Penalty saved by CAS with a little help from English Courts

The English High Court enforced and upheld an arbitral award issued by the Court of Arbitration for Sport (CAS), in a case involving Juventus starlet Paulo Dybala’s financial rights.

The Question

In Pencil Hill Ltd v US Città Di Palermo S.p.A, the CAS award found that a penalty clause was, in part, enforceable, and this raised a question for the English High Court as such a clause is unenforceable under English law. 

The question was whether the enforcement of a penalty clause by an English court via an arbitral award was contrary to public policy, or whether there was a more convincing argument that ensuring that international arbitration awards are enforced was in the interests of public policy (s. 103(3) of the Arbitration Act 1996).

The Facts

Pencil Hill Limited owned the financial rights to Paulo Dybala after it acquired them from his club in a Third-party ownership structure.  In April 2012, Serie A club Palermo agreed to purchase the financial rights from Pencil Hill Limited in order to sign Dybala as a summer transfer.  The purchase price was EUR 10m which was due in various instalments.

After defaulting on the instalments, Pencil Hill Limited relied on the ADR clause to seek payment of the outstanding amounts from CAS.  As part of the claim, Pencil Hill Limited pointed to a penalty clause which required any outstanding amounts to be due, plus another payment equal to the outstanding amounts to be due (effectively doubling the amount outstanding under the contract).

The Decision

CAS exercised its discretion under Article 163.3 of the Swiss Code of Obligations to reduce the size of the penalty award, to the money outstanding plus 25% of the penalty claimed.  Bird HHJ disagreed with Palermo that there was a pressing public policy issue which ought to prevent the award being enforceable.  Bird HHJ explained that it was more important to enforce international arbitral awards and that, the exceptions which rely on public policy exceptions, must infringe a universal principle of morality.  Bird J also relied on the fact that the parties elected to contract under Swiss law in the first place.

Why is it important?

1. The CAS tribunal effectively held that the penalty clause was unfair and it reduced it to an amount which it felt reflected a more fair position.  It is therefore important to consider what CAS might consider fair when negotiating an agreement with a CAS ADR clause.

2. This penalty clause was governed by Swiss Private Law and does not impact on the recent Supreme Court ruling in Cavendish Square Holding – see here.

3. This does not mean penalty clauses can simply be inserted into contracts with foreign ADR provisions.  CAS held that Swiss law required a penalty to be reduced and it was confirmed that the reduction meant the penalty no longer contravened Swiss law.  English law does not permit courts to intervene to reduce penalty clauses to make them enforceable in the same way.