The dispute concerns the complex and diverse commercial relationship between two companies - a manufacturer and a distributor of pipes. Claimant is described as both an agent and a distributor. A considerable number of contractual ties were formed between the parties. Although formally and legally distinct, they are considered as constituting a single commercial relationship. A deterioration occurred in the relationship, with Respondent complaining that Claimant's debt was much higher than the line of credit granted, and Claimant criticizing Respondent for problems of quality and delays in delivery. The parties entered into a settlement agreement which laid down a schedule for Claimant to pay its debt, in return for which Respondent would carry out certain deliveries. However, there was no improvement in the situation and arbitration proceedings were instituted, with each party requesting that the contractual relations between them be considered terminated due to the other's default. The Arbitral Tribunal's task is complicated by the fact that the contracts are varied as well as numerous. As only one of the contracts contains an arbitration clause, Respondent pleads lack of jurisdiction, but later withdraws its plea. After examining the applicable law and bearing in mind the fact that the content of the settlement agreement which the parties had reached has a decisive role to play in deciding their claims, the Arbitral Tribunal attempts to define the scope of the settlement by interpreting the overall situation in question. Reference is made to the <b>Unidroit Principles</b> - a text described as being normative - notably Articles 1.7, 4.1 to 4.8, and 2.11. It finds that, although both parties defaulted on their obligations, this chiefly applies to Claimant, whose obligation to comply with the deadlines set in the settlement agreement was vital and fundamental. As neither party is entirely successful in its claims, arbitration costs are halved between the two.

<i>With respect to the applicable law:</i>

'The contract contains a clause, quoted at the beginning, whereby Italian law is applicable. This clause has certainly been extended to the amendment dated . . ., given the reference to the former in respect of matters otherwise unregulated. . . .

In view of the basic unicity of the relations, mentioned earlier, it is therefore necessary, as a preliminary measure, to establish the law applicable to the contracts in respect of which the parties have not expressed their intent.

This point is covered in paragraph 11 of the Terms of Reference where it is stated that: "With regard to the substantive and procedural provisions contained in the International Chamber of Commerce Rules, it is clearly specified that: a) the applicable substantive law is Italian law . . ." Given that the parties, counsel and the arbitrators had signed such Terms, this matter can be considered as settled and beyond dispute. It is true that at that moment Respondent had raised an objection to arbitral jurisdiction over all the contracts referred to in Claimant's claims, and so, it could be objected, its acceptance of Italian law as the applicable law was limited to the definition of this procedural objection. Moreover, the subsequent waiver of this objection . . . and the statement whereby Respondent's legal representative "admits that the solution to all these issues raised by one or other of the parties in the dispute pending between Claimant and Respondent before the Arbitral Tribunal . . . is sought from the aforementioned Arbitral Tribunal in accordance with the arbitration clause contained in Article XIII (arbitration) of the Accord dated 1st October 1991, inter partes" . . . do not contain any reserves regarding the point of applicable law, as previously outlined in the Terms of Reference, which therefore has to be considered as granted. There is therefore precise justification for the choice of Italian law and the Arbitral Tribunal considers it appropriate to support this choice with a number of clarifications that make a distinction between supplies . . . and settlement:

(a) for the former, it would seem appropriate to apply the Vienna Convention, and, purely for the part not regulated by this or for which the principles deriving from it or from international usages are of no assistance, the general rules of Italian law (see Article 7(2) of the Vienna Convention);

(b) the settlement, on the other hand, is unquestionably regulated by the general rules of Italian law.

The supplies between Respondent/Claimant are considered as "international sales of goods" to which the Vienna Convention is applicable for the following concisely stated reasons:

(a) according to Article 13.3 of the ICC Rules of Conciliation and Arbitration: "The parties shall be free to determine the law to be applied by the arbitrator to the merits of the dispute. In the absence of any indication by the parties as to the applicable law, the arbitrator shall apply the law designated as the proper law by the rule of conflict which he deems appropriate";

(b) the parties have not adopted this choice, which has thus been deferred to the Arbitral Tribunal;

(c) the original contract, together with the successive amendments and additions thereto (which, despite not being a deed of sale, is considered by the parties to be the general reference framework for their business relations), provides for the applicability of Italian law. It thus appears that Italian law is the most appropriate law and the one that offers the closest connection;

