12. June 2019

Arbitration Newsletter Switzerland CAS’ Order of Procedure and the Right to Challenge the Award for Arbitrariness

On 31 May 2019, the Swiss Federal Supreme Court (the “Supreme Court“) published on its website a new decision in the field of international arbitration (the “Decision“)¹ dealing with an action for annulment against an award of the Court of Arbitration for Sport (“CAS“) in the matter between the former FIFA Secretary General and FIFA regarding violation of the FIFA Code of Ethics.

The main issue addressed by the Supreme Court was whether the signing of the Order of Procedure in the course of the arbitration proceeding before the CAS resulted in a valid opting out from the lex arbitri for domestic arbitrations and the application of the lex arbitri for international arbitrations, with the consequence that the award cannot be reviewed under the standard of arbitrariness.

The Decision was rendered by all five members of the First Civil Chamber on 7 May 2019 and will be included in the Supreme Court’s publication of leading cases.

1. Facts

By its decision of 10 February 2016, the FIFA Ethics Committee sanctioned the former FIFA Secretary General (hereinafter “SG“) both with a 12-year ban from taking part in any football-related activity and with a fine of CHF 100,000 for having infringed the FIFA Code of Ethics. SG was inter alia found accountable for having been involved in private transactions, to his personal benefit, by the selling of tickets for the 2014 FIFA World Cup, by flying in private jets for private purposes at FIFA’s expense and of offering undue gifts in the form of media rights for the FIFA World Cup 2018 and 2022 far below the market price.

SG appealed this decision to the FIFA Appeal Committee. On 24 June 2016, the FIFA Appeal Committee partially confirmed the FIFA Ethics Committee’s decision by reducing the ban to 10 years while maintaining the fine at CHF 100,000.

SG appealed this decision with the CAS on 23 February 2017. In the course of the arbitration, the CAS Court Office sent the parties the “Order of Procedure”, which they signed and returned to CAS. The Order of Procedure contained inter alia the following part:

“In accordance with the terms of the present Order of Procedure, the parties agree to refer the present dispute to the Court of Arbitration for Sport (CAS) subject to the Code of Sports-related Arbitration (2017 edition) (the “Code”). Furthermore, the provisions of Chapter 12 of the Swiss Private International Law Statute (PILS) shall apply, to the exclusion of any other procedural law.”

In an arbitral award of 27 July 2018²   (hereinafter “Award“), the CAS dismissed SG’s appeal.

SG filed an action for annulment against the Award with the Supreme Court. He contended that the arbitration in front of the CAS was to be qualified as a domestic arbitration and thus would also be reviewable under the standard of “arbitrariness”. Therefore, SG inter alia attacked the Award by alleging that the decision would violate mandatory Swiss labour law and would have to be qualified as arbitrary.

On 7 May 2019, the Supreme Court rejected the action for annulment.t with the Supreme Court and requested that it be annulled and the matter sent back to the Commercial Court.

2. Considerations

The Supreme Court first pointed out that the admissibility of the action for annulment against arbitral awards differs depending on whether the arbitral award was rendered in a domestic or international arbitration. The question of the domestic or international character of the arbitration is of great importance, as the grounds for annulment of an award in an international arbitration are considerably more limited than the grounds available in domestic arbitration. Indeed, article 190(2) of the Private International Law Act (“PILA“), which exhaustively lists the admissible grounds against international awards, does not stipulate arbitrariness as a ground for an action for annulment.

The arbitration is international if the seat of the arbitral tribunal is in Switzerland and if at least one of the parties had, at the time the arbitration agreement was concluded, neither its domicile nor its habitual residence in Switzerland (article 176(1) PILA); in such situations, the arbitration is governed by Chapter 12 PILA. If the seat of the arbitral tribunal is in Switzerland and the provisions of Chapter 12 PILA are not applicable, the arbitration is domestic and governed by Chapter 3 of the Code of Civil Procedure (“CPC“) (article 353(1) CPC).

However, according to article 353(2) CPC, the parties may exclude the application of Chapter 3 CPC by making an express declaration to this effect in the arbitration agreement or in a subsequent agreement, and instead agree that the provisions of the Chapter 12 PILA apply (so called “opting out”). There is an analogue provision for international arbitrations: article 176(2) PILA gives the parties, when the arbitration is of an international nature, the opposite possibility, namely to opt for the provisions relating to arbitration of the CPC with the exclusion of those of the PILA.

