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The framework for the enforcement of non-performing loans in the EU and the Republic of Serbia

The proposed EU framework

The European Commission proposed a number of regulatory norms that are aimed at non-performing loans (NPLs) as a threat to the stability of the financial system of the EU and the Banking Union. These measures are in accordance with the European Councils Action Plan that addresses the issues that NPLs can have to the normal functioning of banks and can lead to systemic failures of the single market within the EU.

I.      What are NPLs?

Non-performing loans or non-performing loan agreements are generally defined as loan agreements where the borrower has not paid interest instalments for a period of over 90 days or the borrower reveals that the loan is unlikely to be repaid. Non-performing loans constitute the majority of non-performing exposures (NPEs) on the balance sheets of banks, however NPEs are also consisted of other debt instruments.

II.    Why are NPLs so important for the financial stability of the Banking Union?

The importance of NPLs and the reasons why NPLs deserve special attention can be explained by the fact that the value of non-performing loans in Europe are estimated at 1.1 trillion $ or around nine percent of EU GDP and because a high percentage of over 30% of  NPLs on bank portfolios was noticed in several countries of the EU (e.g. Cyprus).[1] NPLs are considered to be one of the reasons for the lower profitability of EU banks.[2] It is beneficial to the economy as a whole if the NPLs on the balance sheets of banks are reduced gradually.[3] One of the main causes for the increase of NPLs in the EU is the reduction in the regulation of financial markets and the advancement of information technologies which resulted in the significant development of credit by financial institutions.[4] Banks that have NPLs on their balance sheets need to commit their resources for servicing them as in the case of other assets, however unlike other assets these do not give any profit. When committing its resources to NPLs a bank limits its capacity to lend to new ventures or established businesses causing potential problems to the real economy. Therefore, NPLs have negative effects on banks which in turn have negative impacts on the real economy.

        The proposed solution for NPLs in the EU

I.      The detected problems

The internal legal framework of the member states of the EU varies, albeit harmonized to a certain extent. Due to this, the legal possibilities that the banks have when managing NPLs depend on the countries of their incorporation and on the applicable laws that govern their loans.[5] Thanks to the recently implemented legal frameworks that pressures banks to free up their capital, the banks in Europe have sold their non-performing loans with large discounts.[6] Another important question is the complexity and duration of the enforcement of loans and the role of the state in the enforcement stage. Seizing collateral in the EU currently can span from 24 hours up to ten years as showed by the research of KPMG.[7]

        II.    The state-of-play of the European Commission NPL package

According to the Councils Action Plan the European Commission in March 2018 adopted a package of measures that address the issues of NPLs in the EU. The package of measures comprehensively identifies three key standpoints for tackling NPLs. Firstly, by amending the current Capital Requirements Regulation for banks which will constitute new common minimum levels of money for the banks to keep in order to cover future losses caused by loans that turn into NPLs, secondly, a Directive was proposed on the recovery of collateral, credit servicers and credit purchasers and lastly a non-binding guidance on how to set up domestic Asset Management Companies.

A.    Amending the current Capital Requirements Regulation for banks

The need of having capital that the bank can draw on when facing problems is aparent. The Commission’s proposal is that banks should establish a common minimum level that banks need to keep in order to cover losses that could arise from future loans that become non-performing which will act as a statutory prudential backstop. The rationale behind prudential backstops is preventing a systemic buildup of NPLs such as at the recent financial crisis.[8] When a loan becomes non-performing i.e. when the borrower does not pay the agreed instalments the bank needs to assume that the loan will not be paid back and set aside more capital. The objective of this framework is for the banks to become more flexible and resistant to adverse shocks by incentivizing them to address NPLs more proactively, preclude them of accumulating NPLs on their balance sheets in the future and facilitating private risk-sharing among the parties while on the other hand decreasing the possibilities of public risk-sharing.[9] The proposed framework will have different coverage requirements depending on the loan itself, with the Councils position distinguishing loans as secured or unsecured and if secured, depending on the collateral as immovable or movable. The maximum loss coverage of a 100% for NPLs secured with immovable collateral will have to be gradually built up for 9 years on the assumption that immovable property retains its value for a longer period of time, while the unsecured NPLs have a significantly shorter period of 3 years for the banks to build up capital to cover these loans, with the maximum coverage requirement of 100% being applied after 3 years.[10] However, a potential drawback could be even though having capital is considered the same as having money, the value of the asset in the banks books can be different from the real value of the asset. All the defined formulas for capital requirements such as Basle I are based on the value of the bank’s assets in the books. The book value can vary to a great extent because it is widely known that the real value of the asset that needs to be sold today “can be worlds apart“ from the assets value in the banks books.[11]

