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SENShobo

Kovalchuk contract arbitration not clear cut

This week, starting today and in an undisclosed location, men will sit down in a small square room with the windows shuttered, and the NHL and the NHLPA will goe toe to toe over the validity of the flag-bearer contract of Ilya Kovalchuk. While the NHL asserts that the contract is “a circumvention of the Collective Bargaining Agreement,” many have been quick to point out that it follows every letter of the law of the CBA.

Rule 50.6 (a) limits compensation in any year of the contract from exceeding 20 per cent of the cap as it was in the year the contract began. With a cap of $59.4 million, Kovalchuk’s high water salary mark of $11.5 million respects this by $380,000. Rules 50.7 (i) and (ii) look at the first two years of the contract—valued at $6 million each—and requires that any year-over-year increase in salary be not greater than the lower of the two years—the largest jump, from $6 million to $11.5 million, flies $500,000 under the radar—while any decrease cannot exceed half of the lower of the two years—the largest drop on the way down from the $11.5 million peak being equal to this $3 million limit. Even the required minimum salary is met throughout the tail of this dragon contract.

But outside the rules, you have to accept that there are valid reasons for wanting a contract with more ups and downs than Rick DiPietro’s. You must see that even in respecting these rules, the contract can indeed be called a circumvention of the CBA, at least in spirit, and one damaging to the whole League.

And you must also be aware that, despite following the rules of the CBA to the letter, the NHL might reveal to the arbitrator that they have some unmentioned trump cards yet to play.

What could be wrong with Kovalchuk wanting to earn varied salaries?

Some among us might like the thought of DiPietro’s take, a cool $4.5 million every year for more than a decade still. Others might have different priorities. In settling in New Jersey for the foreseeable eternity, Kovalchuk just might want to buy himself a nice house, and maybe after a few years turn it in for a nicer one once he’s found himself at home in the area, maybe snapping up or starting up a business in the area at the same time. Jumping up to $11.5 million for those critical years could save him a bundle in mortgage payments and business loans, and that’s certainly his prerogative.

Earning a bulk $95 million by the time his first decade is up also sets him up for retirement. The first principle I recall when thinking of investing is that if you can get a better return on your investments than the rise of inflation, you’d be foolish to leave your cash holed up in a bank, and wise to invest it as early on as you can to maximize your return. The hilly nature of Kovalchuk’s contract will see him with $35 million or in excess of 58 per cent more money at his disposal by the end of that first decade than had he received his actual cap value each year, and with it a much greater potential for increased returns.

Even at its simplest, there’s nothing wrong with the insinuated desire of Kovalchuk to be the highest paid player in the NHL for years three through seven, higher than countryman Alex Ovechkin, and the highest paid player in 2014 when Olympic Men’s Hockey lands in Russia. Barring of course the possibility that the rise in the cap or some player’s ability could see them ink a deal a few years down the road to push Kovalchuk from the podium.

How do these contracts break the bank, the CBA, and the League’s back?

The NHL’s Collective Bargaining Agreement is a collection of rules, and yet the intent should not be too hard to surmise. A form of cost control, where the players have been entitled to between 54 and 57 per cent of the yearly take, based on various factors. Assuring a measure of competitive balance by setting a floor to which all teams must spend, and a ceiling which no team can exceed, helping to close the payroll gap that pre-lockout could have been a BP worthy blemish of well over $50 million in a competitive league. Ensuring that money would not always be the trump card to lure free agents with, higher contracts eating up precious cap space that allows less financially lucrative teams a chance to keep pace with their Pension Plan investment worthy peers. Even playing a little Robin Hood by taking some revenues from the richest teams and giving it back to the poorest, following a set structure.

Those familiar with franchises will recognize this as the many benefits derived from having D-list stores on your roster barely staying afloat, in order to spread the appeal, increase the bulk discount, and overall increase the success of the brand overall.

The problem stems from the expectation that, as a player who signed his contract prior to being 35 years old by June 30th of this season, should Kovalchuk not show up at training camp to play for his salaries of the lower, $3.5 million, $750,000, and $550,000 range, the actual cap hit of $6 million will not count against the Devils’ cap. Assuming we still have a cap in 2020 and beyond.

Suddenly, teams with wherewithal have no problem in getting any player they want, for any length of time they want. A player you might expect to fetch $2 million of a team’s cap, and who might be expected to retire in four years, could easily be offered a contract giving him $10 million in the first two years, $5 million in the third and fourth year, and just the league minimum of a comparably paltry half million in the remaining years. Let’s suggest that there be at least 15 of these years, to get the cap hit down under that previously expected $2 million ballpark. Tack on a few more decades, and you can start getting players like Ilya Kovalchuk for equally egregious cap hits.

Or keep it slim and get a decade of Kovalchuk for what should be a cap hit of $9.5 million, while in fact only sacrificing $6 million of payroll space. A little more believable since it’s already happening on all sorts of teams around the League.

