Does the Seat of Arbitration Still Matter? Can Italy be a “Good” Place for Arbitration?

1. Introduction

On November 16, 2012, the Milan Chamber of Arbitration has hosted its 3rd Annual Conference in international arbitration.

The aim of this contribution is to briefly report the lively discussion related to the main topic of the conference – the seat of arbitration – to express some comments on this issue and hopefully to stimulate a broader debate among practitioners and scholars.

Nowadays, it is not unusual for the parties to determine the seat of the arbitration in their arbitration agreement.[1] But what are the factors taken into account by the parties when selecting such place?[2]

As it has been pointed out by the moderator of the first session[3], the questions we should try to answer to are the following:

–          Do parties pay attention more to the legal or to the practical factors when choosing the seat?

–          Is the place of arbitration related to the origin of the parties and to their place of business?

–          To what extent a good and estimated arbitral institution, placed in a particular city, influences the choice of the party?

No doubt one of the leading factors influencing the choice of the seat is the substantive law of the contract. For example, dispute resolution lawyers find it coherent to choose England as the place of the arbitration if the substantive law of the contract is English law. Today, the four most popular places of international arbitration are London, Paris, Geneva and New York.

But does the choice of the seat still really matter? Or is the so-called “seat factor” facing a progressive decline?

During the Milan Annual Conference two opposite opinions emerged.

2. “Transnational” approach vs. “Traditional” approach

2.1 “Transnational” approach: the decline of the role of the “seat”

For some scholars (well represented at the Milan Conference by Antonias Dimolitsa), the choice of the seat is becoming gradually less important due to multiple factors.

First of all, the progressive harmonization of the rules governing international arbitration under national legal systems (such as the UNCITRAL Model Law, which has been adopted by an high number of States).

Secondly, the increasing recognition of party autonomy in the determination of a large number of aspects of the arbitral process, such as, for example, the substantive applicable law or the rules of procedure.

It seems that factors like these make the location of the seat of the arbitration less important.

According to the well-known Emmanuel Gaillard’s work on “Philosophical Aspects of the Law of International Arbitration”[4], there are three different representations of international arbitration and each of them leads to a different role played by the “seat” of arbitration:

–          “Monolocal” representation[5]: this is the traditional vision according to which the arbitration has a forum and the award has a nationality, which is the nationality of the seat. In this case, the seat plays a crucial role.

–          “Multilocal” or “Westphalian” representation[6]: according to this approach, there is no lex fori and the award has no nationality. There is a connection between the arbitration and the seat, but not so significant and relevant as in the “Monolocal” representation.

–          “Transnational” representation[7]: it assumes the existence of a transnational legal order composed by States, collectively, willing to recognize an award if it does present certain features. In this case, there is no connection between the arbitration and the seat.

For scholars supporting the third approach, the “seat” of the arbitration is no longer a decisive factor, neither for the arbitration proceedings nor for the destiny of the award. This is due to the harmonization of arbitration laws and to the homogenization of rules and practices. Several elements seem to support such a position:

–          as far as arbitrator’s jurisdiction is concerned, the principle of “competence-competence” is accepted and recognized in almost every legal system (even though there are few strongly criticized exceptions);

–          as for the proceedings, the procedural autonomy of the parties in determining the “rules of the game” – as well as the procedural powers of the arbitrator to conduct the process – is recognized by all arbitration laws and institutional rules. This happens also thanks to codified practices like, for example, the IBA Rules on the Taking of Evidence[8];

–          regarding the action of the State judge in support of the arbitration (the so-called juge d’appui), it is worth mentioning that such support is rarely required and that, even when requested, it is not necessarily addressed to the judge of the “seat” of the arbitration;

–          there is a common principle of non-intervention concerning the supervisory jurisdiction of the courts of the seat over the arbitration. Such a principle is widespread with limited, ineffective or avoidable exceptions. Any supervision is minimal and the real exception to this principle is in relation to the phenomenon of anti-suit injunctions;

–          the law of the seat has no impact on the choice of the law applicable to the merits. The eventual applicability of whatever public policy rule depends on the worthiness of its application and on the consequences of its non-application. The applicability of the public policy rules (lois de police) of the seat depends on factors different than their identification as “mandatory rules of the seat”;

–          last but not least, the grounds of annulment of arbitral awards are internationally limited and very similar (with exceptions in some country, like the United States and its “manifest disregard of the law” case law). Such grounds, that are similar to the grounds for refusing enforcement, are reproduced almost identically in the various arbitration laws, with very few instances of local annulment standards. Some arbitration laws grant to the parties the right to exclude setting aside proceedings. There are then different approaches regarding the recognition and enforcement of an annulled award.

