Article 190(2)(e) of the Private International Law Act (PILA) provides that an award can be challenged if it is incompatible with public policy.

A professional football player who was contracted to a football club (Club A) signed a two-year extension to his contract (Extension). Shortly afterwards, the player also entered into a contract with another football club (Club B) that covered the same time period. Club A objected to the player's registration as a member of Club B, ultimately resulting in proceedings before FIFA's Dispute Resolution Chamber (DRC). The DRC found that the player had breached the Extension.

Pursuant to its powers under FIFA's Regulations on the Status and Transfer of Players, the DRC ordered the player to pay damages to Club A and suspended him for four months. It also imposed sanctions on Club B for inciting the player to breach the Extension. Club B and the player appealed the decision to the Court of Arbitration for Sport (CAS), contending that the player had been unlawfully duped into signing the Extension. During these proceedings, the parties arrived at a settlement agreement in which they all acknowledged that:

(Agreed Facts.)

The parties invited the CAS tribunal to take into account the Agreed Facts, but expressly recognised that it remained free to evaluate the weight of these facts in light of the allegations and evidence before it. FIFA objected to this invitation, arguing that the Agreed Facts were incompatible with the evidence.

In its award, the CAS tribunal distinguished between the monetary relief granted by the DRC to Club A, which Club A was fully permitted to renounce in light of the settlement agreement, and sanctions imposed by the DRC. The CAS tribunal found that the parties could not force it or the DRC to accept the version of events that they agreed upon, as this would clash with the DRC's disciplinary power. It found that the player and Club B did, in fact, breach the Extension and upheld the sanctions imposed on them by the DRC.

Shortly afterwards, Club B filed a request with the Swiss Supreme Court to have the CAS award set aside, contending that the CAS tribunal's unwillingness to decide the appeal on the basis of the Agreed Facts violated the Swiss lex arbitri in several respects.

Firstly, in recognising the validity of the settlement agreement but ignoring the Agreed Facts, the award violated the fundamental principle of pacta sunt servanda (agreements must be kept) and was, therefore, contrary to material public policy.

Procedural public policy was also violated by the award's failure to respect the principle of "unity of fact" (l'unité de fait), as well as by the injustice of going against facts that have been agreed upon by the parties, without whose claims FIFA would never have imposed sanctions in the first place.

The Supreme Court upheld the CAS tribunal's award. It noted that an award is contrary to public policy where it breaches fundamental principles of law (such as pacta sunt servanda) in a manner that is incompatible with the judicial system. An arbitral tribunal can only violate pacta sunt servanda if it contradicts itself by refusing to apply a contractual provision by which it has found that the parties are bound, or if it applies a provision to which it does not consider the parties to be bound (for example, see decision 4A 312/2012, discussed in Legal update, Swiss Supreme Court rejects application to set aside award because tribunal refused to consider related claims in separate arbitral proceedings). By contrast, the interpretation of a contract, as well as almost any other element of a dispute over the alleged breach of a contract, is not governed by pacta sunt servanda (for example, see decision 4A_150/2012, discussed in Legal update, Swiss Supreme Court confirms admissibility of anticipated assessment of evidence and denies violation of pacta sunt servanda and bona fides).

In this case, the CAS tribunal declared itself to be bound by the settlement agreement in respect of the relief granted by the DRC to Club A. It did not, therefore, examine the merits of the corresponding claims. By contrast, the CAS tribunal did not consider itself to be bound by the settlement agreement in its consideration of the DRC's imposition of sanctions, deciding instead to examine the relevant factual and legal circumstances. The Supreme Court found that these opposite decisions of the CAS tribunal were not contradictory and clearly derived from the separate premises on which they were based. A violation of material public policy could only have occurred here if the CAS tribunal had upheld the sanctions issued by the DRC, while also admitting that it could not stray from the settlement agreement even in regard to sanctions.

On the alleged breach of procedural public policy, the Supreme Court reminded the parties that this ground for setting aside an award is a subsidiary guarantee intended to address procedural issues that the legislator did not otherwise anticipate in Article 190(2) PILA (for example, see decision 4A_488/2011, discussed in Legal update, Swiss Supreme Court on effect of untimely appeal before the CAS and on burden and standard of proof in sports arbitration). In the present case, Club B made essentially the same allegations under this ground as under that of material public policy. The Supreme Court also noted that Club B failed to argue why the principle of "unity of fact" would amount to a fundamental principle of public policy. The principle was not defined by Club B but the argument appeared to be that an arbitral tribunal must decide all claims based on the same set of facts.

A more interesting element of the Supreme Court's reasoning was its examination and rejection of the premise supposedly underlying Club B's contention that procedural public policy had been violated. Club B presumably believed that, by entering into the settlement agreement, the parties also withdrew all arguments and evidence previously advanced in the proceedings. By not taking into account the settlement agreement in deciding on sanctions, the CAS tribunal therefore violated the principle of "free disposition" (maxime de disposition), namely that parties to an arbitration are free to determine and dispose of their dispute. But the Supreme Court noted that the parties to the settlement agreement expressly accepted that the CAS tribunal could determine the weight to be given to the Agreed Facts. More importantly, FIFA was clearly regarded as a party to the arbitration and objected to the other parties' contention that the CAS tribunal was bound by the Agreed Facts.

The CAS tribunal's examination of the evidence regarding the sanctions imposed by FIFA was, therefore, fully appropriate, as the relevant appeal involved a party to the proceedings that had not consented to the settlement agreement or the Agreed Facts. Since not all of the parties had agreed to settle the case, the principle of free disposition could not have been violated.

With regard to the injustice argument made by Club B, the Supreme Court did not agree that the matter was tied in any way to public policy under PILA. It also referred again to the separate nature of the relief and disciplinary functions of the DRC and to the importance of FIFA's status as a party to the CAS proceedings. While the relief function is dependent on the parties' respective claims, the latter is entirely different in that it closely involves a third party, FIFA, acting as a "moral person" (personne morale) holding disciplinary authority. One of FIFA's assigned purposes (ensuring respect for the rules governing professional football) would be threatened if parties were allowed to agree on a set of "facts" denying an already established fact (in this case, that the Extension was breached). However, the Supreme Court did note that an agreement on facts like the settlement agreement could be enforced in a situation where the facts on which sanctions were initially based were subsequently found to be erroneous or incomplete, prompting the parties to arrive at, and FIFA to approve, the agreement in question.

The Supreme Court's decision highlights the special nature of sports arbitration, which involves both "indemnity" and disciplinary elements. Recognition of this "dual" nature can be tricky for those accustomed to international commercial arbitration and can raise both conceptual and practical difficulties. Here, for example, the arbitral tribunal found itself in the awkward position of essentially recognising two contradictory sets of facts. However, difficulties of this kind are partly resolved by including the sports federation that holds the disciplinary power as a party to the arbitral proceedings in which its sanctions are being appealed. Whether that particular approach will always be appropriate or fair is a question that touches upon some of the key issues (and concerns) surrounding the unique nature of sports arbitration.