IN THE HIGH COURT OF JUSTICE QUEEN'S BENCH DIVISION MANCHESTER DISTRICT REGISTRY MERCANTILE COURT Case No: BA40MA109 Date: 19 January 2016 Before : His Honour Judge Bird Sitting as a Judge of this Court Between: Pencil Hill Limited Claimant -and- US Citta Di Palermo S.p.A Defendant Martin Budworth (instructed by Cassell Moore Solicitors) for the Claimant Thomas Braithwaite (instructed by Couchmans LLP) for the Defendant Hearing dates: 11 December 2015 I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic. HONOUR JUDGE BIRD
HIS HONOUR.JUDGE BIRD His Honour Judge Bird: Overview 1. Should a New York Convention arbitration award be enforced in the courts of England and Wales if it includes an award in respect of a penalty? 2. The relevant contracts entered into by the parties relate to the sale of financial rights deriving from "registration rights" of a football player called Paulo Dybala. Pencil Hill Limited had acquired the rights from a Spanish football club, Cordoba, and sold them on to an Italian football club, Palermo for a total price of 10,000,000 Euros. 3. By a written contract dated 27 April2012 Palermo agreed to pay Pencil Hill Limited a total of 6,720,000 Euros in 2 instalments of 3,360,000 Euros on certain fixed dates. A further 1,000,000 Euros became due under an agreement made in August 2012. 4. Clause 4 of the 27 April contract read as follows: "In the case [Palermo] fails to pay any of the instalment agreed, then, all the remaining amounts shall become due and as 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". 5. Clause 6 read as follows: "any question arise from this agreement will be submitted to the [Court of Arbitration for Sport ("CAS")] according to Swiss Private law. The file shall be conducted in English and decided by a panel composed bythree members". 6. The sum of 6,720,000 Euros was not paid. Procedural History 7. On 4 July 2013 Pencil Hill Limited filed an arbitration request at CAS. The application was heard on 26 March 2014. The claim was for 6,720,000 Euros under the 27 April contract together with the clause 4 penalty of a further 6,720,000 Euros and the 1,000,000 Euros due under the separate August agreement. 8. On 26 August 2014 CAS published its award. It directed that Palermo pay Pencil Hill Limited 9,400,000 Euros plus interest. That sum comprised the 1,000,000 Euros due under the August agreement, the 6,720,000 Euros due under the April agreement and the reduced additional sum (in place of the penalty) of 1,680,000 Euros. The reduced additional sum represented 25% of the penalty claimed. 9. In reducing the amount of the penalty, the Arbitral Panel referred to Article 163.3 of the Swiss Code of Obligations, which provides that (in its English translation) "the judge must reduce a contractual penalty considered excessive". I note in passing, that injanuary 1978 the Committee of Ministers of the Council of Europe recommended a number of common principles should apply to penalty clauses throughout Europe, including a power for the court to reduce the penalty "when it is manifestly excessive" (see paragraph 37 of Cavendish Square v Makdessi referred to below). At paragraph 189 of the Award the Panel expressed the view that the original penalty of 6,720,000 Euros was "disproportionate and unfair".