All the above mentioned arguments – as well as a realistic approach towards the practice of international commercial arbitration – entitle a group of scholars to state that the seat of arbitration is gradually losing its legal importance and that, on the contrary, the “transnational” approach has to be followed.

The arbitral process – and its efficiency – is more influenced by the quality of the arbitration agreement (and by pathological clauses) rather than by the choice of the seat.

The most important factors are others: first of all, the choice of the arbitrator and the reasoning of the award. On the other hand, the role of the choice of the seat cannot be excluded at all, but only diminished in its importance.

2.2 “Traditional” approach: the choice of the seat has still significant legal and economic consequences

According to a more traditional approach, the selection of the seat has still a legal and economic significance because it creates a link between the country where the arbitration is placed and the arbitration itself. Such link presents significant legal and economic consequences for the parties and for the arbitrators.

This approach is based on several arguments.

First of all, some of the grounds for refusal of recognition and enforcement of foreign arbitral awards under Article V of the New York Convention (specifically those relating to the validity of the arbitration agreement, the composition of the arbitral authority or the arbitral procedure) refers to the law of the country either where the award was made or where the arbitration took place and all these elements point to the law of the seat.

Another point is that the seat of the arbitration shall determine whether an award is “foreign” for purposes of the New York Convention.

The seat shall also determine whether any reservation made by the State of the seat regarding its acceptance of the New York Convention does apply.

There is another important element that should be taken into account: when selecting the place of arbitration, the parties consider the choice from an economic point of view. The significance of the place of arbitration relates to issues of convenience and costs. Let’s think about accommodation, transportation (including flight connections), hearing facilities and technical support. It is true that hearings may be held at locations other than at the arbitral seat, but it also true, on the other hand, that this frequently does not occur. Parties usually make the location of the seat a matter of practical and logistical importance.

According to many scholars (represented at the Milan Conference by Stefan Kroell), this more “traditional” approach should be followed. They believe that the selection of the seat is still one of the most important factors and has great consequences for the parties. If the choice of the place is made with consciousness there will be a cheaper and less painful process for the clients. So, parties to an international arbitration should pay great attention to this choice.

The seat may have a potential influence on three fundamental factors:

1)      the arbitration proceedings itself

2)      the courts’ supportive function for the arbitration

3)      the arbitration-related proceedings on the third country (the process of enforcement).

It is absolutely true that arbitration is based on an agreement between the parties and that party autonomy has a central and fundamental role. But it is undeniable that the local law, the law of the seat of arbitration, plays a fundamental role as well (for example, as far as the setting aside of the award and the enforcement process are concerned). This approach can be seen as “traditional” and, according to the scholars supporting the “transnational” approach, it is gradually losing its importance.

For all those reasons, the choice of the seat definitely influences the arbitration proceedings. There is no doubt that, when choosing the place, parties make legal and non-legal considerations.

Legal considerations such as, for example, the existence of a modern arbitration friendly legal environment, the attitude and the efficiency of State courts and the neutrality of the seat.

Non-legal considerations include, for example, accommodations, direct flights and hearing facilities.

This approach seems to be supported also by the “final” users of arbitration, as expressed in Milan by a senior counsel of a Germany-based company[9]. According to his approach, if we do analyze the issue from a practical point of view, the seat is important for three reasons:

1)      because of the need of “predictability”: the seat may be not so important for the arbitrator but it is important for the parties. They have to manage a legal risk and predictability of the outcome is extremely important to them. The legal risk can be very different if you have an arbitration in Hungary rather than in India, in India rather than in Italy, and so on. Predictable situations may influence companies’ legal strategies and decisions;

2)      even though it is true that international arbitration laws and practices are tending towards harmonization, it is also true that the seat still determines and influences the approach taken by the arbitrators towards procedural issues (like, for example, disclosure);

3)      because the approach of State judges still influences the enforceability of arbitral awards.

