10.10.16

Lassana Diarra: Art. 45 TFEU, Breach of Contract, Compensation & Transfer Fees

source: http://www.footballclubdemarseille.fr/wp-content/uploads/2016/05/Diarra-edf2016.jpg

Last week the news emerged that French international, Lassana Diarra, was taking legal action against FIFA and the Royal Belgian Football Association (RBFA) after he was ordered to pay 10 million Euros to Lokomotiv Moscow which resulted in a failed transfer to Sporting Charleroi.

Diarra left Lokomotiv in 2014 after agreeing a four year deal with them in 2013, following what was reported to be a dispute over a pay cut. Charleroi approached Diarra in February 2015 and produced a letter of intent to sign the player but eventually decided not to do so in July 2015, as they did not want to face any sanctions that Diarra may have been forced to pay. Lokomotiv sought damages, from Diarra, for breach of contract and the case went to FIFA for a decision. Diarra was ordered, by FIFA, to pay 10 million Euros as compensation to Lokomotiv for breach of contract, a decision which was later appealed and upheld by the Court of Arbitration for Sport (CAS) which also imposed an additional 110,000 to the Court, as a result of his conduct.

Diarra is now suing both FIFA and the RBFA, through the Belgian Courts, on the basis that the order was in violation of the free movement of workers guaranteed by European treaties and he was technically unemployed in February 2015 when an approach came from Charleroi.

It is understood that the verdict in the case will be given in the coming months.

Athletes and EU law

This is not the first sporting dispute to engage EU law which applies when one party to the dispute infringes EU provisions that are implemented to protect a person's rights. Courts are often reluctant to interfere in the operation of rules set out by governing bodies but there are certain scenarios where such rules breach laws and the rights of the athletes within that sport. Such provisions include the freedom of movement and competition/antitrust laws and football is one such sport which has seen its governing bodies having to amend its rules as a result of infringements with EU law.

However, it is worthwhile to note that sporting disputes are only subject to EU law where the sporting relationship gives rise to an 'economic activity.' Given the nature and extent of the commercialisation of modern day football, it is difficult to imagine an example of a scenario where professional football would not have some involvement in 'economic activity'.

Freedom of movement of workers - Art. 45 TFEU

Art.45 TFEU secures the right of workers to move freely throughout the European Union for work purposes. Workers are able to accept offers of employment in any member state and remain there for the purposes of employment. Art.45 also prohibits discriminating against a worker on the basis of their nationality.

In determining whether there has been a breach of Art. 45, the Court will consider four tests:

(1) Is the rule a restriction on a worker's freedom of movement under Art. 45?
(2) If the rule is a restriction, is its use capable of being justified objectively?
(3) Is the rule effective in promoting the objectives pursued?
(4) Is the rule a proportionate means of achieving the objectives?

Union Royale Belge des Societes de Football Association ASBL v Bosman
source: http://i.dailymail.co.uk/i/pix/2013/07/26/article-2378894-00C08C6900000190-762_634x418.jpg

The Bosman decision was a landmark case which finally saw the governing bodies come to the realisation that some of their practices were not exempt from EU law and were, in fact, unlawful. Prior to Bosman, a player could only move between clubs where there was an agreement between both clubs on a transfer fee, regardless of whether the player was still under contract.

Bosman was employed as a professional footballer by RC Liege who, in 1990, offered him a new one year contract. That offer was rejected by Bosman and as a result he was put on the transfer list at a staggering fee of BFr11,743,000. The fee was justified by the RBFA as being compensation for the training provided to the player, a figure which was calculated based on Bosman's previous year's salary and in accordance with the transfer regulations. The fee was so large that no club was prepared to pay it but Bosman was able to negotiate a move to US Dunkerque. Thereafter, Dunkerque had the option to secure a permanent transfer by paying an additional BFr 4.8m to Liege, however, Liege failed to request the necessary international clearance certificate, as a result of concerns about Dunkerque's solvency, and thus the contracts lapsed which left Bosman unemployed.

Bosman sued Liege and the RBFA (and eventually UEFA also) citing that the transfer system, as operated in Belgium and sanctioned by UEFA, was in breach of Art. 45 as it restricted him from being able to take up employment in another member state. Further, he also argued that UEFA's '3+2' Rule was also in breach of Art. 45. That rule had been introduced while the Bosman litigation was underway and prevented a club from fielding more than 3 players who were eligible to play international football for a national association other than the one in which their club was based. Bosman argued that this rule effectively limited the number of non-Belgium clubs that he could join as many would have already reached their foreign quota and therefore be unable to employ him. This, therefore, restricted his ability to work freely throughout the EU which was in breach of Art. 45.

The case was referred to the Court of Justice of the European Union (CJEU) who had to determine whether Art. 45 could be interpreted as:

(1) Prohibiting a football club from requiring and receiving payment of a sum of money upon the
     engagement of one of its players, who has come to the end of his contract, by a new employing
     club;

(2) Prohibiting the national and international sporting federations from including in their regulations,
      provisions restricting access of foreign players from the EU to the competitions which they
      organise.

