English Court enforces arbitral award including a contractual penalty

The English High Court has enforced a Swiss-seated arbitral award (the Award) issued by the Court of Arbitration for Sport (CAS), notwithstanding that the Award ordered a payment representing enforcement of a contractual penalty.  The decision is significant because clauses which are considered penal under English law are not enforceable.  The test for whether a clause represents a penalty was recently considered and clarified by the English Supreme Court in the case of Makdessi, covered on our Litigation Notes blog here.      

The Court in this case did not consider that enforcement of the element of the Award representing the penalty would be contrary to public policy for the purposes of Article V(II) of the New York Convention 1958, finding that:

1. there "is a strong leaning towards enforcement of foreign arbitral awards" and, given that the English law rule against penalties did not protect a "universal principle of morality", without more enforcement would not be refused; and
2. the penalty was enforceable under the governing law as applied by the Tribunal and therefore, on application of "domestic principles", there was no reason why enforcement should be refused.

The decision is a welcome one in the context of international transactions, in which the parties may choose a governing law of a particular jurisdiction for their contractual obligations but may look to another jurisdiction for enforcement.  It is particularly important given that penalty clauses are a relatively regular feature in transactions in many sectors and jurisdictions. 

The claimant entered into two contracts with Italian football club, Palermo, relating to the sale of financial rights deriving from "registration rights" of a football player, Paulo Dybala.  The contracts required payment by instalments, and the second contract contained a clause which read: "In the case [Palermo] fails to pay any of the instalment(sic) agreed, then, all the remaining amounts shall become due and as a 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 on the payment". The second contract was governed by Swiss private law and provided for arbitration under the rules of the CAS.

When Palermo failed to pay a sum due, the claimant brought arbitration proceedings. The CAS arbitration panel (the Tribunal) ordered that Palermo pay a sum which included the payments due under the first and second contracts, and an additional sum of €1,680,000 (the Penalty Sum), representing 25% of the penalty claimed. The Penalty Sum was reduced from the sum which would have been due under the penalty clause, on the basis of a provision of Swiss law which provides that a judge must reduce a contractual penalty which is considered excessive. On appeal by Palermo, the Award was upheld by the Swiss court, the courts of the seat.  The claimant sought to enforce the Award in England.

The Court considered whether to refuse enforcement of the penalty sum on the ground that to do would be contrary to public policy.

The judgment

The Court noted (and it was accepted by the parties) that in deciding whether to refuse enforcement on the public policy ground, it was English public policy that was relevant and, citing a leading text, that for enforcement to be refused, the Award must "fundamentally offend the most basic and explicit principles of justice and fairness".

The Court then considered various cases in which the English and other commonwealth courts had considered refusal to enforce an award under the public policy ground.  In particular, the Court highlighted that it had been accepted that where a contract infringes a "universal principle of morality" it would not be enforced by the English courts, no matter what its governing law or where the place of performance might be.  However, where the public policy arose not by application of these "universal principles" but by application of domestic principles, the question for the English court was whether performance was contrary to the public policy under the proper law of the contract or its curial law. If it was, then enforcement would be contrary to English public policy.

The Court concluded that the rule against the enforcement of penalty clauses was not protecting a "universal principle of morality" and penalty clauses were not so "injurious to the public good" that enforcement should, without more, be refused.  On this basis, the governing law as applied by the Tribunal should be considered. The parties had chosen Swiss law as the law governing the obligation and the tribunal had exercised its power to reduce the penalty, so that Swiss law no longer regarded it as objectionable. This consideration tipped in favour of enforcement. 

This is a welcome decision demonstrating the acceptance by the English Court of the pro-enforcement regime provided by the New York Convention and that the English Court is not willing, without more, to rely on the public policy ground to undermine the parties' contractual agreement because the obligations in that agreement would be treated differently under English law. The decision suggests that penalty clauses which are not considered objectionable under the proper law of the contract are unlikely to be found contrary to public policy in England. Given that the law across various jurisdictions is not consistent on the use and enforcement of penalty clauses, this conclusion could provide some comfort to parties who regularly include them in their contracts. 

For more information, please contact Hannah Ambrose, Professional Support Consultant, Vanessa Naish, Professional Support Consultant or your usual Herbert Smith Freehills contact.