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CAS award set aside for lack of jurisdiction of arbitral tribunal
Practical Law UK Legal Update Case Report 2-524-8387 (Approx. 6 pages)
CAS award set aside for lack of jurisdiction of arbitral tribunal
by PD Dr. Nathalie Voser (Partner, Zurich) and Aileen Truttmann (Associate, Geneva), Schellenberg Wittmer
| Published on 06 Mar 2013 • Switzerland |
In a German-language decision 4A_244/2012 of 17 January 2013, published on 26 February 2013, the Swiss Supreme Court set aside an award of the Court of Arbitration for Sport (CAS), on the ground that the arbitral tribunal lacked competence to resolve the dispute submitted to it.
Speedread
In this case, the Court of Arbitration for Sport (CAS) tribunal concluded that an arbitration clause in an employment agreement was valid, without analysing the interplay with a forum selection clause in the same agreement. The CAS tribunal had also failed to take into consideration the Swiss Supreme Court's case law, according to which a new dispute resolution clause in a settlement agreement replaces the dispute resolution clause contained in the initial contract. The parties had entered into a settlement agreement containing a forum selection clause, but no arbitration clause. Irrespective of whether or not the forum selection clause of the settlement agreement was valid, an objective interpretation led to the only conclusion that the parties intended to have their dispute resolved by a state court.
With this decision, the Supreme Court has confirmed that CAS tribunals must strictly adhere to the general principles of interpretation developed in the Supreme Court's practice. This decision might even be viewed as an indication by the Supreme Court that it is not willing to accept that sports arbitration should detach itself further from the well-established principles of international arbitration in general. (Decision 4A_244/2012).
Background
Article 178 of the Swiss Private International Law Act (PILA) provides that:
"(1) As regards its form, an arbitration agreement is valid if made in writing, by telegram, telex, telecopier or any other means of communication which permits it to be evidenced by a text."
"(2) As regards its substance, an arbitration agreement is valid if it conforms either to the law chosen by the parties, or to the law governing the subject-matter of the dispute, in particular the law governing the main contract, or if it conforms to Swiss law."
Article 190(2)(b) PILA provides that an award can be challenged if the arbitral tribunal wrongly accepted or declined jurisdiction.
Facts
On 6 June 2009, a professional football trainer (Y) and a football club (FC X) signed an "Employment Agreement" with a company in Zug (W), under which FC X undertook to employ Y as trainer for the period 1 July 2009 to 31 December 2010.
Article 7 of the Employment Agreement provided as follows:
"Any dispute arising from or related to the present contract will be submitted exclusively to the Court of Arbitration for Sport in Lausanne, Switzerland, and resolved definitely in accordance with the Code of sports-related arbitration. Notwithstanding the foregoing provisions of this clause 7 and without prejudice thereto, the parties shall use and until the conclusion of the arbitration shall continue to use their best endeavours to attempt to reach a settlement of their dispute by mediation" (emphasis added).
Article 25 provided that:
"This agreement shall be governed by and construed in accordance with Swiss law and each of the parties hereto submits to the non-exclusive jurisdiction of the Swiss courts" (emphasis added).
Under Article 20 of the Employment Agreement, the Agreement would be terminated if Y did not receive payments due by FC X and Y would be entitled to receive the total compensation he would have received if the Agreement had lasted until 31 December 2010. Under the Agreement, the total compensation due to Y amounted to EUR7.5 million, payable in three instalments. However, the agreed instalments were only partially paid.
On 26 May 2010, FC X, Y and W entered into a "Settlement Agreement" to deal with the consequences of the non-payment of an outstanding amount of EUR750,000. The parties agreed that the Employment Agreement was terminated on 26 May 2010 and that FC X would pay to Y an amount of EUR1 million no later than 30 June 2010 as final payment. They also agreed that if the payment was not received by Y, the remaining amounts due under the Employment Agreement, that is EUR3.25 million (the outstanding EUR750,000 and EUR2.5 million of the third instalment) would be due by FC X to Y. Article 8 of the Settlement Agreement provided that:
"This Agreement is to be construed in accordance with Swiss Law and each of the parties hereto submits to the non-exclusive jurisdiction of the Swiss Courts" (emphasis added).
The EUR1 million agreed on in the Settlement Agreement was never paid, so on 16 August 2010, Y filed a request for arbitration with the CAS, claiming payment of EUR3.25 million.
By award of 19 March 2012, the CAS tribunal ordered FC X to pay EUR2.5 million to Y.
FC X petitioned the Supreme Court to have the award set aside, arguing that the arbitration clause was not valid.
Decision
The Supreme Court admitted the petition and set aside the CAS award, declaring that the CAS was not competent to rule on the dispute. The Supreme Court dismissed the other argument raised by FC X based on an alleged violation of its right to be heard. As the developments of the Supreme Court on this last point are of limited interest, this report will concentrate on the jurisdictional issue.
