- Arbitral Award
- ICC International Court of Arbitration, Rome 9029
LONG-TERM CONTRACTS - SHAREHOLDERS AGREEMENT - BETWEEN AN ITALIAN COMPANY AND AN AUSTRIAN COMPANY - PARTIES' CHOICE OF DOMESTIC LAW (ITALIAN LAW) AS LAW GOVERNING THE CONTRACT - ART. 834 ITALIAN CODE OF CIVIL PROCEDURE REQUIRING ARBITRAL TRIBUNAL TO TAKE INTO ACCOUNT "TRADE USAGES" - REQUEST OF APPLICATION OF UNIDROIT PRINCIPLES AS AN "AUTHORITATIVE SOURCE OF KNOWLEDGE OF INTERNATIONAL TRADE USAGES" - REJECTED
ART. 3.10 (GROSS DISPARITY) OF UNIDROIT PRINCIPLES - DISADVANTAGED PARTY'S STATE OF IGNORANCE - CONDITIONS
ART. 6.2.2 (HARDSHIP) - ALTERATION OF EQUILIBRIUM DUE TO EVENT WHERE RISK ASSUMED BY DISADVANTAGED PARTY
An Italian company (Claimant) and an Austrian company (Respondent) entered into a Shareholders Agreement for the financing of an aeronautical project. The Italian company terminated the contract after the Austrian company failed to make payment. The contract contained a choice of law clause in favour of Italian law.
In its statement of defence Respondent invoked the application of individual provisions of the UNIDROIT Principles. In doing so, it argued that, since Art. 834 of the Italian Code of Civil Procedure requires in an international arbitration the arbitral tribunal to take into account trade usages, the lex mercatoria is an integral part of Italian law, and that the UNIDROIT Principles are to be considered an "authoritative source of knowledge of international trade usages".
The Arbitral Tribunal decided against the applicability of the provisions of the UNIDROIT Principles. In its view, "[…]although the UNIDROIT Principles constitute a set of rules theoretically appropriate to prefigure the future lex mercatoria should they be brought into line with international commercial practice, at present there is no necessary connection between the individual [provisions of the] Principles and the rules of the lex mercatoria, so that recourse to the Principles is not purely and simply the same as recourse to an actually existing international commercial usage". The Arbitral Tribunal further held that in the context of Art. 834 of the Italian Code of Civil Procedure "[i]nternational commercial usages are of strictly interpretative and integrative value, to the extent that there are gaps in national regulations that could usefully be filled by the aforesaid usages […]" and concluded that the doctrine of gross disparity and hardship (invoked by Respondent), as dealt with in the UNIDROIT Principles, could not be applied "[b]eyond the limits of or with effects different from the presuppositions that are relevant in law and from the actual consequences of rescission and of cancellation of the contract [provided for in the Italian Civil Code …]".
Nevertheless, the Arbitral Tribunal entered into the merits of some of the individual provisions of the UNIDROIT Principles invoked by Respondent (in particular Arts. 3.10 and 6.2.2).
Thus, with respect to Art. 3.10 (Gross disparity), the Arbitral Tribunal pointed out that the disadvantaged party may invoked its state of ignorance when it concerns facts which take place before the conclusion of the contract, provided that they were not known and could not have been known at that time. What is important is not "[w]hat was subjectively believed […] by the disadvantaged party, but rather […] what was objectively knowable".
Finally, with respect to Art. 6.2.2 (Definition of hardship), the Arbitral Tribunal found that hardship may be invoked if the alteration of the contractual equilibrium is due to an event the risk of which was not assumed by the disadvantaged party and if such an event takes place after the conclusion of contract, while original facts which alter the contractual equilibrium "[m]ay be cited solely in relation to gross disparity".
Respondent has claimed that these proceedings are an arbitration that is international and subject to statutory rules and to institutional procedures; that the arbitration's international character is determined by the fact that both Respondent's head office and the locus destinatae solutionis of a considerable part of the services that are the subject of the disputed business relationship are situated abroad (Article 832 of the Code of Civil Procedure), as well as by the fact that this is an institutional arbitration governed by the Rules of Arbitration of the International Chamber of Commerce; and that the statutory nature of the arbitration is inherent in the fact that this is a legal arbitration, with application for every purpose of Italian law [...].