B.    The objectives of the Directive on credit servicers, credit purchasers and the recovery of collateral

The objectives that the Commission seeks to accomplish with a Directive on credit servicers, credit purchasers and the recovery of collateral is: a) provide banks with the possibility of efficiently seizing collateral that underpins the loan by facilitating out-of-court collateral enforcement; and b) fostering the development of a secondary market for NPLs by removing barriers to credit servicing and to transfer of NPLs to third parties.

            a) Out-of-court collateral enforcement is an efficient way of retaining the value of an NPL by selling assets. However enforcement of collateral was until recently only possible through judicial proceeding, which on the other hand could turn up to be a significantly longer process. This out-of-court regime will not be unlimited at scope. It will only be applicable in cases of out-of-court collateral enforcement in relation to loans granted to businesses and only in cases where the borrower explicitly agreed to it when concluding the loan agreement. Therefore, consumer loans are going to be expressly excluded in this proposed directive. The majority of member states of the EU have implemented legal frameworks allowing out-of-court enforcement of collateral of NPLs. However, in the legal systems of many member states of the EU there needs to be judicial procedures where the loan is secured by real estate. A considerable piece in the total number of collateralized loans, according to the European Banking Coordination Working Group’s 2012 report on NPLs in Central, Eastern and Southeastern European countries, are collateralized by real estate.[12] In the light of these facts the difficulties that are going to follow the objective of out-of-court enforcement of collateral under the proposed directive are apparent. The large number of cases that will be going into out-of-court procedures could pose a threat to personal and property rights of the borrowers unless a solid legal framework is implemented taking into account these threats.

            b) A secondary market for NPLs needs to be established in the European Union in order to foster the possibility of transferring loans to third parties across state borders among member states of the EU, but with due regard to consumer protection making sure that their rights and interests are not impacted. Even though there was some progress in recent years, the large numbers of NPLs need to be tackled through further developing secondary markets because the secondary market for distressed debt in the EU is still underdeveloped compared to some third countries. Currently the trade of NPLs is small in volume, there are few active investors in this market and there is a large bid-ask spread.[13] On the other hand, while there are few direct obstacles for the sale of NPLs, the legislation of many member states indirectly restricts trading in NPLs such as with legislation limiting loan transfers only to banks or other financial institutions.[14] The Commission has the goals of removing restrictions to third-party servicing and at the same time harmonizing the basic principles of the servicing of non-performing loans which could be based on having license requirements, providing ruled on trade secrecy and consumer protection.[15] This mechanism will contribute to the further development of the NPL servicing market.

C.    Non-binding guidance on how to set up domestic Asset Management Companies

Аsset Management Companies (AMCs) have been used effectively in the past to clean up banking sectors and national financial systems that suffered from a pile up of NPLs. AMCs are familiar in the Eurozone and have been used in countries like Spain or Hungary with some common characteristics such as governments passing legislation that governs them, provided capital and facilitated funding.[16] These AMCs can be established as privately or publicly owned companies, with publicly owned companies dominating the period after the 2007 global economic crisis. In the case that an AMC is established by a member state the question arises whether or not that state is in breach of the European state aid rules. The European Commission, which has the obligation to monitor member states in relation to possible breaches of EU state aid and competition law rules, has adopted an approach that as long as member states act in the same way as private investors there is no breach of EU laws.[17] The EU Commission adopted a comprehensive package of measures in March 2018 among which a technical blueprint for the setting up of national AMCs was published. The technical blueprint provides guidance for the creation and design of national AMCs based on the previous experiences of Member States.[18]

