Domestic public policy not pertinent to international arbitration
In a dispute between an Italian football club and an English company based on the acquisition by the English company of the economic rights of an Argentine professional football player, the Court of Arbitration for Sport (CAS) accepted jurisdiction and its Panel (chairman Ricardo de Buen, with arbitrators José Juan Pinto and Massimo Coccia) awarded the English company an amount of EUR 9’400’000, which was then challenged in the Federal Tribunal by way of a Civil law appeal.
The following points are not without interest in the opinion:
- The Federal Tribunal confirmed its long-held view (criticized – rightly - by Andreas Bücher in particular) that the principle of pacta sunt servanda is violated only when an arbitral tribunal refuses to apply a contractual clause that it considers binding, or does the opposite. In other words, pacta sunt servanda will never be violated in an international arbitration held in Switzerland, because no arbitrator will ever hold that a clause is invalid only to compel the parties to abide by it! The reverse is equally fanciful and improbable (holding a clause to be valid but refusing to conclude that is should be complied with : no arbitrator on this planet is likely ever to be dumb enough to do such a thing !) (See Sections 5.1.1 and 5.1.2 of the opinion in this respect.)
- The Court emphasized that the Swiss provision by which compound interest is not allowed in principle is a matter of Swiss substantive public policy. However this would apply in a domestic dispute but does not mean that an international arbitral award including an award of compound interest would be contrary to the Swiss understanding of substantive public policy for international purposes (See Section 5.2.2 of the opinion in this respect.)
Judgment of May 21, 2015
First Civil Law Court
Federal Judge Kiss (Mrs.), Presiding
Federal Judge Klett (Mrs.)
Federal Judge Niquille (Mrs.)
Clerk of the Court: Mr. Carruzzo
Represented by Mr. Laurent Maire,
Represented by Mr. Alexis Schoeb,
In an award of August 26, 2014, the Court of Arbitration for Sport (CAS) ordered the Defendant A.________ S.p.A., an Italian professional football club, to pay to Claimant B.________ Ltd, a company under English law, a total amount of EUR 9’400’000 with interest pursuant to two contracts entered into on April 27 and 28, 2012, by which the Italian club acquired the economic rights concerning an Argentine professional football player from the English company, which a professional Argentine club had assigned to the aforesaid company on the basis of previous agreements with it.
On November 3, 2014, A.________ S.p.A. (hereafter: the Appellant) filed a civil law appeal to the Federal Tribunal with a view to obtaining the annulment of the award at issue.
In its answer of December 2, 2014, B.________ Ltd (hereafter: the Respondent) submitted that the appeal should be rejected to the extent that the matter is capable of appeal. The CAS also submitted that the appeal should be rejected in its answer of January 15, 2015.
In its reply of February 4, 2015, the Appellant reiterated its submissions and so did the Respondent in a rejoinder of February 20, 2015.
The request for a stay of enforcement contained in the appeal brief was rejected by decision of the presiding judge on March 3, 2015.
According to Art. 54(1) LTF,2 the Federal Tribunal issues its judgment in an official language,3 as a rule in the language of the decision under appeal. When the decision is in another language, (here Spanish) the Federal Tribunal resorts to the official language chosen by the parties. Before the CAS, they used Spanish. In the briefs sent to the Federal Tribunal, the Appellant used French. The Respondent did the same. In accordance with its practice, the Federal Tribunal shall resort to the language of the appeal brief and consequently issue its judgment in French.
In the field of international arbitration, a civil law appeal is admissible against the decisions of arbitral tribunals pursuant to the requirements of Art. 190-192 PILA4 (Art. 77(1)(a) LTF). Whether as to the subject of the appeal, the standing to appeal, the time limit to appeal, or the grievances invoked, none of these admissibility requirements raises any problem in the case at hand. There is therefore no reason not to address the appeal.
Invoking Art. 190(2)(b) PILA, the Appellant first argues that the CAS was wrong to accept jurisdiction on a dispute which is not a sport dispute but a purely commercial conflict. Would it have been a sport dispute, the same conclusion should be drawn according to the Appellant because the CAS went beyond the scope of its jurisdiction by refusing to apply the rules of the Fédération Internationale de Football Associations (FIFA).
3.1. Pursuant to Art. 186(2) PILA, the jurisdictional defense must be raised before any defense on the merits. This is a matter of good faith as embodied at Art. 2(1) CC5, which governs the law entirely, including arbitration. Expressed differently, the rule of Art. 186(2) PILA implies that the arbitral tribunal in which the defendant addresses the merits without reservations has jurisdiction by this very fact. Hence, he who addresses the merits without reservations (Einlassung) in an arbitration concerning an arbitrable matter thereby recognizes the jurisdiction of the arbitral tribunal and definitively loses the right to claim the lack of jurisdiction of the aforesaid tribunal (ATF 128 III 50 at 2c/aa and the references).
Art. 186(2) PILA is dispositive as to how the jurisdictional defense must be raised. Thus, arbitration rules contain various forms and specific time limits (judgment 4A_682/20126 of June 20, 2013, at 22.214.171.124 and the writers quoted). Art. R39 of the Code for Sport Arbitration requires the defense to be raised in the defendant’s answer.
