Paolo Soro

ITALY: Challenging the validity of arbitral clauses in commercial agency contracts.

In its judgment No. 27.072/16 of December 28, 2016 the Italian Supreme Court dealt with the question of validity of an arbitration clause contained in a "buying agency agreement", between a US buyer and an Italian buying agent. The judgment contains several surprising statements, which need to be challenged in order to avoid that they might be taken for granted in the future.

The agreement in question, concluded in 1998 between a US buyer and an Italian agent, drafted on the basis of a US model contract, provided that possible disputes should be decided by arbitration under the rules of the American Arbitration Association, in conformity with New York law.

The US principal terminated the agreement in 2002, and the Italian agent brought soon after a claim before the Florence District Court requesting a goodwill indemnity under Article 1751 of the Italian civil code and other damages. The US principal opposed and asked the Court to refuse jurisdiction and to refer the parties to arbitration.

After various vicissitudes, the Florence Court decided in 2014 (after more than 10 years) that the arbitration clause in favour of the American Arbitration Association was valid and effective, since the “buying agency agreement” could not be considered as a real agency contract, which might otherwise have implied the nullity of the arbitration clause. In other words, the Florence Court assumed (wrongly) that, if the agreement had to be considered as an agency contract, the arbitration clause would have been null and void, and the Florence Court would have had jurisdiction. But since this was not the case, because the agreement did not fall under the rules on commercial agency, the arbitration clause was valid and effective and the dispute should be referred to arbitration in conformity with such clause. 

After confirmation of the decision by the Court of Appeal of Florence in 2015, the Italian agent brought a recourse before the Court of Cassation arguing: (1) that the “buying agency agreement” should be considered as a true agency agreement and consequently (2) that the arbitration clause should be declared null and void by virtue of the rule according to which disputes regarding non disposable rights (like the agent’s right to goodwill indemnity) cannot be waived by agreement in favour of a foreign court or a foreign arbitration.

With respect to the first issue the Court of Cassation confirmed the decision of the Florence Court, stating that the agreement was to be considered an atypical contract with elements of a mandate and a works/contract (“appalto”; “contratto d’opera”), which could not be classified as a commercial agency agreement, due to (i) the broader activity performed by the buying agent; (ii) the power of representation he was given; and (iii) the remuneration which was substantially higher than the commission normally granted to commercial agents, and which also included a fixed minimum guaranteed amount.

Particularly, with respect to the broader activity performed by the buying agent, the Court of Cassation expressly quoted the following list of obligations provided under Article 2 of the agreement: to inform the buyer about the prices and sources of supply of the products, the marketing aspects; to occasionally participate to fairs and make market research for the buyer; to request offers of products on behalf of the buyer; to assist the buyer and his representatives when they visit the various sellers; to act as interpreter for the buyer’s representatives; to assist and advice the buyer in the preparation and negotiation of the purchase contracts; to request orders on behalf of the buyer; to notify in writing to the buyer all information concerning the sellers; to monitor all orders; to supervise and manage the quality control program of the goods purchased; to supervise shipment of the goods; to assist the buyer in case of complaints; to obtain for the buyer the documents for importation and exportation of the goods; to inspect the goods at the sellers’ premises in order to check the compliance with the buyer’s policies.

After having considered also the two further aspects evaluated by the lower Court (i.e. the power of representation given to the agent and the remuneration, which consisted in a fixed annual amount of 500.000,00 US $ - thereafter increased to 700.000,00 $ - in addition to a percentage on the business concluded), the Supreme Court confirmed that the contract should be classified as an atypical agreement, not subject to the rules governing commercial agency contracts.

As regards the second issue, the Supreme Court confirmed the decision of the Florence Court that, since the mandatory rule on goodwill indemnity provided by Article 1751 of the civil code for commercial agents does not apply to the case at issue, because the “buying agency agreement” is not an agency contract, the arbitral clause provided for in the agreement is valid and effective, and the case must be referred to arbitration.

Now, while the decision that the buying agency agreement should not be considered as a real agency agreement can be discussed (in fact the reasoning followed by the Florence Court and the Court of Cassation is not very convincing), the conclusion that the arbitration clause is valid and effective, because the agreement is not an agency contract, is not at all acceptable.

In fact, the assumption that, if the buying agency agreement were a real agency contract, the arbitration clause contained in such agreement would have been null and void, is based on a reasoning that cannot be followed.

The Supreme Court, based its reasoning on Article 4(2) of Law 218/1995 pursuant to which “the Italian jurisdiction may be waived by an agreement in favour of a foreign court or a foreign arbitration if the waiver is proved in writing and the case concerns rights of which the parties are free to dispose (“diritti disponibili”). In other words, "non-disposable rights" ("diritti indisponibili") cannot be submitted to foreign arbitration or foreign courts.

