Parity of Termination Rights in Football Employment Contracts
Former Liverpool Manager Bill Shankly once famously said that “some people believe football is a matter of life and death… I can assure you, it is much, much more important than that.” Whilst that might be so (at times) for die-hard fans, it can sometimes be forgotten that players are employees with their own livelihoods on the line – particularly given the comparatively short career of the average professional footballer. With so much at stake – both on and off the pitch – it comes as no real surprise that disputes often arise between players and clubs.
When one of those parties wishes to bring the employment contract to an end, the situation can be far from straightforward. This results from the interaction of various factors – for instance, the nuances and applicable regulations governing the player-club relationship, statutory rights for employees, and sports law concepts that need to be considered outside the contract itself. In the context of bringing an employment contract to an end, a particularly contentious area is the so-called “parity of termination rights”.
In this article, William Sternheimer (Partner) and Henry Goldschmidt (Associate) examine the differing approaches of FIFA and the Court of Arbitration for Sport (“CAS”) to this issue, and how that is the case given that both forums will generally apply the same regulations and governing law to player-club disputes of an international dimension. Indeed, it will become apparent just how important it is for termination provisions in an employment contract to be drafted in a manner that are clear, robust and enforceable – to avoid potential problems down the line.
2. JURISDICTION / APPLICABLE LAW
FIFA DRC and the CAS
The FIFA Regulations on the Status and Transfer of Players (“RSTP”) provide that FIFA – and the FIFA Dispute Resolution Chamber (“FIFA DRC”) specifically – is “competent to hear… employment-related disputes between a club and a player of an international dimension”.
Generally, player-club employment contracts with an international dimension will expressly refer to the RSTP. Where something is not expressly covered by the RSTP – for instance, if the dispute relates to so-called “penalty clauses” (see below) – Swiss law will be applied as appropriate to deal with any lacuna in the legislation, including the RSTP. The parties to the employment contract may, of course, decide on a governing law of their choice or their own mechanism of dispute resolution – provided it meets the criteria of independence and impartiality.
Where there is an international dimension, cases will be appealable from the FIFA DRC to the CAS – and then, potentially, to the Swiss Federal Tribunal (“SFT”) after that. The CAS panel will:
… decide the dispute according to the applicable regulations and, subsidiarily, to the rules of law chosen by the parties or, in the absence of such a choice, according to the law of the country in which the federation, association or sports-related body which has issued the challenged decision is domiciled or according to the rules of law the Panel deems appropriate.
When it comes to international football disputes, the applicable law(s) before the CAS is also prescribed in the FIFA Statutes, which state that “CAS shall primarily apply the various regulations of FIFA and, additionally, Swiss law."The issue of determining the applicable law can become particularly complicated when the parties have expressly chosen in the relevant contract an applicable law which is neither the FIFA Regulations nor Swiss law. In such a situation there are potentially three applicable laws at play – (i) the FIFA Regulations, (ii) Swiss law, and/or (iii) another national or international law.
CAS, however, has developed jurisprudence according to which, in the circumstances described immediately above, the CAS panel will primarily apply the RSTP and Swiss law for any lacuna in the former (to ensure that the universal/consistent application of the RSTP are not undermined) As explained by Prof. Dr. Ulrich Haas, “any other issues (regarding interpretation and application) that are not addressed in the FIFA Regulations, i.e. for which FIFA has not set any uniform standards of the industry, are subject to the law that has been chosen by the parties.”In short, where there are issues peculiar to the specific legal dispute in question (e.g. discrete contractual issues relating to the employment contract), the panel should have no issue applying the chosen national law, if this differs from Swiss law.
In light of the above, the vast majority of player-club employment disputes before the FIFA DRC and/or the CAS will be governed by Swiss law. Furthermore, given that the respective seats of FIFA and the CAS are in Switzerland, procedural matters before both forums will be governed by Swiss law.
