Arbitration and choice of forum clauses

The Court of first instance of Milan addressed in its decision No. 7692 of 26 November 2020 (Italian text available here) the issue arising out of the coexistence, within the same contract, of an arbitration clause and a choice of forum clause.

This is a partly risky phenomenon, capable of delaying from the outset any procedural initiatives taken by the parties to uphold their respective rights. It is sufficient to consider the objection of lack of jurisdiction or the so-called “objection of arbitration” that a party might raise with the consequence of requesting, on the one hand, a preliminary ruling on jurisdiction and, on the other hand, postponing the decision on the merits. The issue at hand, besides being of considerable practical relevance, conflicts with one of the cornerstones of the subject matter, i.e. the principle of celerity and expeditiousness of arbitration. In fact, an ambiguous contract, which is unclear as to which forum (arbitral tribunal or state court) is competent to settle disputes connected with it, may cause delays that can extend the length of the process. This is a particularly harsh effect, especially for those parties who, by choosing arbitration, have relied on a speedy procedure to settle disputes. On the contrary, where the contract is well drafted, at least with respect to the choice between arbitration and state court, the aggrieved party will have the possibility to seek remedy through the instrument agreed upon.

The case heard by the Court, as far as we are concerned, can be summarised as follows. A company and an ONLUS foundation entered into a contract of sale of a business unit for a particularly high consideration, to be paid in instalments according to the agreed terms. The company, however, paid only a portion of the agreed price to the ONLUS foundation, forcing the latter to file a summary judgment’s motion to obtain payment of the balance. The company promptly opposed the summary judgment, preliminarily arguing that the court of Milan lacked of jurisdiction because of the arbitration clause contained in the inter partes agreement. The ONLUS foundation sought the rejection of this objection, invoking a further contractual provision qualifying the court of Milan as the competent court.

The problem at hand is as follows: an arbitration clause which, within the same contract, competes with a clause granting jurisdiction to the state court. For the sake of clarity, the competing provisions are set out below:

  1. art. XI of the contract: «any dispute arising between the parties concerning the validity, effectiveness, construction and performance of this contract and subsequent agreements and in any case connected to it, shall be settled by arbitration under the Milan Chamber of Arbitration (…)»;
  2. art. XII of the contract: «the court of Milan shall have jurisdiction».

The court of Milan held that the company’s arbitration objection was prima facie valid, and declared its lack of jurisdiction. In particular, the court held that the arbitral body as regulated by art. XI of the contract has jurisdiction on the decision at hand by virtue of the arbitration clause. Such a statement has been broadly justified in the following terms.

Firstly, the court of Milan took the opportunity to highlight the similarity between arbitration and state proceedings. In fact, with Legislative Decree No. 40/2006, the Italian lawmaker introduced a series of provisions aimed at conferring to the arbitration system the same function as that of state justice. On this point, the court specifically referred to a notorious judgment rendered by the Italian Constitutional Court which, in making a comparison between arbitration and state proceedings, confirmed the jurisdictional nature of arbitration (Italian Constitutional Court, 16 July 2013, no. 223). It was stated, in such a judgment, that arbitration constitutes, to all effects and purposes, a judicial process governed by the Code of Civil Procedure aimed at applying the law in order to settle disputes. For this reason, fundamental principles of adversarial process and impartiality shall be fulfilled in state processes as well as in arbitration proceedings. Moreover, in a key passage of the same leading judgment was highlighted the assignment «to arbitral judicial system of a substitute function to state justice». From this last assumption, i.e. the fungibility of the arbitral instrument with the state process, the court of Milan set the basis of its decision.

Secondly, the court of Milan noted that the principle of state jurisdiction’s primacy invoked by the ONLUS foundation to ask the rejection of the company’s arbitration objection has been overruled. More specifically, the defendant referred to the principle of the natural primacy of state jurisdiction over arbitration, which has been affirmed in the past by the Italian Supreme Court (Italian Supreme Court decision, 28 May 1979, no. 3099; Italian Supreme Court decision, 23 August 1990, no. 8608). Such a principle, developed at the beginning of the 1980s, provided that in our court system the activity relating to judicial protection was an essential function of the State. This implied – in cases of uncertainty – that the jurisdiction of the state courts prevailed over that of the arbitrators. However, there has been a gradual overruling of this principle in favour of a new approach developed by the Italian Supreme Court’s judges, precisely referred by the court of Milan in the decision at issue (Italian Supreme Court decision, 14 October 2016, no. 20880). In particular, the Italian Supreme Court has held that arbitral justice: (i) is no longer an exception or derogation from state jurisdiction, (ii) is a fungible and perfectly alternative remedy to state proceedings and (iii) is a constitutionally protected faculty of the parties. From these relevant principles, the court of Milan derived a key statement as basis for its decision: in the event of uncertainty as to the parties’ agreement on the choice between arbitration and state proceedings, the disputes governed by arbitration clause shall not be referred to state courts. For this purpose, it is necessary to determine the real intention of the parties regarding the scope of application of the arbitration clause. This has been the effort made by the court of Milan in its decision, implemented by seeking the parties’ real intention in the content of the competing jurisdiction clauses.

