CCLM 73/2 |
|
CCLM 73/2 |
COMMITTEE ON CONSTITUTIONAL AND LEGAL MATTERS |
Seventy-third Session |
Rome, 3 - 4 June 2002 |
ARBITRATION AWARD BETWEEN EQUIPE `90 S.R.L. AND THE FOOD AND AGRICULTURE ORGANIZATION OF THE UNITED NATIONS |
III. COMPOSITION OF THE ARBITRATION TRIBUNAL
IV. INITIATION OF THE ARBITRATION PROCEEDINGS
V. PARTIAL AWARD OF 25 SEPTEMBER 2000
VI. MAIN ARGUMENTS OF THE PARTIES CONCERNING THE TERMINATION OF CONTRACT No RP/HQR 1997-027/AFSI
VII. SUBSEQUENT COURSE OF THE ARBITRATION PROCEEDINGS
VIII. THE ARBITRATION AWARD OF 4 DECEMBER 2001
IX. SOME CONCLUSIONS TO BE DRAWN FROM THIS ARBITRATION PROCESS
XI. COMMENTS ON THE ARBITRATION PROCEEDINGS BY AVVOCATURA GENERALE DELLO STATO
1. On 17 December 1998, the Organization terminated Contract No RP/HQR 1997-027/AFSI with Consorzio Equipe `90 S.r.l. (hereinafter referred to as Equipe `90 or Contractor). This contract, concluded with respect to the period 1 January 1998 to 31 December 2000, entrusted to Equipe `90 the performance of works of ordinary maintenance on the premises of the Organization, on a non-exclusive basis. The contract followed two previous similar contracts, Contract No RP/HQR 1992-025/AFSI, concluded and executed during the period 1 January 1992 to 31 December 1994, and Contract No RP/HQR 1995-026/AFSI, concluded and executed during the period 1 January 1995 to 31 December 1997.
2. The reason which led to the termination of Contract No RP/HQR 1997-027/AFSI was as follows. In 1998, within the context of a review of a number of contracts, it came to light that works had been ordered, certified and paid for under Contract No RP/HQR 1995-026/AFSI, but those works had not been performed. The "order of service" and the "certification of works done" had been made by the former Chief of the Infrastructure Service, AFSI of the Administrative Services Division, AFS (Cf. paragraphs 4 and 5 below). The Organization tried to clarify the matter with Equipe `90, but the Contractor refused to discuss the issue and maintained that the works had been performed. The non-performance of such works was established by technical expertise provided, at the Organization's request, by a Surveyor of the Royal Institute of Chartered Surveyors of the United Kingdom.
3. By letter of 17 December 1998, the Organization served to Equipe `90 notice that, in view of the above, as well as the surrounding circumstances, it was terminating Contract No RP/HQR 1997-027/AFSI. The termination of this contract was not based on any particular clause of the contract, but on a breach of a very fundamental principle of "good faith and fair dealing" on the part of the Contractor, which made its execution impossible. It may be of interest to recall, from the outset, that, at first, FAO contracts for the provision of services generally were concluded for undetermined periods of time. Those contracts contained a clause allowing for their termination by the Organization upon a specified number of days' notice, usually 30, 60, 90 or 180 days, depending on the services covered by the contract. The Internal Auditor recommended that this practice be discontinued and that contracts be concluded for pre-determined periods of time following tender processes at regular intervals. For this reason, the Organization started to conclude contracts, such as Contract No RP/HQR 1997-027/AFSI, for pre-established terms, without including any provision for termination without cause. However, in light of the difficulties arising from the termination of Contract No RP/HQR 1997-027/AFSI, the Organization inserted in all its contracts for the provision of services a clause allowing for termination of those contracts by FAO upon a specified number of days'notice, the notice period being determined by the length of the contract and the nature of the services provided. It should be noted, however, that Contractors feel that there is an inconsistency between a contract providing for a specific termination date and containing, in addition, a clause allowing the Organization to terminate that contract at any time, without cause.
