Article 190(2)(e) of the Swiss Private International Law Act (PILA) provides that an award may be annulled if it is contrary to public policy.

On 24 June 2005, the applicant (A), a Mexican football club, and the respondent (B), a Uruguayan football club, entered into an agreement regarding the transfer of a football player (C) from B to A (the Transfer Agreement). The Transfer Agreement provided for the payment of a transfer sum of US$945,000 to be paid in three equal instalments by A to B. A paid the first instalment of US$315,000 on 4 July 2005.

As C was unable to adapt to life in Mexico, the two football clubs entered into discussions about the annulment of his transfer and his return to B. On 26 October 2005, B wrote to A, stating that it would agree to the latter's oral proposal to annul the Transfer Agreement provided that, among other conditions, A would pay a further US$150,000. By letter dated 2 November 2005, A refused to pay the additional amount. Subsequently, A released C from his contractual obligations and, on 11 January 2006, C signed a new contract with B. Previously, on 2 January 2006, B had claimed the payment of US$630,000 from A which corresponded to the two outstanding instalments due under the Transfer Agreement. A did not respond.

On 6 June 2006, B took A before the Fédération Internationale de Football Association (FIFA) in order to obtain the payment of US$630,000. By decision of 1 September 2008, the single judge of the Players' Status Committee of FIFA rejected the claim. On appeal by B, the Court of Arbitration for Sport (CAS) overturned the decision of the single judge on 16 November 2009 and ordered A to pay US$630,000 to B.

In its reasoning, the CAS observed that B made its agreement to the annulment of the Transfer Agreement dependent on the conclusion of a new agreement that would have obliged A to pay a further US$150,000. However, as A did not accept this proposal (neither tacitly nor by conclusive acts), A remained bound by the original Transfer Agreement and had to pay the remaining instalments.

A challenged the decision of the CAS before the Swiss Federal Supreme Court.

In its petition to the Federal Supreme Court, A argued that the CAS' award was contrary to public policy and should therefore be set aside pursuant to Article 190(2)(e) of PILA, in particular because the award allegedly violated the principle of pacta sunt servanda (agreements must be kept) and the rules of bona fide (good faith).

The Federal Supreme Court first confirmed that its power to re-examine an international arbitral award on the merits is limited to the question of whether the award is compatible with public policy. The notion of public policy has a limited scope: an award is incompatible with public policy only if it disregards, both in its considerations and in its findings, those essential and widely recognised values which, according to the predominant conception in Switzerland, should constitute the foundation of any legal order. The principles of pacta sunt servanda and of bona fide invoked by A are both protected by the concept of public policy.

On the issue of bona fide, the Federal Supreme Court succinctly rejected A's allegations that the CAS had violated the rules of good faith, on the ground that A was just criticising the application of a legal rule by the CAS (in this case, the application of Article 6 of the Swiss Code of Obligations regarding the prerequisites for an offer to be deemed to have been accepted). A review of the award showed that the CAS had extensively dealt with the arguments raised by both parties, but had reached a different legal conclusion to the single judge. Therefore, the Federal Supreme Court could not see any reason how the findings of the CAS could in any way have violated the rules of bona fide.

With respect to the principle of pacta sunt servanda, the Federal Supreme Court first made some general observations on its limited scope in the context of an allegation of violation of public policy under Article 190(2)(e) PILA. It stated that the principle was only infringed if the arbitral tribunal did not apply a contractual clause after having admitted its binding nature or if the tribunal applied a clause despite having declared the clause inapplicable. In other words, the arbitral tribunal must have applied (or refused to apply) a clause and thereby contradicted its own findings regarding the existence and/or meaning of the contentious legal act. In contrast, mere questions of interpretation of a legal act or its result do not fall under the concept of public policy under Article 190(2)(e) PILA.

In the present case, the Federal Supreme Court concluded that the CAS, by ordering A to pay the remaining instalments to B based on the Transfer Agreement, had rendered an award which was consistent with its interpretation of the issues at stake without contravening in any way the principle of pacta sunt servanda. Consequently, the Federal Supreme Court rejected A's complaint against the CAS' award.

Once again, the Federal Supreme Court has made it clear that the concept of public policy in Article 190 PILA, which sets out the grounds for complaint against an international arbitral award available in Switzerland, is very narrow, as is an alleged violation of public policy through a breach of the principle of pacta sunt servanda or the rules of bona fide. In particular, by requiring that the arbitral tribunal must have contradicted itself with regard to the application (or non-application) of contractual provisions, the Federal Supreme Court's decision clearly shows the narrow scope of the frequently relied upon pacta sunt servanda claim. As a consequence, and as the Federal Supreme Court itself stated, the result is that almost all breach of contract disputes fall outside a claim of violation of Swiss public policy.