3.2. The Appellant claims to have raised a jurisdictional defense in the arbitration. In this respect, it refers in particular to n. 75 of the award under appeal.
The passage of the aforesaid award it quotes, which is excerpted from the summary of its arguments, reads as follows: “B.________ no tiene ninguna reclamación valida en contra de A.________” (English translation: “B.________ has no valid claim against A.________”). This quote has nothing to do with a jurisdictional defense. The Appellant does not mention at what other places in its answer it would have challenged the jurisdiction of the CAS. Consequently, it is barred from challenging it at this stage in the proceedings, according to the aforesaid case law. That the CAS examined its jurisdiction ex officio does not change the situation.
The matter is therefore incapable of appeal in this respect.
Secondly, the Appellant argues a violation of its right to be heard within the meaning of Art. 190(2)(d) PILA. It claims that the CAS based its award on Swiss law only, to the exclusion of the FIFA regulations on which it relied and did so without inviting the parties to state their views beforehand as to the issue of applicable law.
4.1. In Switzerland, the right to be heard mainly concerns the fact-findings. The right of the parties to be asked for their views as to legal issues is recognized in a restrictive manner only. As a rule, pursuant to the adage jura novit curia, state courts or arbitral tribunals freely assess the legal bearing of the facts and may decide on the basis of rules of law other than those invoked by the parties. Consequently, as long as the arbitration agreement does not limit the mission of the arbitral tribunal to the legal means invoked by the parties only, they do not have to be heard specifically as to the scope to be given to the rules of law. As an exception, they need to be asked for their views when the judge or the arbitral tribunal considers basing a decision on a norm or a legal consideration which was not invoked in the proceedings and the pertinence of which the parties could not anticipate (ATF 130 III 35 at 5 and the references). Moreover, determining what is unforeseeable is a matter of appreciation. Therefore, the Federal Tribunal shows restraint in applying the aforesaid rule for this reason and because the specificities of this type of procedure must be taken into account by avoiding the use of an argument of surprise with a view to obtaining substantive review of the award by this Court (judgment 4A_554/2014 of April 14, 2015, at 2.1).
4.2. Considered in the light of these principles, the argument under review borders on impertinence. It must indeed be admitted with the Respondent and the CAS that the Appellant had ample opportunity to state its view as to the issue of applicable law and that it did so extensively in its answer of November 26, 2013, (n. 36 to 52). Therefore, it argues in vain a surprise effect in this respect. What it actually challenges through this is the fact that the CAS did not uphold its rather singular argument according to which Swiss law, applicable according to the agreement of the parties, would encompass the regulations adopted by FIFA.
In a last group of arguments, the Appellant raises a double violation of substantive public policy according to Art. 190(2)(e) PILA because the award violated the principle of sanctity of contracts on the one hand and the prohibition of usurious interest and the protection against excessive contractual penalties on the other hand.
An award is contrary to substantive public policy when it violates some fundamental principles of substantive law to such an extent that it is no longer compatible with the determining legal order and system of values; among such principles are in particular the sanctity of contracts, compliance with the rules of good faith, the prohibition of the abuse of one’s rights, the prohibition of discriminatory or confiscatory measures, as well as the protection of incapable people (ATF 132 III 3897 at 2.2.1).
5.1.1. The principle of sanctity of contracts, expressed by the adage pacta sunt servanda with the restrictive meaning it is given by case law concerning Art. 190(2)(e) PILA, is violated only if the arbitral tribunal refuses to apply a contractual clause while admitting that it binds the parties, or conversely, if it imposes upon them compliance with a clause that it considers not binding. In other words, the arbitral tribunal must have applied or refused to apply a contractual provision in contradiction with the result of its interpretation as to the existence or the contents of the legal deed in dispute. However, the process of interpretation itself and the legal consequences logically drawn there from are not governed by the principle of sanctity of contracts, so that they cannot be invoked as a violation of public policy. The Federal Tribunal has emphasized many times that almost all contractual disputes are outside the scope of protection of the principle of pacta sunt servanda (judgment 4A_232/20138 of September 30, 2013, at 5.1.2).
5.1.2. According to the Appellant, the CAS violated the principle of sanctity of contracts for failing to notice that the various agreements signed by the parties were “irredeemably irreconcilable” and for adopting reasons in complete contradiction with the agreements previously entered into by the Respondent and an Argentine football club.
The Appellant’s argument totally disregards the specific concept of sanctity of contracts as particularized by the aforesaid case law. It actually uses it to try to circumvent the prohibition of criticizing the application of substantive law in a civil law appeal against an international arbitral award. The only thing that matters in the case at hand is to note that the CAS issued an award, the operative part of which does not contradict its interpretation of the agreements in dispute.