NPLs in Serbia

The banks in the Republic of Serbia have not been immune from the global and EU-wide problems that are generated from a buildup of NPLs. The macroeconomic backgrounds for the NPL accumulation in the bank sheets of Serbian banks are increased unemployment, currency depreciation and higher inflation rates. In June 2015 the Serbian Government rendered its NPL Resolution Strategy with a goal of preventing further accumulation of NPLs to prevent it from impacting banks lending capability and the real economy. One of the central parts of the NPL Resolution Strategy was the further development of the NPL market, which was slowed down by a variety of factors: tax, legal, capacity data and other obstacles.[19] Obstacles that were planned to be tackled were the potential impediments related to the establishment of privately-owned AMCs or other SPVs, and safeguards for the potential liberalization of NPL sale to investors and entities established outside of Serbia. Finally, the National Bank of Serbia (NBS) had conducted a comprehensive analysis of modalities for a potential liberalization of the retail NPL market.[20] The results from the NPL Resolution Strategy are positive. According to the NBS Third quarter report of 2018 Serbia’s Non Performing Loans Ratio stood at 6.4 % in Sep 2018, compared with the ratio of 7.8 % in the previous quarter. Serbia’s Non Performing Loans Ratio data is updated quarterly, available from Sep 2008 to Sep 2018. [21]  The data reached an all-time high of 23.0 % in Sep 2014 before the NPL Resolution Strategy and a record low of 6.4 % in Sep 2018.[22]

Conclusion

The EU banks have a large stock of NPLs on their balance sheets that are gradually being reduced through the adopted measures of EU institutions. Similar efforts are taking place on the domestic level in Serbia. This reduction is not going in the anticipated pace. Although the positive outcomes are visible the high levels of NPLs in some EU Member States still pose a problem.[23]

[1] Amelie Labbe, The NPL Clean Up, International Financial Law Review, Vol. 35, Issue 7 (September 2016) 20, page 21, para 1; Juanjo Berdullas, Daniel Gonzales Pila, Alejandra Alvarez Ucar, Lending to lenders, International Financial Law Review, Vol. 35, Issue 3 (April 2016) 64, page 64, para 1 [2] Non-performing loans in the Banking Union, European Parliament Briefing- Stocktaking and challenges, 15th October 2018, available at <http://www.europarl.europa.eu/RegData/etudes/BRIE/2018/614491/IPOL_BRI(2018)614491_EN.pdf > (accessed at 6 June 2019), page 1, para 1

[3] Guidance to banks on non-performing loans, European Central Bank, March 2017, available at <https://www.bankingsupervision.europa.eu/ecb/pub/pdf/guidance_on_npl.en.pdf > (accessed at 6 June 2019), page 4, para 3

[4] Christos Gortsos, Platon Monokroussos (Eds),  Non-Performing Loans and Resolving Private Sector Insolvency: Experiences from the EU Periphery and the Case of Greece, Palgrave Macmillan 2017 edition, page 47, para 1 [5]Agnes Molnar, Trash or Treasure, International Financial Law Review, Vol. 34, Issue 1 (February 2015) 47, page 47, para 9 [6] Amelie Labbe, The NPL Clean Up, International Financial Law Review, Vol. 35, Issue 7 (September 2016) 20, page 21, para 16 [7] Ibid, page 23, para 2 [8] European Banking Authority Report on Statutory Prudential Backstops, 14th March 2018 available at < https://eba.europa.eu/documents/10180/2087449/EBA+Report+on+Statutory+Prudential+Backstops.pdf > (accessed at 6 June 2019), para 18

[9] Ibid, executive summary para 3 ; Press release of the Council of the EU on non-performing loans, 31. October

2018, para 3 [10] Press release of the Council of the EU on non-performing loans, 31. October 2018, available at <https://www.consilium.europa.eu/en/press/press-releases/2018/10/31/non-performing-loans-council-approves-position-on-capital-requirements-for-banks-bad-loans/ > (accessed at 6 June 2019), para 7-8

[11] Paul S. Nadler, Asset-Based Capital requirements: Time for a change, Commercial Lending Review Vol. 6, Issue 4 (Fall 1991) 84, page 86, para 5 [12] Ibid, page 47, para 9 [13] Inception impact assessment for the development of secondary markets for non-performing loans 22. June 2017, European Commission page 1, para 2 [14] Inception impact assessment for the development of secondary markets for non-performing loans 22. June 2017, European Commission page 1, para 2 [15] Inception impact assessment for the development of secondary markets for non-performing loans 22. June 2017, European Commission page 1, para 2 [16] John Fell, Maciej Grodzicki, Reiner Martin, and Edward O’Brien, Role for Systemic Asset Management Companies in Solving Europe’s Non-Performing Loan Problems, European Economy (2017, issue 1), page 73, para 2 [17] Virag Blazcek, A comparative analysis of the bad asset management companies of Spain and Hungary: The devil is in the details, Queen Mary Law Journal Volume 8: Conference Issue London, UK (2016), page 70, para 3 [18] Second Progress Report on the Reduction of Non-Performing Loans in Europe, European Commission, page 11, para 1 [19] NPL Resolution Strategy (“Official Gazette of the Republic of Serbia”, Number 72/15), page 1, para 3 [20] Ibid [21] National Bank of Serbia, BANKING SECTOR IN SERBIA Third Quarter Report 2018, page 15-20 [22] Ibid [23] Third Progress Report on the Reduction of Non-Performing Loans in Europe, European Commission, page 12, para 1

