How CAS deals with excessive contractual penalties in footballDespina Mavromati
It is fairly common to have a penalty clause inserted in a football-related contract (e.g. a player-transfer contract)1 for the event of non-compliance with its terms. Due to the fact that contractual penalties are not explicitly regulated in the FIFA Regulations on the Status and Transfer of Players (RSTP),2 Swiss law applies in the majority of the contracts (with an international dimension) and defines / interprets the modalities of such penalty clauses. In fact, disputes with an international dimension are brought to the appropriate judicial instances of FIFA and, in appeal, before the Court of Arbitration for Sport (CAS).
Under Article R58 of the CAS Code (which defines the law applicable to the merits of the case) “The Panel shall decide the dispute according to the applicable regulations (…)”.3 Article 57 par. 2 of the FIFA Statutes foresees that “CAS shall apply the various regulations of FIFA and, additionally, Swiss law”. Player transfer - and other football - contracts usually refer to the FIFA Regulations on the Status and Transfer of Players (RSTP), with Swiss law to apply in case of lacunae and when appropriate.4
Numerous arbitral awards of the Court of Arbitration for Sport (CAS) have dealt with the issue of contractual penalties (in most cases in appeals against decisions rendered by the FIFA Player Status Committee, PSC and the FIFA Dispute Resolution Chamber, DRC),5 and the CAS panels are called to determine whether a penalty is excessive and reduce it accordingly.
Notwithstanding the case-specific character of contractual penalties, this article examines:
- How penalty clauses are generally treated under Swiss law; and
- What are the conditions in order to qualify a contractual penalty as excessive under CAS case law.
- What are the criteria to employ in order to reduce an excessive contractual penalty under CAS case law, and
- What are the limits of control of excessive penalties in football by the Swiss Federal Tribunal (SFT), but also
- By foreign jurisdictions that are called to enforce CAS awards.
Contractual Penalties under Swiss Law
Under Swiss law, penalty clauses are legal and valid for the event of non-performance or for defective performance. They can be “exclusive”, in the sense that the claimant can request either performance or penalty (Article 160 par. 1 of the Swiss Code of Obligations – “CO”).
It is also possible to agree a penalty in addition to performance in case of failure to comply with the provided time or place of the performance, (Article 160 par. 2 CO), in which case the penalty is “cumulative”. In the latter situation, it is possible to ask for the default interest (Article 104 CO).6 In order to define the kind of penalty clause (i.e. cumulative or exclusive, in case that this is not clearly specified in the contract), the creditor bears the burden to prove the cumulative nature of the clause, while the nature thereof depends on the nature and the meaning of the main obligation that is guaranteed.7
There is no need to prove damage or loss in order to pay the contractual penalty (Article 161 par. 2 CO). Furthermore, additional compensation (if the loss suffered exceeds the penalty amount) can only be claimed if the creditor proves that the debtor was at fault. Penalties cannot be claimed for an immoral undertaking or where non-performance was due to circumstances out of the control of the debtor (unless otherwise agreed between the parties, Article 163 par. 2 CO).8 As we will see below, and although the parties are in principle free to determine the amount of the contractual penalty (Article 163 par. 1 CO), the court may reduce penalties that it considers excessive (Article 163 par. 3 CO).
The following elements are necessary in order to qualify a penalty clause as a contractual penalty under Swiss law (Articles 160 et. seq. CO):
- the parties bound by the penalty clause are mentioned,
- the penalty is determined,
- the conditions for the obligation to pay are set, and
- the measure of the contractual penalty is identified.9
Excessive contractual penalties under CAS and SFT case law
Contractual penalties can be foreseen in a variety of football-related contracts. For example, Article 17 of the FIFA RSTP, in case of a unilateral termination of a contract by the club or the player prior to the foreseen expiration date, compensation is due either based on the terms of the contract or based on several (non-exhaustive) criteria. When determining compensation for unilateral termination based on Article 17, the hearing panel must examine whether the parties entered a buy-out clause or not (in which case the criteria of Article 17 should apply). Contractual penalties may also be inserted in loan/transfer contracts, contracts between clubs and players / agents / coaches etc.10 A frequent issue at stake in CAS football-related procedures arises in cases where a contractual penalty is foreseen in the contract and one of the parties argues that such penalty is excessive.
