To adjudicate, or not to adjudicate – that is the question (before Italian courts)

Italian litigators regularly face this dilemma when their clients decide to go to court: is mediation a binding procedural step before commencing court proceedings? The answer to this question became clearer in 2010 when Legislative Decree no. 28 (Decree) set mediation as a mandatory precondition to court litigation for certain types of disputes. In particular, the Decree provides for a statutory obligation to mediate disputes related to condominium, rights in rem (diritti reali), division of assets, inheritance, family arrangements, lease contracts, medical liability and defamation as well as matters regarding insurance, banking and financial contracts. The Decree further establishes that, in the event that the claimant fails to first commence mediation, the claim is barred from proceeding to court litigation.

The Decree does not extend its scope to construction contracts, but it’s well known that contractors and employers often draft multi-tiered dispute resolution clauses with the aim of avoiding the escalation of the dispute. The clauses provide that disputes must go through a sequence of steps before they can be brought to arbitration or litigation. Therefore, the dilemma about whether to mediate first or not is also faced by construction practitioners.

However, multi-tiered clauses are not always clear in outlining the consequences for the claimant who “jumps the gun” and misses out a step of the process. For example, Clause 20 of the 1999 FIDIC Contracts establishes a three-tier dispute resolution mechanism, whereby the parties have to first refer their claims to the engineer. If parties are not satisfied with the engineer’s determination, they can refer the dispute to the dispute adjudication board (DAB), and then, should adjudication be not successful, they can proceed to arbitration.In a nutshell, the question addressed by the Court of Lecce is whether parties are obliged, under Clause 20, to submit the dispute to the DAB before referring it to arbitration.

The pioneering decision of the Court of Lecce (16 April 2020, no. 1003)

To our knowledge, the judgment of the Court of Lecce is the only existing Italian decision that dealt with the interpretation of Clause 20 of the 1999 FIDIC Contracts (in 1994 and 1997, the Rome Court of Appeal also dealt with Clause 20, but with regard to a different issue, namely the enforceability of the engineer’s determination).

In the case resolved by the Court of Lecce, the parties entered into a contract based on the 1999 FIDIC Red Book for the renewal of the asphalt surface of the Nardò Technical Center, the test track for Porsche in the southern Italian region of Apulia. Rather than referring the dispute to the DAB or to arbitration, the contractor commenced court proceedings right away, alleging breach of contract and claiming over EUR8 million in damages. The employer argued that the court lacked jurisdiction as the contract contained an arbitration agreement. Secondly, it argued that the claim was inadmissible as the contract provided that adjudication by the DAB was a mandatory first step of the dispute resolution process.

The 1999 FIDIC Red Book is not a contract of adhesion

After lingering over the concepts of jurisdiction and competence, the Court affirmed the enforceability of the arbitration agreement contained in Clause 20. By doing so, the Court rejected the contractor’s argument that the contract had to be categorized as a “contract of adhesion” (contratto per adesione), pursuant to Articles 1341 and 1342 of the Italian Civil Code, and thus, according to the Court, the arbitration agreement did not need to be specifically approved in writing. To support its finding, the Court referred to the words of the Court of Cassation, whose case law maintains that:

“contracts of adhesion are intended to regulate an indefinite series of legal relationships, both from the substantive point of view (ie when one of the parties bids its services to an unlimited number of parties) and from the formal point of view (ie when such party uses standard forms of contract). On the contrary, contracts that are drafted with the aim to regulate a single legal relationship cannot be categorized as contracts of adhesion, especially if the parties had the possibility to exchange the draft contract during the negotiations” (Cass., sez. II, 19 March 2018, no. 6753).

The Court notably added that the 1999 FIDIC Red Book is an example of “international uniform contract,” drafted by an independent third party, the Fédération Internationale Des Ingénieurs-Conseils, “with a view to spread the use of such contract within the international construction industry.”

The DAB procedure is not a condition precedent to arbitration

After having recognised its enforceability, the Court analysed the provisions of Clause 20:

“As conceded by both parties, Clause 20.2 of the 1999 FIDIC Red Book provides for the preliminary referral of all disputes to the DAB. Clause 20.6 further establishes that disputes shall be settled by international arbitration, unless a DAB’s decision has become final and binding. After all, Clause 20.8 provides that, if no DAB is in place, either party may refer the dispute directly to international arbitration. Said provision is consistent with the phrase ‘if any,’ contained in Clause 20.6, which indeed refers to the decision of the DAB.”

The Court then concluded that:

“The decision of the DAB must be regarded as not necessary to commence international arbitration.”