Notwithstanding that freedom of contract is an important principle of Swiss law (and has its roots in the Swiss Constitution), rights relating to the termination of an employment contract should be equal. Indeed, although Article 335a para.1 of the Swiss Code of Obligations (“SCO”) relates to notice periods for employers and employees, the spirit and purpose of this article are consistent with the requirement for formal parity between employee and employer in respect of termination rights in general.
The Swiss Civil Court – albeit not in a football context – will regularly impose equality of treatment between employee and employer in respect of termination rights. In particular, an employer may be prevented from relying on a provision to give it a more favourable position – as this could be considered contrary to the purpose of Article 336 para. 2 of the SCO, which seeks to grant equivalent protection to each of the parties.
The relevant procedural rules governing the FIFA DRC and CAS allow the respective panel members to apply the rules of law (as material law) which are deemed appropriate
Accordingly, in addition to Swiss law, the FIFA DRC and the CAS is entitled to, and regularly does, apply certain general principles of law which have become part of international law and the so-called lex sportiva.
3. PARITY - WHEN IS IT AN ISSUE?
What do we mean by "parity"?
The principle of “parity”, particularly in English law, has tended to be synonymous with criminal law – i.e. the notion of equal justice when it comes to the sentencing/punishment of co-offenders. However, in the context of the breakdown of employment relations, Swiss law understands parity to be equal or proportionate treatment for employer and employee.
On one hand it can mean absolute equality – as enshrined in Article 335a of the SCO (see above). Indeed, “according to the case law of the Swiss Federal Court and cantonal courts, the principle of parity of termination rights is understood in a broad sense going beyond the language of the provision" to protect one of the parties (usually the employee) against the other having preferential status with respect to terminating the employment relationship. Parity can also mean “prohibition of excessive commitment"– as laid down in Article 27(2) of the Swiss Civil Code:
Article 13 of the RSTP states that a contract between a professional footballer and a club may only be terminated upon its expiration or by mutual agreement. Indeed, FIFA’s own Commentary on this article states that it “aims to ensure… [the] contract will be honoured by both parties.” It is common for there to be termination provisions that allow for the club to terminate in the event of certain circumstances – for example, gross misconduct, bringing the club into disrepute, material or persistent breach of contract, etc.
Articles 14/14bis and 15 of the RSTP also allow for a contract to be terminated by asserting “just cause" or “sporting just cause"respectively. Whilst the qualification requirements for the latter can be contentious (as the athlete seeking to rely on the provision must be an “established” player), the rationale for the provision is fairly clear. Indeed, one aim of “sporting just cause” is to prevent clubs leaving players on the bench (or rot in the reserves) whilst refusing to sell them.
The “just cause” rationale will depend on the conduct in question. The original drafting of Article 14 was very broad – indeed, even FIFA’s Commentary on Article 14 was sufficiently opaque to leave it open to interpretation – and therefore often in the hands of a tribunal.
By virtue of Circular Letter 1625 (which came into force on 1 June 2018), FIFA (amongst other things) added:
- a new Article 14(2), enabling a party to terminate their contract with “just cause” where there has been abusive conduct (e.g. where a player has been forced to train alone or been subject to a form of economic duress). This provision essentially codified the existing CAS jurisprudence at the time (for instance, CAS 2015/A/428)– in doing so, FIFA created greater certainty for those seeking to rely on the provision.
- Article 14bis, enabling a player to unilaterally terminate their employment contract if their club unlawfully fails to pay their wages for two months – provided a 15-day period of written notice is first given to the club by the player. This was regarded as a gain for the players who, under established FIFA and CAS jurisprudence at the time, had generally been entitled to terminate for “just cause” if the club failed to pay for three (rather than two) consecutive months.