4. In addition to this instance of non-performance by Equipe `90, it appeared that the Manager of Equipe `90, was also the manager of another company, not controlled by Equipe `90 and dealing with a different business, in which he was associated with the wife of the then Chief, AFSI, who was, at the time, the head of the service in charge of the administration of the contract. This was considered to be a violation of a standard clause of FAO contracts whereby the Contractor guarantees that no official or representative of the Organization, or member of his family, has an interest in, or derives any benefit from the contract. However, given the fact that the Company was not controlled by Equipe `90 and that it dealt with a different business, the Legal Office considered, after consultation of major legal firms, that this fact, per se, did not provide a sufficient legal basis for the termination of the contract under that standard clause1.
5. Prior to the termination of Contract No RP/HQR 1997-027/AFSI, disciplinary action had been initiated against the Chief, AFSI in connection with other facts2. This official resigned before the completion of the disciplinary proceedings and the Director-General accepted the resignation. The External Auditor was of the opinion that the Director-General should have refused to accept his resignation. This opinion was not shared by the Director-General, who considered that, at the time of the resignation, the Organization was not in presence of a situation of fraud.
6. Almost one year after the termination of Contract No RP/1997-027/AFSI, FAO received, through the Permanent Representation of Italy to the Organization, a request for arbitration by Equipe `90. The request was made under the terms of Section II - General Conditions, Article 3, Paragraph b, of the Contract, reading as follows:
"Any dispute between the parties concerning the interpretation and the execution of the Contract, if not settled by negotiation between the parties or by another agreed mode of settlement shall, at the request of either party be settled by arbitration in accordance with the Arbitration Rules of the United Nations Commission on International Trade Law".
7. In accordance with the Arbitration Rules of the United Nations Commission on International Trade Law (UNCITRAL), Equipe `90 requested that the Arbitration Tribunal be constituted by three arbitrators, i.e. one to be appointed by Equipe `90, one to be appointed by FAO within 30 days of the notification of the arbitrator appointed by Equipe `90; and a third, to act as President, to be chosen by the two arbitrators thus appointed. Equipe `90 requested also that the arbitration be held in Rome.
8. The notice of arbitration requested the Arbitration Tribunal to ascertain and declare that there had been no defaults in the contractual performance by Equipe `90 and, consequently, to order FAO to pay:
9. The combined level of the various claims made could be set at an estimated amount of over Lit. 2,500,000,000.
10. The notice of arbitration served by Equipe `90 included a notification of the appointment of an arbitrator, Avv. Giancarlo Tabegna. In line with the UNCITRAL Arbitration Rules, FAO was required to appoint its arbitrator.
11. At its Twenty-fourth Session, held in November 1987, the FAO Conference "decided that, henceforth, if the Director-General deemed it appropriate in the circumstances, he should be free to arrange for the Organization to plead its immunity in court, possibly through the Avvocatura Generale dello Stato whose services have been offered by the host Government" (Cf. Report of the Twenty-fourth Session of the Conference, Rome, 7-27 November 1987, Paragraph 333). Subsequent to this decision, and following a request by FAO to that effect, by Decree of the President of the Italian Republic of 10 June 1989, the Avvocatura Generale dello Stato was authorized to assume the representation and defense of FAO. Consequently, the Director-General decided to request the Avvocatura Generale dello Stato to appoint the arbitrator for FAO and to represent the Organization in the proceedings. On 11 March 2000 the Avvocato Generale dello Stato of Italy appointed Avv. Francesca Quadri as arbitrator.
12. Both arbitrators chose a third arbitrator, Avv. Federico Tedeschini, who was to act as President.
13. The Arbitration Tribunal held its first session on 26 May 2000 to decide on a number of issues regarding the proceedings. The Arbitration Tribunal decided that the place of arbitration would be in Rome, at the Avvocatura Generale dello Stato, Via dei Portoghesi, 12 and designated a secretariat. This reflected a number of considerations including the fact that the contract was drafted in Italian and that Equipe `90 is an Italian company. It decided inter alia that the proceedings would be conducted either in English or Italian, and that its final award would be made in English and Italian, both versions being equally authoritative. The Arbitration Tribunal determined that the submission of the statements of claim by Equipe `90 and of defence by FAO, including submission of evidence and designation of witnesses, should be made by 20 June 2000, that subsequent statements by Equipe `90 or FAO should be submitted by 10 July 2000 and set the date for the first hearing on 25 September 2000. It may be of interest to note that, while the initial stages of the proceedings adhered strictly to this schedule, subsequent phases of the proceedings lasted for more than one year.