(d) according to the Rome Convention (to which Article 57 of Italian law 218/1995 on the reform of private international law refers), in the absence of any choice by the parties, the contract is governed by the law of the country in which the person effecting the characteristic performance is based (see Articles 4.1 and 4.2). According to standard indications in legislation and conventions, the characteristic performance, as a rule, is that which is not in cash, and, in a deed of sale, is that effected by the seller: see Article 117.3 of the Swiss federal statute on private international law of 18.12.1987, on which the Italian statute was modelled; Article 3.1 of the Hague Convention of 1955; Article 8 of the new Hague Convention of 1985 (not ratified). In our case, Respondent, a company with its head office in Italy, effected the characteristic performance;

(e) the applicability of Italian law makes international sales immediately subject to application of the Vienna Convention, Article 1.1(b) of which establishes that: "This Convention applies to contracts of sales of goods between parties whose places of business are in different states . . . when the rules of private international law lead to the application of the law of a Contracting State" and this is the case of Italy on the basis of law 765/1985 that ratified this Convention. Furthermore, this applicability of the Convention is also valid in relation to the explicit choice of Italian law adopted in the Terms of Reference;

(f) the supplies in question can be considered to be international sales, in the meaning of the Vienna Convention, in that the exclusion stated in Article 2 and the circumstances contained in Articles 3 and 6 are not applicable.

The fact that an ongoing distribution relationship was involved, of which individual sales/supplies were part, does not detract from the conclusions reached. It is true that commercial distribution contracts do not fall within the scope of the Vienna Convention, but this does not, however, prevent individual sales transactions which are part thereof from being subject to the Convention . . .

As already mentioned, in drawing up the settlement . . . the parties did not establish which was to be the applicable law. In the course of the arbitration, the question has not been specifically covered by the parties, but it can be said that this is dealt with in the general resolution contained in paragraph 11 of the Terms of Reference. In addition to this, in applying Article 13.3 of the ICC Rules of Arbitration, it would seem appropriate, however, to make reference to the rules of conflict pursuant to Article 4.1 of the Rome Convention on the Law Applicable to Contractual Obligations (to which Article 57 of Italian law [218]/1995 reforming private international law refers) and, at the same time, to Article 117.1 of the Swiss federal statute on private international law (Claimant has its operating base in … in Switzerland. . .) and so to the law of the country with which the settlement presents the "closest connection" or, respectively "the law of the State with which [the contract] is most closely linked". This connection cannot be provided by the additional "characteristic performance" criterion (Article 4.1 of the Rome Convention; Article 117.2 of the previously-mentioned Swiss federal statute), that does not exist in the settlement as such, just as the examples listed in Article 117.3 of the previously-mentioned Swiss federal statute are also of little help, but rather by taking into account that, as a result of the reciprocal concessions reached between the parties, the settlement has regulated the relationships - by modifying them in part - that originate from other contracts, with respect to which it is placed in a relation of connection/dependence. It is therefore the law applicable to such contracts that presents the "closest connection". Since the inter partes contracts subject to arbitration are covered by Italian law through an explicit clause . . . or on the basis of the rule of conflict deemed to be most appropriate, Italian law shall be extended to the settlement too.'

<i>With respect to the scope and interpretation of the settlement:</i>

'The Arbitral Tribunal is of the opinion that the search for the content of the settlement . . . plays an essential role in finding a solution to the questions and the claims raised by the parties . . .

From the literal meaning of Article 1975 of the Italian Civil Code, it results that the settlement may be of a general nature and cover "all the business affairs that may exist" between the parties and, implicitly and a contrario, that it may cover only certain controversial business affairs, thus allowing the disputes and controversies on other business affairs to subsist . . . Given the extent of the controversies between the parties, it is a question of defining what is the specific subject of the settlement, and whether it covers the entire dispute . . . or only part of it and which part.

The language that Respondent uses in its letter-contract . . . is of little help in itself. It only states the re-scheduling of debts brought forward, the guarantees, Claimant's compliance with its payment obligations on the due dates as a condition for the observance by Respondent of its commercial commitments with respect to the orders confirmed . . . in same lettercontract. However, it has to be borne in mind that this letter was drafted by Respondent's commercial managers in the style that is characteristic of this corporate position, according to which, as would seem to be the general rule, only elements of a strictly commercial nature are listed, such as quantity, prices, terms of payment, place of delivery. The letter therefore needs to be supplemented with the purpose being pursued by the parties, and, on the other hand, with the starting situation and any stated or potential reciprocal objections, even if these emerge at a later date.

