By judgment no. 13 of 2018 (published in the Official Journal - Gazzetta Ufficiale - on 30 January 2018), the Italian Constitutional Court confirmed the recent position of the Italian Supreme Court, whereby it is always possible to challenge an arbitral award for error of law, if the parties have not otherwise agreed and if the arbitration agreement on which the award is rendered was stipulated before 2 March 2006 (date of entry into force of the 2006 Italian reform on arbitration).

The opposite rule applies to the arbitration agreements concluded after such date and thus challenging the award for error of law is possible only if this option is expressly provided by the parties or by the law.

Background

The 2006 Italian reform on arbitration (the "Reform") amended the provisions governing the possibility to challenge the award for breach of rules of law governing the merits of the dispute. While such ground for annulment was always admissible before the reform – unless the parties had agreed differently – with the entry into force of the Reform the motion to challenge an award for error of law is admissible only if the parties so provided in the arbitral clause (or the possibility is granted by the law). In brief, there has been a shift from a presumption of admissibility (old regime) to a presumption of inadmissibility (new regime).

With the twin judgments of 9 May 2006, no. 9341, 9285 and 9284, the Joint Division of the Supreme Court ruled that arbitral awards rendered in arbitral proceedings commenced after 2 March 2006 (date of entry into force of the Reform), but based on arbitral agreement entered prior to such date, can be challenged also for error of law. According to the Supreme Court, the parties opting for arbitration before 2 March 2006 did so relying on the possibility to challenge the award also for error of law and thus they cannot be deprived of such right as a result of the Reform.

The interpretation of the Supreme Court was not shared by the Milan Court of Appeal, which found it to be in breach of articles 3 and 41 of the Italian Constitution and requested the Constitutional Court to verify the compliance of said interpretation with the provisions of the Italian Constitution.

The Court of Appeal of Milan observed that, based on the Supreme Court interpretation, arbitral proceedings started after the entry into force of the Reform would be subject to different provisions, depending on whether the arbitration clause had been signed before or after 2 March 2006, with consequent breach of the principle of equality (art. 3 Constitution). Moreover, challenging an award for breach of substantive laws would be possible even if the parties did not agree on such option, with consequent unjustified detriment of their freedom to independently negotiate the terms of their contractual relationships (art. 41 Constitution).

What did the Constitutional Court say?

By judgment no. 13 of 2018, the Constitutional Court rejected the Court of Appeal's request as ungrounded, for the following reasons:

• Equality has to be granted when the compared situations are equal, which does not appear to occur in the case presented by the Court of Milan. The different regime applicable to proceedings started after 2 March 2006, based on the date of the arbitration agreement, is fully justified by the fact that the decision to turn to arbitration is made by the parties at different times, subject to different law regimes. Before the Reform, the annulment of the award for breach of substantive law was admissible, while it is excluded after the Reform, unless otherwise agreed by the parties (or allowed by law). Given the difference between the two situations, it is correct to draw a distinction between the two and to apply the new or the old regime depending on when the arbitration agreement was concluded (rather than when the arbitral proceedings started), taking into consideration also its contractual nature.
• Both the old and the new regimes aim at protecting the independence of the parties in contractual relations. The ultimate decision rests on the parties, which – under the old regime - could exclude the challenge for error of law and include it under the new one. As a result, there is no issue regarding the protection of the independence of the parties in the conclusion of the contract, as - on the contrary - "the interpretation of the Joint Divisions of the Supreme Court regarding the new rules governing the possibility to challenge the award protects the same independence of the parties that the referring judge asserts to have been breached".

Is your arbitral clause safe?

The judgment of the Constitutional Court upholds the opinion of the Supreme Court that the identification of the applicable regime to the motion to challenge an award for breach of substantive laws depends on the date of the arbitration agreement rather than on the date in which the arbitration proceedings started. In compliance with this interpretation, companies which are parties to agreements signed before 2 March 2006 and including an arbitration clause should be able to challenge the award also for breach of law, provided that the clause does not state otherwise. For agreements concluded after 2 March 2006, such option should be explicitly agreed in writing.

Still, some cautions are advisable if you want to be able to challenge the award for error of law. Indeed, the stare decisis rule does not apply in Italy and - as the Constitutional Court itself highlighted - other Courts of Appeal might depart from the interpretation of the Supreme Court, as long as adequate reasoning is provided:

– A check up of the existing contracts and of the arbitration clauses is recommended:

• if the contract or clause were concluded before the Reform and do not expressly state that the award can be challenged for error of law, it might still be advisable to amend it so as to include the option;
• if the contract or clause are subsequent to the Reform, do not allow the challenge for error of law (but this was not the result of an informed choice), it might be worth trying to negotiate an amendment of the arbitral clause.