14. In the course of its first session, the Arbitration Tribunal requested each party to deposit an equal amount as advances towards costs of the arbitration. These advances were Lit. 200,000,000 for the arbitrators and Lit. 10,000,000 for the secretariat. Thus, each party was requested to deposit with the Secretary of the Arbitration Tribunal Lit. 100,000,000 and Lit. 5,000,000, which they did.
15. Equipe `90 was represented in the proceedings by Avv. Paolo Spataro and FAO by Avv. Francesco Sclafani of the Avvocatura Generale dello Stato.
16. On 19 June 2000, both Equipe `90 and FAO submitted statements of claim and defence. Additional statements were submitted by both parties by 10 July 2000, as requested by the Arbitration Tribunal.
17. On 25 September 2000 the Arbitration Tribunal issued a partial award under the terms of Article 32, Paragraph 1 of the UNCITRAL Arbitration Rules allowing it to make interim, interlocutory or partial awards. This partial award was required in order for the Arbitration Tribunal to determine the law applicable to the dispute, in accordance with Article 33 of the UNCITRAL Arbitration Rules whereby "(...) the arbitral tribunal shall apply the law designated by the parties as applicable to the substance of the dispute. Failing such designation by the parties, the arbitral tribunal shall apply the law determined by the conflict of law rules which it considers applicable".
18. In its statements, Equipe `90 argued that the issue of the applicable law should be dealt with in accordance with the European Community Convention on the Law Applicable to Contractual Obligations, concluded in Rome, in 1980, among the Parties to the Treaty establishing the European Economic Community. Under this Convention, "a contract shall be governed by the law chosen by the parties". "To the extent that the law applicable to the contract has not been chosen (...), the contract shall be governed by the law of the country with which it is most closely connected". "It shall be presumed that the contract is most closely connected with the country where the party who is to effect the performance which is characteristic of the contract has, at the time of conclusion of the contract, his habitual residence, or, in the case of a body corporate or unincorporated, its central administration". Under these provisions, Equipe `90 was of the view that Italian law should apply to the contract and to the dispute. Subsidiarily, the rules on international contracts published by the "Fédération internationale des ingénieurs-conseils"(FIDIC) should be applied.
19. For its part, FAO argued that the contract was an international one, and that Section I, Article 1, (e) of Contract No RP/HQR 1997-027/AFSI provided expressly that: "Subject to any specific provision herein, 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". The intent of the parties was clearly that the contract should be "delocalized". Consequently, FAO was of the view that the contract and the dispute should be considered under the Principles of International Commercial Contracts adopted in 1994 by the International Institute for the Unification of Private Law (UNIDROIT).
20. The Arbitration Tribunal upheld FAO's position. It considered that the issue had to be dealt with in accordance with the nature of the contract and the will of the parties as reflected in the contract. Contract No RP/HQR 1997-027/AFSI was clearly an international contract, concluded between an Italian company and an international organization and concerning the provision of services in the headquarters of that international organization. In addition, the provisions of Section I, Article 1 (e) excluded the application of Italian law as such. Consequently, the Arbitration Tribunal concluded that the substance of the dispute should be considered in accordance with the "UNIDROIT Principles of International Commercial Contracts". In the event that specific matters were not covered or dealt with by those principles, it would apply the principles of Italian law concerning public contracts, provided, however, that they were not incompatible with the "UNIDROIT Principles of International Commercial Contracts".
21. The Arbitration Tribunal also rejected the arguments raised by Equipe 90 rebutting the legitimacy of the representation of FAO by the Avvocatura Generale dello Stato.