This constitutes the premise on the basis of which Respondent pleads to recall that in accordance with Article 834 of the Code of Civil Procedure international arbitration should in all cases also take into account, as regards the relevant legal rules applicable, commercial usages; to claim that lex mercatoria is thus necessarily an integral part, even where binding rules of procedural practice apply, of substantive Italian law, under which, as indicated in the contract, the present case must be appraised and the dispute decided by the Arbitrators; to engage the Principles of International Commercial Contracts drawn up by Unidroit, as an authoritative source of knowledge of international trade usages.
In its written response [. . .] Claimant considered inappropriate Respondent's appeal to Unidroit Principles, inasmuch as these apply only when the parties have agreed that the contract be subject to them; in as much as the Unidroit Principles shall be applied when the parties have agreed that their contract be govemed by them and they may be applied when the parties have agreed that the contract be govemed by them; inasmuch as the doctrine expounded by the author of the commentary on the preamble and the first, second and fourth chapters of the Unidroit Principles, has made it clear that the Unidroit Principles are not the subject of an intemational agreement and do not have binding force in themselves, but can acquire validity only by the will of the parties; that one of the fundamental principles of the Unidroit Principles is that of freedom of contract; and inasmuch as Article 11 (Freedom of Contract) stipulates that: The parties are free to enter into a contract and to determine its content. Claimant observes that it is precisely in their exercising of contractual autonomy, a cardinal principle endorsed by Article 1322 of the Civil Code and by Article 41 of the Constitution, that the parties agreed Clause 17 of the Shareholders Agreement, the applicability of Italian law, and did not make any reference to the Unidroit Principles.'
Respondent concluded by asking the Arbitral Tribunal to declare that the Shareholders Agreement entered into by the parties [. . .] causes grave hardship to the detriment of Respondent.... Respondent has attempted to identify the hardship in the unzumutbare Hàrte of German experience, i.e. in the excessive disparity in the contract or in some of its clauses, with excessive advantage to one of the parties, in which the Unidroit Principles also refer... [and to show] that the disparity between the services rendered by the two parties is vast [...] .
Furthermore, Claimant, having considered inappropriate Respondent's appeal to the Unidroit Principles on the basis of the general considerations described above, has also pointed out that, in any case, Articles 3.10 and 6.2.2 of the Unidroit Principles referred to in Respondent's concluding plea do not permit a finding of the existence of the alleged grave hardship complained of, i.e. the disparity between the services in the contract, to the detriment of Respondent; that Article 3.10 of the Unidroit Principles, in particular, stipulates that there must exist two presuppositions in order for the grave hardship principle to be applicable, viz. that there must be a serious disparity between the parties' reciprocal rights and obligations which gives an excessive advantage to one party and that the excessive advantage must be unjust, that is in say that one party must have taken excessive advantage of a dependency a state of economic necessity, urgent needs or lack of foresight, ignorance, inexperience, or the other party's disablement in conducting the negotiations; that these presuppositions are not present in this case.
The Arbitral Tribunal considers that the abnormal hardship complained of by Respondent does not exist, and that it cannot therefore accept the connected claim aimed at obtaining from the Arbitral Tribunal the finding that the Shareholders Agreement is invalid or void. And this for many concurrent reasons.
Firstly, it notes that Respondent's claim aimed at obtaining from the Arbitral Tribunal the finding that the Shareholders Agreement is invalid or void is based sometimes on the lex mercatoria and sometimes on the Unidroit Principles; it also notes that, notwithstanding the textual references in hardship, in basing its defense claim on the Unidroit Principles Respondent does not limit itself to pleading Article 6.2.2 of the Unidroit Principles, but also invokes Article 3.10, which deals not with hardship but with gross disparity.
In the first place, the Arbitral Tribunal considers that the reference to lex mercatoria and the specific appeals to the Unidroit Principles do not constitute sufficient justification for sustaining Respondent's claim that the Shareholders Agreement should be declared invalid or void, for various reasons.
