How CAS deals with excessive contractual penalties in football

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:

1. How penalty clauses are generally treated under Swiss law; and
   
   
2. What are the conditions in order to qualify a contractual penalty as excessive under CAS case law.
   
   
3. What are the criteria to employ in order to reduce an excessive contractual penalty under CAS case law, and
   
   
4. What are the limits of control of excessive penalties in football by the Swiss Federal Tribunal (SFT), but also
   
   
5. 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):

1. the parties bound by the penalty clause are mentioned,
2. the penalty is determined,
3. the conditions for the obligation to pay are set, and
4. the measure of the contractual penalty is identified.⁹

Excessive contractual penalties under CAS and SFT case law