22. FAO expanded the position that Contract No RP/HQR 1997-027/AFSI was terminated because Equipe `90 had accepted to be paid for works that it had not performed, because despite overwhelming evidence to the contrary, it had been stating for several months that it had done such works which, in fact, it had not performed, thus breaching a fundamental requirement of good faith, trust and fair dealing that are at the very heart of any business relationship. This made the execution of the contract impossible. In addition, the works in question had been ordered and certified as having been done by a former official of the Organization and it had come to light that the Manager of Equipe `90 was also the manager of another company in which he was associated with the wife of that former official, at the time in charge of the administration of the contract. This was also a violation of 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.
23. FAO laid substantial emphasis on its specific situation as an intergovernmental organization of the United Nations system which must follow and require, both from its staff and from outside contractors, high standards of good faith and fair dealing. Any deviation from these standards might put at risk the image and the credibility of the Organization and the trust that both its Member States, in particular, and the public, in general, place upon it. This was all the more so as the Organization is under a very tight system of financial and management control, in particular from a Finance Committee, consisting of a limited number of representatives of Member States, and an External Auditor, fully independent and solely accountable to the Governing Bodies of the Organization.
24. Equipe `90 put forward a range of legal arguments. First, and foremost, the Organization terminated Contract No RP/HQR 1997-027/AFSI because of non-performance of works under a previous contract already executed and lapsed. However, in doing so, the Organization could not rely on any specific provision of Contract No RP/HQR 1977-027/AFSI allowing for that termination. Second, in its subsequent statements, Equipe `90 admitted that it had not performed the works in question. However, in order to respond to the Organization's functional requirements, the overall relationship between FAO and Equipe `90 was characterized by a significant degree of informality and flexibility. In practice, there were situations where "orders of service" and "certifications of works done" did not correspond strictly to the works performed. The Organization consistently denied that such practices could exist and should they occur, they would justify the imposition of disciplinary measures on its staff and action with respect to a contractor who would not report such practices.
25. After the hearing of 25 September 2000, the Arbitration Tribunal held several other hearings and sessions, namely on 19 October 2000, 2 November 2000, 15 December 2000, 22 January 2001, and a final hearing of the parties on 15 March 2001, as a result of which it issued a number of interim awards.
26. During the course of the hearing of 19 October 2000, the Arbitration Tribunal considered, at its request, a number of statements by the Assistant Director-General, Administration and Finance. The Assistant Director-General laid great emphasis on the above-mentioned requirement that the Organization must follow and require both from its staff and from outside contracts good faith and fair dealing. In the course of this hearing, as is often the practice in arbitration proceedings, the President of the Arbitration Tribunal insisted that the Organization consider an amicable settlement of the dispute.
27. The Assistant Director-General, Administration and Finance, informed the Arbitration Tribunal that the Director-General was clearly not in a position to enter into an amicable settlement of the dispute. In this regard, he noted that the dispute could not be seen in isolation from a situation of presumptive fraud on the part of a senior official of the Organization that had been brought to the Director-General's attention by the External Auditor, the "Cour des Comptes" of France. In view of these considerations, the Director-General felt that he could not enter into any settlement and that the dispute was one for the Arbitration Tribunal to adjudicate.
28. Equipe `90 expanded its arguments whereby its on-going relationship with FAO was, and had to be, characterized by a considerable degree of informality and flexibility which allowed it to respond better to the needs and functional requirements of the Organization, especially at a time when many works were required. In this regard, Equipe `90 argued that "orders of service" and "certifications of works done" were sometimes signed with respect to works of a nature different from the specified works, or regularized "post factum". FAO denied categorically these practices and insisted that should they occur they would justify action with respect both to its staff and any concerned outside contractor. It does not seem that the hearing of witnesses allowed the Arbitration Tribunal to draw any definite conclusions on this matter.