In doing so, the court of Milan relied on the interpretation criteria set out in Articles 1362 et seq. of the Italian Civil Code. The wording of the arbitration clause, given its scope of wide application «any dispute arising» out of the contract of sale, or out of «subsequent agreements and in any event connected therewith», led to the conclusion that the intention of the parties was to refer all disputes relating to the contract to arbitration. The parties have also regulated in a very detailed manner, as the court of Milan pointed out, (i) how the arbitration procedure is to be conducted, (ii) how the arbitral tribunal shall be appointed and how it shall function, (iii) the seat of the arbitration, (iv) the rules to be applied for the decision and (v) the effectiveness of the arbitral award.

Moreover, pursuant to the principle of the overall interpretation of the contractual clauses as provided for in art. 1363 of the Italian Civil Code, the court of Milan considered an additional provision of the contract to be relevant in determining arbitral jurisdiction. In particular, art. IX.3 provided that the parties were entitled to refer to arbitration disputes arising out of their failure to agree, within the agreed time, on the compensation mechanism referred to in art. IX.3. Thus, a further reference to arbitration made by the parties with respect to disputes connected with the contract.

In the reasoning, a clarification was also made with regard to the principle of preservation of the contract and its clauses, as governed by art. 1367 of the Italian Civil Code. In view of the contractual provisions recalled above, conferring jurisdiction on the court of Milan for disputes relating to the contract would deprive the arbitration clause set out in art. XI of its effect and meaning. This would lead to a result which is entirely incompatible with the real intention of the parties arising out from the interpretation, literal or not, of the contractual provisions.

The court of Milan also noted that the scope of application of the choice of forum clause, in cases such as these, is entirely residual. The parties’agreement, as determined by the construction of the contractual provisions, was clear and unambiguous: choice of arbitration for all disputes relating to the contract (which includes the one at issue in this decision). Thus, the scope of application of the choice of forum clause is limited to those matters which by law are not subject to arbitration, i.e. inalienable rights (art. 806 Italian Code of Civil Procedure) and interim measures (arts. 818 and 669 quinquies Italian Code of Civil Procedure). According to the court of Milan, this is how contractual provisions on jurisdiction as provided by the parties should be interpreted.

It may come as a surprise, but only at first glance, that the court did not use the provision in art. 808 quater of the Italian Code of Civil Procedure to support its decision. This rule allows, in case of doubt, to construe the arbitration clause broadly so as to extend its scope to all disputes arising from the contract or relationship to which the clause refers. However, the caselaw has been prompt in observing that article 808 quater of the Italian Code of Civil Procedure, concerning the “favor” for the arbitral jurisdiction, applies only to cases in which the interpretative doubt regards the quantification of the disputes submitted to arbitrators in light of the arbitration clause (Italian Supreme Court, 24 September 2018, no. 22490). The doubt shall therefore only relate to the scope of application of the arbitration clause. Differently, this rule does not apply to the choice between arbitration and state proceedings made by the parties, which shall be construed solely in the light of their will, in relation to which art. 808 quater Italian Code of Civil Procedure does not apply. Most likely, these are the grounds that induced the court of Milan not to invoke this rule.

Even in a situation of partial ambiguity, this decision upheld the favor arbitrati principle. This is a finding reached by (i) noting the well-known fungibility between arbitration and state proceedings and (ii) respecting the parties’ intention as expressed in the provisions of the contract of sale. As we all know, parties’ intention finds in the arbitration field its widest recognition. This assumption, as derived from the decision at hand, acted as a guide for the court of Milan in the use of the interpretation criteria set out in the Italian Civil Code.

In other decisions, Italian courts, including the Supreme court, have disregarded the favor arbitrati principle in favour of state courts’ jurisdiction (Italian Supreme court, 13 October 2016, no. 20673). This happened, precisely, under competing provisions (arbitration and choice of forum) formulated differently from those contained in the contract of sale taken into consideration. However, the criterion used to determine the truly competent judicial body has always been the same: the construction of the parties’ intention in view of (i) the literal content of the provisions, (ii) their meaning as derived from the overall sense of the contract and (iii) the conduct of the parties at the time of the conclusion of the agreement and during its performance.

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