Essentially, Circular Letter 1625 expanded (and better defined) the scope of “just cause” as, prior to that, “just cause” only tended to be successfully asserted before the CAS where “(i) the breach of contract [was] so serious that the injured party [could] no longer, in good faith, be expected to maintain the contractual relationship, and (ii) the injured party [had] given sufficient warning to the other party of its unacceptable conduct."Attempts by clubs to assert “just cause” against a player/manager on grounds of poor sporting performance (being a subjective perception)or uncertainty as to their employment status have historically been rejected.
The consequences of terminating a contract without “just cause” are provided for by Article 17 of the RSTP – namely, compensation payments and sporting sanctions (e.g. restrictions on playing for players, transfer bans for clubs, etc.). The cases of Andy Webster, Matuzalémand Morgan De Sanctis are all well-known examples of where FIFA and (subsequently) the CAS decided on the compensation payable to the player’s former club (payable jointly by the new club and the player).
The CAS has been criticised in some quarters for taking the market value of the player into account when ruling on the level of compensation payable:
To FIFPro and others within the game, it is unacceptable that a player be held responsible to pay at least part of a transfer fee that he had no part negotiating. What it means in effect is that the better the player and the bigger the transfer fee, the higher the cost and risk to the player to break his contract.
Penalty and liquidated damages clause
As mentioned above, contractual penalties (i.e. where a penalty is to be paid in the case of non-performance or breach of contract, with the intent to encourage performance) are not expressly dealt with under the RSTP – albeit Article 17 para. 1 of the RSTP implicitly allows for such clauses by virtue of its caveat language (i.e. “…unless otherwise provided for in the contract”). Given that penalty clauses are common in football contracts, it is essential to see how they are treated under Swiss law.
The approach to penalty clauses (and liquidated damages, where the purpose is not to penalise but rather to compensate for an anticipated damage) is perhaps one of the most substantial differences between civil law and common law systems. Under Swiss law, penalty clauses (Konventionalstrafe) are deemed valid and enforceable – save that a judge/arbitrator has the power to reduce the amount of contractual penalty to the extent that it is viewed to be excessive. For a contractual penalty to be enforceable, generally a party does not need to prove any actual damage has been sustained – unlike, say, liquidated damages (Schadenspauschale).
In the case of CAS 2015/A/3999 & 4000, the Panel set out how Swiss law might be applied to penalty and liquidated damages clauses in the context of a football employment contract:
In case a CAS panel considers the amount of compensation to be awarded under a liquidated damages clause to be disproportionate or excessive, the panel may consider to reduce the amount of compensation calculated on the basis of that clause under the provisions of articles 163(3) and 337(c)(2) of the Swiss Code of Obligations (SCO). A liquidated damages clause may be considered as “excessively high” under article 163(3) SCO if there is a manifest contradiction between justice and fairness on the one hand and the liquidated damages on the other hand. However, penalty clauses may not be deemed automatically as abusive just because they exceed the costs of damages suffered by the creditor insofar as the penalty clause also includes a punishment aspect.
The principal difference between a liquidated damages clause and a penalty clause is that, whilst the former constitutes a pre-agreement of the damages that the injured party will suffer (e.g. setting out exactly how much a party can claim in the event of specific breaches), penalty clauses are liabilities born from the non-compliance of a core obligation. Note, the FIFA DRC will tend to differentiate between the two when issuing a decision as it will apply different standards to each.
In contrast to the Swiss civil law position, common law jurisdictions will often consider a liquidated damages provision to be punitive, subject to certain exceptions.In such instance, the clause will be deemed to be void and unenforceable – such that recovery will be limited only to the specific loss flowing from the breach.
4. PACTA SUNT SERVANDA
The principle of pacta sunt servanda (“agreements must be kept”) is a fundamental principle in civil and international law – and also forms part of the lex sportiva. Also known as “sanctity of contract”, it is a core element of the Swiss legal system and reflects the value placed on contractual compliance, in addition to contractual freedom. Indeed, under Swiss law, the interpretation of a contract begins (and largely ends) with the express and clear wording of the clause.