The Court moved on to affirm that it was not competent to hear the dispute since, pursuant to Clause 20.6, the contractor should have referred the dispute to arbitration. Hence, the Court rejected the claim by referring the dispute to arbitration.

While it undoubtedly has the merit to shed new light on the Italian interpretation of Clause 20 the 1999 FIDIC Red Book, the decision of the Court of Lecce opens up to constructive criticism when it affirms that the DAB procedure is not a condition precedent to arbitration. As a matter of fact, this conclusion disagrees with the international case law that addressed the same issue in other jurisdictions.

Firstly, the Court seems to overlook that Clause 20.2 provides that “[d]isputes shall be adjudicated by a DAB.” According to a prima facie literal interpretation, the 1999 FIDIC Red clearly lays down on the parties the obligation to refer any dispute to the DAB. Accordingly, the verb “may” in Clause 20.4 (“…either Party may refer the dispute in writing to the DAB”) merely means that, once the DAB is in place, either party can take the initiative and seize the DAB.

Then, the Court relies on a broad interpretation of Clause 20.8. The Court’s reasoning seems to go like this: if, for any reason, the DAB is not in place, parties are always free to refer the dispute directly to arbitration. This same approach was adopted by some arbitral tribunals (see ICC Final Award in case no. 19581 [2014] and ICC Interim Award in case no. 16155 [2010]). In contrast, according to the leading case law of the Swiss Federal Supreme Court (4A_124/2014, 7 July 2014), Clause 20.8 must be interpreted pursuant to the goals that the drafters of the FIDIC Contracts had in mind. In particular, as the Swiss Supreme Court pointed out:

“[t]he broad interpretation of Sub-Clause 20.8 (…) by the majority of Arbitral Tribunals is not more convincing. According to it, it would be sufficient for a DAB not to be operational at the time arbitration proceedings are initiated, no matter for what reason, for a decision of this body to become optional. Such a conclusion would ultimately turn the alternate dispute resolution mechanism devised by FIDIC into an empty shell.”

In other words, FIDIC designed a specific dispute resolution mechanism that aims at avoiding and resolving disputes before their submission to arbitration. Therefore, it would be contrary to the goal of the FIDIC drafters to allow parties to circumvent the DAB procedure, or to consider it optional.

The mandatory nature of the DAB procedure was also held by the English courts in Peterborough City Council v Enterprise Managed Services Ltd., where Judge Edwards-Stuart ordered a stay of court proceedings to allow the parties’ dispute to be determined by the DAB.

‘Or otherwise’

Notwithstanding its firm belief that the DAB procedure is a mandatory precondition to arbitration, the Swiss Federal Supreme Court, with its 2014 decision, noticed that Clause 20.8 contains a very vague expression which does not facilitate its interpretation. The wording in question is the expression “or otherwise” in the first paragraph. As conceded by the Supreme Court, this expression allows us to consider other circumstances, different from the expiry of the DAB’s appointment, in which the dispute can be brought directly to arbitration. However, according to the Supreme Court, such circumstances must be exceptional and objective, and require that the party be in good faith when affirming them. As explained by the FIDIC Contracts Guide, “[t]here may be ‘no DAB in place’ because of a Party’s intransigence,” and a party can be considered to be in good faith when it has done everything in its power to constitute the DAB. On this basis, the Supreme Court concluded that a party may be allowed to circumvent the DAB mechanism when the other party does not cooperate in the appointment of the DAB members (“…it is indeed impossible to blame the Respondent for losing patience and finally skipping the DAB phase, despite its mandatory nature, in order to submit the matter to arbitration”).

What the Court of Lecce does not say

While it correctly affirmed that the arbitral tribunal was competent to hear the dispute, the Court of Lecce decided not to explore the nature of the DAB procedure.

Had the Court argued in favour of the mandatory nature of the DAB, it would have probably held also that the claim was barred due to the claimant’s failure to refer the dispute to the DAB in the first place. In addition, the Court could have found that the claimant was not entitled to rely on the “or otherwise” expression because, as the summary of facts shows, the contractor never attempted to commence DAB proceedings, as required by the contract. Indeed, the claimant’s lack of good faith would have prevented it from circumventing the DAB procedure and going straight to arbitration.

As earlier said, the decision of the Court of Lecce is a pioneer in the interpretation of FIDIC Clause 20 in Italy. However, like the real pioneers, the Court could have cut across the Italian borders to confront itself with the abundant foreign case law that exists on this matter. It’s therefore desirable that future decisions will take into account the global dimension that FIDIC Contracts have reached today.