Fincantieri-Cantieri Navali Italiani SpA (Italy) v. Ministry of Defense, Armament and Supply Directorate of Iraq, Republic of Iraq

The Ministry of Defense, Armament and Supply Directorate of the Republic of Iraq (Iraq) (plaintiff) and Italian shipbuilders Fincantieri-Cantieri Navali Italiani SpA and Oto Melara SpA (the shipbuilders) (defendants) contracted for the shipbuilders to supply ships for Iraq’s navy. Each of the contracts contained an arbitration clause. After Iraq invaded Kuwait, the United Nations Security Council issued an embargo against Iraq. Italy subsequently passed broad embargo legislation that forbade providing supplies to Iraq and prohibited commercial engagements with Iraqi parties. When the embargo was ordered, most of the ships ordered by Iraq had not been built or supplied. The shipbuilders filed a claim in the Genoa court of first instance against Iraq and sought damages and termination of the contracts. Iraq objected, arguing that under the arbitration clause, the dispute should be arbitrated and not decided by the court. In response, the shipbuilders argued that only arbitrable claims should be referred to arbitration. The shipbuilders contended that the embargo restrictions rendered the claims not arbitrable under Italian civil procedure because they concerned rights that could not be freely disposed of under the embargo law. The court of first instance agreed with Iraq, finding that arbitration was only prohibited if it interfered directly with rights that the parties could not freely dispose of and resulted in an outcome forbidden by law. The court of first instance found that the forbidden outcome under the embargo legislation was the supply of ships to Iraq, not the payment of damages and termination of the contracts sought by the shipbuilders. The shipbuilders appealed to the Genoa court of appeal.