Monday, February 28, 2011

Explaining Fevola's payout and football transfer fees

The press has just circulated the news that the Brisbane Lions will pay Brendan Fevola $1.6 million as a settlement in his contract dispute. This has apparently ended an exchange of allegations by the Lions that Fevola breached his contract though misconduct and by Fevola that the Lions wrongfully terminated the contract.

So what does all  this mean?

When parties sign a contract, the contract is the product of negotiations between those parties. The contract will have a payment in exhange for the services provided (e.g. $1m per year for services provided), it normally has a term (e.g. 2 years) and it normally has a default clause which provides that certain events give the parties rights to terminate the contract earlier than at the end of the term (e.g. termination if there is serious misconduct).

If a party terminates a contract early and has a right to do so which is stated in the contract, the contract ends at the time it is terminated: there is no need to pay the other party to the end of the contract. However, if a party attempts to end a contract early but doesn't actually have the right to do so, then the other party can elect to end the contract and sue that party for all  payments due to the end of the contract. Because of the 'high stakes' nature of these actions, there are usually heated arguments when a party attempts to end a contract: one party will say that they have terminated properly, and the other will say that the first party has not terminated the contract properly and, because of that, the first party owes the other party all payments due under the contract to the end of the contract. Because of the cost in going to court over this, the parties usually negotiate and agree on a commercial settlement.

When a footballer joins a club he signs a contract. If the club is not happy with the conduct of the player, the club will consult its laywers who will see if the club can get out of the contract through termination. If the club is unhappy with the cumulative effect of the player's behaviour, it could rely on a clause which regulates the behaviour of the player, such as a clause which provides for termination by reason of serious misconduct (by way of example only). Like the above general example, the player and the club will have arguments about what the player's conduct means in the context of the particular term of the contract. In the Fevola scenario, the club argued that it had a right to terminate the contract, whereas Fevola was saying that the club didn't have the right to terminate the contract. Given the size of the settlement payment ($1.6m) and the value of Fevola's contract ($1.9m) it is probably fair to assume that Fevola had a stronger argument than the club.

The massive player 'transfer fees' seen in the English Premier League and other leagues in Europe are also for termination of the player's contract. Liverpool was paid 50 million pounds by Chelsea for Fernando Torres. These payments are enormous because of the value of that departing player to each club and because of the time left in the player's contract.

A common misconception is that this payment goes to the player. This is incorrect: the payment is made by the acquiring club (e.g. Chelsea) by reason of the player (e.g. Torres) terminating his contract with his previous club (e.g. Liverpool) earlier than the end of that contract. The acquiring club pays this 'transfer fee' on the player's behalf because it is in the acquiring club's interest to do so in order to acquire that player.

Similar to the AFL example above, Torres wasn't near the end of his contract with Liverpool but he wanted to terminate his contract with Liverpool and move from Liverpool to Chelsea. Because he was unlikely to have had a ground for termination in the contract and his contract was not at an end, then the balance of the contract had to be paid to Liverpool for the termination of the Torres contract. The amount paid to Liverpool would likely have been the actual amount owing to the end of the contract plus further amounts representing the loss of value to Liverpool by losing a valuable player.

This is a simplification of what occurs in reality and is based on my understanding of the transactions that occur. I am happy to receive comments on this, particularly from sports lawyers who practice in this area.

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