Italian Court of Cassation equates lack of appearance to waiver of arbitration clause

Supreme Court of Cassation, Italy. Credit: Pawel Pajor/Adobe Stock

Silvia Lazzeretti
Partner, Macchi di Cellere Gangemi Milan
s.lazzeretti@macchi-gangemi.com

Stefania Mavelli
Senior associate, Macchi di Cellere Gangemi, Milan
s.mavelli@macchi-gangemi.com

Decision No 17244 of May 2022 by the Italian Court of Cassation, in a case where the contract included an international arbitration clause and the defendant had not appeared in the proceedings (thus had not challenged the state court jurisdiction in favour of arbitration), ruled that the defendant’s failure to appear in the court proceedings implies acceptance of the jurisdiction and the will not to avail itself of the arbitration clause, with the consequence that the state court shall decide the case.

The case at issue involved an Italian company (the Seller) and an Algerian company (the Purchaser), who entered into an agreement concerning the sale of a plant (the Sales Agreement), which included an international arbitration clause.

The Seller granted to the Purchaser a bank warranty bond (ie, an independent on-demand guarantee) warrantying the proper functioning of the plant for a certain period of time.

After the delivery and start-up of the plant, the Purchaser detected (alleged) operational defects and, thus, enforced the warranty bond.

The Seller promoted urgency proceedings against the Bank aimed at obtaining an interim injunction to prevent the Bank from paying the amount of the warranty bond alleging that the call of the warranty bond was an abuse of rights. The interim injunction was initially granted by the court, but then annulled by the court in the subsequent challenging proceedings brought by the Purchaser, where the court did not qualify the call of the warranty bond as abusive. Thus, the Bank paid the amount of the warranty bond to the Purchaser and debited it to the Seller.

Then, irrespective of the fact that the Sales Agreement contained an international arbitration clause, the Seller promoted a lawsuit against the Purchaser and the Bank before the state court to ascertain the proper functioning of the plant and, consequently, to recoup the amount of the warranty bond that had been paid by the Bank to the Purchaser and reimbursed by the Seller to the Bank.

The Purchaser did not appear in court, while the Bank appeared in court and challenged the state court’s jurisdiction by virtue of the arbitration clause contained in the Sales Agreement.

The court ruled as follows:

• as to the Sales Agreement relationship between the Seller and Purchaser, it declared on its own motion its lack of jurisdiction towards the Purchaser because of the arbitration clause contained in the Sales Agreement;

• as to the warranty bond relationship, while confirming its jurisdiction towards the Bank, it rejected the Seller’s claims against the Bank.

The Court of Appeal confirmed the decision.

The Court of Cassation, reverting the first and second instance courts’ decisions, confirmed jurisdiction of the Italian state court also with respect to the Sales Agreement relationship by ruling that:

‘The lack of jurisdiction of the Italian court by virtue of an arbitration clause for international arbitration cannot be declared by the judge on his own motion, given the voluntary nature of arbitration under which the parties, even in the presence of an arbitration clause, may always agree to opt for a decision by the state court and this can occur even tacitly, by initiating the state court proceedings in which the exception of arbitration is not raised…’.

By this decision the Court of Cassation emphasised the voluntary nature of arbitration and on this ground equated lack of appearance in court by the defendant to revocation of arbitration choice and implicit acceptance of the state court’s jurisdiction.

The possibility for the defendant, who did not appear before the state court, to invoke the arbitration clause at a later stage when enforcement of such decision is sought in its or another jurisdiction may present uncertainties. This depends on international conventions, if any, or applicable state procedural rules of the addressed jurisdiction, which may or may not include jurisdiction challenge for international arbitration as a ground to refuse enforcement of foreign court decisions.

For instance, while Italian conflict of laws rules, where applicable, would allow the defendant to challenge recognition and enforcement of a decision issued in a foreign (non-European) jurisdiction because of lack of jurisdiction, instead Regulation (EU) No 1215/2012 does not include lack of jurisdiction among the limited grounds for refusal of recognition and enforcement of another Member State decision, in compliance with the principle of mutual trust in the administration of justice applied by the European Union.

Equally, the Hague Convention on the Recognition and Enforcement of Foreign Judgments in Civil or Commercial Matters of 2 July 2019 (the ‘Judgments Convention’), recently ratified by some of the Contracting States, admits refusal of recognition and enforcement by the addressed state court ‘if the proceedings in the court of origin were contrary to an agreement […] under which the dispute in question was to be determined in a court of a State other than the State of origin’ (Article 7(d)), but it could hardly be interpreted as to include arbitration clauses in addition to state jurisdiction clauses. Especially considering that the same Convention expressly excludes from its field of application arbitration and related proceedings.

In light of the above, it is advisable for a defendant who is summoned before a state court in breach of an applicable international arbitration clause to appear before the court and challenge its jurisdiction in favour of arbitration, instead of relying on the possibility to invoke the arbitration clause at a later stage.