In conclusion, we can say that the two opposite approaches, the “transnational” and the “traditional” one, are based on different considerations and are both considerable and interesting.

3. Italy as the seat of arbitration: heaven or hell?

 It is a fact that the importance of the seat of arbitration has not escaped the attention of national legislators and national courts. In the last thirty years a large number of States have competed to ensure the best legal environment for arbitration within their territory, in order to attract foreign parties to choose their country as the seat of their arbitration. This was done in view of the economic benefits expected in terms of custom to local counsel and possibly arbitrators, as well as benefits to hotels and other support services. Many examples can be brought: England, Switzerland, Belgium, France, Singapore.

We can say there is some sort of international competition in modernizing arbitration law in order to make a country’s environment more attractive as a place for international arbitration.

It is undeniable that, notwithstanding the standardization of the arbitration rules and practice, there is still a significant difference between an arbitration conducted in Milan and an arbitration conducted in Zurich or somewhere else.

The fact that international commercial arbitration is going towards some kind of harmonization and standardization does not mean that we have to lose the different legal traditions developed in each country.

On the contrary, we are entitled to be proud of the intrinsic differences of each legal framework and to maintain some peculiarities, even though we operate in the field of international arbitration. I do strongly believe that “diversities”, in commercial arbitration, is a value and not an obstacle to be overcome. 

Many scholars believe that is counterproductive and not forward-looking for the international arbitration community. They propose a move towards a fixed standardization of the procedure, but it is not reasonable to use the same procedural rules everywhere and in any case. It does not make sense to select the common law system and the general principles background if it is not the case. And the same applies for the civil law system.

Parties should be free to use the rules that are congenial to their juridical background and to the specific needs of the case.

So, a proper investigation on the main features of the “place” of arbitration is still essential.

Does the Italian arbitration legislation (and moreover its application by the Courts) satisfy the foreign parties’ needs?  

In the past, certain aspects of Italian arbitration regulation, such as the distinction between “arbitrato rituale” and “arbitrato irrituale”, may have cast doubts about the convenience of selecting Italy as the seat of arbitration.

The situation after the reform of 2006 has changed significantly. The most serious issue, still pending and not properly governed by the Italian legislation, is the absence of the power to issue interim measures for the arbitrator sitting in Italy. Such lack of power may be seen, by practitioners,  as an obstacle for placing the arbitration in Italy.

But, apart some specific technical solution provided for Italian law, the fundamental question seems to be another one: can Italy be considered an “arbitration friendly” country? And to what extent? Can this country be chosen by the parties as a suitable place of their arbitration?

Undoubtedly, many foreign investors have the perception of the existence of some legal and technical problems concerning the Italian framework and for these reasons Italy is definitely not the first place that come into mind when thinking about the choice of the seat. The complexity of the Italian legal system affects the perception of foreign investors and, as a consequence, the possibility of choosing Italy as the seat of an international arbitration.

The general perception that many foreign investors have is that in Italy the court system is pretty slow. Generally speaking, they may take into consideration an arbitration placed in Northern Italy and administered by an arbitral institution.

Otherwise, choosing Italy as the seat of the arbitration is considered not appropriate.

 It is understandable that, if the initial general perception is negative (no matter whether right or wrong, deserved or not), most parties tend to stay away from that country. Most of the time, parties do not have the opportunity, the time, the resources to deeply analyze and study in detail a legal (and political) framework and its case law. But the evaluation should not be based on an aprioristic perception. And the suitability of a place should not be excluded “a priori”, because of the existence of some pathological cases.

Of course, it is wise to avoid places because of the interventions of the courts and because of setting aside provisions. And it is of fundamental importance to provide the parties with a place with good and serene atmosphere.

