Italy: Punitive damages - Risks and precautions when operating in the U.S.A.
In a recent order (Supreme Court, Civil I Section, Order no. 9978 of 16 May 2016), Civil Section I of the Supreme Court requested the Court in full session to rule on whether foreign judgments for punitive damages should not be recognised in Italy because they are contrary to the Italian public policy. This order is a warning bell for Italian businesses which operate, or are thinking of operating, in the US market.
The judgments ordering multimillionaire damages whose recognition has been requested in the Italian courts up to the present time - few so far - have all arisen from tort cases (even if we cannot exclude the possibility that future applications may also be made in connection with contractual liability actions) and have all originated on the other side of the ocean. And, at least until now, they have all been “returned to sender” on the basis of the argument that their recognition would be contrary to Italian public policy, a mandatory condition for such actions to be contemplated under the Italian legal system.
In practice, the definition of the function of civil liability as entailing remedy and compensation, and not punishment and deterrence, has prevented foreign judgments for punitive damages from entering the Italian legal system.
This Order, however, seems to call the principles that have been applied until now into question, also because of the evolution of our legislation and jurisprudence, which, especially in recent years, have outlined various cases of liability of a punitive nature (the Order quotes the French astraintes - which are deemed compatible with Italian public policy after judgment no. 7613 April 2015 -, Article 96 of the Italian Code of Civil Procedure, which punishes abuse of process with a fine determined on an equitable basis, and Article 709 ter of the Italian Code of Civil Procedure, which imposes a restoration of a punitive nature in cases of the exercise of parental responsibility, custody of minors, etc.).
The above indications of different forms of liability in the Italian legal system could favour the recognition of foreign judgments for punitive damages, even be for substantial amounts if we bear in mind the foreign case law precedents involving the requests for recognition made up to the present time (usually the amount of punitive damages is at least the same as the amount of the “remedial” damages).
The only limitation, which is confirmed in the Order, on the recognition in Italy of judgments for punitive damages amounting to “abnormal” sums is the principle of proportionality, which is unequivocally acknowledged as a principle of domestic public policy. The application of this principle, however, entails an appraisal of the circumstances of each actual case and therefore, in practice, each individual court would be responsible for considering whether punitive damages could be allowed.
How can businesses protect themselves against a scenario which could prove to be a harbinger of unexpected risks of both a financial and a juridical nature at the same time?
First of all, particular attention must be paid to the choice of the jurisdiction and law applicable to the contract, in view of American courts’ historical tendency to exercise their jurisdiction even when it is not stipulated in the agreement between the parties. In a contract with a US counterparty, choosing Italian law and Italian jurisdiction could, therefore, protect the Italian party from a possible judgment for punitive damages.
On the other hand, choosing Italian jurisdiction and law could also lead to problems. Since no Convention on the reciprocal recognition of judgments is in force between Italy and the USA, an Italian judgment against a US debtor would run the risk of not being recognised in the USA.
What could be done, however, is to stipulate that Italian law applies to the contract and that the Italian courts have jurisdiction over any disputes, and that the Italian party has the right, at the same time, to have recourse to the US courts in certain cases.
A valid alternative to the above solution is arbitration. Contracts could contain an arbitration clause: awards (judgments handed down by arbitrators) handed down in Italy or in the USA are reciprocally recognised because both countries are parties to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.
Finally, a useful precaution which could be taken by a business which operates in the United States would be, if possible, to take out an insurance policy which also covers punitive damages.
by Marialaura Frittella (firstname.lastname@example.org)
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