High Court enforces reduced CAS penalty clause award for first time

North West firm Cassell Moore has obtained a landmark judgment against Italian football club Palermo in the High Court.

The case concerned the 2012 transfer of Argentina international striker Paulo Dybala, a 22-year-old wonderkid dubbed the 'next Lionel Messi', who is currently linked with a big-money switch to Premiership title contenders Manchester City.

When Dybala originally signed for Palermo from Argentine side Cordoba in a £7.7m move, English-based football rights company Pencil Hill Ltd handled the deal.

Pencil Hill were owed £5.2m by Palermo for the sale of the player's financial rights, deriving from registration rights, to be paid in two instalments on fixed dates.

Following a further agreement in August 2012, Palermo was bound to pay Pencil Hill an extra £770,000 but missed these payments, triggering a clause in the contract causing the amount owed to the rights company to be doubled, taking the total to £11m.

In July the £5.2m fee was reduced to £1.3m after a hearing at Switzerland's Court of Arbitration for Sport (CAS) where arbitrators considered the original penalty 'excessive'. Palermo's bill then stood at £7.2m.

But despite losing a subsequent appeal in the Swiss Upper Tribunal, Palermo still failed to settle the balance.

Earlier this week Liverpool-based Cassell Moore convinced the High Court to enforce the CAS award containing the penalty clause, even though it appears contrary to English public policy.

His Honour Judge Bird upheld CAS's ruling, ordering Palermo to settle their £7.2m debt, plus interest.

Cassell Moore's commercial litigation solicitor Tom Melville says this is the first time a penalty clause has been considered by the domestic courts in such circumstances, and signified the tension between the public policy of refusing to uphold penalty clauses and the Lugano Convention.

'Any additional fee stipulated in a contract needs to be a genuine pre-estimate of loss, otherwise it's termed as a 'penalty clause' and unenforceable under English contract law,' he added.

'In this case, the judge in the Court of Arbitration for Sport upheld the clause but reduced it.'

Melville continued: 'Because CAS reduced the amount owed under the clause, the penalty clause was changed to something more reasonable, and therefore was deemed enforceable in England.'

'This is the first time this issue has been considered by an English court so it's likely that any further contracts containing penalty clauses upheld in foreign Courts in the future will be quoting this case', he said.

Barrister Martin Budworth of Kings Chambers remarked: 'Palermo made a determined attack but the court was persuaded, thankfully, to uphold the finality of international arbitration awards as far as possible.

'Ironically, it was the choice of Swiss Law as the governing law of the contract, rather than English law, which led the English court to find in the claimant's favour.'

Palermo, owned by controversial Italian businessman Maurizio Zamparini, has offered no reason as to why the fee has not been paid.

A number of English clubs are believed to owe transfer fees to the Palermo for players, money which will now be sought by Cassell Moore to settle their client's bill.

It is believed Palermo has a sell-on clause entitling it to additional funds should Dybala leave to join the Premier League this transfer window.