Sid DeLong on Incentive Contracts in the NFL

Express Conditions, Good Faith and Touchdowns: Incentive Contracts in the NFL
Sidney W. DeLong

Express conditions often work better than express promises to insure performance of a contract for services. A party can induce a counterparty to perform a difficult contract by using either a stick or a carrot or both. Sticks make the return performance a legally enforceable contractual duty; carrots make the return performance an express condition to the performer’s receipt of payment. A return performance is induced by both a stick and a carrot when substantial performance of a contract duty is also a condition precedent to payment for it, as in the typical construction contract.

Duties are not of much use when the return performance is difficult to ascertain or evaluate objectively. In such cases, express conditions based on performance outcomes may be the only practical way to ensure performance. Thus, promising a real estate agent a commission based on a home’s sales price is a better way to secure her optimal performance than threatening to sue her to if she fails to use her best efforts. Giving an attorney 25% of a tort recovery may be a better way of securing her best performance than paying her either a flat fee or an hourly rate.

Because of the practical difficulties of legal enforcement of the duties of good faith and best efforts. elegant design of services contracts requires the use of self-enforcing, conditional incentives to create circumstances in which each party profits most by performing as planned and neither is tempted to engage in self-seeking breach.

Which brings us to NFL incentive contracts. A football player’s performance of his contract can be extremely arduous and dangerous. His best efforts might be difficult for an owner to motivate once the player’s salary is fixed. And even if those efforts are given, it is often difficult for the owner to predict how well a player will perform over the course of a season, and equally difficult to value that performance in advance.

For these and other reasons, many NFL player contracts provide for both a base salary and an incentive bonus that is payable only if the player achieves certain statistical performance standards during the season. Generally, these standards are of two sorts: performance statistics such as numbers of yards gained or touchdowns scored and more general achievements such as making the All-Star team or winning in the postseason.  You can find  examples of such contracts here.

Incentive arrangements address many of the difficulties in valuing player contracts. A team that is unwilling to guess at how well an unproven player may perform may be unwilling to pay big money unless and until it receives the anticipated level of performance. The team also may want to give an established player on a fixed contract a stronger incentive to play well than an empty threat of being cut. But incentive contracts can raise the problem of opportunism.

Suppose a team has a contract with a running back under which he will make an additional $500,000 for the year if he scores 20 touchdowns. The running back begins by having a very good year and with two games left has scored 17 touchdowns. To his consternation, however, during the last two games, he is replaced in critical situations, during which four more running touchdowns are scored by his back-up. Of course, coaches have plenary power to call whatever plays they wish for whatever reasons they wish. Should they have the power to conduct the games so as to deny an incentive bonus under these circumstances?

The situation suggests a risk of bad faith. One of the most familiar forms of bad faith arises when a contract gives a party the discretion to set the level of its own performance. Contractual discretion can ensure critical flexibility, reducing the risk that circumstances can alter the risks that parties face at the time contracts are entered. Flexibility permits parties to adapt their performance to post-formation conditions without the deal blowing up or either party suffering a loss. Is the team’s exercise of discretion over the player’s achievement of his bonus an example of needed flexibility?

Several legal principles may come into conflict when incentive contracts make a player’s performance a condition precedent to the bonus payment. In some cases, courts have held that the non-occurrence of a condition precedent may be excused if it is prevented by the obligor. “It is a principle of fundamental justice that if a promisor is himself the cause of the failure of performance either of an obligation due him or of a condition upon which his own liability depends he cannot take advantage of the failure” Patterson v Pattberg 161 NE 428 (N.Y. Ct. App. N.Y. 1928). This would suggest that the player’s achievement of the bonus level of performance would be excused because the team prevented it from occurring, i.e. prevented the occurrence of the condition precedent to its duty to pay.

What if the team just terminated the player in order to prevent him from earning the bonus? Unless otherwise agreed by an express guarantee, NFL player contracts may be terminated, or the player may be “cut,” by the team at any time without cause, ending the player’s entitlement to any unpaid compensation that was not guaranteed, presumably including unearned bonuses that are not payable until the end of the year. But in other employment contexts, courts have consistently held that a business that terminates an at-will employee to prevent the collection of incentive-based pay that the employee would otherwise be due under the employment contract violates the duty of good faith and entitles the employee to recover the earned pay. Fortune v. National Cash Register Co., 364 NE 2nd 1251 (Mass. 1977); See. Tymshare Inc. v Covell, 727 F.2d 1145 (D.C. Cir. 1984) (Scalia, J).

Under this reasoning, if a team wrongfully prevents a player from reaching a statistical incentive level of performance, the condition on the payment of the bonus might be forgiven. But football coaches have, and must have, complete discretion to manage a game, including decisions on whom to play. (PeeWee League coaches, apparently answerable to angry parents, are another matter.) How can a player prove that an coach’s refusal to let him play was made in bad faith? And what exactly would be a bad faith reason? Even a decision to bench a star player on the last regular season game might make sense if, for example, the team wanted to avoid a risk of injury to the player that would affect its post-season success or its ability to trade the player to another team. In such a case, the team needs for him to be healthy more than it needs for him to score more touchdowns. Such a decision is reasonably related to its success and should not be grounds for a remedy.

All these possibilities suggest that a lawsuit seeking to recover an unpaid bonus under the hypothetical circumstances has a slim chance of success. But it remains obvious to lawyers and fans alike that giving a team unreviewable discretion to manipulate a player’s playing time in order to avoid paying him a bonus puts players at the mercy of the owners. A particularly cynical strain of contract theory will reason that this risk is so well-known to the players as to make the team’s promise illusory: “We will pay you a bonus for meeting our standard . . . if we want to. Now win one for the Gipper.“