The first reason appertains to the fundamental judicial rule that the onus is on the party that has invoked the application of the lex mercatoria and of the Unidroit Principles to prove that the rules invoked are part of lex mercatoria so far as concerns assumptions that may be of legal relevance and so far as concerns the consequences of disparity between the parties in the agreement, proving the existence of interpretative and applicative trends in international commercial circles supporting the interpretation that is put forward. This Respondent has failed to do, and therefore the appeal to the Unidroit Principles as regards gross disparity and hardship is not valid: it having been made clear that the Unidroit Principles are not part of normative sources of production, and that they are designed to constitute a uniform model for regulating the negotiation of contractual relations, whatever their connection with the lex mercatoria and with international commercial usages in particular, and it is also clear that the Unidroit Principles are only partly valid, and in many ways are innovative. In other words, although the Unidroit Principles constitute a set of rules theoretically appropriate to prefigure the future lex mercatoria should they be brought into line with international commercial practice, at present there is no necessary connection between the individual Principles and the rules of the lex mercatoria, so that recourse to the Principles is not purely and simply the same as recourse to an actually existing international commercial usage.
The second reason, which comes into play even if one assumes that the rules on gross disparity and on hardship invoked by Respondent actually come under lex mercatoria and the practices of international trade in particular, consists in a widespread interpretative trend, which the Arbitral Tribunal agrees with, whereby, where the parties have expressly and precisely identified the law applicable to the relationship established between themselves and, in particular, have, as in the present case, identified it as a national law, the possibility of putting before judges rules that do not belong in the national system of rules to which the contracting parties have referred is precluded. In the light of the above mentioned trend, it is not sufficient, in order to make applicable lex mercatoria, for provisions that may exist in the national legal system to which the contracting parties have referred to contain references to lex mercatoria: that is to say, where the parties have availed themselves of the possibility of choosing the legal system applicable to their relationship, no-one can substitute himself for these parties in the choice of applicable laws, adapting the system at his discretion. All of the above, which applies even in respect of the widespread referrals in lex mercatoria that can be found in French and Swiss legislative practice, has even more validity with regard to Article 834 of the Code of Civil Procedure, where the reference proves to be more tenuous. On the one hand, it should be borne in mind that Article 834 of the Code of Civil Procedure refers to international commercial usages, while lex mercatoria is an expression of notoriously very wide scope and interpretation, and could even be termed imprecise and debatable; in this light, there is no merit in appealing to Article 834 of the Code of Civil Procedure as a provision legitimizing the application of lex mercatoria as the basis for making the Shareholders Agreement void and invalid. On the other hand, it should be borne in mind that the appeal in international commercial usages contained in Article 834 of the Code of Civil Procedure must be linked with the national legal regulations to which the provision appealing to international commercial usages belongs. If one refers to instruments that are specifically regulated by Italian law or, in any case, that produce rules that are incompatible with the regulations of Italian law, international commercial usages cannot take precedence over national law; thus Article 834 of the Code of Civil Procedure, which does not allocate any precedence to the various sources, does not grant to any international commercial usages that can be taken into account, in the interpretation of a contract, supremacy over the provisions of Italian law. Thus, international commercial usages are of strictly interpretative and integrative value, to the extent that there are gaps in national regulations that could usefully be filled by the aforesaid usages; this means that Article 834 of the Code of Civil Procedure refers in international commercial usages as a source of law, but that those practices have their place and are treated in a similar way to custom; all the more so when the parties have chosen national law as the law applicable to their relationship, it being certainty not possible, in such a case, to substitute international commercial usages for the national law chosen by the parties with regard to institutions, actions, and effects, for which the latter makes special provision. Since the presuppositions for juridical relevance and the consequences of the contractual disparity, whether at the start or that occurred after the conclusion of the contract, are specifically regulated by Italian legislation, which recognizes the remedies of rescission and cancellation of the contract because the contract has become excessively onerous, the appeal to lex mercatoria or to the Unidroit Principles does not permit application of the doctrine of gross disparity and of hardship in order to bring into greater focus the contractual disparity whether original or occurring later beyond the limits of or with effects different from the presuppositions that are relevant in law and from the actual consequences of rescission and of cancellation of the contract because it has become excessively onerous.
The third reason is found in the nature of the provisions of Italian law concerning the invalidity and nullity of contracts that are considered in come under the rules of public policy The binding nature of these provisions, which flows directly from the obligation emphasized above, precludes the possibility that the provisions of Italian law concerning hypotheses and presuppositions of invalidity or nullity of contracts be set aside by reference in lex mercatoria. In a more specific sense, this constitutes a further proof of the above argumentation in that, given that the parties opted for Italian law as the law governing their contractual relationship, the rules on gross disparity and on hardship invoked by Respondent are rendered inapplicable in the present case, even if one assumed that they are part of lex mercatoria and, in particular, intemational commercial usages.
