Since I had to deal with some major player contracts this week, or rather recreate them for international teams, I would like to end the week by saying a few words on the subject of contractual penalties in player contracts.

Many professional teams in esports now want to include penalties in contracts if, for example, players or coaches don’t show up for practice, don’t participate in events, or even if they don’t perform as they should. But is that even possible under German law? Last year, I published a few posts around the topic, for example around the problem of toxic behavior or also on the problem of match fixing. The latter may possibly also result in criminal consequences.

In this problem area, a distinction must be made above all between employment contracts and marketing contracts, because although it is possible to stipulate certain requirements in marketing contracts or to attach conditions to sponsorship payments, the nature of the matter makes it more difficult to force certain behavior from players who are only tied to the team via marketing contracts. You can read more about this in this article on the differences, and this article on what all goes into a player contract.

Today, and in the context of this article, I would like to talk about employment contracts, because an important point in the question of how much penalty is possible, is always relevant to the earning potential of the player and the nature of the job.

Therefore, let us put it first: Theoretically, contractual penalties are also permitted in employment contracts. They are only subject to GTC control, i.e. they must be comprehensible and not ambiguous, may not be designed in a surprising manner and may not constitute an unreasonable involvement of the employee (on the problem of GTC and prohibited clauses, see this article). There really isn’t much case law on the subject, however, so you’ll have to factor in a bit of contract tactics, business acumen and legal skills. This is because labor judges often do not like to see contractual penalties, since there are certainly “milder” means at hand in the form of admonitions and warnings. Contractual penalties should therefore be used to generalize actual damages that are otherwise difficult to quantify, rather than actually understanding the monetary payment as a disciplinary measure. Details in the wording of the clauses are therefore quite relevant here if they are to hold up before German labor courts.

In principle, it is possible to impose a contractual penalty, especially if the purpose is to punish the unlawful detachment from the employment contract. The same is thus true in professional sports (i.e., professional esports as well) and is directly related to the question of whether transfer fees are actually possible in esports (see this article). A contractual penalty is then structured as a contractual agreement that obligates the contractual partner who has made the promise of penalty to pay a certain sum of money if he culpably, i.e. intentionally or negligently, violates certain contractual obligations. The labor courts usually accept such contractual penalties, as the employer otherwise has no particularly effective way of defending itself against an unlawful repudiation of the contract. Because you can’t force people in Germany to work (or “play” in esports). This is already regulated in the Code of Civil Procedure, because according to Section 888 III of the Code of Civil Procedure, a performance judgment that obligates an employee to work cannot be enforced at all.

Although such clauses are therefore possible in principle, they must stand up to scrutiny under GTC law. This is because promises of contractual penalties are practically always GTCs. This therefore means that these must not be cheated into the player contract somehow and somewhere, must be clear and understandable for an average employee (here, of course, what is usual in other esports is relevant, e.g. participation in majors etc. or certain types of training situations) and they must not constitute an unreasonable disadvantage. The last condition tends to be the most difficult to assess, because here there are already countless judgments of the most diverse kind in the area of regular case law on GTCs. Certainly not possible are clauses of an absolutely general nature, such as provisions imposing a contractual penalty on the employee in the event of “culpable conduct in breach of contract” or a “serious breach of contract”. The violations must be clearly stated and formulated. And the violations must also be neutrally verifiable and not purely at the discretion of the employer, i.e. the team, in the assessment. Clauses in esports player contracts regarding the quality of play, i.e. whether a player is “good” or “bad” or “not improving”, therefore tend to be problematic.

As outlined above, such clauses may also not unreasonably disadvantage the employee, i.e. the player, contrary to the requirements of good faith. The main issue here is the amount of the contractual penalty. The penalty must not be disproportionate to the employer’s interest in the employee’s compliance with the contract. A disproportionately high contractual penalty would result in the entire contractual penalty clause being invalid. Even a severability clause is of no help in such cases. German labor courts often follow the rule of thumb that one month’s salary is sufficient as a penalty in most cases. However, in individual cases and in the case of particularly high employee interest, more would be possible. If, for example, a team is unable to participate in a major tournament or a league final as a result of its conduct, and if there is also a risk that sponsors may drop out or demand compensation, higher penalties are also conceivable.

As you can see, it is advisable that such clauses are drafted by lawyers who have seen market conditions many times and who could defend the clauses in labor court in case of doubt. This is relevant if only because damages caused by employees, even if major sponsors recover money, trigger the jurisdiction of the Labor Court, in which the employer (as the team) must bear its own costs even if it prevails completely.