Award upheld despite claim of violation of public policy (based on erroneous findings of facts and of law, as well as on the principles of good faith and of pacta sunt servanda)
This opinion of the Federal Tribunal of March 10, 2010, is related to sport arbitration, which nowadays tends to become the main “provider” of appeals to the Swiss Federal Tribunal. This is due to the fact that the Court of Arbitration for Sport (CAS) is based in Lausanne (Switzerland). Also, there are numerous sport arbitrations, some of which inevitably find their way to the Federal Tribunal, including some cases in which it is clear that an appeal should not have been filed at all.
The enclosed opinion related to a dispute between two football clubs in Mexico and Uruguay, in connection with the transfer of a Brazilian player.
The FIFA Players’ Status Committee rejected a request by the Uruguayan club on September 1, 2008, and the case was appealed to the Court of Arbitration for Sport (CAS). A three arbitrator panel (Omar Alejandro Vergara as Chairman, with Miguel Angel Fernandez Ballesteros and Fernando Cabrera Garcia as arbitrators) upheld the appeal in an award of November 6, 2009, and ordered the Mexican club to pay compensation to the Uruguayan club. The Mexican club appealed to the Federal Tribunal.
The following points in the opinion are worth noting:
- The Federal Tribunal reiterated that wrongly assessing the evidence or making an obviously erroneous finding of facts will not render an international arbitral award contrary to public policy. The same applies if an applicable legal provision is blatantly violated. To be contrary to public policy within the meaning the Federal Tribunal gives to the concept, the award must violate some fundamental principles of law on the merits in such a way that the award is no longer consistent with the legal order and the determining system of values. (See section 3.1 of the opinion in this respect)
- The rule of pacta sunt servanda is violated only if the arbitral tribunal finds that there is a contract but then refuses to enforce its provisions or, conversely, if the arbitrators enforce a contractual provision after finding that there was no contract. This often restated interpretation of pacta sunt servanda makes it extremely unlikely that any arbitral award will ever be annulled by the Federal Tribunal on that ground. (See section 3.1 of the opinion in this respect)
- While the basic principle of Swiss law that anyone should act in good faith falls within public policy – because upholding behavior blatantly contrary to the rules of good faith would of course be incompatible with public policy – the Court refuses to question the interpretation given by the arbitrators to a specific contractual provision. Again, this makes it unlikely that an award will ever be annulled on those grounds. (See section 3.2 of the opinion in this respect).
Judgment of March 10, 2010
First Civil Law Court
Federal Judge Klett (mrs), Presiding,
Federal Judge Rottenberg Liatowitsch (Mrs),
Federal Judge KOLLY,
Clerk of the Court: GIANINAZZI.
Represented by Mr Rocco TAMINELLI
Represented by Mr Jaime LLOPIS
Pursuant to a June 14, 2005, contract the Brazilian football player C.________ was transferred from B.________ a football club in Uruguay, to A.________ a football club in Mexico. The parties agreed a transfer fee of USD 945,000 payable in three installments on July 4, 2005, on January 4, 2006, and on June 4, 2006. They also agreed that should the Player be transferred from A.________ to another club during the contract, B.________ would be entitled to 20% of the amount paid by the buyer.
A.________ paid the first installment of USD 315,000.
As the Brazilian football player apparently did not adapt to life in Mexico, the two clubs discussed a possible termination of the transfer and return of C.________ to the Uruguayan club.
On October 26, 2005, B.________ wrote to A.________ to express its agreement in principle with the verbal proposal to terminate the transfer contract. However, the Uruguayan club subjected its agreement to the following conditions: payment by the Mexican club of an amount of USD 150,000; reimbursement by the Mexican club of the legal costs related to the early termination of the contract of another player, on loan to A.________; the Player’s acceptance of the termination of the relationship with A.________ and of the conclusion of a new employment contract with B.________ with the Player’s transfer to the Uruguayan club.
In a letter of November 2, 2005, A.________ refused to pay the amount of USD 150,000, claiming that the amount already paid of USD 315,000 was sufficient compensation for the Uruguayan club. However, the Mexican club would agree to take back the Player on loan to B.________, whilst not taking a position as to a possible sharing of the costs of the termination of the contract of that Player. Finally, it indicated that the Brazilian player was interested in returning to B.________, so that the transfer would take place at the end of the season.
On November 27, 2005, C.________ and A.________ mutually agreed to terminate the employment contract biding them.
Taking notice that the October 26, 2005, proposal had not been accepted, B.________, in a fax of January 2, 2006, claimed from A.________ the payment of the balance of the transfer fee agreed on June 24, 2005, namely USD 630,000. The Mexican club did not respond to that request.
On January 11, 2006, the Uruguayan Football Federation, acting on behalf of B.________, asked the Mexican Football Federation to issue the International Transfer Certificate (ITC) concerning C.________. The certificate was issued on February 16, 2006, with the wording “on loan until December 31, 2006.”