In any case, even if lex mercatoria and the Unidroit Principles were applicable in this case, Respondent's claim aimed at obtaining from the Arbitral Tribunal the finding that the Shareholders Agreement is invalid or void, could not, in the Arbitral Tribunal's opinion, be sustained, either with regard to the supposed gross disparity, or with regard in the supposed hardship.
As for the possibility of accepting the aforesaid claim under the heading of gross disparity, the Arbitral Tribunal considers that there are impediments even on the formal level. […]
And, even if one wished in ascribe the notion of gross disparity to the disputed issues that are the subject of this arbitration according to the principle of jura novit curia, supposing a mere error on the part of Respondent and bearing in mind that Respondent's claim is aimed at asserting the original disparity in order to make the Shareholders Agreement invalid or void, the said claim could still not be sustained, given the absence of the presuppositions.
In this regard, the Unidroit Principles specify that the consequences of the gross disparity consist in amending the contract at the demand of one party or, alternatively, in annulling the contract. In this case, there being nothing in the documents to show there was a request in amend the contract based on the original contractual disparity which Respondent refers to for the first time at the start of the arbitration, the only consequence can be the annulment of the Shareholders Agreement, for which, however, the presuppositions to such an end required by the Unidroit Principles invoked by Respondent are lacking.
And, in fact, Article 3.10 of the Unidroit Principles asks that the following factors be taken into account when determining the injustice of the disparity: the fact that the advantaged party (in this case Claimant) had taken advantage of the dependent state, economic difficulties or immediate needs of the disadvantaged party (in this case Respondent), or of the ignorance, inexperience or lack of negotiating skills of the disadvantaged party (in this case Respondent). Not only has Respondent failed to prove the presuppositions alluded to, but also circumstances have emerged such as to exclude them totally: not only has Respondent failed to prove that, at the time the contract was concluded, it was in a state of dependence, economic difficulty or immediate need, but it has also emerged that it was Claimant who was in economic difficulties; not only has Respondent failed to prove that, at the time the contract was concluded, it was incompetent, ignorant, inexperienced, or lacked negotiating skills, but also these conditions are excluded by Respondent's status.
On the other hand, whatever state it was in, ignorance would not be relevant in the notion of gross disparity, inasmuch as Article 3.10 of the Unidroit Principles gives relevance to the disadvantaged party's being in ignorance only if this ignorance was of circumstances that came about later or, if prior to the conclusion of the contract, of circumstances that were not known and could not have been known at that time. In the present case, because of the considerations just described, the Arbitral Tribunal holds that the extent of the contributions requested could reasonably have been foreseen by a professional operator in the aeronautical sector, by exercising the due diligence expected from a professional from the sector to which Respondent belonged. All the more so since the facts brought forward by Respondent in its own defense, following investigations carried out in the course of the arbitration, demonstrate not only and not so much that many of the facts learnt by Respondent ex post were objectively knowable beforehand, but above all that Respondent was negligent in its preliminary investigations at the stage of the pre-contractual negotiations, which constitutes confirmation of an attitude that cannot but assume importance as regards the application of the invoked Article 3.10 and, particularly, as regards the presupposition of the unknowability of such facts by a diligent professional.
[…] considering that the cited Article 3.10 attaches importance not to what was purely subjectively believed to be the case by the disadvantaged party, but rather in what was objectively knowable, the remedy of annulling the agreement due to gross disparity purely because the disadvantaged party attaches blame, both in general and in the present case, remains precluded.
Just as there are no presuppositions on which one could base annulment of the Shareholders Agreement due to gross disparity, it must also be pointed out that, under the invoked Article 3.10, an assessment aimed at verifying the presupposition of the original disparity must take into account the nature and purpose of the contract whose annulment is sought.
As regards the possibility of accepting, under the heading of the alleged hardship, Respondent's claim aimed at obtaining a finding from the Arbitral Tribunal that the Shareholders Agreement is void or invalid, even if the Unidroit Principles invoked in this regard by Respondent came under lex mercatoria, and it were to be held that the latter is applicable to the present case, the Arbitral Tribunal considers that in the present case there would be no presuppositions of hardship and, therefore, no grounds for a finding of invalidity or nullity.