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Issues of independence and impartiality of CAS itself as an Institutional Arbitration

Unlike other institutional arbitrations the Court of Arbitration for Sport has a specific issue that has been at the center of many setting aside attempts of its arbitral awards. When a party to a dispute believes that an arbitral award was rendered by a dependent or biased arbitrator the setting aside attempt is directed at challenging the specific arbitrator (assuming that the party had already unsuccessfully challenged the arbitrator during the arbitral proceeding). However the issues that are specific to CAS arbitration are not on an individual arbitrator level but on an institutional level.

I. Independence and impartiality of CAS Arbitrators

Firstly, there is the need to define independence and impartiality which does not pose a problem in state court proceedings on a domestic level but in the international law this question always poses a potential problem that could hold back arbitral proceedings and may even result in the arbitral award being denied recognition and enforcement.

IBA Guidelines

In attempting to deal with the issues of independence and impartiality in international commercial arbitration the International Bar Association formed a Working Group that created an important legal instrument – the IBA Guidelines for the Conflicts of Interest in International Arbitration (IBA Guidelines) which are applicable in CAS arbitration also. They can be of great help to any potential arbitrator when he is uncertain what information to disclose and whether to disclose information at all. However any potential arbitrator needs to be aware that too much disclosure can be a favor for the abusive party, which could see it as an opportunity for its guerrilla tactics

Independence

An arbitrator is independent when he has no financial interest in the case or in the outcome of the case.[1] Independence also means that the arbitrator is objectively independent of the parties in the dispute, e.g. that he is not an employee of one of the parties or in a professional relationship with one of the parties.[2] The purpose of the independence requirement is to ensure that there are no connections and relations between the party and the arbitrator in order to prevent compromising the arbitrator. Arbitrators need to pay attention to every detail about their previous professional and personal engagements and disclose information which may be relevant to their independence and impartiality.

Impartiality

Impartiality means that the arbitrator is not biased, that he is not already subjectively invested in the dispute by having a preconceived notion regarding the issues in case and that he does not favor one of the parties to the detriment of the other.[3] Impartiality is therefore a subjective concept and, unlike independence, more difficult to prove as it is essentially a state of mind.[4] Unlike independence that is focused on the relationship between the arbitrator and the parties, impartiality is focused on the relationship between the arbitrator and the matters of the case.[5] The specificity of impartiality is that it it quite certainly impossible to establish for outsiders given that it is a state of mind of the arbitrator, therefore requiring a party to prove impartiality with a high degree of certainty would be illusory and impossible and proof for actual bias is very difficult to obtain.[6]

II. Independence of the CAS itself:

The International Olympic Committee (IOC) played a crucial role in creating CAS. According to the previous Statutes of CAS, the IOC had the possibility of influencing CAS to a great extent and, according to the Swiss Federal Tribunal in the past, the independence of CAS would be questionable if a party to a dispute was IOC.[7]

The Pechstein case

Although the Swiss Federal Tribunal has upheld numerously that CAS is in fact a genuine and independent arbitral tribunal especially after the adoption of the new CAS Statute, a new case in another State turns the attention to these matters from a different perspective, the case of German professional speedskater Claudia Pechstein.

Overview of the case

Ms Claudia Pechstein’s legal battle began in 2009 after the International Skating Union (ISU), which is seated in Lausanne, Switzerland and governed under laws of Switzerland, suspended her for two years from competition for an anti-doping violation and she submitted an appeal against that decision to CAS, according to the ISU Statute.[8] The CAS rejected Ms Pechsteins appeal and confirmed the two-year suspension. Unsatisfied with the arbitral award of CAS Ms Pechstein decided to change the venue and went to the Swiss Federal Tribunal with an attempt to set aside the arbitral award claiming inter alia that the CAS itself lacks independence.[9] The ground for challenging the independence of arbitrators is possible pursuant to article 190 (2)(a) of the Swiss Federal Statute on Private International Law (PILA) whereby an illegal composition of an arbitral tribunal is sufficient for challenging an arbitral award. However such an objection must be made immediately in accordance with the principle of good faith, otherwise it is assumed that the right to invoke that ground for appeal is forfeited.[10] The SFT concluded that given the facts of the case, most importantly that Ms Pechstein herself submitted an appeal to CAS and signed the Order of Procedure, it would be contrary to the principle of good faith to raise the issue of independence before the SFT as a public appeal under the PILA and rejected her appeal.