This method of interpretation is entirely consistent with the specific rules of Italian law (Articles 13621371 of the Italian Civil Code), as applied by the courts, according to which: (w) recourse is made to an extra-textual interpretation when the letter-contract is incomplete and fails to execute the "common intent of the parties"; (x) among the methods taken into consideration, there is first and foremost the so-called logical interpretation, which includes the identification of the purpose of the contract; (y) although considered as being subsidiary, the assessment of past and subsequent behaviour falls within the interpreter's responsibilities when the text is unclear or incomplete; (z) an interpretation on the basis of good faith places importance, among other things, on the reciprocal trust between the parties and so on what one of the parties should have communicated to the other with a view to protecting their respective interests, and also in relation to the obligation of good faith in negotiations pursuant to Article 1337 of the Italian Civil Code. The rules relating to interpretation and good faith contained in the Unidroit Principles (in particular, Articles 1.7 and from 4.1 to 4.8), which are in all events a useful reference framework for applying and judging a contract of an international nature, also confirm what has been said.

In this light, the Arbitral Tribunal feels that the following circumstances are important:

(a) the reciprocal objections raised by the parties prior to the settlement agreement: by Respondent: Claimant's failure to perform payment obligations and violation of commercial obligations; by Claimant: defects in goods sold, overdue deliveries and violations of commercial obligations . . .

(b) the manifest and stated scope of the settlement to define all outstanding issues . . . with a view to re-establishing current commercial relations which there was a desire to maintain at that time. . . .

(c) the previous behaviour of the parties: more specifically, the proposals and counter-proposals formulated gradually prior to the meeting of . . .

(d) subsequent (immediately following) behaviour, and above all the spontaneous "principle of execution" [sic] (which can also be described as a declaration of a "sign of good faith"): on the part of Claimant, through the issue of a bank guarantee and payment of the first instalment . . .; on the part of Respondent, acceptance without reserve of the bank guarantee in which, in the description of the agreed terms of payment, no mention is made of the last instalment of interest . . .

. . . the payment schedule described in the bank guarantee does not mention the January instalment . . . and this omission was explained by Claimant . . . as consideration for waiving the claims relating to defects etc. - later consideration - pursuant to subsection (c), in respect of the waivers already made in this respect. Respondent's acceptance without reserve of the bank guarantee, in which point 6 is omitted, and the alleged start-up of production of the ordered pipes amount to a tacit acceptance by Respondent of the modified/counter-proposed acceptance by Claimant, according to the principle derived a contrario from Article 1326, last paragraph, of the Italian Civil Code. Moreover, reference should be made to Article 19, (1) and (2) of the Vienna Convention with regard to the formation of international sales contracts, and Article 2.11 of the Unidroit Principles, which are both normative texts that can be considered helpful in the interpretation of all contracts of an international nature . . .'

<i>With respect to interest:</i>

'Given that long-term contracts are involved, the termination of relations on the ground of Claimant's fault, as mentioned above, does not extend to relations that have already ended. With regard to payment obligations remaining unperformed, performance cannot be ordered, but rather compensation for damages . . . This compensation is calculated in proportion to the amount from the settlement remaining unpaid, to which overdue interest has been added, as provided for in Article 1219, no. 3 of the Italian Civil Code, with effect from the due date . . . and up until full payment of the balance. The Vienna Convention lays down a general rule, in Article 78, that the liability for payment of a sum is subject to interest for late payment, but it does not lay down the criteria for calculating this interest. International case law presents a wide range of possibilities in this respect, but amongst the criteria adopted in various judgements, the more appropriate appears to be that of the rates generally applied in international trade for the contractual currency . . . In concrete terms, since the contractual currency is the dollar and the parties are European, the applicable rate is the 3-month LIBOR on the dollar, increased by one percentage point, with effect from the due date not respected up until full payment has been made. However, capitalization of interest is excluded, as from Respondent's arbitration answer, since this is not provided for in the Vienna Convention and does not appear to be in keeping with international trade usages. Revaluation is also included in the above-mentioned rate.'