Italian renaissance: radical civil justice reforms are energising lawyers in Italy

Italy’s charismatic young prime minister, Matteo Renzi (pictured), is a social media addict, with two Twitter hashtags he is particularly fond of – #italiariparte and #italystartsover. The eurozone’s third-largest economy is slowly emerging from a triple-dip recession, and is predicted to grow by 0.9% this year and 1.6% in 2016, according to the Bank of Italy. Renzi, the former mayor of Florence who took power in February 2014, claims it is all down to his reforms.

Renzi has overhauled labour market laws and Italy’s electoral system; he plans to curb the powers of the upper house; he has earmarked €12bn of public assets for privatisation; and (of most interest to lawyers) he is streamlining Italy’s sluggish civil justice system, which is seen as a drag on growth and foreign investment. According to the World Bank’s 2014 Doing Business report, it takes an average of 1,185 days to enforce a contract through Italy’s courts. Longer than Iraq or Nigeria.

Mirroring the experience of other firms in the market, Stefano Modenesi, a partner in the Milan office of DLA Piper, says that following a period of ‘dead calm’ the Anglo-American firm has in the past year seen a ‘significant’ revival in deals activity in real estate and corporate, driven by foreign investment.

Emanuele Bosia, a London-based consultant at Gianni Origoni Grippo Cappelli & Partners, says: ‘There is an impression of political stability and reforms [being] under way. International investors are a bit more confident.’ Bosia contrasts the centre-left government of Renzi, whose programme has wide political consensus, with the political turmoil that preceded it. Since the start of the decade, Italy had four different governments.

Renzi’s minister of justice, Andrea Orlando, has toured the world’s financial capitals to promote the civil justice reforms to foreign investors. He is making an impression. As Marco Gubitosi, a London-based partner at Italian law firm Legance, says: ‘Only three years ago, all this would have been regarded as science fiction in Italy.’

Signs of recovery

Italy’s recent economic woes have been painful for the legal profession, forcing new strategies but also creating new opportunities.

Many law firms have posted a fall in revenues or profits, or both. ‘In the past three years growth has not been very strong,’ says Baker & McKenzie Milan partner Gianfranco Di Garbo. The world’s biggest firm by revenue expects a small decline in turnover in Italy in the financial year to 30 June 2015, but remains sanguine: ‘There are signs of economic and financial recovery in Italy and we expect an increase next year,’ Di Garbo says.

The tough climate has seen local firms restructure – and lose good lawyers. Their losses have seen rivals gain. ‘In our Milan office there have been no spin-offs and no partner has left, which is rare,’ Di Garbo says. ‘Instead, we have taken advantage of the difficulties faced by many firms to hire talented people.’

But it is not just the economy. Local firms suffer one fundamental problem: domination by ageing patriarchs. ‘Italy’s traditional law firms are still linked to the name of their founders, who in some cases are 80-90 years old and still active in the firm. But clearly they are facing succession issues, so there are opportunities for international firms,’ Modenesi says.

The older generation has generally been reluctant to cede control to younger lawyers and accept Anglo-Saxon models of partnership remuneration. It was instructive that a joint venture, followed by a merger in 2000, between Clifford Chance and the now defunct Grimaldi e Associati failed; the two firms demerged two years later.

Foreign firms do still have to contend with strong domestic players. Italian firms BonelliErede, Chiomenti Studio Legale, Pirola Pennuto Zei & Associati and Gianni Origoni dominate the market, with individual revenues reportedly in excess of €100m. Modenesi says: ‘To compete with Italian law firms, international firms need to embed themselves into the fabric of the Italian world of business.’

Another challenge is the reluctance of Italian clients to pay hourly rates. Modenesi explains: ‘There has been a lot of pressure on fees and one reason is that supply is outstripping demand.’ There are 240,000 ‘avvocati’ in Italy compared with about 184,000 solicitors and barristers in the UK, which is a significantly bigger legal market by value.

