The English High Court recently held that a foreign arbitration award should be enforced in its entirety, despite it including a sum awarded pursuant to a penalty clause (Pencil Hill Ltd v US Citta di Palermo SpA (Case No. BA40MA109) (unreported)).
The contracts between the parties related to the sale of financial rights deriving from registration rights of a football player. Pencil Hill had acquired these from a Spanish football club and sold them on to an Italian football club (Palermo) for a total price of €10 million.
Palermo had agreed, in an April 2012 contract, to pay Pencil Hill a total of €6,720,000 in two equal installments, with a further €1 million pursuant to an August 2012 agreement.
Clause 4 of the April 2012 contract specified that “In the case [Palermo] fails to pay any of the installment 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”. Palermo duly missed an installment.
In July 2013, Pencil Hill filed a request for arbitration with the Court of Arbitration for Sport (CAS), claiming €6,720,000 under the April 2012 contract, with a penalty of a further €6,720,000 and the €1 million due under the August 2012 agreement.
In its award of August 2014, CAS awarded Pencil Hill €9.4 million, comprising the €1 million due under the August 2012 agreement, the €6,720,000 due under the April 2012 contract, and €1,680,000 representing 25 per cent of the penalty claimed by Pencil Hill.
Palermo appealed to the Swiss Supreme Court, which upheld the penalty awarded by CAS, after which Pencil Hill applied to the English High Court to enforce the award, where the judge held that it would not be contrary to public policy to enforce the award, indicating that “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”. In the judge’s view, the “public policy of upholding international arbitral awards […] outweighs the public policy of refusing to enforce penalty clauses. The scales are tipped heavily in favour of enforcement”.
Many will be heartened to note the pro-arbitration stance taken by the English High Court. However, it is important to note that the contract in this instance was governed by foreign law (Swiss law), under which penalty clauses are not prohibited. Moreover, on appeal the curial court had upheld a reduction of the payment obligation, made in accordance with Swiss law – as the English court noted, that variation arguably changed the payment obligation from a penalty to a non-penalty. Accordingly, this case cannot be taken as a blanket approval by the English courts of arbitral awards awarding sums pursuant to penalty clauses. Such clauses must still be carefully drafted, particularly if enforcement is to be sought in England or other jurisdictions where penalty clauses are contrary to domestic public policy.