On February 18, 2006, the Brazilian player signed a new employment contract with B.________.
On July 26, 2007, C.________ was transferred to D.________, an Argentinian football club.
On June 6, 2006, B.________ filed a claim against A.________ before the Fédération Internationale de Football Association (FIFA) with a view to obtaining the payment of USD 630,000 with interest, equal to the balance of the transfer fee agreed on June 24, 2005. The Mexican club opposed the request.
In a decision of September 1, 2008, the single judge of the Players’ Status Committee (hereafter: the single judge) rejected the request. Substantially, the single judge held that with its letter of November 2, 2005, A.________ had accepted the October 26, 2005, offer by B.________ to terminate the transfer contract under certain conditions. Yet in the same letter the Mexican club made a counterproposal to the extent that it did not intend to pay the additional amount of USD 150,000 asked by the Uruguayan club. According to the single judge, that counterproposal was implicitly accepted by B.________, evidence of that being the fact that the club, through its Federation, subsequently asked the Mexican Football Federation to issue the ITC concerning the Brazilian player and hired him again, as in the meantime he had been freed from the contract with A.________.
In the light of such circumstances, the single judge went on, the wording on the ITC “on loan until December 31, 2006” can only be the result of an administrative error. Indeed there is no indication that there ever were any discussions with a view to a hypothetical loan of the Brazilian player by A.________ to B.________.
In the single judge’s view, the final transfer of the Player from the Uruguayan club to the Mexican club was converted by the parties, by mutual agreement, into a loan until December 31, 2005. Hence the single judge rejected B.________’s request for the payment of the last two installments of the transfer fee agreed upon in the June 24, 2005, contract.
In an award of November 6, 2009, the Court of Arbitration for Sport upheld the appeal by B.________, annulled the decision of the single judge and ordered A.________ to pay USD 630,000 with interest to the Uruguayan club.
On the basis of the FIFA Regulations and, subsidiarily, on the basis of Swiss law, the CAS held in substance that B.________ had subjected its agreement to the termination of the transfer contract of the Brazilian player to a condition – the payment of USD 150,000 in addition to the amount of USD 315,000 already paid by the Mexican club – which was not accepted tacitly by A.________. In fact, the CAS ruled out that in the case at hand A.________’s silence could be qualified as implied acceptance within the meaning of Art. 6 CO,2 as the general principle of Swiss legal writing should have been applied, according to which “he who says nothing does not consent”3 (François DESSEMONTET, in Commentaire romand, Code des Obligations I, 2003, p. 41, n° 1 ad Art. 6 CO). It also could not be claimed that acceptance by concluding acts took place. In the award under review the CAS set forth the reasons for which the circumstances relied upon by A.________ - such as the termination of the employment contract binding the Mexican club to the Brazilian player, the request for an ITC made by the Uruguayan Association, the conclusion of a new contract between B.________ and the aforesaid Player, the latter’s subsequent transfer to an Argentinian club – did not demonstrate that, as a consequence of a new contract (Art. 116 CO), the obligations undertaken in the transfer contract of the Brazilian player signed on June 24, 2005, would be extinguished. Hence A.________ was ordered to comply with the obligations, specifically with the payment of the remaining installments of the transfer fee.
On June 4, 2010, A.________ filed a civil law appeal with the Federal Tribunal with a view to obtaining the annulment of the CAS award.
Neither B.________ nor the CAS were asked to answer the appeal.
According to Art. 54(1) LTF4 the decision of the Federal Tribunal is written in an official language,5 as a rule in the language of the decision under appeal. Should that decision be in another language, the Federal Tribunal resorts to the official language chosen by the parties. In this case they chose Spanish before the CAS, whilst the civil law appeal is in Italian. According to its practice in such a case, the Federal Tribunal resorts to the language of the appeal and will issue its decision in Italian.
In the field of international arbitration, a civil law appeal against arbitral awards is allowed pursuant to the requirements of Art. 190-192 PILA6 (Art. 77 (1) LTF). The admissibility of the appeal at hand raises no issues, whether with regard to the nature of the decision under appeal or as to the standing to appeal, the time limit to do so, the submissions of the appeal, or as to the reasons. There is accordingly no obstacle to a review of the merits.
In a sole grievance based on Art. 190 (2) (e) PILA, the Appellant argues that the CAS issued an award inconsistent with public policy; he claims in particular that the rule of pacta sunt servanda and the rules of good faith were violated.
3.1 The review of the merits of an international arbitral award by the Federal Tribunal is limited to the issue of its compatibility with public policy (DTF7 121 III 331 at 3a).