HIS UONOUR.IUUGE 811W 10. On 3 November 2014 Palermo appealed the arbitration award to the superv1smg, or curial, court the "Tribunal Federal" in Lausanne. Its decision was published on 21 May 2015. The reduced penalty was upheld. The Issue 11. The only issue before me is whether I should refuse to allow enforcement of 1,680,000 Euros of the award on the ground that to do so would be contrary to public policy. Relevant Law 12. Section 103 of the Arbitration Act 1996 deals with enforcement in the English courts. It is clear that there is a general duty on the English courts to enforce a New York Convention award, subject to certain limited exceptions set out at section 103(2)(a) to (e), and 103(3). Enforcement may be refused under subsection (3) "if it would be contrary to public policy to recognise or enforce the award". 13. Section 103 reflects national obligations assumed as a signatory to the Convention. The obligations are set out at Article V of the Convention. (see Nigerian National Petroleum Corp. v JPCO ( Nigeria) Ltd. [2008] EWCA Civ 1157 At para.6). 14. The Arbitration Act 1996 is founded on a number of principles set out at section 1. The Act is to be construed with those principles in mind. They include at section 1(b): "the parties should be free to agree how their disputes are resolved, subject only to such safeguards as necessary in the public interest" 15. Before dealing briefly with the authorities on the point in issue, I should deal with the views of the authors of the leading text books. Merkin, in a footnote to paragraph 19.72 notes that in considering refusal it is English public policy that is at stake, not the public policy of any other country. The parties accepted that is the case and I need say no more about it. In the same paragraph Merkin notes that for enforcement to be refused on the grounds of public policy, the award must "fundamentally offend the most basic and explicit principles of justice and fairness". Having referred to authority, the authors go on to say this: "It follows from these principles that a court may not refuse on public policy grounds to enforce an award which is erroneous in law or reaches a conclusion which the court would not itself have reached...". 16. In Deutsche Schachlbau und Tiefbohrgeselischaft mbh v Ras at-khaimah National Oil Co. [1987] 2 Lloyds Rep 246, Sir John Donaldson MR put it in this way: "Considerations of public policy can never be exhaustively defined, but they should be approached with extreme caution. As Burrough J. remarked in Richardson v. Mellish (1824) 2 Bing. 229, 252, "It is never argued at all, but when other points fail." It has to be shown that there is some element of illegality or that the enforcement of the award would be clearly injurious to the public good or, possibly, that enforcement would be wholly offensive to the ordinary reasonable and fully informed member of the public on whose behalf the powers of the state are exercised." 17. In Westacre Investments Inc. v Jugoimport-SDPR Holding Co and others [1999] 1 All ER (Comm) 865, it was said that the underlying contract was one which would be contrary to the public policy of England with the result that enforcement should be refused. The parties had chosen Swiss law as the governing law of the contract and the arbitration seat
His Honour Judge Bird PencilHill v Palermo was Switzerland with the Swiss Courts as the curial courts. Absent bribery, Swiss law did not regard the contract as contrary to public policy. 18. Waller LJ, referring to Lemenda Trading Co. v African Middle East Petroleum. Co Ltd [1988] 1 All ER 513, noted that "there are some rules of public policy which if infringed will lead to non-enforcement by the English Court whatever their proper law and wherever their place of performance". He cited the judgment of Phillips J in that case at page 521. There, having referred to attempts to categorise the various heads of public policy capable of invalidating contracts Phillips J held 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 the law of the place of performance might be. Waller U noted that Colman J at first instance had described such types of agreement as based on "universally condemned activities" including "terrorism, drug trafficking, prostitution or paedophilia". 19. The position is different if the public policy arises, not by the application of these universal principles but rather by the application of "domestic principles". Then, enforcement of a contract performed out of the jurisdiction will not necessarily be refused. In Westacre, Waller U (at 877h-j) decided that if a contract fell into this category it would need to be established that performance was contrary to the public policy of the place of performance before the English Courts would refuse to enforce it. Waller U noted that "It is legitimate to conclude that there is nothing which offends English public policy if an arbitral tribunal enforces a contract which does not offend the domestic public policy under either the proper law of the contract or its curial law, even if English domestic public policy might have taken a different view" 20. In Omnium de Traitement et de valorisation SA v Hilmarton Limited a decision of 25 May 1999 (1998 Folio No.1003), Walker J noted that the English courts would refuse to give effect to the contract which gave rise to the arbitration award. He pointed out that he was not adjudicating upon the underlying contract, rather he was deciding whether an arbitration award should be enforced in England. There the Judge noted that the parties had chosen Swiss Law to govern their relationship and that as a matter of Swiss Law the agreement was not unlawful. 21. Walker J felt the fact that the parties had agreed upon Swiss Law as the governing law and that Swiss law accepted the underlying contract as good was an important factor. As he put it: "...the fact that English law would or might have arrived at a different result is nothing to the point. Indeed the reason for the different result is that Swiss law is different from English Law and the parties chose Swiss Law and Swiss arbitration. If anything, this consideration dictates (as a matter of public policy of the upholding of international arbitral awards) that the Award should be enforced". 22. From the New Zealand case of Amaltal Corporation Ltd. V Maruha (NZ) Corporation Ltd Judgment delivered on 11 March 2004 in the New Zealand Court of Appeal) it can be seen that the international community has adopted the same, or at least a very similar, approach. At paragraphs 44 and 55 of the decision, Blanchard J, delivering the judgment of the Court, noted that the courts of the United States and of Canada have adopted a similarly "narrow reading" of the right to refuse enforcement on public policy grounds. Where enforcement would breach the rules (in Canada) of "essential morality" or (in the United States) the "most basic notions of morality and justice" enforcement will be refused.