However, the Supreme Court made a further step by assuming that the agent's right to goodwill indemnity under article 1751 of the civil code, must be considered as a "non-disposable right" because of its mandatory character. Now, this reasoning, which reaffirms an unfortunate decision of 1999 (judgment of the Supreme Court No. 369 of June 30, 1999, Air Malta) is clearly wrong, because one cannot extend the notion of "non-disposable rights" to all rights granted by mandatory rules.

Actually, “non disposable rights” under Italian law should be limited to a very narrow category of rights established not only in the interest of the person concerned but also protecting a public interest (e.g. rights concerning the person; the name; family rights; rights protected by labour rules; etc.); therefore, the individual is not allowed to freely dispose of them (e.g. by transferring or waiving them).

The theory according to which all rights protected by mandatory rules are "non disposable" would imply that most commercial contracts are not arbitral, which conclusion is obviously unacceptable. The position taken by the Supreme Court, as expressed in the above judgment, is plainly wrong and must be rejected.

Finally, the Supreme Court concluded its judgment with a number of unnecessary (and partly wrong) statements on the applicable law, in order to show that, if the buying agent agreement had been a real commercial agency  contract, the choice of New York law as the governing law would not have been valid, because Italian law would have been applicable notwithstanding the choice of law by the parties.

Thus the Court of Cassation invoked in particular:

Article 3(3) of the 1980 Rome Convention which provides that, when a purely domestic contract is submitted to a foreign law, the mandatory rules of the country of the parties must be respected. However, this rule is obviously not applicable to a contract between parties of two different countries.

Article 7(2) of the Rome convention on internationally (overriding) mandatory rules which must be applied by the courts of the country which enacted them. However, the Court did not deal with the problem if Article 1751 should be considered as an overriding mandatory rule according to Article 7(2) ("a rule that must be applied whatever the law applicable to the contract").

Article V(2) of the New York Convention which excludes the recognition of awards on matters which are not arbitral. But, here too, the Court did not explain why the issue regarding the indemnity under Article 1751 c.c. should be considered "not arbitral" under the New York Convention.

We may hope that the judgment No. 27.072/16 of the Court of Cassation may be considered as an exceptional case implying a mere obiter dictum on the relation between arbitration and mandatory rules, not relevant for the future.

In fact, the heart of the matter in the case decided by the Court was the issue whether the buying agency agreement was an agency contract or not. Once decided that it was not, the problem whether arbitral clause would have been invalid if it had been a real agency contract becomes a secondary issue. This explains probably why the Court has not given enough attention to this aspect which was of no real importance for the solution of the case: in fact, once it was decided that the buying agency agreement was no real agency contract, the question was settled without needing to inquire what would have happened in the opposite case.

If we consider in more general terms the situation that gave rise to the case decided by the Court of Cassation, we can understand the actual reasons behind the claim of the Italian agent.  In fact, if his right to indemnity were to be considered to be a right granted by an internationally (or "overriding") mandatory provision of Italian law (which is likely to be the case, also considering the judgment of the European Court in the Ingmar case), an Italian Court would have been obliged to grant him the goodwill indemnity whatever the applicable law chosen by the parties and, by submitting possible disputes to arbitration abroad, the agent would have lost the possibility of enforcing his right.

In other words, although the position taken by the Court of Cassation examined above is wrong, the problem of the lawfulness of arbitration clauses (or choice of forum clauses) used for the purpose of circumventing overriding mandatory rules actually exists and has given rise to a number of decisions of national courts. In particular, in several occasions the question has been raised whether overriding mandatory rules can have the effect of not only invalidating the choice of law clause, but also the conferral of exclusive jurisdiction on a foreign court or on arbitrators.

The answer to this question is disputed. There are German courts who have invalidated choice of forum clauses which would have excluded the application of the provision on goodwill indemnity (see, for instance, OLG Stuttgart 29 December 2011 and Bundesgerichtshof, 5 September 2012). On the same line, the Belgian Court of Cassation affirmed in a judgment of 3 November 2011, the invalidity of an arbitration clause under the law of Quebec in a dispute with a Belgian agent, because it would have excluded the application of mandatory provisions of Belgian law. The opposite conclusion has been reached by the Italian Court of Cassation (judgment of 20 February 2007, n. 3841, JP Morgan v. Poste italiane) which considered that the existence of overriding mandatory rules  ("norme di applicazione necessaria"), according to Italian terminology) which preclude the application of the foreign law chosen by the parties do not affect the validity of a choice of forum clause in favour of a foreign court, and by the French Court of Cassation in the case Monster Cable of 22 October 2008.

We can therefore conclude that there is an open question regarding the validity of clauses excluding jurisdiction with the purpose of avoiding the application of overriding mandatory provisions protecting a party. This important issue will be dealt with in in more detail during one of the workshops of the 2017 IDI conference (Paris, 9-10 June, 2017).

Source: IDI News

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