The Basketball Arbitral Tribunal Part 3 (of 3) – How ex aequo et bono is applied

Peter Sibley, a paralegal at Morgan Sports Law, examines specific instances of equitable intervention, by means of the controlled application of ex aequo et bono, into contractual arrangements between the parties by the BAT. This is the third article in a three part series on the Tribunal and its jurisprudence.1

‘Remember that basketball is a game of habits. If you make the other guy deviate from his habits, you’ve got him’.2What is true of the game is also true of the BAT. As Hasler observes, with respect to the application of ex aequo et bono, ‘the BAT has developed a series of principles with regard to various recurrent concepts, arguments, claims and defences.’3

As previously explored, the BAT adopts a functional, corrective equity style, approach to ex aequo et bono.4 This involves the intervention of equity at the second stage of the BAT’s analysis, having first determined the contractual position. Specific and recurrent instances of this equitable intervention have arisen in the BAT jurisprudence. Some particularly clear examples of these will be the subject of this article. While it would seem always to be open to the BAT to add to the list of instances of equitable intervention, as a matter of general practice, the BAT only applies ex aequo et bono if such an established instance applies.

The following BAT awards make this clear:

1. award 1124/17: ‘it is not an arbitrator’s mandate to replace the parties’ express contractual arrangements by his or her own considerations of fairness and justice…the Arbitrator’s power to adjust, or even disregard, the parties’ mutual consensus should be used with extreme caution.'5
2. award 0634/14: ‘Other facts may also be taken into consideration, especially if the wording is unclear or if a literal interpretation leads to a manifestly unfair and unjust result under the specific circumstances. Only in such cases, the Arbitrator is entitled under the concept of ex aequo et bono to deviate from the wording of the contract.’6

Before turning to some of the instances of equitable intervention, recognised and applied in recent BAT jurisprudence, the tribunal has articulated the following (summarised) interpretative principles to be applied at the first, contractual, stage:7

• The natural and ordinary meaning of all the contractual language should be deduced through the eyes of a reasonable reader. 
• This meaning can be informed by the overall background context of professional basketball and general common understanding.
• The clearer the ordinary and natural meaning the more difficult it is to justify departing from it.
• Labels are not determinative.
• Negative resulting consequences for a party cannot change the natural and ordinary meaning.
• Interpretation is not an exercise in re-writing the contract to assist an unwise party or to penalise an astute party.

Indeed, in some instances, it will not be necessary to resort to equitable intervention to resolve a dispute before the BAT.

Established instances of equitable intervention

The following are established instances where the BAT will typically be prepared to modify a contract through the invocation of ex aequo et bono.

A) Penalties

A commonly encountered contractual clause, in contracts which are the subject of BAT disputes, provides for the payment of some form of penalty in respect of any period during which sums due under a contract go unpaid, or in respect of other contractual breaches. 

In respect of such clauses, there exists a well-established and consistently applied8 exception to pacta sunt servanda.  This is neatly summarised by the BAT in 0756/15: ‘contractual clauses which apply in the context of a breach, or termination for cause, such as penalties, or liquidated damages (this is not a closed list), are subject to careful scrutiny when ruling ex aequo et bono. In particular, such a clause which imposes a detriment on the contract-breaker out of all proportion to any legitimate interest of the innocent party, may be refused enforcement, or moderated in its application.'9

Further to this, established jurisprudence provides that the following factors may be taken into account in considering such a clause:10

• Penalties may legitimately act as deterrents against deliberately withholding payment.
• Flat fees may require adjustment depending on the circumstances.
• Penalties should (save in exceptional circumstances) be capped by the amount the contractual penalty is intended to secure payment of.
• The behaviour of the parties should be taken into account.
• Penalties (unless there is an explicit agreement to the contrary) only accrue between the date of the first late payment and the date the payment obligation terminates.

B) Duty to mitigate

There is a consistently applied11 ‘general duty’12 on the innocent party to a breach of contract to take reasonable steps to mitigate the consequences of the breach.13 If a contract expressly excludes the duty, it may be subject to ex aequo et bono review by the tribunal if it leads to disproportionate results; applying similar principles as applied in relation to penalty clauses:14

46        …However, Claimants are of the opinion that the principle of damage mitigation does not apply in the present case, because it was expressly excluded by the Parties in Clause 10 of the Player Contract:

“PLAYER is under no obligation to mitigate his damages and CLUB shall receive no offset.”

47.       BAT and CAS (upon appeal) had to assess the validity of this type of clause in the past. The issue is whether the Arbitrator, under the applicable principles of ex aequo et bono, is allowed – or even required – to disregard a contractual agreement if it is considered intrinsically unfair or unjust. With specific reference to the clause at issue in this arbitration, the CAS has held that even if an arbitral tribunal decides ex aequo et bono, it may normally not derogate from the wording of a contract; it may, however, disregard an unnecessarily high and thus abusive penalty clause and reduce it to an acceptable level, or order an adaption of the contract.

The enforceability of such an exclusion will depend on the circumstances of the case, in particular if the term was discussed, understood and accepted by the parties.15 In 1124/17 an exclusion clause was upheld as, under the circumstances, the clause was ‘not abusive’.16

C) Interest

Consistent with the compensatory aim of BAT awards,17 ‘payment of interest is a customary and necessary compensation for late payment,’18 the BAT consistently awards interest, typically at the rate of 5%, to the winning party, even if interest is not provided for in the contract.19 In this way, the award of interest can be an exception to pacta sunt servanda.20 However, the BAT will not award both interest and penalties in respect of the same period as this would amount to ‘double compensation’.21

D) Verwirkung/ estoppel

Verwirkung or estoppel is probably the most archetypal application of equity over the terms of a contract. Through the application of this principle, the strict terms of the contract are not enforced. In 0480/13 the BAT stated that the principle should be ‘adopted by means of ex aequo et bono in the context of BAT Arbitration.'22 The effect of the principle before the BAT is similar to the effect of limitation periods. In its analysis, the tribunal identifies ‘two prerequisites’ in order for the principle to apply:

• ‘that the creditor has failed during a significant period of time to exercise his right, and
• that the debtor had reasonable grounds to rely on the assumption that the creditor would not avail himself of his right or claim in the future.’23

Conclusion

As previously explained,24 only after the BAT has determined the contractual position, will the sole arbitrator consider equitable modification thereof, ex aequo et bono, in accordance with established instances of such modification. This involves the controlled application of “considerations of justice and fairness which may not be imminently rooted in the contractual language.” These include, but are by no means limited to, the principles relating to penalties, mitigation, interest, and verwirkung. Other established instances, noted by Hasler, include the right to notice,25 and the right to immediate unilateral termination in the case of serious breaches.26

The list of instances of equitable intervention is not closed, and a tribunal empowered to decide a dispute ex aequo et bono must, by virtue of the ex aequo et bono jurisdiction, have discretion to establish new instances of equitable intervention. However, the general tenor of recent reasoned awards suggests that a restrictive rather than permissive approach is adopted in this regard. Such additions must be made with ‘extreme caution’ and not in an ‘unprincipled and unmoored’ manner. Concepts to which the current instances are moored include proportionality 27, provision of adequate compensation28 and legal certainty.29 Furthermore, the BAT applies ex aequo et bono such that it mirrors ‘generally accepted principle[s] which [are] embodied in most legal systems.’30 New instances giving rise to equitable intervention may thus need to be anchored to such concepts and/or shown to be aligned with generally accepted principles.