In CAS 2017/A/5213, the Panel noted how pacta sunt servanda is a guiding principle that is “enshrined in both the FIFA Regulations and Swiss law”:
… in principle, the doctrine of pacta sunt servanda (which is enshrined in both the FIFA Regulations and Swiss law), which in essence means that agreements must be respected by the parties in good faith, is the guiding general principle by which the merits of this case will be examined. In this regard, the Panel further notes that when applying the doctrine of pacta sunt servanda, the proper interpretation of an agreement is of particular importance.
Contractual freedom and compliance are, however, to be balanced by another fundamental principle that is imbued throughout the Swiss legal system – one of fairness. This includes the requirement to act in good faith in commercial dealings (something that is not an obligation in the common law system). Parity in termination of employment contracts might well be seen as an extension of the overarching principle of fairness – so the interplay between that, on one hand, and sanctity of contract, on the other, has been a delicate one for football tribunals to navigate.
5. DIFFERING APPROACHES BY THE FIFA DRC AND THE CAS
Given that FIFA DRC and CAS panels will often be applying the same law and regulations, one might expect a continuity of approach. However, when it comes to player-club employment disputes, recent jurisprudence suggests:
- FIFA DRC panels will tend to apply a slightly lower threshold than the CAS when it comes to intervening to alter the contractual position. The former will more readily hold that the principle of parity is infringed (or the clause is disproportionate or infringes the principle of equal treatment) – rather than that the wording of the contract is final and binding.
- CAS panels, on the other hand, are more inclined to hold parties to their contractual arrangements (allowing parties to rely on the express termination provisions, penalty clauses, etc.). Indeed, it seems the CAS will only refuse to do so when a clause is excessively imbalanced. Only then will the principle of “parity” be deemed to be infringed – i.e. some disparity will be tolerated.
Below are some examples of the respective approaches of FIFA DRC and CAS panels.
FIFA DRC Awards
DRC Decision 0315778-e dated 12 March 2015 addressed the amount of compensation sought by a player from his club under a contractual penalty clause due to the late payment of wages. The Panel noted as follows (at para. 11 of the Decision):
… penalty clauses may be freely entered into by the parties and may be considered acceptable, in the event that the pertinent written clause meets certain criteria, such as proportionality and reasonableness. In this respect, the Chamber further highlighted that in order to determine as to whether a penalty clause is to be considered acceptable, the specific circumstances of the relevant case brought before it shall also be taken into consideration.
Although the club did not present any valid reasons for the late and partial payment of the agreed wages, the shortfall (EUR 225, being 0.03% of the total amount) and lateness of the payment (just six days) warranted a reduction on the penalty payable from EUR 500,000 to EUR 300,000. In short, parity was applied to prevent the penalty clause leading to a disproportionate and unreasonable outcome.
The application of proportionality and equality to a player-club dispute was also apparent in DRC Decision 07160251-e dated 29 July 2016, where a club had unilaterally terminated a player’s contract without paying adequate compensation. A parity-type analysis was employed to declare a contractual provision – whereby the compensation to be owed to the club (if the player terminated) would be considerably more than to the player (if the club terminated) – to be void:
29. The members of the Chamber agreed that this clause is clearly drafted to the benefit of the Respondent, i.e. it contravenes the general principle of proportionality and the principle of equal treatment as it grants exorbitant rights to the Respondent in comparison to the rights granted to the Claimant. In this regard, it can be noted that said clause entitled the Claimant to approximately only 10% of the total value of the contract while at least 8 months of residual duration were expected at the date of its termination. Conversely, the members of the Chamber observed that the aforementioned clause entitled the Respondent to more than 140% of the total value of the contract. Consequently, and in view of the general principle of proportionality and of the principle of equal treatment, the members of the Chamber unanimously agreed that said clause cannot be taken into consideration in the determination of the amount of compensation.
