A recent decision issued by the Italian Supreme Court (decision No. 1788 of 28 January 2021, Italian text available here) deals with the issue of public policy and its relevance in arbitration matters.
The usual definition of public policy is that of the set of principles of the political and economic structure of a given society, inherent in the legal system and essential for its purposes and its very existence.
It is – clearly – an open, if not vague definition, granting the practitioners (and mainly the Courts) with considerable room in its actual construction and discretion in identifying which principles fall within the scope of public policy and which are not.
In fact, almost two centuries ago an English Court used a vivid metaphor to define public policy: that of a very unruly horse, once you get astride it you never know where it will carry you (Court of Common Pleas, 2 July 1824, Richardson v. Mellish, 130 ER 294).
On the one hand, public policy represents a limit to freedom of contract a contract in breach of public policy is null and void: Article 1343 of Italian Civil Code); on the other hand, it constitutes an obstacle to circulation or stability of decisions issued by entities other than State judiciary (such as arbitral tribunals and oversea Courts). That meaning of public policy is obviously relevant to arbitration matters.
In other words, a breach to public policy constitutes a ground for setting a domestic award; and a ground of great relevance, given that the parties cannot waive it in advance. As a consequence, public policy represents a limit to stability of domestic arbitration awards.
Public policy also constitutes a ground for refusing the recognition of a foreign award (Article 840, para. 5, no. 1 of Italian Code of Civil Procedure; Article V, para. 2, b of New York Convention). Once again, it constitutes a ground of particular importance, in that the parties are not requested to plead it and the Court is entitled to find it upon its own motion. As a consequence, public policy represents a limit to circulation of foreign arbitral awards.
Scholars distinguish domestic public policy (which applies to parties’ relationships that are completely domestic) from international public policy, applying to cases having an international element. In addition, some scholars also postulate a transnational public policy.
These concepts, which are perhaps primarily descriptive, can be imagined as three concentric sets. The broader set is that of domestic public policy, containing both fundamental and technical principles (such as that preventing the parties to define property rights other than those provided for by the law of the land). Subsequently, the set of international public policy is more restricted and it only contains fundamental principles whose application is essential for the legal system. Finally, the set of transnational public policy is the narrowest, as it contains, depending on the opinions, the principles of lex mercatoria or those principles of jus cogens upheld by all legal systems pertaining to the same civilization perspectives.
This said, it is worth noting that Italian jurisdiction, as well as many other jurisdictions, over the decades have significantly mitigated the restrictions and constraints arising out of public policy, originally intended as a relief valve aimed at preventing the application of oversea legal principles. Indeed, it has evolved into an extreme defence to prevent legal effects that are radically unacceptable for the legal system.
This line of cases was followed by the Italian Supreme Court in its above-mentioned decision. In fact, the Court declared that the parties are not allowed to seek a re-evalution of the facts already ascertained by an Arbitral Tribunal, alleging a breach to public policy in the reasoning of the award. The Court also added that recourse for setting aside an award on the ground of breach of public policy is only allowed if the interested party is able to satisfy the Court that the effects of the award are in breach to public policy, and that public policy has to be construed as the fundamental principles of the legal system, whose application are crucial for its very existence and the achievement of its essential purposes.