The Court held that the demanding of a transfer fee by a former employer, after a fixed term contract had come to an end, was an obstacle to the freedom of movement for workers as it hindered and potentially prevented a footballer's ability to move to a new club. The rules were thus unlawful unless it could be proven that they were necessary and proportionate in achieving a legitimate outcome.

Two main reasons for the rules in their current stance were put forward by UEFA and the Belgian Football Association:

(1) The rules helped to maintain financial and sporting equilibrium among clubs - this was accepted
      by the CJEU as a legitimate aim but the Court did not consider that the transfer system was a suitable means to go about achieving that aim as such a system did not prevent the richest of
      clubs securing the services of the best players nor could it restrict their commercial activities to
      the extent that it created a financial level playing field.

(2) The transfer fees took into account compensation for the costs incurred by a club in training the
      player - Again the CJEU accepted that this was a legitimate aim but there was no identifiable
      relationship between the calculated compensation fee and the action outlays incurred in training
      the player. The Court referred to the fact that the compensation calculated was based on the
      player's previous salary and not the costs incurred by the club in training him.

As a result, the Court held that a rule that imposes a transfer, training or development fee to allow an out-of-contract player to move to a new club is prohibited by Art. 45 as it is working directly against the freedom of movement of workers. It is as a result of this ruling that transfer fees can no longer be charged for out-of-contract players.

Turning to the '3+2' rule, the CJEU was not prepared to accept that a nationality quote, at club level, was a pure sporting rule necessary for the proper functioning of the game. UEFA argued three justifications:

(1) The rule helped to maintain the traditional link between club and country

(2) The rule ensured that there was sufficient pool of nationally qualified players playing in a
      country's top league to feed its national team

(3) The rule maintained a competitive balance between clubs by preventing the richest from
      acquiring all the best players.

Those arguments were all dismissed by the CJEU which stated that it was not necessary that a club maintain a link with its home country through the engagement of players and that a player could be selected to play for his national team whilst playing for any club in the world. Further, the Court held that the rule did not maintain a competitive balance as the richer clubs were still in a position to not only recruit the best players but would still have the ability to hoover up excess players by employing them but not always fielding them.

The CJEU held that a rule that imposes restrictions on the ability of an employer to recruit workers based on nationality alone is in direct infringement of Art. 45.

How has Bosman affected clubs and players? 

Bosman has had an adverse effect on clubs, for instance longer contracts are now required due to the increased risk of losing players in a Bosman type transfer which in turn creates increased wage outlays. Whilst smaller clubs are unable to sign players on such long contracts and often lose their young development players to the bigger clubs on free transfers.

On the other hand, Bosman has been very beneficial to players. As a result of clubs not having to pay transfer fees when out-of-contract, players are able to negotiate their own salaries and often significant signing-on fees. The power certainly lies with the players as they attract bidding wars from clubs around the world to secure their services as a player.

Olympique Lyonnais v Olivier Bernard and Newcastle United FC


Bernard was a young football player who played for Olympique Lyonnais and was offered a one year professional contract. Bernard refused the contract and concluded a contract of the same terms with Newcastle United. This move was in direct contrast to the terms of the Charter for "jouers espoirs" which is applicable in France and states that he should have signed his first professional contract at the end of his training, with the club that had trained him.

As a result Olympique commenced legal proceedings against Bernard and Newcastle United, seeking an award of damages equivalent to the remuneration that the player would have received over one year had he signed the contract proposed to him by Olympique. The Court of Cassation, the final Court of Appeal in France, referred questions to the CJEU on the extent of the principle of freedom of movement for workers and the possible restrictions which national provisions can impose in circumstances like Bernard.

The CJEU held that the Charter, in this case, although was a restriction on free movement it was justified because it encouraged training for young players. However, the Court did state that a rule may infringe freedom of movement if "they preclude or deter a national of one Member State from exercising his right to freedom of movement in another Member State, even if they apply without regard to the nationality of the workers concerned, unless the potential impediment to the exercise of free movement is too uncertain and indirect."

Article 14 and Article 17 of the FIFA Regulations for the Status and Transfer of Players

Art. 14 of the FIFA Regulations for the Status and Transfer of Players allows a player to unilaterally terminate his contract of employment where there is 'just cause' (a reasonable reason for doing so). There is no standard definition to what constitutes 'just cause' and each case will be assessed on its own merits. Failure to terminate one's contract with 'just cause' carries significant penalties for a sportsperson with sanctions found under Art. 17 of the FIFA Regulations for the Status and Transfer of Players which states that compensation is payable to the original employing club where a player breaches their contract without 'just cause' in order to join a new club. The rules also state that any player who signed a contract before the age of 28 can buy himself out of the contract three years after the deal was signed. If he is 28 or older, the time limit is shortened to two years.