By exhausting all legal remedies in Switzerland Ms Pechstein tenaciously continued her legal battle before the European Court of Human Rights (ECtHR) and in the courts of her country, Germany. In 2012 while the proceedings in the ECtHR were still pending she submitted a claim before the German Court (“LG München”) against the German speed skating association and ISU, suing them for damages that were a result of an unlawful doping ban in the amount of more than  EUR 3.5 million.[11]

The proceedings in Germany

The decision of LG München gained wide attention because the Court found that the arbitration agreement per se was invalid due to the monopolistic structure of ISU which did not give athletes a choice other than to sign the agreement, thereby lacking consent.[12] However the LG München dismissed the claim due to the res judicata effects of the CAS Arbitral Award, because Ms Pechstein neglected to challenge the arbitration agreement during the earlier arbitral proceedings.

Ms Pechstein appealed the decision of the LG München before the Munich Court of Appeals (OLG München) which rendered a landmark interim judgment on January 2015.[13] The OLG München concentrated on the issue of the admissibility of Ms Pechstein’s claim as to the arbitration agreement between her and ISU. The Court concluded the same as the LG München that the arbitration agreement is void however not on the ground of a lack of consent of the athlete but because it is is contrary to German Competition Law.[14] In its judgment the OLG München was of the opinion that ISU has a monopoly in its relevant market (in the sport of ice speed skating) and it imposed an arbitration agreement on an athlete which is not unlawful per se. The OLG München pointed at certain structural misbalances in the process of selection of arbitrators before the CAS which all together constitute a violation of Art. 19 of the German Competition Law.[15] The OLG München therefore concluded that it has jurisdiction over Ms Pechstein’s claim and continued to address the effects of the CAS Arbitral Award based on the void arbitration agreement by verifying the conditions for recognition and enforcement of an arbitral award according to the New York Convention. According to German Law and art. V (2)(b) of the New York Convention recognition and enforcement of an arbitral award may be denied if it is contrary to public policy and, according to the OLG München, fundamental provisions of Competition Law fall within the scope of German public policy.[16] The reasoning of the OLG München was that by imposing the arbitration agreement on Ms Pechstein, ISU abused its dominant position which is prohibited by German Competition Law, hence the CAS Arbitral Award that upheld such an arbitration agreement could not be recognized and enforced in Germany.[17] By denying res judicata effect of the CAS Arbitral Award the German Courts are allowed to examine the facts of the case in the merits, making Ms Pechsteins case admissible in Germany.

This judgment sent ‘shock waves’ throught the world of sports arbitration.[18] The decisions of both the LG München and OLG München were criticized by professional arbitrators related to the possible limits of reviewing a final and binding foreign arbitral award by a domestic court.[19]

Finally, the legal saga of Ms Pecshtein ended with the judgement of the German Federal Court of Justice (BGH) in 2016.[20] The BGH reversed the OLG München decision, confirming the independence and impartiality of the CAS and the validity of the arbitration agreement, rejecting the lower Courts view that the arbitration agreement was imposed by the abuse of a dominant position of a sporting association.[21]

III. Does CAS qualify as an Court of Arbitration at all

At the center of the attention of many professional sports arbitration practitioners was defining the consequences of the interconnection of CAS with sporting associations, mostly the IOC which played a crucial role during the creation of CAS (see p. 17) and the consequences these connections could have on the status of CAS as a court of arbitration. The BGH ruling in the Pechstein case brought back the status quo in international sports arbitration (if it were otherwise the ruling would have had serious effects on international commercial arbitration also, most notably due to its conclusion relating to the validity of the incorporation-by-reference arbitration clause, which is used quite frequently in businesses worldwide) and the reactions to the decision of the BGH were divided, with some legal experts criticizing the BGH for taking the side of SFT and missing the opportunity to influence the CAS to instigate a new reform.[22]

The epilogue of the Pechstein case was that CAS was, at one time during the post-award phase, basically denied the status of a court of arbitration by a national court because of the inferior position of athletes in the pre-arbitration phase which cumulates with certain structural misbalance in the process of selection of arbitrators before CAS. The structural misbalance was caused because the sporting associations had more to say while the list of arbitrators of CAS was being formed. This did not per se cause the OLG München to deny CAS the status of a court of arbitration but in connection with other facts among which the incorporation-by-reference arbitration clause in sporting association’s statutes was the most important. The incorporation-by-reference arbitration clause in sporting association’s statutes is forced upon athletes if they wish to join the sporting association and be a professional athlete.

