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“Irrituale” corporate arbitration *

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.

 

The rules governing ‘irrituale’ arbitration, particularly ‘irrituale’ arbitration in corporate matters, present several gaps and inconsistencies.  Nonetheless, it is a phenomenon of undeniable practical relevance. Indeed, about a quarter of the Italian companies articles of association containing an arbitration clause providing for ‘irrituale’ arbitration (as found by Assonime’s study no. 5/2017, L’arbitrato societario nella prospettiva delle imprese: in a sample of 59 arbitration clauses in Italian companies articles of association, 16 of them provided for ‘irrituale’ arbitration).

 

The surprising fact in such a framework is that only a few precedents (or at least, reported precedents) have offered an interpretation (or construction) of some of the law rules on ‘irrituale’ arbitration whose wording is particularly unclear.

 

One of these rules concerns the relationship between ‘irrituale’ arbitration and the request to set aside resolutions adopted by the company (it is not relevant here whether that rule applies only to shareholders’ resolutions or also to board resolutions).

 

Italian Legislative Decree No. 5 of 17 January 2003 contains a fleeting reference to ‘irrituale’ arbitration: “The submission of a dispute to arbitration, including ‘irrituale’ arbitration, does not preclude recourse for interim measures under art. 669-quinqueis of the code of civil procedure, but if the arbitration clause allows disputes concerning the validity of shareholders’ meeting resolutions to be referred to arbitration, the arbitrators have jurisdiction to stay the resolution by an order not subject to appeal”.

 

This fleeting reference is well understood in the light of the historical context in which it was enacted.  Indeed, at the time, there were doubts as to the existence of interim jurisdiction of the state Courts in case of an arbitration clause for ‘irrituale’ arbitration.  Therefore, that jurisdiction was confirmed on the eve of the 2006 reform of Italian arbitration law by Italian Legislative Decree No. 35 of 14 March 2005, converted into Italian Law No. 80 of 14 May 2005.

 

However, this fleeting reference, in addition to indicating the admissibility of requests for interim measures, also indicates the admissibility of ‘irrituale’ arbitration in corporate matters.

 

The situation is complicated by a subsequent provision of the same Italian Legislative Decree No. 5/2003: “Even if the arbitration clause authorises the arbitrators to decide ex aequo et bono or to issue an award that is not subject to appeal, the arbitrators shall decide according to law, with an award that can also be appealed pursuant to article 829, paragraph 2, of the code of civil procedure when, to issue their decision, they examined issues that are not capable of being decided by arbitral tribunals or when the subject matter of the proceedings is the validity of shareholders’ resolutions” (art. 36, para. 1).

 

This provision has led some learned scholars, as well as several lower Courts, to state that “Arbitration concerning the validity of a company resolution is the regular (‘rituale’) arbitration”, i.e. it is necessarily regular (‘rituale’): see, for instance, Court of first instance of Milan, decision No. 98 of 8 January 2021.

 

Therefore, a decision issued by the Court of first instance of Brescia, which directly addressed the issue, is of particular interest (Court of first instance of Brescia, decision No. 545 of 1 March 2021).

 

For reasons not relevant here, a shareholder of a limited liability company had challenged the resolution adopted by the shareholders’ meeting to reduce due to losses below the legal minimum the share capital and simultaneously increase it pursuant to article 2482-ter of the Italian Civil Code.

 

The company’s articles of association contained an arbitration clause that made no provision as to the nature of the proceedings, leaving the determination of the procedural formalities to the Arbitral Tribunal, and provided that the Arbitral Tribunal would issue its decision on an ex aequo et bono basis.

 

At the time of the constitution of the Arbitration Tribunal, the parties confirmed “expressly that this arbitration is to be considered for all intents and purposes as ‘irrituale’ and that the Tribunal would decide the dispute ex aequo et bono”.

 

The award upheld the challenge proposed by the shareholder and was appealed by the other shareholders and the company before the Court of first instance Bergamo, which declared that the proper venue for the dispute was the Court of first instance of Brescia.