29. The Arbitration Tribunal sought, during the course of the proceedings, to make an estimation of the possible losses sustained by Equipe as a result of the termination of Contract No RP/HQR 1997-027/AFSI and made repeated requests for detailed information on the nature of works commissioned to the Contractor that replaced Equipe `90. This led to a complex stage of the proceedings. In fact, the contract that FAO concluded with the new Contractor which replaced Equipe `90 is of a nature and scope different from the one that was concluded with Equipe `90. FAO emphasized to the Arbitration Tribunal that Contract No RP/HQR 1997-027/AFSI concerned only works of "ordinary maintenance" and that, furthermore, it did not confer upon Equipe `90 an exclusive right to carry out such works. In view of the provisions of the Headquarters Agreement with the Italian Republic, works of extraordinary maintenance are, as a matter of principle, a responsibility of the Italian Government.
30. The Arbitration Tribunal rendered its final award on 4 December 2001. This final award deals with the central issue of the termination of Contract No RP/HQR 1997-027/AFSI in light of the Tribunal's earlier interim award of 25 September 2000 on the applicable law, and ruled on the various claims made by Equipe `90.
A. On the issue of the termination of Contract No RP/HQR 1997 027/AFSI
31. Equipe `90 had been performing services for the Organization for a few years under three Contracts, i.e. Contract No RP/HQR 1992-025/AFSI, Contract No RP/HQR 1995-026/AFSI and Contract No RP/HQR 1997-027/AFSI. The Arbitration Tribunal noted that during the course of the execution of Contract No RP/HQR 1995-026/AFSI, Equipe `90 had been paid for works that it did not perform. The Arbitration Tribunal also noted that this was ascertained subsequently, in the context of a climate of lack of trust and confidence between the parties, and that, under the circumstances, the Organization terminated the contractual relationship.
32. The Arbitration Tribunal pointed out that the instance of non-performance and breach of the requirement of good faith and fair dealing concerned a previous contract, already executed and lapsed[1]. In the absence of a specific clause in the current Contract No RP/HQR 1997-027/AFSI allowing for the termination of this contract, the Arbitration Tribunal considered, in accordance with its award of 25 September 2001 on the law applicable to the dispute, whether the "UNIDROIT Principles of International Commercial Contract" or, subsidiarily, the principles of Italian Law applicable to public contracts, allowed the course of action resorted to by FAO.
33. The Arbitration Tribunal reviewed in detail the "Principles of International Commercial Contracts", with particular reference to Paragraph 7.3.1. on "the right to terminate a contract" and concluded that none of its provisions allowed for termination of Contract No RP/HQR 1997-027/AFSI.
34. In the absence of any specific provision on the matter in the UNIDROIT Principles, the Arbitration Tribunal considered whether the principles of Italian law applicable to public contracts could provide a solution to the case. In doing so, the Arbitration Tribunal noted that the termination of Contract No RP/HQR 1997-027/AFSI could not be seen in isolation from the high standards of behaviour and trust that FAO requires from its contractors, given its institutional objectives, as an intergovernmental organization of the United Nations system, in light of the considerations recalled in Paragraphs 23, 26 and 27 above. The Arbitration Tribunal concluded that the Organization's position was in keeping with provisions of the Italian Civil Code that were very precisely intended to address situations such as the one which had led to the termination of Contract No RP/HQR 1997-027/AFSI. Thus, the Arbitration Tribunal noted that Article 1671 of the Italian Civil Code concerning public contracts provides that:
"Il committente può recedere dal contratto, anche se è stata iniziata l'esecuzione dell'opera o la prestazione del servizio, purché tenga indenne l'appaltatore delle spese sostenute, dei lavori eseguiti e del mancato guadagno.[2]"
35. Consequently, in accordance with the applicable law governing the contract, FAO had the right to terminate the contract and the letter of 17 December 1998 constituted valid notice of termination. FAO acted correctly, with due regard to the Organization's institutional objectives and nature as recalled throughout the proceedings.
36. Although the Arbitration Tribunal did not make any specific reference to the Headquarters Agreement, its conclusion was in keeping with the spirit, if not the letter, of several provisions of the Headquarters Agreement between FAO and the Italian Republic, whereby, for matters not covered by the Agreement, FAO should enjoy a status not less favourable than that accorded to governmental administrations.
