Young and in demand: The legality of buy-out clauses in Spanish football contracts

Published 27 October 2017 | Authored by: Lloyd Thomas

Undoubtedly the biggest story of the summer transfer window (or perhaps any transfer window ever) was the transfer of Neymar from FC Barcelona to Paris Saint-Germain for a reported €222 million.[1]

Before that, the largest transfer fee ever paid for a player was the €105 million[2] Manchester United paid Juventus for Paul Pogba in the summer of 2016.  The fee that Paris Saint-Germain paid to secure the services of the Brazilian captain was more than twice that amount.  As part of the deal, Neymar is reportedly paid €30 million a year after tax – equivalent to around £520,000 a week.[3]

Barcelona had previously stated that the player was not for sale.[4]  Yet the player’s employment contract contained a buy-out fee of €222 million, which Paris Saint-Germain agreed to pay on the player’s behalf.  A statement on the FC Barcelona website confirmed the position:

Neymar Junior, accompanied by his father and agent, has this morning informed FC Barcelona of his decision to leave the club during a meeting held in the club’s offices. Given this position, the club referred them to the buyout clause stipulated in his contract, which since 1 July stands at €222m and must be paid in its entirety.[5]

While the transfer was intriguing for a number of reasons, it is the application of the buy-out clause that has received the most attention. This article explains the use and legality of buyout clauses in football contracts in Spain.  Particularly focus is given to minors’ contracts, where buy-out clauses are widely used.  Specifically, we look at:

  • A brief recap of what buy-out clauses are and how they work;

  • The use of penalty clauses in minors’ contracts in Spain

  • The case of Fran Mérida and FC Barcelona

  • The case of Javier Fernandez Jusdado and Club Atlético de Madrid

  • The case of José Raul Baena Urdiales and FC Barcelona

 

What are buy-out clauses?

Buy-out clauses are a form of penalty clause. They are, in principle, permissible both under Spanish law and under the FIFA Regulations on the Status and Transfer of Players (the “FIFA Regulations”)[6].   The Commentary on the FIFA Regulations explains that:

The parties may, however, stipulate in the contract the amount that the player shall pay to the club as compensation in order to unilaterally terminate the contract (a so-called buyout clause).  The advantage of this clause is that the parties mutually agree on the amount at the very beginning and fix this in the contract.  By paying this amount to the club, the player is entitled to unilaterally terminate the employment contract.  With this buyout clause, the parties agree to give the player the opportunity to cancel the contract at any moment and without a valid reason, i.e. also during the protected period, and as such, no sporting sanctions may be imposed on the player as a result of the premature termination.[7]

In Al Gharafa S.C. & M. Bresciano v Al Nasr S.C. & FIFA[8], the Court of Arbitration for Sport stated that:

As made clear by [the definition of buy-out clauses set out in the Commentary], which corresponds to standard practice in international football, the parties, when entering into a contract, may agree that at a certain (or at any) moment, one of the parties (normally, the player) may terminate the contract, by simple notice and by paying a stipulated amount.  In other words, one of the parties (ordinarily, the club) accepts in advance that the contract may be terminated: as a result, when the contract is effectively terminated, such termination can be deemed to be based on the parties’ (prior) consent.  Therefore, no breach occurs, and the party terminating the contract is not liable for any sporting sanction.  It is only bound to pay the stipulated amount – which represents the “consideration” (or “price”) for the termination.[9]

The validity of such clauses in Spain is entrenched in Article 1,152 et seq. of the Spanish Civil Code.  In essence, the Code (together with case law) confirms the legitimacy of such clauses and states that the only situation in which a judge can reduce the amount payable in a penalty clause is where (a) only part of the main contract obligation has been performed or (b) if the contract has been performed irregularly or (c) where the sum in question is abusive.  In addition, Spanish case law has repeatedly confirmed that penalty clauses must be interpreted restrictively.  Under Real Decreto 1006/1985 of 26 June (For the Regulation of the Employment of Professional Sportspeople), the inclusion of buy-out clauses in contracts between Spanish football clubs and their players is mandatory.  For further reading on Real Decreto, please see: How Spain’s "Real Decreto" impacts football player transfers and solidarity contributions under FIFA Regulations.[10]

Putting aside La Liga’s reported complaint regarding financial fair play, its refusal to accept the money proffered by Paris Saint-Germain on the basis of it being a buy-out fee seems odd.  It may well be the case that a foreign club is not guaranteed the right to trigger a buy-out clause, as reportedly asserted by La Liga.[11] But the reality of the position is that Paris Saint-Germain could pay such money to Neymar, who in turn would pay it to Barcelona.  In such circumstances, Barcelona would not be able to reject the money.  Wealthy though Neymar might be, he is unlikely to have €222 million at his personal disposal.  Realistically, if the buy-out money was ever to be paid, it would always be likely to be paid by another club on the player’s behalf.