HIS HONOUR JUDGE BIRD 23. In that case the Court of Appeal in New Zealand was concerned with a penalty clause. At paragraph 56 it posed the rhetorical question: is the unenforceability of a penalty clause to be regarded as falling foul of fundamental concepts of law and justice? It concluded that it was not. At paragraph 59 the rule against penalties was described as "not a rule which can properly be characterised as so fundamental as to constitute "public policy" in the sense in which those words have been used in [the New Zealand equivalent of section 103(3) of the 1996 Act]." The New Zealand court took the view that the law of penalties owed its development to equity and was not a matter of "public policy". 24. I was referred to Cavendish Square Holding BV v Makdessi [2015] UKSC 67. The decision deals with the circumstances in which the rule against penalties is to be applied. It explains in the clearest terms that the rule against the enforcement of penalties is a rule based on public policy. Lord Neuberger, Lord Sumption and Lord Carnworth note (at paragraph 31 and 32) that the law relating to penalties "has become the prisoner of artificial categorisation, itself the result of unsatisfactory distinctions: between a penalty and genuine pre-estimate of loss, and between a genuine pre-estimate of loss and a deterrent....[t]he real question when a contractual provision is challenged as a penalty is whether it is penal, not whether it is a pre-estimate of loss. These are not natural opposites or mutually exclusive categories...the true test is whether the impugned provision is a secondary obligation which imposes a detriment on the contract breaker out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation. The innocent party can have no proper interest in simply punishing the defaulter." 25. Lord Hodge (with whom Lord Toulson agreed) described the correct test for a penalty as "whether the sum or remedy stipulated as a consequence of a breach of contract is exorbitant or unconscionable when regard is had to the innocent party's interest in the performance of the contract". Submissions 26. Mr Braithwaite who appears for Palermo accepts (as he must) that the test to be applied in deciding whether to decline to enforce is "a rigorous one". His argument is that the nature of the penal clause in the present case is "sufficiently injurious" to justify refusal. He submits that Makdessi makes it clear that the rule against penalties is firmly a matter of public policy and that, even after reduction of the amount of the penalty by the arbitral body following curial review, there remains a penalty which the courts of England should not enforce. 27. Mr Braithwaite referred also to section 5 of the Protection of Trading Interests Act 1980, described by Lord Hodge in the Outer House in Service Temp. Inc v MacLeod 2014 SLT 375 as a "remarkable Act". Lord Hodge (at paragraph 33) expressed the view that in enacting the statute, Parliament had "sought to discourage what is considered to be the exorbitant effects of United States anti-trust laws. The Act is concerned not only with the extra territorial effect of such laws but also with preventing the recovery of multiple damages". Lord Hodge went on to say that, even if the Act did not exist: "the common law, bolstered by [Article 1 of the First Protocol of the European Convention on Human rights] would have rendered unenforceable a claim for multiple damages". I need not set out the substance of the Act because the submission was not based on it, rather it was based on what Lord Hodge said the common law would do in the absence of the Act. The submission was that the view adopted by Lord Hodge strengthened Palermo's argument.