In its reply, however, the Appellant seeks an extension of the principle of sanctity of contracts, invoking a commentator’s opinion (Andreas Bücher, Commentaire romand, Loi sur le droit international privé – Convention de Lugano, 2011, n. 158 ad art. 190 PILA). In doing so, it overlooks that an appellant may not use the reply to invoke a legal argument not submitted in a timely manner, namely before the non-extendible time limit to appeal (Art. 100(1) LTF in connection with Art. 47(1) LTF), or to supplement after the time limit the arguments in its appeal brief (judgment 4A_199/2014 of October 8, 2014, at 3.1 and the precedent quoted).
5.2.1. It is further submitted that the CAS awarded the Respondent a contractual penalty of EUR 1’680’000 corresponding to a quarter of the EUR 6’720’000 sought. According to the Appellant, such a contractual penalty, contained in the contract that the Respondent did not invoke in support of its arbitration request, would violate the public policy provision of Art. 163(3) CO,9 pursuant to which the court must reduce the penalties it considers excessive. It would be null in part, pursuant to Art. 20(2) CO, due to its usurious nature because it exceeds the 15% ceiling set at Art. 14 of the Federal Law on Consumer Credit (LCC; RS 221.214.1) applicable by analogy. In any event, still according to the Appellant, the aforesaid penalty would be compensation for an alleged failure to pay, namely interest on arrears. Thus, it would violate the prohibition of compound interest, as ordinary interest at 5% covers an amount which already constitutes compensation for late payment.
5.2.2. Art. 163(3) CO is a public policy provision, namely a mandatory provision which the court must apply even if the debtor of the contractual penalty did not expressly seek a reduction of its amount (ATF 133 III 201 at 5.2, p. 509 and the writers quoted). This concept of public policy has nothing to do with public policy within the meaning of Art. 190(2)(e) PILA. The Federal Tribunal emphasized this a long time ago by pointing out, with regard to mandatory rules such as Art. 163(3) CO, that it does not behoove this Court to review the arbitral award as a court of appeal would do, but only to sanction the violation of the prohibition of discriminatory or confiscatory measures ordered or upheld by the arbitral tribunal (judgment 4P.12/2000 of June 14, 2000, at 5b/cc). In the case at hand, the Appellant challenges the basis of the contractual penalty imposed by the CAS in vain because this is tantamount to criticizing the interpretation that the Arbitrators gave of the agreements concluded by the parties. Moreover, it does not demonstrate or even allege that the amount of the penalty, which incidentally the CAS significantly reduced (EUR 1’680’000 instead of EUR 6’720’000), would constitute an excessive contractual restriction to its economic freedom that could jeopardize its existence to such an extent that the penalty inflicted should be considered a confiscatory measure.
Finally, the Appellant wrongly equates interest imposed for late payment of the contractual penalty to interest upon interest for late payment, which would violate the prohibition of compound interest at Art. 105(3) CO. Be this as it may, compound interest does not violate public policy within the meaning of Art. 190(2)(e) PILA (Berger and Kellerhals, International and Domestic Arbitration in Switzerland, 3rd ed. 2015, n. 1770; Tarkan Göksu, Schiedsgerichtsbarkeit, 2014, n. 2135; Kaufmann-Kohler and Rigozzi, Arbitrage international, 2010, n. 847 I, 3rd bullet).
The argument that substantive public policy was violated is unfounded as well, which leads to the rejection of the appeal insofar as the matter is capable of appeal.
The Appellant loses and shall pay the costs of the federal proceedings (Art. 66(1) LTF) and compensate the Respondent (Art. 68(1) and (2) LTF).
Therefore the Federal Tribunal pronounces:
The appeal is rejected to the extent that the matter is capable of appeal.
The judicial costs set at CHF 40’000 shall be borne by the Appellant.
The Appellant shall pay an amount of CHF 50’000 to the Respondent for the federal judicial proceedings.
This judgment shall be notified to the representatives of the parties and to the Court of Arbitration for Sport (CAS).
Lausanne, May 21, 2015
In the name of the First Civil Law Court of the Swiss Federal Tribunal
Presiding Judge: Clerk:
Kiss (Mrs.) Carruzzo
- 1. Translator’s Note: Quote as A.________ SpA v. B.________ Ltd, 4A_634/2014. The original of the decision is in French. The full text is available on the website of the Federal Tribunal, www.bger.ch.
- 2. Translator’s Note: LTF is the French abbreviation of the Federal Statute of June 17, 2005, organizing the Federal
- 3. Translator’s Note: The official languages of Switzerland are German, French, and Italian.
- 4. Translator’s Note: PILA is the most commonly used English abbreviation for the Federal Statute on International
- 5. Translator’s Note: CC is the French abbreviation for the Swiss Civil Code
- 6. Translator’s Note: The English translation of this decision is available here: http://www.swissarbitrationdecisions.com/no-requirement-exhaust-extraordinary-legal-remedies-seizing-court-arbitration-sport
- 7. Translator’s Note: The English translation of this decision is available here: http://www.swissarbitrationdecisions.com/violation-of-public-policy-notion-of-public-policy-exclusion-of-
- 8. Translator’s Note: The English translation of this decision is available here: http://www.swissarbitrationdecisions.com/resorting-auxiliary-performance-contract-does-not-affect-arbitration-clause
- 9. Translator’s Note: CO is the French abbreviation for Swiss Code of Obligations.