B. On the various claims made by Equipe `90
37. The Arbitration Tribunal ruled on the various claims made by Equipe `90, as follows.
38. The Arbitration Tribunal concluded that it was established that Equipe `90 had not performed the works for which it had been paid for and, therefore, rejected this claim.
39. The Arbitration Tribunal examined at length this claim in light of the provisions of Article 1671 of the Italian Civil Code concerning public contracts. Article 1671 of the Italian Civil Code provides that a public contractor has the right to terminate a contract provided that it should indemnify the other party for "expenditures sustained, works performed and lost gain". The Arbitration Tribunal noted that the Corte di Cassazione of Italy had established principles for the assessment of the "general expenditures incurred" and the "lost gain" within the meaning of Article 1671 of the Italian Civil Code, which it applied to the claim. Under these principles, the Arbitration Tribunal considered that "the incurred expenditures" and the "lost gain" should be set at levels, respectively, of 5% and 10% of the overall level of works that would have been commissioned to the Contractor had the contract not been terminated. The Arbitration Tribunal considered that the overall cost of the services entrusted to Equipe `90 in 1999 and 2000, had Contract No RP/HQR 1997-027/AFSI not been terminated, would have been identical to those commissioned under the previous contract. Thus, it assumed that the cost of these services in 1999 and 2000 would have been about Lit. 2,500,000,000 (i.e. Lit 1,250,000,000 per year). Accordingly, the Arbitration Tribunal set at Lit. 375,000,000 the sums due to Equipe 90 (15% of Lit. 2,500,000,000), plus interests, at the legal rate in force, as from the date of notification to FAO of the request for arbitration.
40. The figure of Lit. 375,000,000 arrived at by the Arbitration Tribunal for "expenditures incurred" and "lost gain", is almost six times lower than the sum claimed by Equipe `90. This highlights the propriety of the course of action followed by the Arbitration Tribunal in proposing a solution whereby FAO would receive a treatment comparable to Italian Governmental administrations.
41. In its statements to the Arbitration Tribunal and subsequent proceedings, Equipe `90 had argued that it had drawn up detailed projects for works to be carried out subsequently under Contract No RP/HQR 1997-027/AFSI, had this contract not been terminated. The Organization stated, in very clear and unconditional terms, that such projects, by their very nature, insofar as they concerned works of extraordinary maintenance (and were thus the responsibility of the Italian authorities) were totally outside Contract No RP/HQR 1997-027/AFSI, which covered only works of ordinary maintenance. In addition, the drawing up of such projects had never been ordered by FAO, nor were they ever used by the Organization.
42. The Arbitration Tribunal upheld the Organization's position and rejected the claim by Equipe `90 as baseless.
43. The claim for damages to the commercial image of Equipe `90 and its administrator was rejected by the Arbitration Tribunal as unfounded.
44. The Arbitration Tribunal concluded that the costs of the arbitration should be borne by both parties but not on an equal basis. The Tribunal felt that FAO should bear 2/3 (two thirds) and Equipe `90 1/3 (one third) of such costs. In doing so, the Arbitration Tribunal acted under the provisions of Article 40, Paragraph 1 of the UNICTRAL Arbitration Rules whereby although "the costs of arbitration shall in principle be borne by the unsuccessful party", the Tribunal "may, however, apportion each of such costs between the parties if it determines that apportionment is reasonable, taking into account the circumstances of the case".
45. By order of the same day, the Arbitration Tribunal set the fees of the arbitrators at Lit. 300,000,000, i.e. Lit. 100,000,000 for each arbitrator, the compensation to be paid to the Secretary and Assistant Secretary at Lit. 29,000,000, and the operating expenditures of the Tribunal at Lit. 10,000,000. Thus, the global procedural costs of the arbitration were set at Lit. 339,000,000. Lit 226,000,000 are to be paid by FAO and Lit 113,000,000 by Equipe `90 (in line with the observations made in Paragraph 44 above).