In the present case, the parties were in agreement that the dispute between them qualified as a domestic arbitration (and accordingly is governed by Chapter 3 CPC), unless there was such an opting out, i.e. a binding choice of the lex arbitri in favour of Chapter 12 PILA.

In this regard, the Supreme Court addressed the requirements for a valid opting out of the application of Chapter 3 CPC in favour of the application of Chapter 12 PILA. It held that the following requirements must be fulfilled: (1) the application of Chapter 3 CPC is expressly excluded, (2) exclusive application of the provisions of Chapter 12 PILA is agreed and (3) the express declaration of the parties is in written form.

The Supreme Court further noted that an opting-out under article 353(2) CPC cannot be validly agreed in order to circumvent the arbitrability restrictions regarding disputes concerning claims arising out of a Swiss employment relationship which the employee cannot renounce. While this is strictly speaking not an additional condition, it must be noted that, in the event of opting out in such a situation, the arbitrability of a domestic dispute is to be determined in accordance with Chapter 3 CPC and not Chapter 12 PILA.

The Supreme Court then assessed whether the mentioned Order of Procedure³ resulted in an opting out of Chapter 3 CPC in favour of Chapter 12 PILA.

It first rejected SG’s argument that the parties had not validly agreed on an opt-out in the Order of Procedure. The Supreme Court held inter alia that a party, in particular when represented by legal counsel, cannot sign a legal document such as the Order of Procedure containing a choice of law clause and, subsequently, argue that it is not bound by it.

The Supreme Court then held that a valid opting-out in accordance with article 353(2) CPC and article 176(2) PILA did not require the express mentioning of Chapter 3 CPC or of Chapter 12 PILA, respectively, in the arbitration agreement or in any subsequent agreement. While such a reference is advisable in order to avoid any uncertainty, the validity of a choice of law does not depend on it. As the Supreme Court has already clarified in its case law on article 176(2) PILA, it is sufficient that the common intention of the parties to exclude the application of these provisions is clear from the terms used.

The Supreme Court then analyzed the Order of Procedure and held that the parties’ intention to exclude the application of the CPC’s provisions on domestic arbitration was clear from the terms used therein. Accordingly, the disputed clause constitutes, from this point of view, a valid opting-out within the meaning of article 353(2) CPC.

The Supreme Court next addressed the question of the latest moment at which the parties could validly agree such an opt-out. It held that, in cases where the arbitral tribunal had consented to such an opt-out, it could be agreed at any time prior to the rendering of the arbitral award.

In view of the above, the Supreme Court considered the parties’ agreement to submit their dispute to the rules of Chapter 12 PILA in compliance with the requirements of article 353(2) CPC. Therefore, only the grounds for an annulment under article 190(2) PILA are admissible against the Award. Since article 190(2) PILA does not permit arbitrariness as a ground for an action for annulment, SG’s complaints relating to the alleged arbitrary violation of the mandatory rules of Swiss labour law was declared inadmissible by the Supreme Court.

Finally, the Supreme Court addressed the further grounds invoked by SG in seeking to annul the Award but rejected them as well. Therefore, the action for annulment was rejected to the extent it was admissible.

3. Conclusions

he Decision provides an answer to an ephemeral academic question only, namely which formalities are to be followed in a domestic arbitration to validly opt out – as provided for in article 353(2) CPC – from the national provisions for challenging a domestic award (article 393 CPC) to the applicable provisions for the annulment of an international award rendered in Switzerland, as provided for in article 190(2) PILA.

But who would do so anyway, thus depriving the losing party from having its case reviewed by the Supreme Court on the merits – though under the narrow angle of arbitrariness only? Article 393(e) CPC does at least open a small window for success, whereas the required violation of public policy under article 190(2)(e) PILA for annulling an international award, with only one successful application due to violation of substantive public policy in the past 30 years, makes such remedy for a review by the Supreme Court on the merits almost non-existent. Therefore, the Decision is not of significant value because this opting out happens very rarely only.

