CBA Discussion: Max Term Contracts & Option Contracts

The increase in stat based evaluation may have improved managerial decision-making, however restrictions within the collective bargaining agreement (“CBA”) continue to limit the number of roster changes that certain fanbases and management teams desire.

Although the CBA has been drafted to protect the league’s cap based system from obvious exploitation, player contracts remain over-regulated agreements. The term of each player’s contract is fixed, as is the cap hit. The calculation of a player’s cap hit appears unlikely to change, but provisions regulating the actual term of a contract (i.e. the length of the contract) could be amended without mass upheaval to the current system. Teams and players alike would be provided an avenue to terminate player services early or extend their services for an additional term.

Our discussion will focus on the incorporation of max term contracts and option contracts in the CBA.

Max Term Contracts

Max term contracts, as one may assume, provide for the maximum term of service (i.e. they agree on the latest possible date that employment will end) however the parties retain the right to terminate employment at any time before a contract’s end date.

To incorporate max term contracts into a salary cap system, the right to terminate would have to be restricted between the end of the professional season and 1 July, and the total salary (i.e the. combined value of base salary and bonus) for each season would remain the same. Although this would take away one important characteristic of max term contracts, being the right to terminate at any time, the yearly window to terminate prevents circumvention of the salary cap and makes the inclusion of early termination contracts in the CBA more palatable for the NHLPA. The availability of contracts that provide for both guaranteed years and a right to early termination (after the guaranteed years have concluded) would be even more intriguing. Those who follow other sports, may recognize this sort of modified max term contract as an early termination option (“ETO”).

Players and teams alike could negotiate for the right to an ETO. Therefore, we could see contracts with the right to terminate held by:

only the player;

only the team;

both player and team, where only one party needs to exercise the right to terminate; or

both player and team, where both parties need to exercise the right to terminate.

Teams would benefit from their newfound ability to terminate the contract of a player they believe is overpaid and/or hasn’t performed. Players on the other hand could terminate a contract a year or two early if they believe they could fetch a higher salary on the open market or utilise the termination as avenue for renegotiation with their current team.

ETO’s are often lumped in with option contracts, however to separate the early termination of a contract from the extension of a contract, we have kept them apart in our discussion.

Option contracts

Option contracts allow for the player or team to exercise a pre-negotiated right to extend a contract. Much like ETO’s, we could see contracts with the right to extend held by:

only the player (“ player option ”);

only the team (“ team option ”);

both player and team, where only one party needs to exercise the right to extend (“ dual option ”);

both player and team, where both parties need to exercise the right to extend (“mutual option”).

If the NHL were to adopt such a model, obvious conditions must be included in the CBA. Option years would have to be controlled much the same way as a player’s regular contract. The cap value of the contract for those years would have to match the cap hit of the contract prior to the option being exercised.

To incorporate option contracts into the CBA, the total salary available in each of the optional year(s) would have to match the annual average value of the contract’s guaranteed years. This would maintain the players cap hit, whether or not the option is exercised.

Example:

A player signs a 4 year contract for $20M total salary with a 5th year dual option.

The player would have 4 years guaranteed with an annual average salary of $5M per season. The player would be eligible to receive no more than $20M (base salary and bonus) over the 4 year term. If the 5th year option is exercised by either player or team, then the additional year of the team is included and the player can receive the remaining $5M (base salary and bonus) that was until that period, segregated from the player’s contract.

What are the effects of a buyout on a contract with optional term ?

The answer relies on the type of option included.

A contract that provides the right for the player to extend the contract (player option or dual option) will include the additional year(s) in the buyout. This will maintain the player’s negotiated right to extend the contract for the additional term.

A contract that provides the exclusive right for the team to extend the contract (team option or mutual option) will not include the additional year(s) in the buyout. This will maintain the team’s negotiated right to terminate the contract after the guaranteed term is completed.

The previously mentioned max term contracts without any guaranteed years will terminate without buyout compensation. Whereas contracts that include both guaranteed years and an ETO will once again rely on the rights held by the player and the team.

If a contract is terminated during the period of guaranteed years and the contract provides the team the right to terminate without the player’s consent, then the buyout will not include the years available for early termination.

If a contract is terminated during the period of guaranteed years and the contract provides the player the exclusive right to terminate or the right to reject an early termination (e.g. both team and player must exercise the right to terminate early), then the buyout will include all available years under the contract.

Current Stance

The current CBA relevantly provides the following:-

“11.13 Option Clauses/Voidable Years. SPCs shall not contain any option clause or voidable year, whether automatic, optional or otherwise.

…

50.8 Prohibited SPC Terms and Practices.

(a) After the execution of this Agreement, no SPC may provide for:

(i) Any option year, whether such option is automatic or exercisable at the option of the Player or the Club;

(ii) Any voidable year, whether automatic or otherwise; or

(iii) Salary revisions.”

It’s crystal clear that option contracts and max term (or early termination) contracts are not permitted by the CBA. However, the additional rights provided to these sort of contracts and the inconsistencies that would be found between individual player contracts would ultimately increase the creativity involved in player contracting and cap management.