46. The Arbitration Tribunal also ordered the Organization to pay Lit. 30,000,000 as costs of the services of the lawyer defending Equipe `90, (including Value Added Tax and "Cassa Avvocati", at the rate prescribed by Italian laws).
47. The Organization is of course under a legal obligation to comply with the award of the Arbitration Tribunal in accordance with the clause on the settlement of disputes contained in Contract No RP/HQR 1997-027/AFSI whereby "any arbitration award rendered in accordance with (the relevant provisions of the contract) shall be final and binding on the parties".
48. Recourse to arbitration is in line with the broad obligation placed upon the Organization, inherent in its immunity from jurisdiction and execution under the terms of the Convention on the Privileges and Immunities of the Specialized Agencies, to arrange for means of settling disputes arising from its activities so that the immunity does not result in a denial of justice. In particular, Article IX, Section 31 of the Convention provides that "each specialized agency shall make provision for appropriate modes of settlement of: disputes arising out of contracts or other disputes of private character to which the specialized agency is a party...".
49. This is also reflected in the provisions of Article VIII, Section 16 of the Headquarters Agreement between the Government of the Italian Republic and FAO of 31 October 1950, made executive in Italy by Law No 11 of 9 January 1951, whereby FAO enjoys immunity from any form of jurisdiction in Italy. In accordance with the provisions of the Exchange of Letters of 16, 19 and 22 December 1986 all disputes arising out of contracts and other disputes of private character are settled through arbitration.
50. The proceedings have shown that it would be appropriate to improve current standard clauses on the settlement of disputes and arbitration in two main respects.
50.1. First, the request for arbitration made by Equipe `90 was submitted almost one year after the termination of Contract No RP/HQR 1997-027/AFSI. For this reason, FAO has decided to establish a time limit in order for the parties to request arbitration or conciliation.
50.2. Second, the current methods of settlement of disputes through arbitration would be improved if recourse to arbitration were preceded by mandatory conciliation. Arbitration is a procedure involving high costs and some degree of uncertainty as to its outcome. Under the UNICTRAL rules followed by FAO it implies the designation of an arbitrator by each party and the subsequent designation of a third arbitrator who will act as president. The arbitrators may tend to consider themselves as "representatives" of the parties and act as conciliators, inclined to introduce considerations of equity in their deliberations. For his part, the President might tend to see his role as one of a facilitator of a compromise between the arbitrators appointed by the parties, rather than as a statutorily independent judge applying well defined rules of law (which he is not).
51. Therefore, drawing on the experience acquired, FAO is reviewing the clause on settlement of disputes to read as follows:
Settlement of disputes, conciliation and arbitration
52. At the recent meeting of the Legal Advisers of the United Nations System, held in Geneva, 7-8 March 2002, the issue of the adjudication of commercial disputes and appointment of arbitrators was considered in some detail. Some of the conclusions or recommendations of the meeting are of great relevance to the issues under discussion.
52.1. In general, it appeared that all organizations have been faced with difficulties arising from the choice of law by arbitration tribunals. Arbitration tribunals have a clear tendency to choose the law of the country where contracts are executed and have difficulties in accepting that a contract could be governed by general principles of law, to the exclusion of any single system of law. In addition, they tend to act on an "ex aequo et bono" basis, acting de facto as conciliators rather than as judges. In the arbitration Equipe `90 v. FAO, as noted above, the Arbitration Tribunal decided to apply the "UNIDROIT Principles of International Commercial Contracts". In the event that specific matters were not covered or dealt with by those principles, the Arbitration Tribunal decided to apply the principles of Italian law concerning public contracts. Eventually, on this basis, the Arbitration applied provisions which were favourable to the Organization, insofar as it equated FAO to a public entity having the power to terminate a contract at any time, subject of course to payment of indemnity, a course of action that is not contemplated in the "UNIDROIT Principles of International Commercial Contracts". In addition, the Arbitration Tribunal applied principles established by Italian jurisprudence to set the level of indemnities.
