Liquidated damages, termination and arbitration

Arbitrability of disputes arising out of the termination of a contract: in my opinion, this is a very interesting topic, both for its theoretical and practical consequences.  In fact, I have already addressed this topic, a few months ago (in this post), in relation to contractual restitutions, commenting a decision by the Court of Milan that in my view misapplied the principles governing the matter.

A recent decision issued by the Court of first instance of Rome (No. 1695 of 27 January 2020, Italian text available here) gives me the chance to examine again the topic, from a partially different point of view.

The case heard by the Court of Rome concerned a franchising agreement.

The contract provided that upon its termination, and as a result of the same, certain obligations arose on the franchisee, to be fulfilled within a certain term. The stipulation was assisted by a liquidated damages clause: for each day of delay, the franchisee would have had to pay a certain sum to the franchisor.

The franchising agreement also contained an arbitration clause concerning “Any dispute (…) between the parties regarding the interpretation, validity, fulfilment or termination of the Contract“, also providing for that “the jurisdiction of the State Courts for the issuance of precautionary measures and orders for payment or delivery pursuant to articles 633 and following of the Italian Code of Civil Procedure, in relation to which the Court of Rome will be the exclusive proper venue“.

The franchisor claimed the failure of some franchisees to fulfil their contractual obligations resulting from the termination of the contract and requested the Court to issue orders for payment with respect to the allegedly due liquidated damages.

The franchisees appealed to these orders and, amongst other things, they objected to the Court’s jurisdiction on the basis of the said arbitration clause.

In two cases, the Court of Rome rejected this objection, due to the fact that the dispute related to events occurred after the termination of the contracts (Court of Rome, ord. 27 August 2016, Italian text available here; and Court of Rome, ord. 17 May 2017, Italian text available here). In a third case, the Court of Rome granted the objection.

In my opinion, the last decision is correct.

The arbitration clause has its own specific construction rule, the rule established by art. 808-quater of Italian Code of Civil Procedure, whereby “In case of doubt, the arbitration agreement shall be in the sense that the arbitration jurisdiction extends to all disputes arising from the contract or from the relationship to which the agreement refers“.

In the light of this specific interpretative rule, the Supreme Court recently stated that the arbitration clause “unless otherwise provided, shall be construed in the sense that the arbitral tribunal has jurisdiction over all the claims having the contract containing the clause as their cause of action” (Italian Supreme Court, I Civil Chamber, decision No. 3795 of February 2019, n. 3795, Italian text available here).

All the cases heard by the Court of Rome concerned alleged breaches of contractual obligations and liquidated damages consequently due under specific contractual clauses.  It is therefore clear that the cause of action was the relevant contract and, as a consequence, it is also clear that the jurisdiction lied with the arbitral tribunals.

This said, it is worth examining the part of the arbitration clause whereby the arbitral agreement does not affect the State Courts’ jurisdiction to issue interim orders and orders for payment.

Under Italian law, State Courts already have jurisdiction to issue the said orders, without the need for a specific stipulation.  

Nonetheless, Italian law also requires to construe contractual stipulations giving them a meaning and an effect, rather than no meaning and no effect: in a nutshell, this is the principle laid down by Article 1367 of Italian Civil Code.

It could be possible to construe the said arbitration clause as meaning that State Courts would have jurisdiction not only to issue orders for payment (jurisdiction they already have) but also over the appeals to such orders (jurisdiction they would have on the basis of the clause)?

This is an interesting question.  As far as I am aware, it was not examined by the Court of Rome.  The Supreme Court could perhaps investigate the topic in case of appeal to the decision of the Court of Rome.  In that case, I’ll come back to this issue on this blog.

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