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In a decision of December 13, 2016, recently published (4A_116/2016), the Swiss Supreme Court  (“SC”), called on to decide on a request for the setting aside of an award by the Court of Arbitration for Sport (CAS), had to consider the compatibility of a third-party ownership (“TPO”) agreement with public policy under Swiss law. The SC considered that the TPO was not in material breach of public policy.

The facts forming the basis for the litigation are not very significant, but the SC’s analysis merits attention.

The dispute involved a professional football club (X) and an investment company (Z) from which X had obtained financing to acquire a player. In August 2012, X and Z had signed an Economic Rights Participation Agreement (“ERPA”), under which  Z paid X €3 million in exchange for the transfer of 75% of the economic rights generated by the player. If the player was transferred, Z would be entitled to 75% of the value of the transaction and, in any case, to a minimum of €4,200,000. Having estimated the market value of the player at €8 million, the ERPA also included a clause under which Z could require X to sell the player if the offer was equal to or higher than such an amount, paying Z 75% of the transaction, an amount that X would have to pay Y if it were to reject the offer.

Subsequently, the parties entered into a second ERPA in relation to another player, in the same terms.

X transferred the players, and Z claimed the payment of €15 million from it. X paid a part (a total of €4.5 million), but a few months later started arbitral proceedings against Z before the Court of Arbitration for Sport (CAS), requesting that the ERPAs be declared invalid.

The CAS dismissed the claim, and X challenged the dismissal before the SC, requesting that the ruling by the CAS be set aside and invoking, as the sole grounds for the appeal, an alleged violation of material public policy in line with article 190.2 (e) of the Swiss Federal Act on private international law (“PILA”). Specifically, X alleged that the ERPAs were contrary to (i) article 27 of the Swiss Civil Code (“CC”) that forbids excessive agreements (the excessive nature being the commitment to pay 75% of the value of the transaction); (ii) article 157 of the Swiss Criminal Code in relation to usury; and (ii) article 20 of the Swiss Code of Obligations (“CO”) in relation to the nullity of agreements that are impossible, illegal or contrary to accepted customs (as the TPOs had been forbidden by FIFA rules since May 2015).

In view of the strong political implications of this decision, in its analysis, the SC did not wish to argue whether the TPO was in line with accepted customs or whether the prohibition of the TPO introduced in May 2015 by article 18 (3) of the FIFA Regulations on the Status and Transfer of Players is valid.

However, the SC stated that, in any case, it would not be possible to adapt the public policy concept in article 190.2 (e) of the PILA on the basis of the industry in question (football in this case), because it would allow FIFA to define the meaning of public policy according to its own criteria.

The SC also indicated that although it had recognized the specific nature of international arbitration on sports matters in certain cases, it did not mean that it should establish a different sports-specific notion of public policy, unless it were to create genuine sports legislation, which would cause problems from the point of view of the division of powers between the legislative and the judicial branches.

In its analysis, the SC confirmed that the TPO was not contrary to the prohibition on usury of article 27 of the CC, or article 20 of the CO. In analyzing its compatibility with article 27 of the CC and article 20 of the CO, the SC stressed that X is an experienced professional football club and had itself financed its transactions through the TPO.

To conclude, although in this case the SC’s margin of discretion was very limited, as it dealt with an appeal against an international award, its analysis seems to tend towards recognition of the validity of the TPO from the standpoint of Swiss law.

In our opinion, however, the analysis could vary based on the circumstances of each specific case. Depending on the content of the TPO agreement, there may be a breach of (i) article 27 of the CC prohibiting excessive commitments; and (ii) article 28 of the CC protecting personality rights, including the right to economic development, which also applies to legal persons. For example, we could consider a TPO agreement with a percentage of economic rights transferred to the financing company that is so high that it could place the very existence of the club benefitting from the financing at risk.

Also we cannot rule out the fact that the results would have been different if this prohibition were to have been the object of analysis in a Swiss court with a broader discretionary scope, rather than an arbitration court.

Author: Marco Vedovatti

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