Heart of Midlothian v Webster & Wigan Athletic FC
source: http://e0.365dm.com/12/09/660x350/Webster_2835696.jpg?20120928110201

This case was also based around Art. 17 and its correct interpretation along with the appropriate approach in determining compensation under it. The case concerned Andy Webster, a Heart of Midlothian player, who was under a four year contract with the club, that contract commencing shortly before his 19th birthday in March 2001. In January 2006, Hearts entered into negotiations with Webster to keep him at the club long-term. Negotiations broke down and there was a dispute with Vladmir Romanov, the majority shareholder of the club. In May 2006, Webster gave notice to Hearts that he was unilaterally terminating his contract on the basis of Article 17 of the FIFA Regulations. His termination occurred outside the protected period as Webster had served more than three years of his contract. However, The FIFA DRC held that Webster had breached his contract (on a technicality) and awarded £625,000 compensation. This calculation was based on Webster's future wages, his earning potential and the legal costs of the action. Both parties appealed to the CAS.

The CAS ruled that Art. 17 did not allow a club or player to unilaterally terminate an employment contract without just cause, even if it fell out-with the protected period. Given that, Hearts were owed compensation. In assessing the level of compensation, the CAS reduced the original award significantly. It held that the outlays claimed to have been spent on training and developing Webster were irrelevant. The alleged estimate value (£4m) of Webster on the transfer market had not been agreed contractually and thus would cause unjust enrichment to Hearts and would be punitive of Webster. Compensation was thus awarded at £150,000.

The Webster case unsurprisingly drew mixed reactions depending on what side of the fence you sat. FIFA were critical of the decision with President, Sepp Blatter, stating that it would be generally damaging to the game and football clubs and associations were also dismayed by the decision.

However, players' unions were supportive of the decision stating that it gave players the same employee rights that any other worker would expect to find and awarded a greater freedom of employment.

FC Shakhtar Donetsk v Matuzalem Francelino da Silva, Real Zaragoza SAD & FIFA


In this case, Matuzalem, was three years into a five year contract with Shakhtar Donetsk when he unilaterally and without just cause, terminated his contracted with Shakhtar and signed a three year contract with Real Zaragoza. Shakhtar brought an action against both Matuzalem and Zaragoza before Fifa's Dispute Resolution Chamber (DRC) seeking 25m Euros. Fifa's DRC awarded 6.8m Euros which Shakhtar appealed to CAS for a larger award.

CAS ruled that the purpose of Art. 17 was to create greater contract stability (Art.13) and did not give players the right to unilaterally breach their contracts and move to a new club, whether in or outside the protected period. Compensation awarded under Art. 17 was to be at a level as to act as a deterrent for breaching contracts. The CAS held that Matuzalem had breached his contract by not reporting for training with Shakhtar and signing a contract with Zaragoza, this was a serious breach of contract for which there must be consequences and Shakhtar was thus owed compensation.

Turning to the level of compensation, the CAS held that the compensation should be calculated in accordance with Art. 17 and not the release clause, as the circumstances in which Matuzalem terminated his contract were not anticipated in the contract. In determining the level of compensation, the CAS held that the value of the player's services to the club, his status and standing , his behaviour and the timing of his departure should be taken into account when calculating the sum payable. That sum should then be reduced by the sum of money that Shakhtar would not have to pay Matuzalem in wages. Compensation was assessed to consider what was necessary to put the club back into the position it would have been in but for the breach of contract. The CAS, thus, awarded 11.9m Euros, in Shakhtar's favour which Real Zaragoza were jointly and severally liable for.

Although Art,17 has not been challenged under EU law it is likely to be considered as in accordance on the basis that it is an objectively justifiable means of calculating the value to a club of a player who has breached their contract. Effectively, this case helped restore the contractual stability thrown into turmoil by the Webster case whilst bringing an end to cheap buy-out clauses. Now if a player wants to get out of his contract quicker, he better have deep pockets to meet the compensation due.

So what now for Lassana Diarra?

Diarra's case differs from the Bosman case in that Bosman was out of contract and Diarra was not , nor was Lokomotiv Diarra's training club, as per Olympique Lyonnais in the Bernard case.

In determining Diarra's case, the Court will have to assess: (1) was there a restriction of free movement? (2) was that restriction justified? (3) is the restriction necessary in pursuing a legitimate aim? and (4) Is the sanction proportionate to the objective pursued?

Very little has been released about Diarra's case but there have been reports that there may have been a pay-cut proposal which led to the dispute. If Diarra's contract had a variation term within it, it may be the case that the club could legally alter his pay. However, if there was no variation provision and no agreement could be met, the prospect of having your pay reduced could very well form 'just cause' for terminating your contract and signing with another club. Diarra may use an argument such as that in an attempt to mitigate his behaviour during the process. However, as discussed above 'just cause' is always determined on the merits of one's own case and there is no set standard definition.

Diarra may also argue that the level of compensation, awarded against him, acted as an obstacle for him signing on with another club, due to the level, and thus created an obstacle for him to work freely within the European Union. Each case will be assessed on its individual circumstances, however, and it remains yet to be seen what arguments will be presented, during Diarra's case, for there being an unjustified violation of the free movement of workers. The judgement is likely to be heard within the coming months and it will be much anticipated as the transfer system rules are called into question, yet again, in relation to footballer's rights as employees and the significant sanctions they face when considering terminating their contracts.

IMPORTANT: This post is not intended to be a legal briefing, it is not intended to be a statement of the law and no action should be taken in reliance on it without specific legal advice. 

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