Article 190(2)(e) of the Swiss Private International Law Act (PILA) provides that an arbitral award may be set aside if it is incompatible with public policy. Public policy has both a substantive and a procedural component. A decision only violates substantive public policy if it is rendered in disregard of fundamental principles of law and consequently cannot be reconciled with the essential and widely recognised system of values which serves as the bedrock for any legal order.

The rights of the individual are protected by guarantees which operate against the state and against private parties. Pursuant to Article 27(2) of the Swiss Civil Code, no person may relinquish his freedom or restrict the use of it to a degree which is contrary to law or morals.

In 2007, Matuzalem broke his contract with the Ukrainian football club, Shaktar Donetsk, to join the Spanish club, Real Zaragoza, with neither just cause nor so-called "sporting just cause". Real Zaragoza undertook to hold Matuzalem harmless for any damage claims raised against him in relation to the termination.

In a first award, the Court of Arbitration for Sport (CAS) ordered Real Zaragoza and Matuzalem, jointly and severally, to pay Shaktar Donetsk damages of nearly €12m, plus interest. A petition to set aside this award was rejected by the Swiss Supreme Court in June 2010 (see Legal update, Swiss Federal Supreme Court dismisses an appeal to set aside a CAS award).

Neither Matuzalem nor Real Zaragoza was able to pay the awarded amount. Real Zaragoza was experiencing financial difficulties at the time (and indeed the club ended up filing for bankruptcy in February 2012). As no payment was made, Shaktar Donetsk applied to the FIFA Disciplinary Committee. The latter granted a final deadline for payment of 90 days, failing which Matuzalem could, pursuant to article 64(4) of the FIFA Disciplinary Code, be banned from taking part in any football-related activity until the outstanding amount had been fully settled. Alternatively, six points could be deducted from the first team of Real Zaragoza in the domestic league championship. These sanctions would be imposed at the first request of Shaktar Donetsk, without further formal decision. Following an appeal by both Matuzalem and Real Zaragoza, the CAS confirmed the FIFA Disciplinary Committee's decision in an award of 29 June 2011. Matuzalem petitioned the Swiss Supreme Court to have the award set aside.

Matuzalem's main argument was that the award, and more specifically the underlying sanction of a potential playing ban, violated public policy within the meaning of article 190(2)(e) of the PILA.

The Swiss Supreme Court set aside the award.

Referring to article 27(2) of the Swiss Civil Code, the Supreme Court held that, while an individual may choose to restrict his own rights by entering into a contract or, as in the present case, acceding to statutes of a sporting association, such restriction cannot be so excessive that it cancels out that person's economic freedom. This is one of the fundamental principles which, according to the prevailing view in Switzerland, should form part of any legal order.

A contractual limitation of freedom is considered excessive if it submits the fate of one contracting party to the discretion (and potential arbitrariness) of another party, or if it eliminates economic freedom entirely or to such an extent that the contracting party's very livelihood is threatened. An excessive limitation of freedom is contrary to public policy if the rights of the individual concerned are clearly and severely infringed.

The Supreme Court found that an open-ended playing ban, such as the one Matuzalem was facing, which could be triggered at the sole discretion of a former employer, constitutes a severe infringement on the player's individual rights.

The Supreme Court went on to examine whether there were any legitimate interests which could justify such an infringement. It pointed out that the FIFA sanctions in this case are equivalent to measures of private debt enforcement and, therefore, primarily serve the interests of a particular FIFA member, and indirectly of FIFA itself. Furthermore, if Matuzalem is indeed not in a position to pay the amount awarded to Shaktar Donetsk, a playing ban is not an appropriate measure to reach the stated aim, as it would deprive him of the means of earning money to fulfil his obligations.

In any event, given that Shaktar Donetsk has the option of enforcing the first CAS award against Matuzalem based on the New York Convention, there is no actual necessity for such a private enforcement mechanism.

Finally, the interests that would be served by the sanction are not sufficiently substantial to justify such a severe infringement on Matuzalem's rights. FIFA's abstract aim of ensuring that players observe their contractual obligations is clearly outweighed by the acute impact that an open-ended and geographically unlimited ban on any football-related activities could have on the player's individual rights.

Based on these considerations, the Supreme Court held that the CAS award, which confirmed FIFA's threat of an open-ended ban, was contrary to public policy within the meaning of Article 190(2)(e) of the PILA and must be set aside.

Despite the fact that violation of public policy is one of the most frequently chosen grounds for challenging international arbitral awards before the Swiss Supreme Court, this is the first case in which an award has been set aside for violation of substantive public policy and only the second case in which a petition based on Article 190(2)(e) of the PILA has been successful since the provisions on international arbitration were introduced in 1989 (the first case was 136 III 345 / 4A_490/2009 of 13 April 2010, see Legal update, Swiss Federal Tribunal sets aside CAS award for violation of procedural public policy).

Until now, Article 27(2) of the Swiss Civil Code has not figured among the examples of "fundamental principles" typically listed in leading cases on substantive public policy, such as pacta sunt servanda, good faith and the prohibition of abuse of rights, discrimination, forced labour or corruption. The provision will now feature prominently in any discussion relating to substantive public policy and the Supreme Court's decision has made a valuable contribution toward defining the contours of this notion.

The decision is to be welcomed, coming at a time when there has been an increasing call for checks and balances in sports arbitration. While successful challenges to awards for violation of public policy will remain the exception, the Swiss Supreme Court has, with this decision, reminded us that the legitimacy of international arbitration requires that the most fundamental principles of the legal order be respected at all times.