Nullity of «surprise» arbitral awards

On 27 September 2018, by order n. 23325, the Italian Court of Cassation ruled on the nullity of arbitral awards issued in breach of art. 101, paragraph 2, of the Italian Code of Civil Procedure (“ICCP”).

According to this provision, if the judge wants to base his decision on an issue raised ex officio, he must grant to the parties, under penalty of nullity, time limits for filing their observation on the same issue. Its aim is to ensure that the parties be heard on an issue raised by the judge sua sponte, which was not being discussed by them.

The Court of Cassation held that art. 101, paragraph 2, ICCP is certainly applicable to arbitral proceedings. Any failure to comply with said provision constitutes a ground for challenging the award for nullity, under art. 829, paragraph 1, no. 9 of the ICCP[1].

Facts

In 2002, a Municipality and a company had entered into a contract, which was subsequently modified in 2004, to build a thermal spa complex, following a public tender in the context of a project finance structure under art. 37 et seq of Law 109/1994.

After a dispute arose between the parties, the company commenced arbitral proceedings against the Municipality, seeking termination of the contract and compensation for the damages suffered due to the counterparty’s breach of contract. The Municipality joined the proceedings, alleging, in its turn, the company’s own breach of contract, seeking termination of the contract and damages.

On 15 March 2011, the arbitral tribunal declared the contract ineffective for lack of approval of a preliminary project, which was a prerequisite to the contract, and affirmed the Municipality’s pre-contractual liability.

The company challenged the award for nullity before the Court of Appeal of Florence, inter alia, for breach of art. 101, paragraph 2, of the ICCP. The Court of Appeal dismissed the case, ruling that:

(i) the arbitrators had only interpreted the claims of the parties; and

(ii) even assuming the applicability of art. 101, paragraph 2, of the ICCP to arbitral proceedings, the provision could not in any case be relevant ratione temporis.

The company challenged the decision of the Court of Appeal before the Court of Cassation, complaining about the breach of art. 829, paragraph 1, no. 9 in relation to the failed application by the arbitrators of art. 101, paragraph 2, of the ICCP.

The Order delivered by the Court of Cassation

According to the Court of Cassation, the solution adopted by the arbitration tribunal does not stem from a different interpretation and qualification of the claim but is based on a matter raised by the arbitral tribunal sua sponte, i.e. the ineffectiveness of the contract lacking a preliminary project at the basis of it; a circumstance that neither party had ever mentioned and from which the arbitral tribunal had derived the ineffectiveness of the contract.

As to the applicability ratione temporis of art. 101, paragraph 2, of the ICCP, added by art. 45, paragraph 13, of Law n. 69 of 2009, the Supreme Court emphasized how, before the issuance of the new law, mainstream scholarship and case law had inferred, from the system and the general principles, the drastic «nullity» of the so-called «surprise» decision, for breach of the audi alteram partem principle.

As far as the applicability to arbitral proceedings of this provision, the Court of Cassation, recalling prior decisions, reasserted that:

(i) arbitrators breach the audi alteram partem principle when they schedule deadlines and declare forfeit the parties’ right to request and submit evidence, if such consequence is not envisaged in the arbitral agreement, or in a separate written deed or by the procedural rules set out thereunder, and if no specific warning has been given when the deadlines were set out[2];

(ii) although arbitrators are not obliged to abide by the provisions of the ICCP, unless the parties have expressly recalled them, arbitral proceedings must be conducted in compliance with the public order rules, like the principle of audi alteram partem[3].

The breach of said principle entails the nullity of the arbitral award, under art. 829, paragraph 1, no. 9 of the ICCP.

In the present case, the Court remarks that, in breach of the audi alteram partem principle, the issue raised by the arbitrators, i.e. the ineffectiveness of the contract, was not brought by the arbitrators to the attention of the parties who would therefore have had the opportunity to object to it. For these reasons, the Supreme Court remitted the matter to the Court of Appeal for a new decision on the nullity of the arbitral award.

The decision is to be welcomed, as it will contribute to guarantee a three-party confrontation also in the context of arbitration proceedings, under penalty of nullity of «surprise» awards.

 

For the Italian version: http://www.dirittobancario.it/giurisprudenza/arbitrato/la-nullita-del-lodo-sorpresa

[1] The challenge for nullity under art. 829, I paragraph, is not waivable.

[2] Court of Cassation, no. 1099/2016

[3] Court of Cassation, no. 17099/2013; Court of Cassation, no. 4808/2014.

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