Under the relevant provisions of the Swiss CO, the CAS Panel may reduce penalties that it considers excessive (Article 163 para. 3 CO). Although there is no clear definition or specific criteria as to what renders a penalty “excessive” and this is decided on a case-by-case basis, an important characteristic of excessive penalties is that disproportion must significantly exceed the limits of what seems to be normal in light of the circumstances.11 Therefore, there must be a significant disproportion between the amount agreed and the interest of the creditor to maintain the entire claim. The disproportion must be measured at the moment when the non-respect of the contractual provision took place.12
According to the jurisprudence of the SFT, the criteria that can be taken into account include (but are not limited to) the nature and duration of the contract,13 the degree of fault and of the contractual violation, the economic situation of the parties, and the potential subordination of the debtor.14 There is no case law showing that e.g. an imbalance in the negotiating power between the parties could render the contractual penalty excessive as such.15 However, the “lack of reciprocity” could be an additional criterion in order to reduce a contractual penalty that was already found to be excessive.16
By means of example, a CAS panel has found that a contractual penalty representing 1.5 times the entire transfer compensation provided for in the contract and more than 12 times the outstanding amount due was excessive and therefore had to be reduced.17 Another example of an excessive penalty was where the parties (a player and a club) to a 3-year labour contract agreed on a penalty (for early termination of the contract) that was 4 times higher than the annual salary of the player.18 Furthermore, a penalty amounting to 223 years of salary was (obviously) found to be excessive.19 Inversely, a penalty of 10% of the entire debt was not found to be excessive,20 and a contractual penalty amounting to 20% of the transfer fee was found to be a proportionate deterrent in order to ensure that the debtor would pay the overdue amounts (considering the fact that an amount of EUR 5,000,000 was outstanding at the time).21
Reduction of excessive contractual penalties: conditions and criteria under CAS / SFT case law
Before deciding on the reduction of the excessive contractual penalty, the CAS panel has to determine that certain conditions are met: The (logical) substantive conditions are that the penalty is already due and that both the main obligation22 and the penalty clause are valid,23 since in case of invalidity the CAS panel will declare the clause null and void and will not need to reduce it.24
As to the formal conditions, the panel can neither award more than what was requested, nor award less than the other party has acknowledged, in accordance with the principle "ne ultra petita" ("not beyond the request" – i.e. that a court may not decide more than it has been asked to).
Based on the principle of the contractual freedom inferred from Article 163 par. 1 Swiss Code of Obligations (“CO”), the general rule is that parties should be free to determine the amount of contractual penalty in their contract.25 The CAS panel should therefore respect such freedom and only intervene when the penalty unreasonably and flagrantly exceeds the amount admissible with respect to the sense of justice and equity,26 or reduce manifestly abusive penalties.27 Inversely, this means that the CAS Panel should not reduce a contractual penalty on the sole ground that it exceeds the damages suffered by the creditor.28
On the other hand, due to the fact that Article 163 CO is a public policy provision,29 the CAS panel can apply it even if the debtor has not expressly invoked said provision in order to request a reduction of the penalty. This also means that the CAS Panel should apply Article 163 CO even when Swiss law is not applicable to the contract between the parties30 (since this provision is part of the Swiss public policy within the meaning of Article 17 PILA).31 The judge must intervene only when the stipulated amount is excessively and blatantly high with respect to the sense of justice and equity.32 The debtor bears the onus to present and establish why the contractual penalty is excessive and should be reduced.33 The debtor therefore should not only claim that the penalty is excessive but should also explain e.g. the reasons for refusal to pay the outstanding amount on time, whether the penalty had been freely negotiated or imposed by the creditor etc. Otherwise the Panel has few objective criteria to evaluate the contractual penalty.34
All objectively relevant elements have to be taken into account by the CAS panel when determining the reduction of the excessive penalty.35 By means of example the panel may consider the debtor’s overall attitude, the severity of the breach of contract, the intentional character (or not) of the non-execution of the contract. Moreover, the Panel should reduce the contractual penalty to an extent to which the penalty is not a confiscatory measure (an inadmissible impediment to the debtor’s financial future).36 As shown above, the “lack of reciprocity” could be taken into account in order to reduce a contractual penalty that was already found to be excessive.37
At the same time, the panel will have to try to find a solution according to the parties’ presumed intention rather than substitute his / her views for that of the parties.38 Instead of reducing the penalty to an amount that the Panel deems fair, and based on the principle of contractual freedom, the Panel should rather reduce the penalty only to the extent that it is no longer excessive.
Subsequent control of the CAS Panel’s decision regarding excessive contractual penalties by the SFT
According to Article R59 CAS Code, all CAS awards are final upon their notification to the parties. However, a motion to set aside a CAS award is possible to be filed before the SFT on a very limited number of grounds, among which the violation of due process and the violation of public policy.39 The SFT thereby controls the decisions of CAS and has so far issued a few judgments interpreting the meaning and scope of contractual penalties.