As regards the absence of presuppositions of hardship, it is enough here in point out that these are listed under Sections A to D of Article 6.2.2 of the Unidroit Principles, which stipulate the only concurrent and supplemental conditions that may be cited when pleading hardship; that, in particular, hardship postulates an event that took place that was the cause of the contractual disparity; that in the present case Respondent has not alleged that such an event occurred, and that this event cannot be the alleged cognizance that third parties owned the rights in make use of the project, since we are dealing here with an original fact that may be cited solely in relation to gross disparity, although even then, as we have written, it could not assume any importance in this respect; that the notion of hardship also postulates that the disadvantaged party was not contractually bound in respect of the event that occurred that was the source of the contractual disparity; that in the present case Respondent was aware. or, at any rate could have been aware, for the reasons already described that this was an old project, and that responsibility for the technical aspects, the certification, the marketing, and any finance necessary for the joint venture would fall upon it, and that it would assume the related risk; that no unforeseen circumstances had even emerged while the contract was being concluded such as to aggravate that risk, taking into account, after all, that Respondent declared its intention of extricating itself from its obligation only two months after the Shareholders Agreement had been finalized.
As regards the absence of presuppositions for a finding of invalidity and nullity it is worth noting that Article 6.2.3 of the Unidroit Principles specifies that the consequences of hardship are that the contract be either amended or terminated. Given that neither party has requested that the contract be amended, Respondent's application to have the Shareholders Agreement declared invalid or void ab origine cannot be accepted, on the basis of the same rules invoked by Respondent, which would in any case only have allowed the possibility that the contract might have been terminated because of the hardship.'
Respondent concluded by asking the Arbitral Tribunal to declare that Claimant had violated Article 1337 of the Civil Code and of the corresponding rules of the lex mercatoria, at least in the objective meaning of the criterion for good faith.
In its concluding pleading, Respondent particularly emphasized injure that according to commercial usages, which, in Respondent's opinion, and also according to Article 834 of the Code of Civil Procedure, the arbitrators should take into account, good faith should be evaluated not in a subjective sense, according to the equation lack of good faith = fraud, but in an objective sense; that in the Unidroit Principles, in which good faith is mentioned repeatedly, it is always evaluated by reference not in the internal standards of various national legal systems, but to the standards of international business practice, according to which the obligation in observe it is violated not only in the case of fraud, but also in that of simple negligence, thoughtlessness, and rashness; that in contract law acting in good faith refers to a purely objective test: if a party acts in an unreasonable and inequitable way, it will not be a defense to say that he honestly believed his conduct in be reasonable and equitable; that this is the correct approach to the concept of good faith in the present judgement, too, in which the way in which Claimant conducted the pre-contractual negotiations was perhaps, but not necessarily, motivated by bad faith in the sense of conscious deceit, but could also have been caused simply by negligence, thoughtlessness, or inexperience, but that, if this were the case, there would be no grounds for not deeming it to have been objectively bad-faith behavior, in a business relationship such as the present, which Is subject to Italian law, whose legal system also includes the lex mercatoria.
Respondent has confirmed that for Respondent the case centres principally on Claimant's violation of the duty in behave in good faith when conducting the negotiations and drawing up the contract; has contested Claimant's thesis that Respondent had violated the general clause on good faith following the 'misplaced' trust that Claimant, 'who claimed [. . .] in have thus overcome some of the problems connected to the development, production and sale of the [...]'had 'intentionally engendered; has confirmed that it is referring, when maintaining that Claimant had violated the canons of good faith [. . .] to the use of that term in the sense that it had objectively violated them, as also and in particular understood by the rules of the lex mercatoria (and by the Unidroit Principles, especially Articles 1.7 and 2.15/2). We do not therefore wish to accuse the other party of having acted fraudulently. Fraud there may have been, perhaps; we are not asserting that there was, in the sense of defective consent within the meaning of Article 1439 of the Civil Code, but it is from the violation of Article 1337 of the Civil Code that we derive Respondent's right to receive compensation for the damages derived therefrom […].
Original in Italian:
Published in English (excerpt):
- ICC International Court of Arbitration Bulletin, Vol. 10, No. 2, Fall 1999, 88-96}}