The Court of Arbitration for Sport (CAS) case between Sociedade Esportiva Palmeiras and Al Shaab Football Club Co. LLC revolved around a dispute concerning the termination of a loan agreement for Brazilian footballer Vinícius Santos Silva. The agreement, signed on 20 September 2015, stipulated that the player would be loaned to Al Shaab until 30 June 2016 without any fee. Key provisions included salary payments, penalties for wrongful termination, and an option for Al Shaab to buy the player’s rights for €2 million. The agreement also imposed a €1 million penalty for any breach without the need to prove damages. Al Shaab terminated the agreement on 21 September 2015, claiming the player had not arrived in the UAE by the specified date, which they argued constituted a breach. Palmeiras contested this, asserting the agreement did not specify an arrival deadline and accused Al Shaab of failing to provide flight tickets and canceling the player’s visa.
The dispute centered on whether Al Shaab’s termination was justified and whether the contractual penalties were excessive under Swiss law, which governs CAS proceedings. The CAS panel examined procedural and substantive issues, clarifying that electronic submissions filed within the 21-day deadline must be followed by hard copies by the first business day after the deadline. On the merits, the panel assessed whether the €1 million penalty was excessive. Under Swiss law, parties have contractual freedom to set penalties, but courts or arbitrators may reduce them if grossly unfair. The panel considered factors such as the creditor’s interest in compliance, the severity of the breach, intent, the parties’ business experience, and the debtor’s financial situation.
Palmeiras argued that the termination deprived them of potential financial benefits, including the €2 million option for Al Shaab to acquire the player permanently and the right of first refusal for third-party transfers. They emphasized that the penalty clause was intended to cover such losses, in addition to the salaries paid to the player, and deemed it proportional. Al Shaab, however, contested the enforceability of the penalty clause, arguing it was excessive and abusive under Swiss law. They cited Swiss legal principles allowing courts to nullify or reduce penalties deemed unreasonable. The panel ultimately found the original penalty clause of €1 million excessive and reduced it to €100,000, considering the exceptional circumstances of the case. It noted that even if the player had been able to play, the likelihood of a transfer was low, estimating it as a 1 in 10 chance, and thus reduced the penalty to 10% of the original amount.
The panel also awarded Palmeiras interest of 5% per annum on the awarded amount, starting from the date Al Shaab terminated the loan agreement. The decision partially upheld Palmeiras' appeal, confirming the FIFA Players’ Status Committee's ruling but modifying it to include the additional €100,000 penalty and interest. All other claims were dismissed. The final ruling required Al Shaab to pay Palmeiras the specified amounts within 30 days of notification, along with the accrued interest. The case underscores the importance of clear contractual terms and the judicial discretion in moderating excessive penalties, balancing contractual freedom with fairness in enforcing penalties. The outcome provides guidance on how such clauses should be assessed in future disputes, emphasizing proportionality and the specific circumstances of each case.