These two facts caused the OLG München to deny recognition and enforcement of the CAS arbitral Award in the Pechstein case because they suffice to be contrary to public policy and, according to the OLG München, fundamental provisions of Competition Law, which fall within the scope of German public policy. This means that even private law instruments such as statutes of sporting associations could have possible effects to the validity of a final arbitral Award in the post-award phase if they contain an arbitration clause and if the court of arbitration that rendered the arbitral Award had certain issues in its formation to the detriment of the “weaker” party.

CAS has instigated a reform as a consequence of the aforementioned Pechstein case targeting the structural imperfections that seem to be a constant struggle for CAS since its foundation. The CAS believes that the closed lists of arbitrators should be kept because they are beneficial to everyone as they allow specialization in sports arbitration and allow further evolution of lex sportiva through the individual quality of arbitrators. The target of the reforms should, therefore, be in the area of the election of arbitrators to the closed list of CAS so as to allow a more balanced representation of athletes.

The steps that CAS has taken were the revision and elimination of the quotas for IOC and other sporting organizations which could suggest the nomination of arbitrators for the CAS closed lists of arbitrators (article S14 of the CAS Code of Sports-Related Arbitration that was examined the most by the OLG München).[23] CAS has since 2012 acknowledged that it would be beneficial if former professional athletes could be arbitrators and took measures to encourage and educate former athletes to be arbitrators before CAS. CAS also formed a legal aid fund for athletes that could not afford to finance a case before CAS in order to help them access justice in CAS. All these measures were taken with the goal of leveling the balance of power between sporting associations and individual athletes.

Even though the BGH ruling in the Pechstein case brought back the status quo in CAS and reaffirmed that CAS is a genuine court of arbitration, further measures should be taken to clear out any potential danger that another national court might refuse recognition or enforcement of CAS’s arbitral Awards.

IV. Conclusions

Independence and impartiality of arbitrators in CAS and the status, the standards of proof, definitions and case law in sports arbitration per se is mostly similar to the practice of institutional arbitrations in commercial matters. The different decisions on challenges to independence and impartiality of arbitrators in certain cases before CAS come from the characteristics of the structure of CAS itself as an institution and not due to sports law as a specific area of law or different rules of procedure. Therefore, individually an arbitrator could be challenged for the same reasons as in any other arbitration proceeding. The outcomes of challenges are also similar to other commercial arbitration proceedings because they follow the best practice and recommendations that are codified in the IBA Guidelines. The IBA Guidelines allow for more legal certainty and they are applied frequently in sports arbitration if the opportunity exists. Also, the obligations of arbitrators in CAS are similar to those of any other institutional arbitration, with independence and impartiality being defined in article R34 of the CAS Code of Sports-Related Arbitration 2019 so as to allow flexibility to the Challenge Commission and ICAS when deciding on a challenge.

There are two main reasons that forced a large number of athletes to challenge arbitral Awards of CAS. The first reason was an institutional and structural matter of CAS itself, the disproportionate power of arbitrator nomination to the CAS closed lists is what triggered set aside attempts because the athletes felt that they do not have a say when choosing an arbitrator. The second reason is that athletes before even starting an arbitration proceeding are in an unequal position with their sporting associations. They need to join a club or another sporting organization in order to play their sport and by joining they need to accept all terms and conditions of the clubs and sporting associations and it goes even further so as to be obliged to comply with the rules of higher instance international sporting associations which their clubs are directly or indirectly members of.