However, it is worthwhile to consider two features of CAS’ well-reasoned Award.

The first concerns the Order of Procedure: it remains unclear how the opting-out clause ever made it into this order and why SG’s then counsel signed it at all – probably inadvertence by both. The Award then raises at least doubts as to whether the parties truly opted out of a domestic arbitration because the wording used as to “the exclusion of any other procedural law” may not be considered sufficient to qualify as an “express declaration” pursuant to article 353(2) CPC⁴ – however, the Supreme Court held otherwise. In any event, the Award then concluded as follows on this issue:

“127.  In any event, the Panel recognizes that the practical effect of characterizing the present arbitration as domestic or international is generally limited and, in this particular proceeding, essentially insignificant. It only has a potential future effect on the applicable standard of review in the event the award is appealed to the Swiss Federal Tribunal. In fact, only if this proceeding were considered as a domestic arbitration would this award be reviewable also under the standard of “arbitrariness” (Article 393(e) CPC), given that this concept is not present among the grounds of appeal listed for international arbitration (Article 190, para. 2 PILA). Accordingly, given the practical irrelevance and the fact that neither party’s motions for relief ask the Panel to determine this issue, the Panel will make no ruling on it, as it can be left to be decided by the Swiss Federal Tribunal if and when this award is challenged.”

The Supreme Court supported this approach and rejected, therefore, the alleged violation of SG’s right to be heard because of CAS’ voluntary abstention from deciding this issue. As to the doubts expressed by CAS they turn now out to be unfounded.

The second interesting feature is that the Award also addressed the relationship between Swiss labour law and the association law of FIFA⁵. Indeed, the opting-out affected only the procedural law (PILA instead of CPC) but not the substantive law applicable to the relationship between SG and FIFA, which continues to be Swiss law and the association rules of FIFA. This could potentially create a conflict between mandatory Swiss labour law provisions and FIFA’s association rules. In this respect the Award outlined the following:

“153.  The Panel is of the view that the Appellant was in a situation of “role splitting” (in French a “dedoublement fonctionnel”) in the sense that, in his capacity as the FIFA Secretary General, he had two separate legal statuses or roles. On the one hand, he was an official (and even an organ) of FIFA on the basis of the association rules; on the other hand, he was a FIFA employee by virtue of an employment agreement under private law. The Appellant’s dual legal relationship as both an official/organ and employee of FIFA is underscored by the fact that the moment he assumed the role of FIFA Secretary General on 27 June 2007, with his appointment by the FIFA Executive Committee upon proposal by the FIFA President (Article 31, para. 10 of the FIFA Statutes of 2007), was different from and earlier to the moment he became an employee by signing his employment contract on 2 July 2007 (see supra at para. 121).”

“155.  The result of the Appellant’s dual legal status is that his status as an official or organ of FIFA has been governed by Swiss association law, while his status as an employee of FIFA has been governed by Swiss employment law. This means that both the Appellant and the Respondent, symmetrically, have possessed rights and obligations vis-à-vis each other under two different sets of rules: (i) the FIFA Statutes and various FIFA regulations, including the FCE, in relation to the Appellant’s status as an organ or official of the Respondent association, and (ii) the employment contract and Swiss labour law, in relation to the Appellant’s status as an employee and the Respondent’s status as an employer.”

“156.  This also means that – as is commonplace for sports associations – FIFA had the power to sanction the Appellant, as it did, on the basis of association law, without being limited by employment law. […]”

This remarkably balanced approach was regrettably not addressed by the Supreme Court, which could therefore not further develop the border lines in this interesting issue.

The three substantive arguments raised by SG, besides his objection to the procedural opting-out, namely violation of (i) his right to be heard, (ii) article 6(1) EHRC and (iii) public policy were of a nature that the Supreme Court could dispose of all three arguments in a few sentences each. The arguments raised were not of a strength to put the Award into serious question. It did, therefore, not matter at all whether the Award was reviewed by the Supreme Court under the narrower scope of article 190(2)(e) PILA or under the slightly broader concept of arbitrariness of article 393(e) CPC – the action for annulment was obviously without merits anyway.

Decision-4A_540_2018-of-7-Mai-2019.pdf (pdf 112 KB)