputes to arbitration.

Both Italian and overseas scholars agree on this point.

In addition, a series of further obligations may be derived: in particular, the obligation to appoint the arbitrator(s) in a timely manner and the obligation to pay (to the arbitrators or the arbitral institution, as the case may be) the required advances.

These precise obligations to do are accompanied by equally precise obligations not to do, in addition to the obligation not to refer the dispute to an authority other than the arbitrators, and in particular the obligation not to engage in conduct aimed at preventing or slowing down the constitution and functioning of the arbitral tribunal and the obligation to refrain from challenging the award on grounds other than those permitted by law.

All these obligations are an explication of the principle, set forth in Article 1375 of the Italian Civil Code, that a contract must be performed in good faith.

In more detail.

The parties have the obligation to appoint arbitrators in a timely manner, since the failure to do so cannot be considered compatible with good faith in the performance of the contract.  Such omission, in fact, betrays the intent to slow down the constitution of the arbitral tribunal, and thus the arbitrators’ decision on the merits of the dispute.

The parties are then obliged to pay the advances requested by the arbitrators or the arbitral institution since non-payment is not compatible with the fulfilment in good faith of the contractual objective of obtaining a decision on the merits by the Arbitral Tribunal (either because it may lead to the dissolution of the clause pursuant to Art. 816-septies of the Italian Code of Civil Procedure, or because it may lead to the stay or termination of the proceedings).

The parties are also under an obligation not to engage in any conduct – other than those just mentioned – aimed at preventing or slowing down the constitution of the arbitral tribunal or its functioning.  Thus, they may not, for example, appoint an arbitrator who is compelled not to accept the appointment because of a known conflict of interest.  So-called filibustering techniques also fall within this category, although particular caution seems appropriate with respect to them, given the far from clear-cut boundary between the exercise of the right of defence and its abuse.

Finally, the parties must refrain from challenging the award in cases other than those permitted by law.  In particular, this means that they must not attempt to ‘disguise’ in the form of one of the grounds for nullity of the award pursuant to Article 829 of the Italian Code of Civil Procedure criticisms of the findings of fact made by the arbitral tribunal, or of its rulings on the applicable law.  This is because, having chosen a method of dispute resolution that does not provide for a two-tier judgment on the merits, a different course of conduct does not comply with good faith in the performance of the contract.

In the face of non-compliance with the arbitration agreement, the law provides two types of remedies: procedural and substantive.

Procedural remedies are those aimed at removing the most serious effects of non-performance.

Thus, in the event of non-performance consisting in bringing litigation before the State Courts, the procedural remedy is the objection to their jurisdiction.  Or, following the non-performance consisting in the failure to appoint an arbitrator, the remedy is to apply to the appointing authority provided for that purpose, whether by agreement or otherwise by law.  

All these remedies may, however, prove unsuitable to achieve the objective of placing the non-breaching contracting party in the situation it would have been in the absence of the breach.  For example, they do not take into account the costs – except, if appropriate, in the form of litigation costs, which, however, as is well known, may be liquidated in an amount even considerably lower than the costs actually incurred.

There are also breaches for which no remedy is available: thus, if one party has not paid the required advance payments, the other party will have no choice but to pay them in its stead or suffer the dissolution of the arbitration agreement pursuant to Art. 816-septies of the Italian Code of Civil Procedure or, as the case may be, the stay or termination of the proceedings.

In all these cases, the substantive remedy can come to the rescue: damages.  All losses (costs) and any lost profits resulting from the non-performance may be compensated, provided that they are, pursuant to Art. 1223 of the Italian Civil Code, an immediate and direct consequence of the said non-performance.

Excluding the numerous cases in which only procedural remedies have been activated, Italian case law on the subject is quite scarce.  Among the reported precedents, reference may be made to a decision of the Court of first instance of Verona of November 2012, a decision of the Court of Appeal of Milan (Italian text available here) and a decision of the Court of Appeal of Brescia (Italian text available here).

It is interesting to note that, in the first case (Court of Verona), the party that had acted before the State Court in breach of the obligation undertaken under the arbitration agreement was ordered to pay the non-breaching party a sum of money (equal to approximately half of the liquidated litigation costs) pursuant to Art. 96, para. 3 of the Italian Code of Civil Procedure.