Why? There are no entrance exams to accede to a law degree (currently the only route to qualification) and university fees are much lower. Graduation is then followed by an 18-month training contract at a law firm. ‘Many students enrol at the faculty of law and, in one way or another, either through expedience or conviction, they get to become lawyers,’ Bosia says.

Faced with struggling domestic markets, Italian businesses have looked abroad and international law firms have responded by marketing their global networks more aggressively. This has paid dividends at Baker & McKenzie, which has widened its Italian client base, Di Garbo says.

‘During the crisis, thanks to [DLA Piper’s] global platform, we were able to work with many Italian enterprises,’ Modenesi adds.

Meanwhile, Italian law firms have expanded their international presence, particularly in London, both to follow clients and to capitalise on increased foreign investment in Italy fuelled in part by the falling value of the euro. Gianni Origoni Grippo Cappelli & Partners, for example, has one of the largest footprints in London with 10 lawyers based there.

‘Over the past five years, Italian businesses have seen domestic demand and revenues collapse, so they need to go abroad,’ Bosia explains. ‘London is very important for our firm. It is an ideal hub because any internationalisation strategy by an Italian business has to go through London, even if we then have to work with our Brussels, New York or Abu Dhabi offices.’

Nello Pasquini, a consultant at City-based Pini Franco, which provides English and Italian legal advice to commercial and private clients, says: ‘Many Italian entrepreneurs are tired of working in Italy and see the UK as an opportunity to do business more easily. Also, there are tax benefits.’ Italy’s high taxes and a volatile taxation regime make the UK relatively attractive. Pini Franco, for example, advises Italians who are investing in real estate and commercial property, or are setting up a business in the UK.

London is also a base for intercepting international clients investing in Italy. Over the past two years, there has been an influx of investment, particularly from China, in financially distressed Italian companies, Bosia notes. Sovereign wealth fund China Investment Corporation, People’s Bank of China and State Grid have all bought Italian assets ranging from stakes in blue chip companies to makers of furnishings, motorcycles and luxury yachts.

Legance launched in December 2007 as a spin-off from Gianni Origoni. It has offices in Milan, Rome and London, a €60m turnover and nearly 200 lawyers, with five in London. ‘A significant proportion of foreign investment in Italy is decided from London,’ notes Gubitosi.

Another Italian spin-off, Grimaldi Studio Legale, beefed up its banking and finance practice in London with the recent partner hires of former Clifford Chance CEO Michael Bray and Riccardo Sallustio, formerly at Bonelli Erede Pappalardo.

Sallustio describes the last 12 months thus: ‘Before there was a great deal of restructuring work, now there’s a lot less. But we are seeing strong interest in new acquisitions.’ In banking and infrastructure, he notes, there are the upcoming disposals of General Electric’s Italian lending unit, Interbanca, and the retail arm of majority state-owned Grandi Stazioni.

DLA Piper has also seen a ‘significant rebound’ in corporate and real estate investment by foreigners, Modenesi says. The firm has recently advised UAE’s Etihad Airways on its €560m investment in Alitalia, for example.

Practitioners expect Italy’s non-performing loans market, estimated to be worth €350bn, to become a significant source of revenue. ‘The Italian government is taking measures to help the sale to third parties of Italian banks’ loans,’ Sallustio says. Foreigners will be the buyers, he adds. One option considered by the Renzi government is to create a ‘bad bank’ to unload part of the loans, subject to compatibility with EU state aid rules.

Meanwhile, corporate restructuring and insolvency remain important, despite the rebound in transactional activity. ‘The economic crisis had a significant impact on Italian companies of all sizes that had either to close down or restructure debt,’ Modenesi notes. New rules for pre-insolvency creditor arrangements, introduced in 2012, allow Italian companies in financial distress to enjoy bankruptcy protection while preparing a reorganisation plan. This has meant more work for lawyers.

