On 19 January 2016, the English High Court enforced an arbitral award – issued by the Court of Arbitration for Sport (“CAS”) in Switzerland – that was based on a penalty clause in a contract.
Palermo and Pencil Hill entered into certain contracts relating to the sale of financial rights deriving from “registration rights” of a footballer, Paulo Dybala. Pencil Hill had acquired the rights from a Spanish football club, Cordoba, and sold them on to an Italian football club, Palermo, for a total price of EUR 10,000,000.
By a written contract dated 27 April 2012, Palermo agreed to pay Pencil Hill a total of EUR 6,720,000 in two instalments of EUR 3,360,000 on certain fixed dates. A further EUR 1,000,000 became due under a contract made in August 2012.
Clause 4 of the 27 April 2012 contract read as follows: “In the case [Palermo] fails to pay any of the instalment agreed, then, all the remaining amounts shall become due and as penalty [Palermo] will have to pay an amount equal to the amount pending IE  [Palermo] will pay the double of the pending amount at the moment of the fail[ure] on the payment”.
Clause 6 read as follows: “any question aris[ing] from this agreement will be submitted to the [Court of Arbitration for Sport] according to Swiss Private law. The file shall be conducted in English and decided by a panel composed [of] three members”.
The sum of EUR 6,720 was not paid.
On 4 July 2013, Pencil Hill filed an arbitration request at CAS. The claim was for EUR 6,720,000 under the 27 April 2012 contract, together with the clause 4 penalty of a further EUR 6,720,000 and the EUR 1,000,000 due under the separate August 2012 contract.
On 26 August 2014, the CAS tribunal issued its award, directing Palermo to pay Pencil Hill EUR 9,400,000 plus interest. That sum comprised the EUR 1,000,000 due under the August 2012 contract, the EUR 6,720,000 due under the 27 April 2012 contract and the reduced additional sum (in place of the penalty) of EUR 1,680,000. The reduced additional sum represented 25% of the penalty claimed.
In reducing the amount of the penalty, the CAS tribunal referred to Article 163.3 of the Swiss Code of Obligations, which provides that “the judge must reduce a contractual penalty considered excessive”.
On 3 November 2014, Palermo appealed the CAS award to the Tribunal Federal in Lausanne.
On 21 May 2015, the Tribunal Federal upheld the reduced penalty.
Subsequently, Pencil Hill sought to enforce the CAS award before English courts. Palermo contested enforcement, arguing that the nature of the penalty clause was “sufficiently injurious” to justify refusal of enforcement. Palermo argued that the rule against penalties is firmly a matter of public policy and that, even after reduction of the amount of the penalty by the arbitral body following curial review, there remains a penalty which the English courts should not enforce.
The English High Court Judgment
The issue before Judge Bird of the English High Court was whether the additional sum of EUR 1,680,000 of the CAS award should not be enforced on the ground that to do so would be contrary to public policy
Judge Bird referred to section 103 of the Arbitration Act 1996, which imposes a general duty on the English courts to enforce a New York Convention award, subject to certain limited exceptions set out at section 103(2)(a) to (e), and 103(3). Enforcement may be refused under subsection (3) “if it would be contrary to public policy to recognise or enforce the award”.
Judge Bird ruled in favour of enforcement of the CAS award.
Firstly, Judge Bird noted that there is a strong presumption leaning towards the enforcement of foreign arbitral awards and that the circumstances in which the English courts may refuse enforcement are narrow. Judge Bird was satisfied that the important public policy against enforcement of penalty clauses is not sufficient to permit him to refuse enforcement. The rule does not in his judgment protect a “universal principle of morality”. It is not so clearly “injurious to the public good” that enforcement should, without more, be refused. That being the case, the position under the governing law as applied by the curial court must be considered. According to Judge Bird, it is particularly important in the present case to note that the parties chose a governing law which empowers its courts to interfere with a penalty by reducing it. Further, the governing law applied by the CAS tribunal and the curial court recognised the relevant payment obligation as a penalty. The CAS tribunal exercised its power to vary and reduce the payment obligation, so that the obligation was no longer considered to be “excessive”. The curial court upheld the reduction. The altered obligation was no longer regarded by the governing law as objectionable. In Judge Bird’s judgment, the public policy of upholding international arbitral awards outweighed the public policy of refusing to enforce penalty clauses. The scales were tipped heavily in favour of enforcement.
Secondly, it seemed to Judge Bird that in the eyes of Swiss law, the variation of the payment obligation changed the nature of the obligation. What had been a penalty (an excessive payment) was changed into a non-penalty (a non-excessive payment). The position then was not that Swiss law upheld a penalty, but that Swiss law removed a penalty and replaced it with an obligation to pay a sum it regarded as neither exorbitant nor unconscionable. As the English High Court was not adjudicating upon the underlying contract, it was easy to see that the decision of the curial court – the court chosen by the parties applying the law chosen by the parties – should be respected.
A more detailed summary and an excerpt of this decision, indexed and searchable according to the list of topics published in http://www.newyorkconvention.org/court+decisions/description will be published in the 2016 volume of the Yearbook Commercial Arbitration, published by the International Council of Commercial Arbitration (ICCA).
Source: Original English High Court Judgment (unreported)