Fines imposed by sporting organisations and the penalty doctrine

Sporting organisations regularly impose fines on players, clubs and other persons within their control.¹ For example:

• In late October 2014 New South Wales and Cronulla Sharks NRL player Paul Gallen was fined $50,000 ($15,000 of which was later suspended) for sending an abusive comment on social media concerning the NRL.  The amount of the fine was significant and some, including the former NRL judiciary chairman, suggested it was excessive and not in proportion to Mr Gallen’s offending behaviour.²
• In November 2014 in the United States, Seattle Seahawks NFL running back Marshawn Lynch was fined US$50,000 (with a further $50,000 imposed from a previous suspended fine) for violating the NFL’s media policy by not speaking to the local media.³ Lynch has appealed the fine.

The rules of sporting competitions generally provide sporting organisations with an ability to sanction players, clubs and other persons within their control with monetary sanctions or fines. Fines are used to discipline players and clubs who breach the rules of the sport or the governing body and may cover a variety of events including on-field and off-field conduct, player transfers and drafts, player payment rules and conduct that brings the sport or sporting organisation into disrepute. While the amount of fines imposed by sporting organisations can range from relatively small sums to very large amounts, in many cases the damage suffered by the relevant sporting organisation or by the sport in respect of the breach of the rules is difficult, if not impossible, to quantify.

The penalty doctrine has recently been the focus of judicial consideration in a number of Australian cases. Most recently, Gordon J delivered her judgement in Paciocco v Australian and New Zealand Banking Group Limited⁴ (Paciocco), a class action against Australia and New Zealand Banking Group Limited (ANZ) which challenged the validity of a number of different fees charged by the bank. This followed Gordon J’s decision in the original action filed in Andrews v Australian and New Zealand Banking Group⁵ (Andrews), which was subsequently appealed to the High Court.⁶

In light of the controversy surrounding Mr Gallen’s fine and recent Australian case law, it is timely to consider whether fines and other sanctions imposed by sporting organisations can be considered void and unenforceable under the penalty doctrine.

The penalty doctrine

The penalty doctrine provides relief to parties against an obligation to make a payment by reason of that party’s breach of a provision in a contract where the payment was out of proportion with the damage suffered by the breach.

Before the High Court delivered its judgement in Andrews, it had generally been accepted that the penalty doctrine only applied when the relevant fee or penalty resulted from a breach of contract. That is, if a fee was linked to some other condition it did not evoke the penalty doctrine.

This concept was summarised by Coleman J in Lordsvale Finance Plc v Bank of Zambia:

whether a provision is to be treated as a penalty is a matter of construction to be resolved by asking whether at the time the contract was entered into the predominant contractual function of the provision was to deter a party from breaching the contract or to compensate the innocent party for breach.⁷

On this basis at first instance Gordon J held in Andrews that certain honour, dishonour, non-payment and over limit fees were not charged by ANZ upon breach of contract by the customer (although her Honour did hold that a late payment fee levied by ANZ was payable upon breach of contract and could therefore be characterised as a penalty). Her Honour also found these fees did not represent a fee charged in respect of an obligation or responsibility on the customer to avoid the occurrence of an event.

However, on appeal the High Court unanimously held the penalty doctrine is not confined to breaches of contract. The High Court held that the penalty doctrine can also apply to grant relief from an obligation to make payment which is triggered by the occurrence of a condition which does not amount to a breach of contract. What will be relevant is whether the purpose of the fee is to secure performance of an obligation or whether it is for further services or accommodation. If it is for further services or accommodation, it will not be characterised as a penalty even if the fee is significant. If the fee is payable to secure performance by a party to a contract, it will be enforceable only if it is a genuine pre-estimate of the damage suffered because of that party’s non-performance.

The decision of whether or not the honour, dishonour, non-payment and over limit fees imposed by ANZ were in fact a penalty was reverted back to the Federal Court for decision in Paciocco. Interestingly, the outcome of Paciocco was very similar to the trial decision in Andrews, notwithstanding the comments of the High Court in Andrews in relation to the scope of the penalty doctrine.

Are fines imposed by sporting organisations unenforceable penalties?

Generally speaking sporting organisations impose monetary sanctions or fines as part of disciplinary procedures with the purpose of having a deterrent effect in relation to certain behaviours and ensuring compliance with the rules. This disciplinary action is required to help protect the relevant competition, the players and/or the club/teams and in this sense supports the core objectives of the sporting organisation which often focus upon developing the relevant sport for the benefit of the community at large.

Traditionally the courts have not viewed such disciplinary actions or sanctions as ‘penal’ in nature, rather they have been seen as protective of the community or the welfare and reputation of the relevant organisation.