In a recent case regarding a contractual penalty for the late payment of a player’s transfer fee, a motion to set aside the CAS award was subsequently filed and the SFT was called to decide whether the CAS had sufficiently reduced a contractual penalty that was found to be excessive.40 The CAS Panel had awarded the claimant a penalty of what corresponded to a quarter of the outstanding payment of the transfer fee. The debtor had requested the reduction of the excessive penalty based on the fact that it exceeded the maximum default interest of 15% per annum provided by the applicable Swiss Consumer Credit Act (to note that for compensation for a late payment a late interest of 5% applied).41 The SFT confirmed its view that it does not act as a court of appeal and, even if Article 163 par. 3 CO is a public policy provision, the SFT can only control (and prohibit) discriminatory / confiscatory measures ordered by the CAS panel.42 In this case, the SFT dismissed the appeal to the extent that the appellant (the debtor) had failed to explain that the awarded contractual penalty constituted an inadmissible obstacle to its financial future.43
In another recent case, the CAS Panel (annulling the previous decision of the Single Judge of the FIFA PSC) applied the contractual penalty awarding damages USD 1’500’000.44 In the subsequent motion to set aside the CAS award, the debtor claimed a violation of substantive public policy because the CAS Panel should have waived or reduced the penalty instead of setting a penalty at three times the transfer fee without previous CAS precedent.45 The SFT addressed Article 163 CO and the issue of excessive penalties. It reiterated its aforementioned view that Article 163 is a mandatory provision that falls within Swiss public policy, which however does not qualify as international public policy within the meaning of Art. 190 par. 2 (e) PILA and could not be invoked (and applied) in the context of international arbitrations in Switzerland. This shows the limits in the control exercised by the SFT with respect to Article 163 CO (as well as all other “public policy” provisions of domestic law) in the context of international arbitration – and more specifically in contractual penalties in football-related cases before CAS.46 The SFT should therefore not act as a court of appeal in cases related to Article 163 CO but should only sanction discriminatory or confiscatory measures ordered by the Panel.47
Recognition and enforcement of contractual penalty clauses by other jurisdictions
What happens when the CAS Panel has issued an arbitral award and the parties wish to have the award enforced in another jurisdiction under the New York Convention on the recognition and enforcement of arbitral awards of 1958 (NYC 58)?
In some jurisdictions (e.g. in England), liquidated damages in the event of breach must be proportionate to estimated loss. If they are not proportionate, they are considered to be penal and are therefore unenforceable. A recent decision of the English Supreme Court clarified the applicable test in this respect.48 There is a recent example of a decision rendered by the English High Court, which was called to enforce a CAS award ordering the debtor to pay an additional contractual penalty based on Article 163 CO.49 The English High Court held that, even if contractual penalties (“punishing clauses”) are not enforceable under English law, the penalty was not found to be against public policy within the meaning of Article V (II) of the NYC58.
The English Court highlighted therefore the narrow scope of the prohibition of penalty clauses under English law that does not protect a "universal principle of morality", as long as the penalty was not "injurious to the public good" to the extent that enforcement should be refused.
Deference should also be shown vis-à-vis the law applicable to the contract (which in this case was Swiss law, like in the majority of football-related contractual penalties as shown above). This interesting decision demonstrates the limits in the legality control of the contractual penalty clauses by the jurisdiction that is called to enforce the arbitral award, but also the contractual freedom of the parties and the pro-enforcement regime established under the NYC58.50
Penalty clauses for non-compliance with the terms of the contract are common in cases related to football. Under Swiss law, contractual penalties are valid but the judge / arbitrator has the authority to reduce them if they are excessive.
Notwithstanding the case-specific character of contractual penalties, CAS Panels have determined some general criteria under which these penalties are considered excessive and when and – to what extent – they should be reduced.
Although the provision regarding the reduction of excessive penalties (Article 163 par. 3 CO) constitutes part of Swiss public policy, the principle of freedom of contracts dictates that such reduction should only when the penalty is unreasonable and flagrantly exceeds the amount admissible with respect to the sense of justice and equity.
Moreover, as established by the SFT, the fact that Article 163 par. 3 CO is a provision of Swiss public policy does not mean that the arbitrators’ refusal to reduce contractual penalties can fall within Article 190 par. 2 (e) PILA (which foresees the annulment of an arbitral award for violation of public policy).
This shows the limits in the control exercised by the SFT with respect to contractual penalties in football-related cases before CAS. The SFT should therefore not act as a court of appeal in cases related to Art. 163 CO but should only sanction discriminatory or confiscatory measures ordered by the Panel.
Also, it seems that, once the contractual penalty has been reviewed by the hearing panel (under Swiss law), its subsequent control by a foreign jurisdiction (e.g. the jurisdiction in which the creditor seeks to enforce the arbitral award under the NYC5 58) is limited, even if contractual penalties are not enforceable in this particular jurisdiction (e.g. in England), to the extent that the penalty was not “injurious to the public good”. This is in line with the narrow scope of review foreseen under Article V of the NYC 58.
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- Tags: CAS Code | Contract | Court of Arbitration for Sport (CAS) | Dispute Resolution | Employment | FIFA | FIFA Dispute Resolution Chamber | FIFA Regulations on the Status and Transfer of Players | New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards | Swiss Code of Obligations | Swiss Federal Tribunal (SFT) | Switzerland | UEFA | United Kingdom (UK)
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About the Author
Dr. Despina Mavromati, LL.M., is an attorney (Bar of Thessaloniki / Ordre des Avocats Vaudois) practicing in the field of international sports law and arbitration. She is the founder of a Lausanne-based practice (SportLegis Lausanne) and represents athletes, clubs, and sports federations in all aspects of arbitration, trials, and drafting policies.