 

The use of penalty clauses in Spanish football contracts

As noted above, depending on the drafting, a buy-out clause may fall within the broad umbrella definition of a penalty clause.  Another area in which penalty clauses are applied in Spain is in contracts entered into by clubs with minors.  A typical contract between a Spanish club and a player will oblige the young player to enter into a professional contract with its training club upon the completion of his training.  If that player chooses not to enter into the agreement, the club will require the player to pay it a sum (often in excess of €3 million). 

The size and frequency of the penalties included in these contracts were in evidence in the Provincial High Court of Barcelona decision in Futbol Club Barcelona v José Raul Baena Urdiales[12]. According to a report from the National Professional Football League dated 12 August 2008, of the penalty clauses included in contracts and pre-contract agreements for players aged under the age of 18 and registered with the Spanish national league since 1 January 2004, 28 contracts contained penalty clauses of €3 million while 86 contracts or pre-contract agreements contained penalty clauses exceeding €3 million, the highest of which was €10 million.

There are a number of high profile cases in which the Spanish courts have upheld the use of such clauses by Spanish clubs, which will be discussed below.  For further reading on how the Court of Arbitration for Sport deals with such clauses, please see: How CAS deals with excessive contractual penalties in football.[13]

 

The case of Fran Mérida and FC Barcelona

One of the most widely publicised cases in Spain involved the player Fran Mérida and his former club, FC Barcelona. In that case, the Spanish Court of First Instance ruled that Mérida, then under the age of legal majority, was required to pay €3,201,000 to FC Barcelona for breaches of his non-professional contract and his pre-contract agreement.

Mérida had played in the FC Barcelona youth system between 1999 and 2005 and his parents had entered into the two contracts with FC Barcelona on his behalf. At the end of the 2004/2005 season, Mérida unilaterally declared that he wished to leave FC Barcelona but FC Barcelona wished to retain his services. As a result, the club called on him to fulfil the terms of the pre-contract agreement by signing a professional contract with FC Barcelona. Mérida chose not to do so and entered into a contract with Arsenal Football Club in England.

The pre-contract agreement entered into by Mérida’s parents with FC Barcelona contained a penalty clause which stated that, if Mérida failed to sign an employment contract with FC Barcelona because he had chosen to join another football club, Mérida would have to pay a sum of €3 million (which could be increased depending on Mérida’s development) to FC Barcelona to compensate it for its loss. FC Barcelona alleged that Mérida was in breach of this term and, as a result, sought payment of a penalty sum totalling €3,201,000.

The Court ruled in favour of FC Barcelona and ordered Mérida to pay the amount sought, together with costs and interest. In its judgment, it stated that the penalty clause in question was “not in any way abusive”.

 

The case of Javier Fernandez Jusdado and Club Atlético de Madrid

Very similar facts had earlier arisen in the case of Club Atlético de Madrid, S.A.D. v Javier Fernandez Jusdado. Alejandro Fernandez Sanchez was registered as a player with Atlético Madrid and his father, Javier Jusdado entered into an agreement with the club on the player’s behalf. This case differed slightly from that of Mérida, as it was the player’s father who incurred the pecuniary liability under the penalty clause, rather than the player himself. Clause 2.2 of that contract stated that:

…if Alejandro Fernández Sánchez, during the aforementioned time period, namely the 2001/02, 2002/03 and 2003/04 seasons, should no longer hold a licence as a player of CLUB ATLÉTICO DE MADRID, S.A.D., taking up a licence with any other national or international team, Mr Javier Fernandez Jusdado shall be obliged to compensate CLUB ATLÉTICO DE MADRID, S.A.D., by way of penalty clause, with the sum of one million five hundred thousand euros (€1,500,000)” 

Upon Sanchez entering into an agreement with the Italian team AC Perugia, Atlético Madrid brought a claim against Mr Jusdado for breach of the contract and sought payment of €1.5 million in respect of the penalty clause. The High Court confirmed that penalty clauses are “perfectly valid under Spanish law”. However, it also considered that the penalty clause in question was abusive and disproportionate, applying the principle of equitable moderation to rule that Mr Jusdado had to pay the sum of €12,000 to Atlético Madrid. Notwithstanding the recognition that the sum in the penalty clause was ruled to be excessive, the principle of including penalty clauses in contracts was affirmed.