 

This latter Court raised ex officio the issue of the arbitration clause and the subsequent award being possibly null and void, due to violation of article 36 of Italian Legislative Decree No. 5/2003, since the said award, concerning the validity of the shareholders’ meeting resolution, was ‘irrituale’ and issued on an ex aequo et bono basis.

 

The State Court noted that the law requires that, if corporate resolutions are challenged, “an award that can be appealed pursuant to article 829, paragraph two, of the Italian Code of Civil Procedure shall be issued”.

 

The Court then added that Article 26 of Italian Legislative Decree No. 5/2003 has the effects referred to in Article 1419(2) of the Italian Civil Code, that is to say, it leads to the substitution by operation of law of the part of the arbitration clause which is null and void.

 

In the Court’s view, this mechanism prevents the Court from stating that the arbitration clause is null and void, as it is automatically deemed to comply with the mandatory rules, as laid down in Article 36 of Italian Legislative Decree No 5/2003.  At the same time, it would have required the Arbitral Tribunal, once the dispute had been referred to it, to ascertain the above automatic replacement mechanism, indicating to the parties that it was required to issue (i) a “rituale” award and (ii) not ex aequo et bono.

 

Since this did not happen, the Court of Brescia declared that the award was null and void.

 

In a few words, the principles laid down by the Court of Brescia are that:

  • the company’s articles of associations may contain an enforceable arbitration clause providing for “irrituale” arbitration;
  • such clause is nevertheless null and void where the subject matter of the dispute referred to the Arbitral Tribunal is that indicated in Article 36 of Italian Legislative Decree No. 5/2003;
  • as a consequence of the above, the automatic substitution mechanism set forth in Art. 1419(2) of the Italian Civil Code would operate;
  • if, however, the Tribunal did not take the above into account and issued an ‘irrituale’ award, it would be null and void.

 

There are many problematic passages in the Court’s reasoning and different solutions to the issue are possible, even if they require a greater effort of interpretation/construction.

 

One of these solutions could consist of the hybridisation of the ‘irrituale’ arbitration model with elements of the ‘rituale’ arbitration model, particularly with the ground of appeal under Art. 829 para. 3 of the Italian Code of Civil Procedure.  In other words: the Arbitral Tribunal may render an ‘irrituale’ award concerning the challenge of a corporate resolution; however, such an award should also be able to be appealed for violation of the rules of law applicable to the merits of the dispute, thus overcoming – only in this particular matter, and under a specific legal provision – the well established principles laid down by Italian case law, whereby violations of law do not constitute ground to appeal an ‘irrituale’ award.

 

A number of precedents have deemed that ‘irrituale’ arbitration proceedings may be brought to challenge shareholders’ meetings resolutions (among the most recent, Court of Naples, decision No. 7174 of 30 October 2020; Court of Milan, decision No. 5067 of 14 June 2021; and Court of Ancona, decision No. 1591 of 7 December 2021).  Nonetheless, these decisions did not examine the issue of the coordination of the applicable rules: this is because they only state that State Courts do not have jurisdiction.

 

A lower Court’s decision apparently prevents such hybridisation: Court of first instance of Salerno, decision No. 3296 of 21 October 2019, which in any case made little examination of the relevant points of law.

 

On the other hand, another recent decision issued by a lower Court (Court of Appeal of Milan, decision No. 2467 of 29 July 2021) seems to allow the above-mentioned hybridisation, insofar as, in appellate proceedings to an “irrituale” award concerning a shareholders’ meeting resolution, it examined (although finding it ungrounded) a claim raised under Article 36 of Italian Legislative Decree No. 5/2003.

 

The above short analysis points up that the rules on ‘irrituale’ corporate arbitration are clearly badly drafted and basically inadequate.  Italian Law no. 206 of 26 November 2021, granting Italian Government with the power to reform civil proceedings, also provides for the reorganisation of the provisions concerning Italian arbitration.  Unfortunately the principles and guiding criteria set forth by the Parliament do not address this particular issue, and therefore an opportunity seems to have been missed not merely to reorganise, but also to rationalise and improve the relevant provisions.

 

* Also forthcoming on AIAOnline (arbitratoaia.com)

 

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