Indeed, the High Court has described disciplinary actions undertaken by a professional association as ‘entirely protective, and, notwithstanding that its exercise may involve a great deprivation to the person disciplined, there is no element of punishment involved’.⁸

While much of the relevant case law involves disciplinary procedures which are sanctioned by statute and involve professional bodies there is no reason why the same approach would not also be applied to disciplinary actions of sporting organisations.

For example, in Thompson v British Medical Association (NSW Branch)⁹ a doctor was expelled from the New South Wales branch of the British Medical Association and, much like a sporting organisation, the disciplinary orders were made by a governing body (not sanctioned by any statute) under the Rules of the Association which have their basis in contract law. In that matter the Court observed that:

The object of the rule is, in their Lordships’ view, not to penalise or impoverish or injure (the plaintiff) … but solely to keep up the discipline and ‘morale’ of the members of the association to protect and promote its interests.¹⁰

Consideration of a purported penalty clause, particularly one which involves a financial sanction, also requires consideration of the quantum of the proposed penalty. Courts have historically directed juries to assess the real damages suffered by the plaintiff for the breach of the agreement and permitted the plaintiff to recover that sum.¹¹ As a result, where it is impossible to assess the loss that has been suffered the penalty doctrine is unlikely to be engaged. This approach was reinforced by the High Court in Andrews when it stated that:

the penalty doctrine is not engaged if the prejudice or damage to the interests of the second party by the failure of the primary stipulation is insusceptible of evaluation and assessment in money terms.¹²

It would be difficult to characterise many of the monetary sanctions or fines in the rules of sporting organisations as being intended to provide for an element of compensation for economic loss or damage which might be sustained by a sporting organisation by any particular breach or infringement of its rules. The object of the rules of sports and sporting organisations are usually protective as opposed to compensatory. Financial sanctions for disciplinary matters are therefore not likely to be regarded as ‘penal’ in nature.

In some circumstances, a breach of a sporting organisations’ rules (particularly involving breaches by clubs of player payment rules or transfer rules) may indeed lead to significant long term damage and economic loss to the sport. However, even if the sanctions were intended to provide some form of compensation, such losses are likely to be impossible to assess.

It is in this context that Mr Gallen would have faced a number of problems had he wished to challenge the fine imposed by the NRL as an unenforceable penalty. Not only could the NRL argue the sanction was designed to protect the image, reputation and integrity of the game, but it would also have been difficult, if not impossible, to determine the economic loss which would be suffered by the NRL as a result of Mr Gallen’s comments on social media. How do you quantify the effect of the comments made by Mr Gallen’s, a senior player who has represented his county, on the NRL’s battle to win the ‘hearts and minds’ of Australian sports fan?

Practical suggestions

While there are sound grounds that monetary sanctions and fines imposed by a sporting organisation under its rules for disciplinary reasons do not amount to a penalty, there are nonetheless a number of practical things which sporting organisations can do to strengthen their position to avoid confusion and rebut any claim that a financial sanction should be characterised as an unenforceable penalty:

• include provisions in the relevant rules and associated contracts clearly stating that the purpose of the sanctions is to protect the competition, the sport, players, clubs and/or other relevant participants or stakeholders in accordance with the objects of the sporting organisation;
• decision makers should give consideration to proportionality when imposing any fine, particularly where the fine has or may be seen as having an element of compensation; and
• refrain from using the word ‘penalty’ in the relevant rules, instead words such as ‘fine’ or ‘sanction’ are more appropriate.

¹For discussion of the class of persons subject to the rules of a sporting organisations, see Commentary – the ‘purview tof the rules principle’ – Hall & Wilcox, The ‘purview of the rules’ principle, 23 August 2012.

²Peter FitzSimons, ‘NRL had to act over Paul Gallen’s foul tweet’, Sydney Morning Herald (Sydney), 31 October 2014.

³Ed Werder, ‘Silence costs Marshawn Lynch $100k’ ESPN, 20 November 2014, (online)

⁴[2014] FCA 52 (‘Paciocco’).

⁵[2011] FCA 1376.

⁶Andrews v Australia and New Zealand Banking Group Limited 247 CLR 205, 217.

⁷[1996] QB 752, 762.

⁸NSW Bar Association v Evatt (1968) 117 CLR 177, 183-184.

⁹[1924] AC 764.

¹⁰[1924] AC 764, 769-770.

¹¹Kemble v Farren (1829) 130 ER 1234; Reynolds v Bridge (1856) 119 ER 961.

¹²247 CLR 205, 217.