Sectors that have also thrived despite difficult economic conditions are contentious and non-contentious tax, driven in part by the introduction in January of new rules on voluntary disclosure, and white-collar crime. Baker & McKenzie has four specialists assisting Italian subsidiaries of multinationals who must comply not only with the US Foreign Corrupt Practices Act and the UK Bribery Act, but also with Italy’s corporate criminal liability laws.

This is part of a global trend, and many other firms in Italy have equipped themselves to meet growing demand as regulators around the world increase pressure on corporates. DLA Piper has nine criminal law practitioners split between its Milan and Rome offices, for example.

One of Renzi’s most significant reforms is the Jobs Act, which came into force in March and makes it easier for employers to hire and fire workers in a country with an unemployment rate of nearly 13%. ‘Foreigners are keen to understand the new labour reforms and the impact they have on their business,’ says Gubitosi. Legance and many other firms in Italy have been busy bringing clients up to speed with the new rules.

But work for lawyers may actually fall, particularly on the contentious side. For example, in dismissal cases employers can now offer an employee a settlement to prevent a formal lawsuit filed in an Italian labour court. Di Garbo notes: ‘For lawyers, the Jobs Act hasn’t been great.’

Civil justice

Arguably, the most heralded reform is the shake-up of Italy’s civil justice system. According to a June 2013 policy note by the Organisation for Economic Co-operation and Development (OECD), it takes almost eight years to complete a civil dispute up to Italy’s highest court, compared with the OECD average of 788 days.

At the end of 2009, there were nearly 6 million pending civil cases, according to minister of justice Orlando, who recently visited the Law Society to showcase measures introduced last September to reform the system and reduce backlog. The volume of pending cases had fallen to 4.5 million by June 2015.  

‘The slow pace of civil justice in Italy is a big problem for the Italian economy,’ says Pasquini. ‘Foreign businesses are not going to invest in a country where they know they will unable to resolve judicial problems quickly.’

Bosia notes that when a private equity firm looks to make an investment, the financing will include loans from banks in addition to the equity, or capital, raised from investors. The loan is typically secured by mortgage on property. But if the investment goes bad and the loan is not repaid, it can take the secured creditor (the bank) up to three years to complete the enforcement procedure via Italian courts. ‘In the UK, you appoint an administrator, the floating charge becomes crystallised into a fixed charge in 21 days, and within two months you have the proceeds of the sale of the asset.’

 

 It is not just a question of procedure. ‘In England, a lawyer’s ethical duty is not to congest the courtrooms,’ says Bosia, who is a dual-qualified solicitor and avvocato. ‘Before bringing a claim to court, a solicitor undertakes an in-depth due diligence review of the case to assess whether it has any real prospect of success. Given the very high cost of justice, if the client doesn’t have a strong case the solicitor’s advice will be not to pursue the case further.

‘In Italy, a lawyer will always advise a client to bring a claim to court,’ he adds. Compared with the UK, accessing the Italian judicial system is six times cheaper, Bosia estimates. Court fees are low and there is no dual system of barristers and solicitors adding to costs. Also, Italian judges are generally reluctant to grant the available remedy of vexatious litigation.  

It is not just the lower courts that are clogged. Italy’s judicial system has a three-tier structure where a case is not considered final until the Corte Suprema di Cassazione has final say. At the end of 2014 Italy’s highest court had a backlog of over 100,000 civil cases, taking an average of 44 months to reach a decision. There were more than 30,000 new civil proceedings registered at the court in 2014. By contrast, the UK Supreme Court received 231 applications for permission to appeal in the financial year to 31 March 2015.

So what measures are being taken to decongest Italy’s civil courts and make them more efficient?

The country is taking a different approach to other jurisdictions such as the UK, Germany and the Netherlands, with no plans to increase court fees significantly – not even in high-value commercial litigation where parties in proceedings would happily pay a premium to expedite them. Orlando told an audience of more than 100 lawyers that to fast-track a case based on the value at stake rather than the merit of the issue would be ‘constitutionally doubtful’.

