- Arbitral Award
- Ad hoc arbitration
- Equipe '90 v. The Food and Agricultural Organization of the United Nations
LONG-TERM CONTRACTS - SERVICE CONTRACT - BETWEEN AN ITALIAN COMPANY AND THE FOOD AND AGRICULTURE ORGANIZATION OF THE UNITED NATIONS (FAO) - CONTRACT REFERRING TO “GENERAL PRINCIPLES OF LAW, TO THE EXCLUSION OF ANY SINGLE NATIONAL SYSTEM OF LAW” AS APPLICABLE LAW – ARBITRAL TRIBUNAL DECIDED TO APPLY UNIDROIT PRINCIPLES AND TO RESORT, IN CASE OF LACUNAE, TO ITALIAN LAW PROVIDED THAT IT IS NOT INCOMPATIBLE WITH THE FORMER
TERMINATION OF CONTRACT FOR BREACH OF THE “FUNDAMENTAL REQUIREMENTS OF GOOD FAITH, TRUST AND FAIR DEALING WHICH ARE AT THE VERY HEART OF ANY BUSINESS RELATIONSHIP” - NO PROVISION TO THIS EFFECT IN THE UNIDROIT PRINCIPLES (1994 EDITION) – RECOURSE TO ARTICLE 1671 ITALIAN CIVIL CODE ON TERMINATION FOR CONVENIENCE OF WORKS CONTRACTS BY EMPLOYER
Claimant, an Italian company, had been performing for Defendant for a few years under three contracts (the “Contracts”) works of ordinary maintenance on Defendant´s premises in Rome. In the course of the performance of the third Contract it came to light that during the execution of the second Contract, which at the time was no longer in existence, works that had been ordered, certified and paid for that had never been performed. Claimant repeatedly denied this allegation but when the non-performance of the works was established by an independent technical expertise, Defendant terminated the third Contract on the ground that Claimant, in breaching “the fundamental requirements of good faith, trust and fair dealing which are at the very heart of any business relationship”, made the execution of the third Contract impossible. In addition, Defendant noted that since the Manager of Claimant was also the manager of another company in which he was associated with the wife of the official of Defendant who had ordered, certified and paid on behalf of Defendant, Claimant had also violated a standard provision in FAO contracts whereby the contractor guarantees that no official, or representative of the Organization, or member of his family, has any personal interest or derives any benefit from the contract.
One year after the termination of the contract, Claimant commenced arbitral proceedings requesting the Arbitral Tribunal to declare that there had been no defaults on its part and to order Defendant to pay damages for the cost of other works not paid by Defendant as well as for lost profits as a consequence of the unlawful termination of the contract. Claimant no longer denied that it had not performed the works In question but pointed out that its on-going relationship with Defendant was, and had to be, characterized by a significant degree of informality and flexibility which allowed Claimant to respond better to the needs and functional requirements of Defendant, especially at a time when many works were required, but which explained that in practice “orders of service” and “certifications of works done” were sometimes signed with respect to works of a different nature from the specified works, or regularized “post factum”.
Each of the Contracts provided that “[…] this Contract and any dispute arising therefrom shall be governed by general principles of law, to the exclusion of any single national system of law”. Defendant argued that the intent of the parties was clearly that the Contracts should be “delocalized” and argued that the Arbitral Tribunal should decide the dispute in accordance with the UNIDROIT Principles of International Commercial Contracts as adopted in 1994. In a Partial Award rendered in 2000 the Arbitral Tribunal upheld Defendant´s position but in addition announced that in the event that specific matters were not covered by the UNIDROIT Principles it would apply “the principles of Italian law concerning public contracts”, provided that they were not incompatible with the UNIDROIT Principles.
As to the merits, the Arbitral Tribunal, noting that the instance of non-performance and breach of the requirement of good faith and fair dealing concerned the execution of the second Contract, and that Defendant, when becoming aware thereof in the course of the execution of the third Contract, had terminated that Contract for the “supervening lack of trust and confidence between the parties”, in the absence of any provision in this respect in the Contract, considered whether the UNIDROIT Principles or subsidiarily the principles of Italian law applicable to public contracts allowed termination of the Contract for the reasons indicated by Defendant. The Arbitral Tribunal reviewed in detail the UNIDROIT Principles, and concluded that, while Article 7.3.1 provided for termination for fundamental non-performance, there was no provision for termination for supervening lack of trust and confidence between the parties. Turning to the principles of Italian law on public contracts, the Arbitral Tribunal held that in accordance with Article 1671 of the Italian Civil Code, which grants the employer the right to terminate the works contract for convenience, provided that it compensates the contractor for the work already carried out and the lost profit, Defendant was entitled to terminate the Contract at hand. At the same time the Arbitral Tribunal awarded Claimant damages for the cost of works it had performed but was not paid for as well as for lost profits due to termination before the expiry of the Contract.