Optional arbitration

An arbitration clause stipulates that all the disputes arising out of the agreement may be referred to an Arbitral Tribunal. Is that an optional arbitration, in the sense that the claimant may choose between the Court and the Arbitral Tribunal? Does the jurisdiction exclusively rest with the Arbitral Tribunal? Or is it a void or ineffective arbitration clause?

I already talked about this issue in this article, when analysing an order rendered by the Court of first instance of Milan. Recent rulings of the I Civil Chamber of the Court of Appeal of Bologna (decision no. 1884 of 12 November 2015, Italian text available here) and the VI Civil Chamber of the Supreme Court (decision no. 22039 of 28 October 2015, Italian text available here) have shed light on this issue again.

I will first analyse the case of the Court of Appeal of Bologna.

It concerned a tender agreement entered into in May 2000.  The project owner was a State entity.  The agreement included an arbitration clause, whereby “all the disputes arising out of the fulfillment of the agreement may be referred to an Arbitral Tribunal, including the disputes arising out of the failure to reach an amicable settlement as stated above. If the jurisdiction rests with the Arbitral Tribunal, Law no. 109/94 and its subsequent amendments and modifications shall apply. Jurisdiction: Court of Bologna.” 

A dispute arose between the parties and the contractor served on the project owner a request for arbitration, commencing the arbitration proceedings in October 2004. The project owner appeared in the proceedings, objecting that the Arbitral Tribunal did not have jurisdiction.  In any case, it also raised its objections on the merits.

After the taking of evidence, the project owner withdrew the objection concerning the lack of jurisdiction of the Arbitral Tribunal: it is likely that some evidence emerged that strengthened its position. More specifically, the project owner declared to waive “the objection concerning the lack of jurisdiction of the Arbitral Tribunal, restoring its full jurisdiction and acknowledging all the activities carried out by the Arbitral Tribunal.” At this point, the contractor objected that the Arbitral Tribunal did not have jurisdiction.  

That led the Arbitral Tribunal to issue a partial award on jurisdiction, whereby the Tribunal affirmed its own jurisdiction. In fact, the Arbitral tribunal ruled that, despite the lack of an effective arbitration clause in the tender agreement, an arbitration agreement was subsequently entered into. Such arbitration agreement would be the result of the request for arbitration of the constructor and the acceptance of the project owner.

The constructor also lost on the merits and, consequently, appealed the partial and final awards before the Court of Appeal of Bologna.

The Court of Appeal of Bologna considered that the tender agreement did not contain an arbitration clause, as previously stated by the Arbitral Tribunal. According to the Court, “the clause is not binding upon the parties because it does not express the will of the contracting parties to refer all contractual disputes to an Arbitral Tribunal. This clause has only the meaning of allowing a future agreement between the parties to refer any dispute to an Arbitral Tribunal.

The Court also excluded that an arbitration agreement might be stipulated in the course of arbitration proceedings. In other words: “the alleged agreement was unable to remedy the total lack of jurisdiction of the arbitrators in proceedings flawed from the beginning.”  Therefore, the Court of Appeal set aside the awards.

The ruling of the Supreme Court is completely different.

An arbitral clause was stipulated in an agreement for professional services.  This clause sets forth that “any dispute arising out of this agreement, which may not be settled through amicable negotiations, may be referred to an Arbitral Tribunal composed of three arbitrators, which shall only decide on the basis of the law.  The Arbitral Tribunal shall not decide ex aequo et bono.

A dispute arose and the professional obtained a payment order issued by the Court of first instance of Milan. However, the ordered party appealed this decision, objecting that the Court did not have jurisdiction, due to the arbitration clause stipulated in the agreement. The Court overturned the payment order and acknowledged that the jurisdiction rests with the Arbitral Tribunal.

The professional appealed this decision before the Supreme Court, claiming that the arbitration clause provided for an optional arbitration, in the sense that the claimant was allowed to choose the mechanism to settle the dispute. In particular, the professional claimed that: “by signing the arbitration clause, the parties agreed to allow the claimant to decide the mechanism to settle possible disputes.

In the proceedings before the Supreme Court, the Prosecutor supported the professional’s claim. Indeed, he stated that “if a doubt arise as to the construction of an arbitration clause, a strict construction has to be given, so as to state that the jurisdiction rests with the Court.” Nevertheless, article 808/quater of the Italian Code of Civil Procedure clearly supports the opposite construction. This provision clearly sets forth that “in case of doubt, the arbitration agreement shall be in the sense that the arbitral jurisdiction extends to all disputes arising from the contract or from the relationship to which the agreement refers.” Conversely, the Prosecutor reached the conclusion that “the parties contemplated arbitration as a facultative mechanism to which they may resort. In any case, such mechanism was only an alternative to proceedings in Court.

However, the Supreme Court rejected the appeal. Indeed, the Supreme Court ruled that “the construction that the Prosecutor did of the verb ‘may’ used in the arbitration clause, lacked any legal basis.

To this respect, the Supreme Court referred to a precedent (decision no. 6947 of 8 April 2004 of the I Civil Chamber, Italian text available here). In that case, the Court dealt with the recognition and enforcement of an arbitration award rendered by a Chinese Arbitral Tribunal. The arbitration clause granting jurisdiction to the Chinese Arbitral Tribunal included the verb “may” as well.

The theory of the optional nature of the arbitration clause, according to which there was no obligation to refer the dispute to arbitration and thus, arbitrators lacked any jurisdiction in that case, has been rejected by the Supreme Court. The Court stated that such theory “is affected by a substantial mistake as to the understanding of the civil action. The legal nature of civil action (either before a Court or before an Arbitral Tribunal) implies that it is a right of the concerned party, which have the burden to use it to attain judicial protection when needed. The adversary party would hold a position of mere subjection. In any case, it would never be considered a duty or an obligation. This is enough to conclude that the parties could never have included a verb meaning an obligation or duty. Nevertheless, if this was the only proper means to express the will of the parties to refer a given dispute to an Arbitral Tribunal, the opposite statement is also right. That is to say, that the clause at hand could not have another purpose but to impose a referral of any dispute to an Arbitral Tribunal. Otherwise, the arbitration clause would have no meaning, and would only allow the parties to enter into an arbitration agreement. This is, in any case, something that could be attained without the existence of an arbitration clause.

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