Concretely speaking, there are many factors that are considered in such an evaluation: flexibility of the juridical system, predictability of the outcome of the arbitration (parties generally like arbitration to be “one shot” process that remains outside from the courts’ structure), political and economic stability and also an uniform and “stable” application of the law.

If we do look at all these factors, we can say that Italy’s bad reputation is only partially deserved. It is true that there is some work to be done by the Italian legislator to improve Italian framework in order to make it more attractive and satisfactory for foreign investors. Parties’ perceptions and expectations should not be underestimated. But, again, I do believe it is more an issue of “perception” rather than of real obstacles.

One example for all: the data collected by the Milan Court of Appeal shows that – regarding the recognition in Italy of foreign awards – from 2005 to 2012, thirty-eight requests for recognition and enforcement have been filed to the Milan Court of Appeal.

Thirty-five of these requests were granted, while only three were rejected: one for non-arbitrability of the subject matter, the other two for lack of formal requirements.

This statistic clearly shows the increasing sensitivity and positive attitude of the Italian judiciary towards international arbitration.

Stefano Azzali
The author, presently Fellow at the NYU Centre for Transnational Litigation and Commercial Law, is the Secretary General of the Milan Chamber of Arbitration and acts as Secretary Treasurer of the International Federation of Commercial Arbitration Institutions (IFCAI). Since 2005, he is Visiting Professor of Arbitration Law at Bocconi University – School of Law in Milan and, from 2001 to 2007, he chaired the Disciplinary Commission of the Italian Football Federation (FIGC), where he is now member of its Federal Court of Justice.

[1] ICC statistics tell us that in the last five years the selection by the parties of the place of arbitration has intervened in over 85% of the cases

[2] Some interesting drafting tips from Paulsson J. – Rawding N. – Reed L., “Choosing the place of arbitration”, The Freshfields Guide to Arbitration Clauses in International Contracts, 31-33: “In choosing the place (seat) of arbitration, consider the following:

–           Is the country in question a signatory to the New York Convention?

–           Has the country in question adopted the UNCITRAL Model Law? If it has, are there any significant qualifications to its adoption? If it has not, are its procedural laws up to date and arbitration friendly?

–          What is the approach of the local courts, e.g. towards enforcing the parties’ agreement to arbitrate, supporting the arbitration process, and enforcing awards? Are they jealous guardians of their own jurisdiction and powers, or co-operative? Should a clause be included to cater specifically for enforcement of the agreement to arbitrate, limiting any review by the courts to those in the place of arbitration? 

–          Does the proposed country have sufficient pool of resident experienced and qualified arbitrators?

–           Will all those likely to be involved in the arbitration be able to travel easily to and from the arbitration venue?

–          Can any logistical issues be satisfactorily dealt with?

[3] Stavros Brekoulakis (Senior Lecturer in International Dispute Resolution, Queen Mary University of London, UK)

[4] Gaillard E., “Legal Theory of International Arbitration”, Martinus Nijhoff  Publishers, Boston, 2010, 115

[5] This representation of international arbitration assimilates arbitrators to national judges and resolves many questions by inviting arbitrators to act exactly as the national judges of the place of arbitration would. The international public policy that the arbitrator should uphold is that of that particular State. He/she must also ensure that the overriding mandatory rules (lois de police) of that State are complied with. Mandatory rules contained in a legal order other than those of the seat are considered to be “foreign” and the arbitrator can only give them effect if and to the extent that the legal order of the seat so allows

[6] According to this representation, the fact that a number of States – and not only that of the place of arbitration – have an equal title to impose their views on the arbitral process, be it as regards the conduct of the arbitration or the solutions reached in relation to the merits of the dispute. The State where enforcement of the award may be sought does not have less of a title than the State where the arbitration is conducted, to require that the norms it considers important prevail over the lex contractus

[7] This representation, recognizing the existence of an arbitral legal order, addresses the question of possible limitations to party autonomy in the determination of the law applicable to the merits through the concept of transnational public policy or truly international public policy

[8] 2010 IBA Rules on the Taking of Evidence in International Arbitration,

[9] Jan-Michel Ahrens, Senior Counsel, Siemens AG, Germany