A similar conclusion was reached by the Panel in DRC Decision 10161150-e dated 13 October 2016 in respect of the otherwise disparity of compensation to be paid upon unilateral termination of the employment contract by each party:
16. The DRC recalled that article 9 of the contract provides that if the Respondent decides to terminate the employment contract “not due to a just cause”, it shall pay the remaining contractual value for the season of termination whereas if the Claimant decides to terminate such a contract under the same conditions, he would owe the Respondent USD 2,000,000. In this regard, the members of the Chamber pointed out that the relevant clause contravenes the general principle of proportionality and the principle of equal treatment of the parties since it blatantly provides benefits only towards the Respondent with no corresponding reward or analogous right in favour of the Claimant. Additionally, in response to the Respondent’s arguments in this regard, the Chamber emphasised that the respect of contractual freedom cannot, in any way, be applied to the detriment of the principle of a proportionate repartition of the rights of the parties.
CAS jurisprudence places heavy weight on the principle of pacta sunt servanda where the dispute is governed by the RSTP and, on a subsidiary basis, according to Swiss law – indeed, the Awards in CAS 2005/A/973 and CAS 2013/A/3379 both state that “the basic legal principle pacta sunt servanda should never be easily disregarded.”
In the case of CAS 2017/A/5056 and 5069, the player sought to unilaterally terminate his contract with the club early because of overdue payments. Although the club argued that this breached the principle of parity, the Panel found that the relevant clause (whereby the player was entitled to terminate the contract if the club failed to comply with its financial obligations to the player for more than three months) did “not constitute excessive commitment from the side of the club” (para. 72). In holding that the player was entitled to unilaterally terminate his contract, it was noted that (i) the clause did not create any new obligations for the club and (ii) there was “no indication whatsoever” that the parties had unequal bargaining powers on the basis of which the club was ‘forced’ to accept such clause.
In terms of the theory applied by the Panel in making its determination, it expressly referenced (at para. 70 of the Award) the legal scholar Wolfgang Portmann, who maintained:
… [i]n relation to the substance of the unilateral option clause, parity of termination rights is no longer to be taken as a benchmark for public policy, since (as shown) a disparity of termination rights has to be accepted as such; instead the question to be answered here is how great the disparity may be. The limit of contractual freedom in this respect is formed by the prohibition of excessive self-commitment, as laid down in Swiss law, for example, at Art. 27(2) of the Swiss Civil Code, adding in a footnote that “[n]o person can alienate his personal liberty nor impose any restrictions on his own enjoyment thereof which are contrary to law and morality” (PORTMANN, Unilateral option clauses in Footballer’s contracts of employment: An assessment from the perspective of International Sports Arbitration, ISLR 2007, p. 6-16).
That same legal commentary was also cited in an (earlier) CAS Award – CAS 2015/A/4042. In that case, the Panel held that the player had just cause to rely on the applicable clause that entitled him to unilaterally and prematurely terminate his contract with the club as he had not received payments due. In coming to that decision, the Panel made a distinction between potestative and non-potestative clauses – the latter being where the conditions for termination could not be unilaterally influenced by the party wishing to terminate the contract.
Whilst CAS panels will “not easily disregard” the express provisions of the contract, they will not apply the principle of pacta sunt servanda in a mechanistic manner. In CAS 2016/A/4549, the club had sought to terminate the player’s contract on the basis of a clause providing for termination in the instance of relegation. However, the CAS held that the relegation provision was a one-way clause as it provided no compensation for the player in such an eventuality and therefore violated the principle of parity (there being an “unbalanced right to the discretion of one party only without having any interest of any kind for the other party.”). In denying the cub’s reliance on the particular clause in the contract, the Sole Arbitrator noted that relegation clauses can in fact be drafted in an equal manner:
55. … there are relegation clauses stating that the contractual relationship of the parties automatically end in the case of relegation of the club, or give both parties the right to terminate the employment contract in case of relegation. From these kinds of relegation clauses do not only benefit clubs but also the players. That is to say, players themselves also could find it desirable to include such a clause in their employment contracts in order to protect their sports career, in that they would not be obliged to play in lower level competition in the case of relegation of their actual club. Therefore, these clauses can be deemed as a valid way to protect mutual interests of both parties of the contract.