Bosia explains: ‘If you increase costs, the more progressive fringe of the legal profession and the judiciary will criticise the system for being discriminatory or otherwise blocking access to justice to the less affluent part of the population, which is what has happened here in the UK.’

Instead, the reforms have focused on forcing the losing party to pay all legal fees rather than sharing them; increasing the interest rate on unpaid debts to limit the use of vexatious litigation as a means of delaying payment; and the enhancement of business tribunals.

Modenesi, head of DLA Piper’s Italian litigation and regulatory department, says some of the changes are working. Judges are not only taking a more methodical and rigorous approach to making the losing party pay all legal fees, they are also making more severe costs orders when they believe the case is groundless. Modenesi cites the recent example of a seizure warrant worth €8m, where the court’s order for costs was €40,000. ‘For an Italian proceeding, this is a significant amount,’ he says. ‘This is actually a deterrent that could have a dramatic effect.’

 

Lawyers also welcome the specialisation new business units are bringing to Italy’s judiciary. There are now 22 business courts in the main Italian cities. Half of these have a specific competence for international companies operating in Italy. About three-quarters of cases going through these courts were completed in less than a year in 2014.

The government is working to strengthen and expand the courts’ jurisdiction but without ‘clogging’ them, Orlando has said. So their remit may extend to enforcing business contracts. Originally introduced in 2012, the courts’ jurisdiction currently includes corporate law, patent and copyright cases, and public works contracts.

Lawyers point out that judges who preside over the business units are specialists in the areas of law they deal with and can streamline and speed up cases. The creation of the business courts is ‘a very important development’, Sallustio says. It is, he argues, enabling the Italian government to begin tackling ‘the fundamental problem’ of the system – a ‘lack of specialisation’ among Italian judges. In Italy, court judges and public prosecutors (magistrati) are appointed by passing a competitive examination, which they can sit after graduation.  

The creation of a ‘single justice fund’ from the proceeds of confiscated assets is also good news. Part of it will be used to bolster the clerks’ offices of Italy’s civil courts, including paying skilled staff to support the judge’s work, such as the drafting of judgments. This will not only improve efficiency but also the quality of justice delivered, Sallustio says.

Other positive changes include: a shorter period of summer closure for courts (very unpopular among judges); the possibility of converting ordinary proceedings into summary proceedings; consensual divorces and separations performed without legal counsel but instead by the mayor at a a cost of €16; the introduction of assisted negotiation in February 2015 (this is a mandatory lawyer-assisted  pre-litigation settlement procedure for disputes centred on consumer protection, road or marine incidents, or debt collection of €50,000 or less); and the digitisation of proceedings – for example, all court documents can now be filed online.

The reforms also aim to promote alternative dispute resolution (ADR). It is now possible to refer pending cases to arbitration conducted by panels of lawyers who have been members of the relevant Italian bar for more than three years, while mediation is compulsory as a preliminary step before filing a court claim in areas such as traffic accidents, real estate, insurance, banking and financial contract disputes.

But unlike in the UK, where businesses are far better versed in ADR, for many Italian SMEs arbitration and mediation remain alien concepts. Referring to the productive yet traditional Triveneto region, Bosia says: ‘It’s not easy to get the message across to the enterprise’s ageing patriarch who only speaks Venetian dialect to consider doing an arbitration in London or Paris.’

Pasquini, who has been in London since 1978 and is a committee member of the British Italian Law Association, warns that Italy’s legal system still has a long way to travel. Attempts to revamp the country’s civil justice system, which dates back to the Code of Civil Procedure of 1940, have been troubled. Take, most recently, compulsory mediation. This was introduced in March 2011, declared unconstitutional by Italy’s Constitutional Court in October 2012 and then reintroduced in September 2013.

‘It will take time to reform such a farraginous system created 70-odd years ago,’ Sallustio observes.

But Gubitosi is upbeat: ‘We are entering a brave new phase, with its ups and downs. But change is inevitable.’

Marialuisa Taddia is a freelance journalist