According to many authors the BGH missed the opportunity in the Pechstein case to influence CAS to instigate a new reform and shed light on the problematic structural matters of CAS.[24] Some even go as far as to say that the BGH ruling “could have had important systemic repercussions for arbitration in general, as it could jeopardise the legal certainty that arbitral awards made in Switzerland offer.“[25]

In my opinion, the BGH ruling in the Pechstein case were it different and upheld the lower court’s decision to deny recognition and enforcement CAS’s arbitral Award, it would not have had the desired effects to change the whole concept of sports arbitration. The reason is that the BGH ruling could have only been beneficial to German athletes because they could have, ideally, chosen to go directly to German national courts and surpass CAS which, from the aspect of German courts, would not have been considered a court of arbitration. The BGH could only consider the Award through German civil and competition law. Athletes from other countries could not avoid CAS because the status of CAS from the perspectives of other countries would not have changed.

Another reason why an alternative ruling of BGH would have had minor global effects to CAS’s arbitral Awards is that the BGH examined the 2004 CAS Code of Sports-Related Arbitration which was applicable back then. The effects of the BGH ruling would be bound to the CAS Code of Sports-Related Arbitration 2004 which could be revised and the status quo would be inevitably restored again because any other subsequent case before a German court would have to go through the same review as in the Pechstein case, but now with a newly revised CAS Code that does not have the said issues. Even if the BGH ruled differently it should be kept in mind that these effects would be bound only to Germany because international sports arbitration is an imperfect necessity that has no alternatives at this moment and is universally accepted by all countries, a status that would not have changed.[26]

The real question was: should foreign national courts examine a foreign arbitral Award with such thoroughness and way out the balance of power among the parties? This could arise the question whether or not an athlete as the “weaker” party should have more protection from national courts and would raise the possible limits of reviewing a final and binding foreign arbitral Award in the post-award phase, which is exactly opposite of what arbitration, in general, seeks to achieve.

In the EU legal system disputes arising out of labour law are common, however mandatory labour law arbitration such as in the US is not allowed by public policy in a number of EU countries (e.g. France and the Netherlands). Unlike labour law, in sports law, mandatory arbitration is accepted. It is accepted even though professional athletes share many similarities to common workers, such as small bargaining power against their employer, they have salaries, training (working) hours, etc. Because of these characteristics, athletes feel like they are in an inferior position to sporting associations and even if they wish to seek court help, they are obliged to firstly rely on the mechanisms of dispute resolution that are incorporated in the statutes of their clubs and associations, without national court recourse. They are obliged to rely on a dispute resolution mechanism which is unfamiliar to them and they know as a fact that their club’s association, i.e. the opposing party in the dispute, has more practice in CAS arbitration which is why they assume that the small number of arbitrators will be in the latter’s favour through mutual acquaintance.

None of the aforementioned circumstances alone are enough to deny enforcement of a final and binding arbitral Award, however, all of them together could raise the matter to be contrary to public policy and the lawfulness of the arbitration agreement. If the structural misbalances of CAS, or any other institutional arbitration, are to such an extent to deny a potential party access to a lawful proceeding (among which being heard by an independent and impartial Panel of arbitrators is the condition sine qua non for a lawful proceeding) which is additionally aggregated by a multi-sided unfavourable factual background to the detriment of the “weaker” party, than the arbitration may be refused the status of arbitration completely.