IUS HONOUR JUDGE UIR.D Approved.Judgment In short, the award in the present case was a simple award of multiple damages which ought not to be enforced. 28. Dealing with Amaltel in the New Zealand Court of Appeal, Mr Braithwaite submitted, given the Supreme Court's decision in Makdessi that the case was wrongly decided. It was now clear that the rule against penalties was a matter of public policy and not a mere rule of equity. 29. Mr Budworth submits that the granting of permission to enforce a New York convention award involves a balance between, on the one hand, the desirability of finality in international arbitration and on the other, public policy considerations concerning penalties. He submits that there is a hierarchy of public policy considerations and that the public policy represented here by the domestic imperative to refuse to enforce penalty provisions was not sufficient to tip the balance against enforcement. He relies on the fact that the curial court has upheld an adjustment of the penalty here so that, in the eyes of that court, the "penalty" is no longer "excessive". He points out that the parties have agreed upon a governing law which would permit (and which resulted in) a rewriting of the penalty clause and have agreed that disputes between them should be dealt with by arbitration in the same jurisdiction. Discussion 30. I have come to the conclusion that the award should be enforced in its entirety. The authorities are clear. There is a strong leaning towards the enforcement of foreign arbitral awards and the circumstances in which the English Court may refuse enforcement are narrow. I am satisfied that the important public policy against enforcement of penalty clauses is not sufficient to permit me to refuse enforcement. The rule does not in my judgment protect a "universal principle of morality". It is not so clearly "injurious to the public good" that enforcement should, without more, be refused. That being the case, the position under the governing law as applied by the curial court must be considered. It is in my judgment particularly important in the present case to note that the parties chose a governing law which empowers its courts to interfere with a penalty by reducing it. 31. In the present case the governing law applied by the CAS and the curial court recognised the relevant payment obligation as a penalty. CAS exercised its power to vary and reduce the payment obligation so that the obligation was no longer considered to be "excessive". The curial court upheld the reduction. The altered obligation was no longer regarded by the governing law as objectionable. 32. In my judgment the public policy of upholding international arbitral awards, as Walker 1 held in Omnium, outweighs the public policy of refusing to enforce penalty clauses. The scales are tipped heavily in favour of enforcement. 33. The decision in Ameltel in my judgment remains good even in the light of Makdessi. The Court of Appeal in New Zealand was doing no more than applying the universal principles set out, in particular, in the Deutsche Schachtbau case. 34. In my judgment there is a second strong reason to enforce. In the eyes of Swiss law it seems to me that the variation of the payment obligation changed the nature of the obligation. What had been a penalty (an excessive payment) was changed into a non penalty (a non excessive payment). The position then is not that Swiss law upheld a
His Honour Judge Bird Approved Judgement penalty, rather it is that Swiss law removed a penalty and replaced it with an obligation to pay a sum it regarded (in the words of Lord Hodge in Magdassi ) as neither exorbitant nor unconscionable. As this Court is (as Walker J put it in Omnium) not adjudicating upon the underlying contract, it is easy to see that the decision of the curial court- the court chosen by the parties applying the law chosen by the parties-should be respected. 35. Mr Budworth raised an estoppel argument. In my view it adds nothing but is simply another way of describing the weight to be attached to the decision of the curial court. Further points 36. The skeleton arguments raised 2 further points. Each dealt with the form of the order made by His Honour Judge Raynor QC. One point related to the reference to sterling in the order, the other to interest. Having heard Mr Braithwaite's submissions on the points Mr Budworth made no argument against them. Conclusion 37. The application to set aside the order of His Honour Judge Raynor QC is refused. 38. For the sake of clarity I will make a fresh order. The parties should use their best endeavours to agree its terms. It should make no reference to sterling or to interest. The order will not be an entry of judgment in a monetary sum. I am confident, given the sensible, efficient and good natured way in which the hearing before me progressed that an order can be agreed. If my confidence is misplaced I will decide on the form of order at the handing down of this judgment. I am grateful to both counsel for their focussed and helpful submissions in this matter. -end-