52.2. The United Nations have experienced difficulties in choosing arbitrators. After severe criticism voiced by the United Nations General Assembly, the United Nations have developed a procedure for the selection of arbitrators and external legal firms with a view, inter alia, to guarantee both quality and reasonableness in costs. The procedure developed leads to the establishment of a panel from where arbitrators and legal firms are selected. In the case of arbitration proceedings carried out in Italy, there is no need to resort to that procedure given the assistance provided by the Avvocatura Generale dello Stato. As noted above, the Avvocatura Generale dello Stato appoints an arbitrator for FAO and represents the Organization in the proceedings. This intervention has the advantage of ensuring that the overall costs arising from arbitration proceedings are reasonable and in line with the costs of similar proceedings carried out in Italy. In addition, the costs of the services provided for the defense of FAO are the same as those charged by the Avvocatura Generale dello Stato to public entities. As regards the selection of arbitrators and external legal firms with respect to arbitration proceedings carried out outside Italy, FAO will consider using the panel established by the United Nations. It should be noted that so far, arbitration proceedings carried out outside Italy and involving FAO date back to the early eighties.
52.3. The Legal Advisers were all of the view that it is essential to provide for mandatory conciliation or a negotiation procedure before resorting to formal arbitration. They were also of the view that it is necessary to insert in all contracts a clause excluding punitive damages and limiting interests. The above revised procedures regarding settlement of disputes include a clause whereby any dispute between the parties concerning the interpretation and the execution of the contract, if not settled by negotiation between the parties, or by another agreed mode of settlement shall, at the request of either party, be submitted to one conciliator appointed by the parties. The conciliation would be carried out in accordance with the Conciliation Rules of the United Nations Commission on International Trade Law, as at present in force. It is only after conciliation that arbitration can be requested. In line with the recommendation made by the Legal Advisers, a clause excluding punitive damages and limiting interests - which is being developed - will be inserted in the above set of provisions.
53. The observations made by the Avvocatura Generale dello Stato on the arbitration proceedings, as well as the award, are presented in Document CCLM 73/2-Sup. 1.
54. The CCLM is invited to review this document and provide its views on whether the arbitration was conducted in full compliance with applicable FAO contractual provisions and practice in force at the time of termination of Contract No RP/HQR 1997-027/AFSI, as described in this document, thus being the award final and binding on the parties.
55. The CCLM is also invited to provide its views on suggestions on the proposed amendments to FAO standard contractual provisions on settlement of disputes, it being understood that the Legal Office will continue to keep the matter under review in close coordination with the United Nations and other organizations of the United Nations System, in full respect of FAO`s immunity from national jurisdiction.
__________________________________
[1] The Organization had argued that the various successive contracts with the same objectives and parties should be seen as establishing a single contractual relationship. This argument was not followed by the Arbitration Tribunal.
[2] This provision, which is under a Chapter of the Italian Civil Code dealing with public contracts, could be translated into English as follows: "The commissioner may terminate a contract, even if the execution of works or the provision of services has been initiated, provided that the commissioner shall indemnify the contractor from incurred expenditures, works already effected and lost gain".
1 Subsequent to the facts that led to the termination of Contract No RP/HQR 1997-027/AFSI, the scope of the standard clause was expanded. This clause reads now as follows: "The Contractor warrants that no official, staff member or other representative of the Organization or any family member of such person shall have any interest in, or derive any benefit from, this Contract. In particular, the Contractor warrants that no official, staff member or other representative of the Organization or any family member of any such person holds or shall hold any direct or indirect financial interest in the Contractor's business. For the purpose of this Article, the mere holding of shares in a publicly listed company shall not be considered as constituting a financial interest, provided that such shares do not confer a power to control, or otherwise significantly influence the management of, the Contractor's business. Should the Contractor fail to comply with this obligation, the Organization shall have the right to terminate this Contract at any time, in accordance with the provisions of Article ... of this Section".
2 The then Chief, AFSI had been informed that it was proposed to dismiss him for misconduct for having accepted a gift (a trip) from a supplier to FAO and having tried to conceal the fact when questioned about it.