[1] Margaret L. Moses, The Principles and Practice of International Commercial Arbitration (2nd edn, Cambridge University Press 2012) p. 135
[2] Ibid
[3] Margaret L. Moses, The Principles and Practice of International Commercial Arbitration (2nd edn, Cambridge University Press 2012) pp. 134-135
[4] Blackaby Nigel , Constantine Partasides, et al., Redfern and Hunter on International Arbitration (Sixth Edition), 6th edition (© Kluwer Law International; Oxford University Press 2015) para 4.78
[5] Alfonso Gomez-Acebo , Party-Appointed Arbitrators in International Commercial Arbitration, International Arbitration Law Library, Volume 34 (© Kluwer Law International; Kluwer Law International 2016) para 4-12
[6] Karel Daele , Challenge and Disqualification of Arbitrators in International Arbitration, International Arbitration Law Library, Volume 24 (© Kluwer Law International; Kluwer Law International 2012) p. 237
[7] See G. v. Fédération Equestre Internationale and Court of Arbitration for Sport (CAS), Federal Tribunal, 1st Civil division, 15 March 1993′, in Mathieu Reeb Digest of CAS Awards I 1986-1998 (Mathieu Reeb ed, Kluwer Law International 1998) pp. 561-575
[8] The applicants in the joined case were Claudio Pechstein and the Deutsche Eisschnelllauf Gemeinschaft (DESG) which is the German national federation governing speed skating and the respondent is ISU. The DESG is a member of ISU.
[9] SFT, 4A_612/2009, Judgment of 10 February 2010, Claudia Pechstein v. International Skating Union p 11, 3.1 <http://www.swissarbitrationdecisions.com/sites/default/files/10%20fevrier%202010%204A%20612%202009.pdf> accessed at 4th September 2019; in her appeal Ms Pechstein claimed that: 1) CAS itself was not independent, 2) the president of the arbitral tribunal was biased, 3) the IOC could have influenced the arbitral proceedings, 4) her right to a public hearing was injured and 5) her right to be heard was injured
[10] Ibid p 12, 3.1.2
[11] D. Mavromati, “The Legality of the Arbitration Agreement in favour of CAS under German Civil and Competition Law – The Pechstein Ruling of the German Federal Tribunal (BGH) of 7 June 2016”, 29 June 2016, p 2, available at: <https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2800044> accessed at 4th September 2019
[12] Ibid pp. 2-3
[13] Ibid p. 3
[14] See Xavier Favre-Bulle, Pechstein v. Court of Arbitration for Sport: How Can We Break the Ice? in Müller /Besson / Rigozzi (eds), New Developments in International Commercial Arbitration, 2015, Publications of theCEMAJ Research Center on Alternative and Judicial Dispute Resolution Methods, Geneva / Zurich 2015, Schulthess pp.322-324;
[15] Ibid 323; D. Mavromati, “The Legality of the Arbitration Agreement in favour of CAS under German Civil and Competition Law – The Pechstein Ruling of the German Federal Tribunal (BGH) of 7 June 2016”, 29 June 2016, p 2, available at: <https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2800044>  accessed at 04th of September.2019
[16] Xavier Favre-Bulle, Pechstein v. Court of Arbitration for Sport: How Can We Break the Ice? in Müller /Besson / Rigozzi (eds), New Developments in International Commercial Arbitration, 2015, Publications of theCEMAJ Research Center on Alternative and Judicial Dispute Resolution Methods, Geneva / Zurich 2015, Schulthess p. 324
[17] Ibid p. 324
[18] Clifford J. Hendel and Gary Smadja, ‘A Riff on the Legal Saga of Claudia Pechstein – Litigation as a Sub-Optimal Means of Advancing Transparency and Legitimacy in Sports Arbitration’, Spain Arbitration Review | Revista del Club Español del Arbitraje, (© Club Español del Arbitraje; Wolters Kluwer España 2019, Volume 2019 Issue 35) p 115
[19] See Xavier Favre-Bulle, ‘Pechstein v. Court of Arbitration for Sport: How Can We Break the Ice?’ in Müller /Besson / Rigozzi (eds), New Developments in International Commercial Arbitration, 2015, Publications of theCEMAJ Research Center on Alternative and Judicial Dispute Resolution Methods, Geneva / Zurich 2015, Schulthess pp. 328-330
[20] Federal Court of Justice, Judgement KZR 6/15, of 7th June 2016, english translation, available at <https://www.tas-cas.org/fileadmin/user_upload/Pechstein___ISU_translation_ENG_final.pdf>  accessed at 4th of September 2019
[21] Ibid ;
[22] See  Antoine Duval, ‘The BGH’s Pechstein Decision: A Surrealist Ruling’, (Asser International Sports Law Blog 2016),  <https://www.asser.nl/SportsLaw/Blog/post/the-bgh-s-pechstein-decision-a-surrealist-ruling> accessed at 27th July 2019; For a different opinion see Despina Mavromati, ‘The Legality of the Arbitration Agreement in favour of CAS under German Civil and Competition Law – The Pechstein Ruling of the German Federal Tribunal (BGH) of 7 June 2016’, [2016], 1, 13-15 available at: <https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2800044> accessed at 18th August 2019.
[23] Ibid 14-15.
[24] Antoine Duval, ‘The BGH’s Pechstein Decision: A Surrealist Ruling’, (Asser International Sports Law Blog 2016), <https://www.asser.nl/SportsLaw/Blog/post/the-bgh-s-pechstein-decision-a-surrealist-ruling> accessed at 27th July 2019.
[25] Despina Mavromati, ‘The Legality of the Arbitration Agreement in favour of CAS under German Civil and Competition Law – The Pechstein Ruling of the German Federal Tribunal (BGH) of 7 June 2016’, [2016], 1, 14 available at: <https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2800044> accessed at 18th August 2019.
[26] Ibid.