When FIFA introduced the latest amendments to the Regulations on the Status and Transfer of Players (RSTP), one of the most misunderstood reforms concerned the distinction between liquidated damages clauses and buyout clauses. While both clauses involve predetermined financial consequences arising from contractual termination, from a legal standpoint, they serve fundamentally different functions.
This article, relying on the FIFA Regulations on the Status and Transfer of Players (RSTP) Commentary and several CAS decisions, explains the difference between liquidated damages clauses and buyout clauses, with practical tips on how to distinguish between them.
1. What Are Liquidated Damages Clauses?
The parties to an employment contract have the contractual freedom to agree in advance on the compensation payable if one party unilaterally terminates the contract without just cause. This agreement is commonly referred to as a liquidated damages clause. A liquidated damages clause is therefore a contractual provision by which the parties agree in advance on the amount of compensation payable if a specified breach or premature termination occurs.
Its main purpose is to compensate one party for anticipated damage, and the parties may: (i) fix the amount of damage in the contract as a lump sum; or (ii) opt for it to be calculated in a relative way in which the parties may prove that the damage is more higher or lower than the agreed compensation. This form of settlement reduces litigation risks and avoids the uncertainty in calculating damages after the event. Rather than requiring the injured party to prove the precise value of its loss, the contract fixes or provides a formula for calculating compensation in advance.
Article 17 of the FIFA RSTP
Article 17 of the FIFA RSTP (“Consequences of terminating a contract without just cause”) provides the legal basis for inserting liquidated damages clauses into football employment agreements. Under the revised RSTP, parties are required to predetermine the compensation due for a breach of contract, with the provisions providing clear limits and guardrails. It must, however, be noted that this contractual freedom is not absolute. In CAS 2022/A/9165 BGPU-BG Pathum United v Daniel Garcia Rodriguez and FIFA, the Panel identified three important requirements for the validity of such a clause:
- It must be unequivocal;
- It must not have been concluded under coercion or duress; and
- It must not create an excessive commitment or give one party undue control over the other.
Therefore, proportionality and appropriateness, rather than reciprocity, are the key considerations in determining liquidated damages. Where a liquidated damages clause disproportionately favours one of the parties and gives that party undue control over the other, it will be considered null and void. In such circumstances, compensation is instead calculated based on the principle of positive interest.
2. What Are Buyout Clauses?
A buyout clause gives a party, usually the player, the right to unilaterally terminate an employment contract without just cause upon payment of a predetermined amount.
As explained in FIFA’s RSTP Commentary:
“Buy-out clauses grant a right to the player to terminate the contractual relationship prematurely in return for payment of a predetermined sum that is stipulated in the contract. In this case, parties are not setting an amount of compensation to be paid to compensate for a breach, but rather are agreeing in advance upon the conditions of a ‘mutual termination’, i.e. consent is given in advance to terminate the contract in the future in return for a specified payment.”(p. 175)
Unlike liquidated damages clauses, buyout clauses cannot trigger sporting sanctions because the termination has been agreed in advance. Whereas liquidated damages clauses may still amount to a breach of contract and may therefore expose the terminating party, or in some cases the new club, to sporting sanctions.
3. Why the Difference Between Liquidated Damages and Buyout Clauses Matters
Liquidated damages clauses and buyout clauses are fundamentally different and cannot be used interchangeably. This distinction is not merely academic, as the classification of a clause can materially alter the parties’ legal and financial positions.
In CAS 2021/A/8543 Paris Saint-Germain Football v Futbol Club Barcelona, the panel stated as follows:
“While buy-out clauses grant one of the parties the right to terminate a contract, liquidated damages clauses simply foresee the amount of compensation that a party to a contract would receive in case its counterpart decides to unilaterally terminate the contract without just cause and against their will. The wording of the relevant clause is essential in order to establish whether it is a buy-out or a liquidated damages clause.”
The consequences include, but are not limited to, the following:
(i) Exposure to Sporting Sanctions: There may still be a breach of contract in liquidated damages, thus exposing the terminating party or a new club to sporting sanctions. A buyout clause is a pre-agreed mutual contract termination which cannot trigger sporting sanctions.
(ii) The FIFA Solidarity Mechanism: Under Article 21 and Annexe 5 of the FIFA RSTP, a 5% solidarity contribution is payable to training clubs whenever a player is transferred before the expiry of his contract. The exercise of a buyout clause is treated as a transfer, thereby triggering payment of a solidarity contribution by the new club. Liquidated damages, on the other hand, cannot generate solidarity payment because they represent compensation arising from unilateral termination, which cannot be homologated to a transfer.
