“Irrituale” arbitration in corporate matters

The Court of first instance of Salerno recently heard a complex corporate case and its decision (No. 3296 of 21 October 2019, Italian text available here), together with the decision issued by the Court of Appeal of Salerno with reference to the same dispute (No. 1311 of 14 September 2018, Italian text available here), provides the perfect opportunity to carry out a brief analysis of the issues concerning “irrituale” arbitration in corporate matters, that is to say the relationship between the “irrituale” arbitration as governed by Italian Code of Civil Procedure and arbitration in corporate matters under Italian Legislative Decree No. 5 of 17 January 2003 .

As a matter of fact, Italian law provides for two different kinds of arbitration proceedings: on the one hand, “regular” (“rituale”) arbitration, resulting in an enforceable award; on the other hand, “irrituale” arbitration, whose award has the effect of a binding contract.

In addition, “irrituale” arbitration has certain other peculiarities: concerning, for instance, the recourse for its setting aside.

The case heard by the Court of first instance and the Court of Appeal of Salerno concerned certain resolutions passed by a simple partnership (“società semplice”). Indeed, a dispute arose between two groups of members; and each group had excluded the other from the partnership by the said resolutions.

The articles of association of the partnership provided that “Any dispute concerning or consequent to these articles and to the relations arising out of them will be referred to a sole ‘irrituale’ arbitrator who will decide the dispute according to the law, hearing the Partnership and the relevant Member, without any procedural formality – except those that she will set forth – and without appeal. The arbitrator will be appointed by mutual agreement of the parties; failing this agreement, the arbitrator will be appointed by the Chairperson of the Court of first instance of Salerno (…).

It should be noted that, despite the provision of the clause, the arbitration did not involve the partnership, but only its members.

In addition, the said clause does not comply with the requirements set forth by Article 34 of Italian legislative decree No. 5/2003 (whereby the arbitrators in corporate matters have to be appointed by a third party unrelated to the company). Is it enforceable or not?

The issue of the enforceability of the clause was addressed by the Arbitral Tribunal during the arbitration proceedings, and the Tribunal held that the said clause is enforceable.

I assume that the Arbitral Tribunal decision was (also) based on the argument that Legislative Decree No. 5/2003 does not apply in that particular arbitration, which as said concerned a simple partnership (“società semplice”).

In fact, Legislative Decree No. 5/2003 is a piece of legislation enacted by the Italian Government on the basis of a delegating law (“legge delega”) of the Parliament. While the said Legislative Decree concerns arbitration in case of disputes related to partnerships and companies, without any distinction, the delegating law (Article 12, para. 3, law No. 366 of 3 October 2001) only empowered the Government to enact legislation on arbitration of “commercial partnerships and companies”.

Taking into account that the simple partnership is not a commercial partnership (it  is forbidden from carrying out commercial activities: Article 2249 of the Italian Civil Code), it can be argued that corporate arbitration rules set forth by Legislative Decree No. 5/2003 do not apply to disputes concerning simple partnership (as indeed was actually argued by several learned authors).

The award, on the merits, rejected the arguments of a group of members and accepted those of the other group. The losing group seised the Court of Appeal of Salerno (in the proceedings leading to the decision No. 1311/2018) and the Court of first instance of Salerno (in the proceedings leading to the recent decision No. 3269/2019), requesting both Courts to set the award aside.

The Court of Appeal rejected the request, noting that it concerned an award issued in “irrituale” proceedings, which cannot be challenged before the Court of Appeal pursuant to Article 829 of the Italian Code of Civil Procedure.

The request brought before the Court of Salerno was also rejected since the alleged grounds for the setting aside were other than the grounds provided for by Italian law with respect to an award issued in “irrituale” proceedings (having this award the effects of a contract, the said grounds, in a nutshell, are those concerning alleged defects of contractual consent, in addition to those arising out of a violation of due process).

As a matter of fact, the grounds rejected by the Court of first instance of Salerno were reasons in law. That circumstance, irrespective of the possible application in the case at hand of the rules concerning corporate arbitration, raises the question whether “irrituale” arbitration and corporate arbitration might coexist. A question of great relevance, taking into account that, according to a statistical analysis carried out by Assonime (available here, although in Italian), about a quarter of arbitration clauses in Italian companies’ articles of association provide for “irrituale” arbitration.

The law apparently maintains that “irrituale” and corporate arbitration might coexist (as a matter of fact, Article 35, para. 5, of Legislative Decree No. 5/2003 expressly refers to “irrituale” arbitration); but certain law provisions lead to the opposite conclusion.

For instance, Article 36 of Legislative Decree No. 5/2003 provides that, in case of dispute concerning a resolution passed by the partnership/company, the review on the merits of the award is always allowed if a violation of the law rules concerning the merits is claimed (I have already examined the issue of the relationship between this provision and the new Italian law on arbitration: see, for example, this post). However, this ground (violation of the rules of law concerning the merits) is never allowed in the case of “irrituale” award.

In the light of the above, I consider that there are two possibilities: in the case of disputes concerning company’s resolutions, the “irrituale” award is also subject to recourse for violation of the rules of law concerning the merit (although this conclusion is ill-founded on the basis of Italian law); as a more likely alternative, these disputes cannot be referred to an “irrituale” Arbitral Tribunal. In this latter case, another question arises: that concerning the scope of an arbitration clause only providing for “irrituale” arbitration. Is that clause unenforceable in the case of dispute concerning company resolutions (and, as a consequence, the jurisdiction over these disputes lies with the State Courts)? Or is it possible to maintain that the Arbitral Tribunal has jurisdiction over these disputes and it shall act as a “rituale” Tribunal, despite the provision of the arbitration clause? Further, what could happen in case of related actions (only some of them allowing “irrituale” arbitration)?

I maintain that the issues arising out of the relationship between “irrituale” arbitration and corporate arbitration are quite serious and should discourage the provision of “irrituale” arbitration in companies’ articles of association. Except, maybe, in the articles of association of simple partnerships, as in the case heard by the Courts of Salerno.

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