A decision is incompatible with public policy when both its reasons and its results disregard the essential and broadly recognized values which, according to prevailing theory in Switzerland, should be the basis of any legal order (DTF 132 III 389 at 2.2.3 p. 395). The concept of public policy is more restrictive than that of arbitrariness (DTF quoted at 2.2.2 p. 393). For example, a mistaken assessment of the evidence, an obviously erroneous finding of facts, or a clear violation of an applicable legal provision are not sufficient to show that a decision is incompatible with public policy (decision 4P.253/2004 of April 8, 2005, at 3.1). A decision is contrary to material public policy only when it violates some fundamental principles of the law applicable to the merits so that it is no longer consistent with the legal order and the determining system of values; among the principles within public policy are the contractual trust (pacta sunt servanda) and compliance with the rules of good faith (4P.71/2002 of October 22, 2002, at 3.2 with references).
The principle of pacta sunt servanda, within the restrictive meaning given in the case law relating to Art. 190 (2) (e) PILA, is violated only when the arbitrator refuses to apply a contractual clause after finding that it is binding or, conversely, when he orders the party to abide by a clause which he found inapplicable. In other words, the arbitral tribunal must have applied or refused to apply a contractual provision in a way that contradicts the results of its own interpretation as to the existence and/or the contents of the legal act in dispute. However, neither the process of interpreting the contractual agreements nor its results fall within the scope of application of the principle of contractual trust – and, accordingly, within Art. 190 (2) (e) PILA – so they escape the review of the Federal Tribunal. It has also been stated several times that almost all legal issues relating to a breach of contract are outside the scope of protection of the principle of pacta sunt servanda (judgment 4A_370/2007 of February 21, 2008, at 5.5).
The rules of good faith may be understood by reference to the case law relating to Art. 2 CC8 (decision 4A_600/2008 of February 20, 2009, at 4.1).
3.2 In this case, the Appellant essentially relies on the principle of good faith contained at Art. 6 CO. He argues that the CAS summarily ruled out the application of that provision, whilst quoting it in the decision under appeal, without reviewing the conditions for its application. According to the Appellant, such a review would necessarily have led the CAS to conclude that the rules of good faith required the Respondent to refuse its offer of November 2, 2005, explicitly, if that was its intent. Having failed to do so, the CAS upheld the abuse of rights committed by the Uruguayan club, which made it possible for the latter not only to demand payment of the total transfer fee but also to hire the Brazilian Player again without spending anything.
Yet, whilst claiming the opposite, the Appellant does nothing else than criticize the application of a legal provision, in this case Art. 6 CO. As already explained, within the framework of an appeal against an arbitral award such a grievance must fail. In any event it appears from the award under review that the CAS dealt with all the arguments submitted by the parties in this respect; it merely drew different legal conclusions from the circumstances alleged by the Appellant than those which it argued and the single judge upheld.
This being said, considering that the CAS – on the basis of a legal reasoning which escapes review by the Federal Tribunal – held that the Parties remained bound by the initial contract entered into on June 27, 2005, one does not see how it could have violated the rules of good faith by allowing one of the parties to the contract to make claims against the other on the basis of a contract in force.
To the extent that it is capable of appeal, the grievance therefore proves to be unfounded.
3.3 The same applies with regard to the alleged violation of the principle of pacta sunt servanda. Indeed, for the purposes of deciding the issues at hand, the CAS, holding that the Respondent could still legitimately make claims against the Appellant on the basis of the transfer contract, ordered the debtor to comply with the contractual obligations. By doing so it issued a decision consistent with its interpretation, without disregarding in any way the principle of contractual trust.
In conclusion, the appeal must be rejected.
In such an outcome the judicial costs follow (Art. 66 (1) LTF). As the Respondent was not asked to file an answer, no compensation will be awarded for the judicial costs of the federal proceedings.
Therefore the Federal Tribunal pronounces:
- The appeal is rejected.
- The judicial costs set at CHF 8,500 shall be borne by the Appellant.
- This judgment shall be notified to the representatives of the Parties and to the Court of Arbitration for Sport (CAS).
Lausanne, March 10, 2010.
In the name of the First Civil Law Court of the Swiss Federal Tribunal
The Presiding Judge (Mrs): The Clerk (Mrs):
- 1. Translator’s note: Quote as A._________ v. B. __________, 4A_4/2010. The original decision is in Italian. The text is available on the website of the Federal Tribunal www.bger.ch
- 2. Translator’s note: CO is the Italian and French abbreviation for the Swiss Code of Obligations.
- 3. Translator’s note: In French in the original text.
- 4. Translator’s note: LTF is the Italian and French abbreviation for the Federal Statute of June 17, 2005, organizing the Federal Tribunal, RS 173.110.
- 5. Translator’s note: The official languages of Switzerland are German, French and Italian.
- 6. Translator’s note: PILA is the most commonly used English abbreviation for the Federal Statute on International Private Law of December 18, 1987, RS 291.
- 7. Translator’s note: DTF is the Italian abbreviation indicating a decision of the Federal Tribunal, the equivalent of ATF in French or BGE in German.
- 8. Translator’s note: CC is the Italian and French abbreviation for the Swiss Civil Code.