However, the fact that some penalty clauses have been reduced as abusive gives players and prospective new clubs no comfort, as a number of decisions of the Spanish courts and the content of the Civil Code have suggested that penalty clauses were prima facie permissible under Spanish law. As a result, Spanish clubs have had very little to stop them securing the services of young football players for considerable periods by using the threat of such penalties as a deterrent to moving clubs. As a result, the clubs are better able to retain the best talent brought up through their youth systems and are less at risk of such players being picked up by other clubs than might be the case in other countries throughout Europe.

 

The case of José Raul Baena Urdiales and FC Barcelona

Yet the protection previously afforded to Spanish clubs appeared to have been removed as a result of the decision in the Spanish Supreme Court’s judgment in Baena.[14] There, the Supreme Court determined that a pre-contract agreement entered into by a training club and a minor’s parents (together with the penalty clause found therein) were both null and void.

In that case, the parents of José Raul Baena Urdiales, then thirteen years old, signed two contracts on his behalf with FC Barcelona. The first contract was a non-professional contract commencing on 1 July 2002 and expiring on 30 June 2010, and the second contract was a pre-contract agreement that regulated the grant of a future professional contract between Baena and FC Barcelona, contingent on the player’s development as a player.

Over the course of the next eight years, Baena played for the different teams in FC Barcelona’s youth system. At the end of the 2006/2007 season, FC Barcelona wanted Baena to enter into a professional contract in accordance with the terms of the pre-contract agreement, but negotiation between the parties broke down. Subsequently, Baena purported to terminate his non-professional contract and entered into a professional contract with Real Club Deportivo Espanyol SAD at the beginning of the 2007/2008 season.

FC Barcelona alleged that by signing his contract with Espanyol, Baena was in breach of both the non-professional contract and the pre-contract agreement. As a result, FC Barcelona sought payment of €30,000 in respect of the early termination of the non-professional contract and €3,489,000 for breach of the commitments in the pre-contract.  Baena refuted FC Barcelona’s claims, arguing that the pre-contract agreement signed between FC Barcelona and Baena’s parents violated Baena’s right to freely choose his profession. In addition, Baena alleged that the penalty clause in the pre-contract agreement was invalid or, at the very least, should be significantly reduced.

After two hearings at which the contracts were upheld, the Supreme Court ruled that both the preliminary contract and the penalty clause were void.  In terms of the pre-contract agreement, the Supreme Court ruled that a minor’s parents or guardians could not enter into agreements on behalf of their children because to do so would violate the “free development of personality” of the child, as established by the Spanish Constitution. As a result of the invalidity of the pre-contract agreement, the penalty clause was also ruled to be null and void and the Supreme Court confirmed that it was, in any event, contrary to the concept of public order in labour matters and did not protect the best interests of minors. The amount of the penalty was ruled to have violated Baena’s ability to elect which football club to play for.

The decision in Baena undoubtedly cast doubt on the ability of Spanish football clubs to continue to enter into such penalty clauses in the future. The corollary of this is that young players may now feel more inclined to move to other clubs and their training clubs will be less able to retain the talent they have nurtured. This may be of particular concern to Spanish clubs when consideration is given to the fact that, in England, players are permitted to sign their first professional contract at the age of 17.

 

Comment

The Neymar case shows that buy-out clauses can cut both ways.  On the one hand, they afford a club with the in principle ability to ensure that players are tied to long contracts and, in turn, they protect against the risk of other clubs swooping in to sign their prized assets.  On the other hand, if a buying club with the resources such as Paris Saint-Germain is able to meet the figure set out in the buy-out clause, a club cannot force the player to stay: once the buy-out clause has been met, the contract will be terminated and the player will be free to transfer to a new club.

Clearly the circumstances in which a club can afford to pay the astronomical figures set out in the top players’ contracts will be few and far between, with only a select bunch of clubs having such resources at their disposal and the fact that such clubs must comply with the relevant financial fair play provisions, which in theory constrain wanton spending.  Yet, given that buy-out clauses are inserted into all player contracts in Spain, the buy-out fees included in the less renowned players’ contracts will often fall within the realms of the affordable for many of the bigger clubs.  

The approach regarding the inclusion of penalty clauses in minors’ contracts in Spain has also changed over the last few years.  While clubs may spend considerable time addressing their first team squad’s buy out clauses in the wake of the Neymar transfer, they will also have to address their youth team players’ situations.  It will no longer be possible to rely simply on the inclusion of a penalty clause in a youth team player’s contract.  As a result, the power has shifted away from the clubs and into the hands of the player.

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About the Author

Lloyd Thomas

Lloyd Thomas

Lloyd Thomas is an associate in Squire Patton Boggs’ Litigation department and is part of the Sports Law team based in its London office.

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