56. This view is supported by a CAS 2008/A/1447 para. 38 stating that “relegations clauses are mainly a way protecting the players’ careers, as their employment opportunities and market values would be reduced by playing in lower divisions during their short-term careers”.
Significance of the differing approaches
The fact that the CAS generally seems to assign less importance to the principle of parity in termination rights than pacta sunt servanda is significant in that it is a higher dispute resolution forum than the FIFA DRC. Not only do CAS decisions carry more weight, in terms of precedent, but it will encourage parties (generally clubs, who would tend to benefit more from a stricter/literal reading of the contract wording) to appeal to the CAS in the knowledge that a more discretionary “equitable” finding by the FIFA DRC could subsequently be overturned.
Given that the FIFA DRC and CAS panels will generally be applying the same rules and regulations (i.e. the RSTP, with Swiss law filling in the gaps), the differing approaches may be surprising to the parties and reflect the familiarity of CAS arbitrators with the strict – and perhaps more universally applied – principle of pacta sunt servanda. According to Portmann, when applying the principle of “prohibition of excessive commitment” (a form of parity), it “seems clear that [Swiss] courts are able to exercise consideration discretion" – so there will be a degree of uncertainty as to its application.
Article V(2)(b) of the New York Convention (“NYC”) provides that:
Recognition and enforcement of an arbitral award may [be] refused if the competent authority in the country where recognition and enforcement is sought finds that… [t]he recognition or enforcement of the award would be contrary to the public policy of that country.
In light of the above, could the current approach by the CAS to termination provisions have (unintended) consequences in terms of enforcement – for instance, by potentially leading to awards that are deemed contrary to public policy in some countries, particularly those which do not have a civil law system (like Switzerland)?
Although “public policy” is notoriously difficult to define, the principle of pacta sunt servanda is considered to reflect “trends in the assessment of substantive policy in various jurisdictions". Whilst it therefore seems highly unlikely that the courts of a signatory to the NYC (of which there are some 159 nations) would refuse to enforce an award purely on the grounds it was decided on a pacta sunt servanda basis, it may be that the terms of the relevant employment contract (if they were upheld by an application of the principle) could themselves contravene public policy.
In reality, however, most courts ascribe a narrow interpretation to public policy so very few applications under Article V2(b) of the NYC (to refuse recognition and enforcement of foreign arbitral award) ultimately prove successful. The Guidelines to the NYC do, however, provide some examples where the “contrary to public policy” ground has successfully been invoked – for instance, where the award:
conflicted with a previous judgment of the courts of the forum;
ordered the party opposing recognition and enforcement to pay interest at an amount considered excessive according to the standards of the lex fori;
effectively condemned a party to pay the same debt twice (as the parties had settled without knowledge of the court);
contravened mandatory rules of the forum in the area of competition law, consumer protection, foreign exchange regulation or bans on exports;
was contrary to core constitutional values such as the separation of powers and sovereignty of Parliament;
was contrary to the national interest of the forum State.
In the context of termination provisions in football employment contracts, it is hard to imagine an example where the public policy could be contravened – save if it related to mandated interest on penalty payments. For instance, under the Egyptian Civil Code, maximum interest is set at 4%, so a CAS award setting interest in excess of that might figure (on the basis that this was a term of the employment contract agreed between the player and club) could be deemed to be unenforceable.
In summary, once the contractual penalty has been reviewed by the hearing panel (under Swiss law), its subsequent control by a foreign jurisdiction (e.g. if a player seeks to enforce an award against their club, or vice versa, under the NYC) will be restricted to the relatively narrow “contrary to public good” exception above.