In brief: defence & security procurement disputes and risk allocation Italy

Disputes and risk allocation

How are disputes between the government and defence contractor resolved?

Disputes concerning the award procedure are reserved for administrative courts, which have general jurisdiction on the award of public procurement contracts. Disputes concerning contractual obligations are reserved for civil courts. Arbitration and out-of-court settlement procedures are permitted only in relation to contractual obligations.

To what extent is alternative dispute resolution used to resolve conflicts? What is typical for this jurisdiction?

There is no specific rule on the use of alternative dispute resolution (ADR) in the Military Procurement Code (MPC). ADR models (eg, arbitration and amicable settlement) are provided by the Public Procurement Code (PPC) and are applicable to defence and security contracts. The use of arbitration – which is only admissible if it is provided for in the initial tender notice or invitation and is authorised by the governing body of the contracting authority – is very common in works and long-term supply-and-service contracts, and is used more frequently in disputes between contractors and subcontractors than between contracting authorities and prime contractors.

Arbitrators have to be registered with the Arbitration Chamber managed by the Italian National Anti-Corruption Authority (ANAC), which acts as a regulator of public procurement.

What limits exist on the government’s ability to indemnify the contractor in this jurisdiction and must the contractor indemnify the government in a defence procurement?

General rules on limitation of liability set out by the Italian Civil Code render invalid any limitations covering grossly negligent or wilful conduct. Contracting authorities are liable for non-performance, but normally do not provide any indemnity for contractors. Contractors are usually required to indemnify the contracting authority in relation to several issues that may cause liability during contract performance, mainly resorting to insurance policies (eg, third-party claims, product liability and personnel protection).

Can the government agree to limit the contractor’s liability under the contract? Are there limits to the contractor’s potential recovery against the government for breach?

Public contracts awarded by contracting authorities – including military and defence contracts – generally do not provide limitations on liability, and such limitations cannot be negotiated once the contract is awarded, as they would amount to an impermissible modification of the contract.

There is no statutory limitation on the ability of the contractor to recover against a contracting authority for breach of contract, and, in general, the burden of proof when asserting government liability is less strict than the one applicable to private parties.

Is there risk of non-payment when the government enters into a contract but does not ensure there are adequate funds to meet the contractual obligations?

The risk of non-payment exists as in any other public contract. However, normally defence and security procurement procedures are launched only after the necessary funds are secured by the relevant administration. There is no specific rule prioritising payments to prime contractors, while general procurement contracts rules make it possible for subcontractors to obtain payment directly from the contracting authority if the prime contractor fails to fulfil its obligations.

Under what circumstances must a contractor provide a parent guarantee?

The only guarantees that are required in relation to the performance of a public procurement contract are bank guarantees or insurance guarantees. The requirement of a parent company guarantee is not envisioned by PPC or MPC rules.