The Supreme Court recalled that the validity of arbitration agreements has to be analysed by reference to Article 178(2) PILA and that the CAS tribunal had correctly applied Swiss law, as it was not argued that applicable provisions of a foreign jurisdiction would be more favourable with regard to the validity of an arbitration agreement. The Supreme Court went on to stress that the intention to arbitrate must be expressed by the parties. It further confirmed that, if the parties' real mutual intention could not be determined, an objective interpretation was necessary, that is, the tribunal had to establish how a person would, or should, in good faith have understood the parties' intention.
The Supreme Court confirmed its longstanding case law and underlined once again that arbitration clauses have to be interpreted restrictively in consideration of the important limitation of recourse ensuing from an agreement to arbitrate. However, once an intention to arbitrate has been established, the interpretation is no longer restrictive, as the parties' contractual understanding must then to be construed in a way that allows the survival of the arbitration agreement.
The Supreme Court noted that the CAS tribunal had not been able to establish the parties' real mutual intention to submit the dispute to arbitration and had therefore objectively interpreted such intention, which was the correct way to proceed. The CAS tribunal came to the conclusion that the arbitration clause in Article 7 of the Employment Agreement was valid, but it had done so without analysing the interplay with the forum selection clause in Article 25 of the same agreement.
The Supreme Court held that even an objective interpretation did not allow the conclusion that the parties' intention was to renounce the jurisdiction of state courts in favour of arbitration. According to the Supreme Court, it was in particular not possible to infer that the parties had intended to provide for a choice between arbitration and state proceedings, as Article 7 of the Employment Agreement provided for the exclusive jurisdiction of the CAS. Moreover, the choice of a non-exclusive jurisdiction of state courts was, in principle, to be understood as providing for the jurisdiction of state courts other than the one competent under the contract.
The Supreme Court mentioned that in any event, Y did not contend that there was such a choice between arbitration and state courts. Therefore, the court left open the question of whether such a choice would be valid. Finally, the court underlined that, contrary to Y's contention, there was no indication that the forum selection was to operate only if the arbitration clause was ineffective.
The Supreme Court held that an overall analysis of the Employment Agreement and of the Settlement Agreement (which were closely linked as they both addressed the termination of the Employment Agreement) led to the same conclusion. The Settlement Agreement merely contained a (non-exclusive) forum selection clause. Contrary to what was held by the CAS tribunal, it was not possible to infer the existence of an arbitration clause from the reference in Article 5.1 of the Settlement Agreement to Article 7 of the Employment Agreement. Despite the fact that the arbitration clause in the Employment Agreement was not valid, the CAS tribunal failed to take the Supreme Court's case law into consideration, according to which a new dispute resolution clause in a settlement agreement replaces the dispute resolution clause contained in the initial contract. Irrespective of whether or not the forum selection clause of the Settlement Agreement was valid, an objective interpretation led to the only conclusion that the parties intended to have their dispute resolved by a state court.
The Supreme Court therefore held that, on an objective interpretation, there was no clearly expressed intention, in the Employment Agreement or the Settlement Agreement, to renounce the jurisdiction of state courts in favour of arbitration. On the contrary, the Supreme Court held that the parties wanted to keep this possibility open. As the arbitration clause was not valid, the CAS tribunal had wrongly declared itself competent.
Comment
This decision is a rare example of the Swiss Supreme Court setting aside an award. Only four out of 46 challenges were allowed in 2012, the usual ratio of successful challenges verging on 7%.
With this decision, the Supreme Court has confirmed that CAS tribunals must strictly adhere to the general principles developed in the Supreme Court's practice. This means that the question of whether an arbitration agreement has been concluded has to be answered restrictively. Only if a mutual intention can be clearly established (based on either a real mutual intent or an objective interpretation) is it permissible to infer that the parties wanted to choose arbitration, and therefore accept with this choice the drastic limitation of recourses against an award.
This holding is noteworthy as one might assume that there is a strong presumption that parties in the sports industry choose sports arbitration to resolve their disputes. Also, in previous decisions, the Supreme Court has relaxed the requirements of arbitration agreements by reference in sports arbitration, as compared to other areas of commercial arbitration (see Article, Switzerland: arbitration round-up 2011/2012 and Legal updates, Swiss Supreme Court dismisses appeal to set aside CAS award for lack of jurisdiction, Swiss Supreme Court confirms broad interpretation of scope of arbitration agreement; and Swiss Supreme Court confirms validity of defective arbitration agreement).
This decision might be viewed as an indication by the Swiss Supreme Court that it is not willing to accept that sports arbitration should detach itself further from the well-established principles of international arbitration in general. If this is the case, and if this approach is confirmed in further decisions, it is to be welcomed.