The reasoning followed by the Court of Appeal of Milan to use, once again, the remedy under Art. 96, para. 3 of the Italian Code of Civil Procedure is extremely clear.

It is worth quoting it in full: “From a simple reading of the petition for setting aside the award, it is unequivocally clear the absolute awareness on the part of the claimant (also taking into account the undoubted professional value of the counsel) that the circumstances underlying all the alleged grounds for setting aside (…) were, in fact, claims relating to the assessment of the facts and the violation of the rules of law, allegedly made by the arbitral tribunal, and, as such, wholly inadmissible, while those underlying the alleged violations of the rules of public policy and failure to give a ruling were clearly non-existent.  In the present case, what ultimately materialised was a case in which the parties had, at first, by concluding an arbitration agreement, preferred to subtract from ‘public justice’ the decision of disputes that might have arisen between them, attributing them to ‘private justice’, which they evidently considered to be quicker or more reliable even if, clearly, much more costly; when, however, a real dispute arose, the ‘private justice’ took the decision, the losing party tried to request the decision on the merits of the same to the ‘public justice’, disguising as grounds for the setting aside of the award those which are, with all evidence, objections on the merits and thus aggravating and hindering, uselessly and inadmissibly, the ordinary work of the ‘public justice’“.

Based on this reasoning, the Court of Appeal of Milan ordered the losing parties to pay, under Article 96 of the Italian Code of Civil Procedure, sums comparable (and in one case identical) to those subject to the order to pay costs.

Even more interesting is the case the Court of Appeal of Brescia decided.  In that case, the party in breach of the arbitration agreement had failed to pay the advances requested by the arbitrators, thus leading to the dissolution of the arbitration agreement under Article 816-septies of the Italian Code of Civil Procedure.  Having been forced to refer the matter to the State Court, the non-breaching party had asked the latter to order the other party to reimburse the costs, including those incurred for the futile arbitration proceedings.  The Court of Appeal rejected the request but did so because those costs were not litigation costs within the meaning of Art. 91 of the Italian Code of Civil Procedure, but an item of damages, which should have been the subject of a specific claim for damages, which was, however, lacking.

Ultimately, in light of these albeit rare precedents, it can be assumed that the Italian Courts are ready to sanction the party that has breached the arbitration agreement and also to sanction conducts other than and in addition to the mere submission of the claim in an improper forum (before the State Courts rather than before the arbitral tribunal).  A preference also emerges for the instrument of Art. 96 of the Italian Code of Civil Procedure, particularly its third paragraph, allowing an equitable determination even regardless of the demonstration of the existence and extent of the damage.

Some interesting hints may, at this point, be taken from foreign experience.

Numerous precedents in England and Wales address the issue of the consequences of non-compliance with choice of court agreements in general and arbitration agreements in particular.  Extremely well known is also a precedent (West Tankers Inc v. Allianz SPA & Generali Assicurazione Generali SPA [2012] EWCA Civ 27) that dealt with a complex case in which, among other things, the jurisdiction to issue a damages award was debated (this issue was resolved in the sense that such jurisdiction also lies with the arbitral tribunal that has finally been seised).

In summary, it may be held that English law recognises the liability of a party who has defaulted on an arbitration agreement and that the damages must be such as to put the non-breaching party in the same situation as it would have been in the absence of the breach.

There is also a line of cases by the Swiss Federal Supreme Court according to which it is provided for by Swiss law – or at any rate not incompatible with Swiss public policy – that the party that has defaulted on an arbitration agreement is liable for damages to the non-breaching party and that the arbitral tribunal has jurisdiction to assess these damages.

Summing up, also in the light of domestic and foreign case law, it seems that an arbitration agreement is a contract, with the consequence that, on the one hand, it must be performed in good faith, and on the other hand, the party that has breached it (to what was explicitly agreed, as well as to the obligation of good faith in its performance) is bound to compensate the damages suffered by the non-breaching party.  Moreover, although the Italian Courts have hitherto been predominantly familiar with the subject matter with reference to its procedural implications, it is not confined to those implications and on some occasions the procedural remedy appears to be inadequate, or in any event insufficient.

It is then a matter, as observed by an Italian scholar, “of identifying the damage, which may consist in the costs borne in the State Court proceedings, not covered by order to pay Court’s costs to the non-breaching party (…)” as well as in all the other damages that constitute an immediate and direct consequence of the breach.