(iii) Judicial Review and Reduction: Courts and CAS tribunals possess the statutory power to reduce excessive liquidated damages or enforce mitigation. In contrast, for a buy-out clause to be properly exercised, the agreed sum must be paid unconditionally, with no deductions of any kind.
(iv) Consent to Termination: In a buyout clause, advance consent is given when the contract is signed, even though the termination may occur much later. A liquidated damages clause, by contrast, does not necessarily contain consent to termination. It simply refers to an agreement on the financial consequences of termination, which cannot by itself, be treated as consent to the termination.
4. The CAS Decisions
(a) CAS 2021/A/8543 Paris Saint-Germain Football v FC Barcelona
In 2017, PSG signed Neymar Jr. after the sum of EUR 222 million was deposited to trigger Clause 8 of his contract with FC Barcelona. Following the player’s move to PSG, FC Barcelona filed a claim for the payment of solidarity contribution due to the club. PSG argued that the relevant clause was a liquidated damages clause, which did not trigger the payment of solidarity contribution. Alternatively, the club argued that the solidarity contribution was already included in the €222 million.
The Panel rejected both arguments. First, the clause was regarded as a classic buyout clause under which Barcelona had consented in advance to release Neymar’s International Transfer Certificate upon receiving the full amount. Second, the Panel held that since Barcelona had to receive the full €222 million without deduction for the clause to be triggered, that amount represented 95% of the gross transfer value. PSG was therefore required to pay an additional €11,684,211 in solidarity contribution on top of the €222m, of which Barcelona was entitled to €2,215,326.32 as one of the player’s training clubs.
(b) CAS 2024/A/11078, CAS 2024/A/11079 and CAS 2024/A/11081 Pacheco and Others v Vasco da Gama
In Pacheco and Others v Vasco da Gama, the Panel acknowledged that the distinction between liquidated damages clauses and buyout clauses can be nuanced. In some circumstances, a clause may grant both termination right and compensatory payment mechanism.The Panel stated as follows:
“FIFA’s RSTP Commentary notes that “buy-out” clauses are “distinct” from other concepts, such as “liquidated damages”. However, in commercial practice, a clause will often display mixed characteristics, freeing a party from sporting sanctions on the one hand while also employing compensatory or dissuasive language on the other.”
This rationale is premised on the fact that buyout clauses do not form a distinct legal category under Swiss law, which applies to CAS proceedings. Therefore, the question whether such a clause is a penalty, liquidated damages or a form of “dédit consensuel” must be decided on a case-by-case basis pursuant to Article 18 of the Swiss Code of Obligations, which provides as follows:
“When assessing the form and terms of a contract, the true and common intention of the parties must be ascertained without dwelling on any inexact expressions or designations they may have used either in error or by way of disguising the true nature of the agreement.”
On this basis, the fact that both parties describe a particular provision as a buyout clause does not necessarily mean it will be regarded as such. In the same vein, a clause may possess both liquidated damages and buyout characteristics. Article 18 of the Swiss Code of Obligations requires the Panel to determine the parties’ true and common intention rather than relying solely on inaccurate expressions, labels or headings. The relevant questions are therefore:
- Does the clause grant a right to terminate?
- Is the termination authorised or wrongful?
- Can sporting sanctions follow?
- Is payment required before termination becomes effective?
- What is the purpose of the payment? Is the payment designed to compensate for loss, punish a breach or grant contractual freedom?
- Has the other party consented in advance to release the player and cooperate with the ITC process?
Final Thoughts
The difference between liquidated damages clauses and buyout clauses begins with a simple distinction.
A liquidated damages clause ordinarily determines the financial compensation payable for a breach or premature termination. While a buyout clause ordinarily grants an agreed right to terminate upon payment of a predetermined amount.
However, this distinction is not always watertight, as demonstrated by the decision in Pacheco and Others v Vasco da Gama. A clause may grant a contractual termination right while also containing a payment mechanism that is legally characterised as liquidated damages. The onus is therefore on the Panel to determine the parties’ true intention, in order to give effect to the wording of the clause.
At BallBusiness, we advise players, coaches, agents, clubs and football stakeholders on the drafting, review and negotiation of football employment contracts. Get in touch with our team today at Legal@theballbusiness.com or visit www.ballbridge.com to schedule an appointment.