Now we wind up creeping ourselves back into the era where rich teams with money to burn use it to burn those less successful teams by easily snatching up all the talent that the comparative paupers can’t afford. That, and instead of the $20 million or so you’d find them spending just a half decade ago, they now have to pony up more than twice that to reach the cap floor, and likely reaching it only by turning belly up to meet it, the head under water and no longer able, or even trying, to gasp for air.

How could an arbitrator not side with the NHLPA on a contract that breaks no rules?

The little trump that could be offered up right off the start comes from the wording of the CBA, in that 26.15 Examples of Circumvention goes on to say that it “is a non-exhaustive list of activities
that either constitute a Circumvention under this Article 26 or from which a Circumvention may be inferred.” Obviously, no example, from (a) through (k), explicitly spells out what circumvention the Kovalchuk contract is, but we know what it is that should constitute the circumvention—or from what the circumvention can be inferred. This can give you access potentially to the allegedly nebulous “spirit of the agreement” allegations.

Really, you needn’t be that nebulous to find a breach.

The CBA spells out the particulars of how the NHL operates as a League, but it is able to take some things for granted. Nowhere is it spelt out that Kovalchuk can blow away Bettman for this contract rejection, because murder happens to be a rule already a provision of both lands the League operates in. So are contracts.

From a cherished university textbook (Donald L. Marston, B.Sc., P.Eng., LL.B.

Law for Professional Engineers, Canadian and Global Insights, Fourth Edition.

Toronto, Canada: McGraw-Hill, 2008.), giving you a bit of my background, you can read up on contract law in Canada, not so different from the laws of its neighbour to the south. To enter into a contract, one of the elements required is consideration. “As Black’s Law Dictionary points out, it is the cause, motive, price, or impelling influence that induces a contracting party to enter into a contract. [...] Each party to the contract promises something in return for the other party’s undertakings. The payment of money is not essential: consideration may consist of an exchange of promises, each promise representing something of value.”

In effect, the contracts issued by the 30 teams are not just between the player and team, but also through the League approval they must receive have the League as parties to the contract as well. In these contracts, it is not just money being promised, but also the promise of service, of Kovalchuk to serve years one through ten to the best of his ability just as much as the final seven years. It is a promise of the team to receive these years of service from this player that they will pay the player, and additionally carry the burden of this contract to term, both financially and with respect to the cap.

A subversion of this leads you to another chapter: Misrepresentation. “A misrepresentation is a false statement or assertion of fact. If a misrepresentation is made to induce a party to enter into a contract, the misled party may apply to the court to have the contract rescinded.” The fraudulent misrepresentation would be obvious if we could prove that the Devils and Kovalchuk agreed both that the team would pay him the exorbitant amounts of the early years, and that Kovalchuk would retire in the second half of the contract to save them from the large cap hit of his likely less serviceable years, and the compensation and damages that could be pursued both plain to see. Still, even innocent misrepresentation, “a false assertion made by a party who does not appreciate that the statement is false,” would enable the deceived party, in this case the League, to pursue compensation.

All of this spells out options for the League to reject this contract. Not only that, but it should bring fair warning for other teams whose contracts out there have been approved, since 26.10 (b) of the CBA states that “The Investigator’s authority to investigate (i) a possible Circumvention relating to an SPC shall in no way be limited by the fact that such SPC was approved and registered by Central Registry.” Just as the League realized that the game’s rules needed updating mid-season to reflect the growing specter of head shot injuries, the CBA could come to be modified at some future point to spell out proper processes for these unrecorded, unpredicted, but undeniably real circumventions.

Perhaps the DiPietro contract is used as a model, and were Kovalchuk to retire after his first decade and $95 million earned for a mere $6 million corresponding cap hit, both parties could be liable. Oh, say, the $35 million Kovalchuk earned early could be returned to any of the Devils as punishment for services not rendered, to the League for contract not honoured, or to teams of the lower financial stature who were hurt by being unable to bid for Kovalchuk’s services, and by having to face an additional $3.5 million worth of cap space attacking for the Devils for that decade, maybe with additional fines tacked on. The Devils could perhaps be forced to take this $35 million cap circumvention, and required to spread it out in some fashion over the remaining term of the contract or some other prescribed eternity, punishing the team for such decisions and cap avoidances.

It wouldn’t be a future seeing Kovalchuk and the Devils standing alone in this situation. Nor would it necessarily be, after a new CBA is established, that there would not be some form of luxury tax or other modification to the agreement available to allow rich teams to push more of their might, while not destroying the teams their wallets lord over. There are fans out there who appreciate 82 game schedules, and being able to watch four rounds of epic playoffs before the Cup is bestowed. There are fans out there who would hate to see their team face division rivals twelve times instead of six, would hate to see the standings shrink to allow every team into the playoffs given the same set of rounds, and would not want to see a vastly extended and near-endless parade of teams offering the threat levels of the Panthers, Islanders, and Blue Jackets of this last season.

Can’t see the forest for the trees? It might be necessary to read between the lines.

Filed in: NHL News, NHL Rules, | SENShobo | Permalink
 

Comments

awould's avatar

In my opinion, the NHL screwed up by allowing this gaping loophole. This contract is a farce and every reasonable hockey fan knows Kov. won’t be playing those last years. I think teams should be able to sign a guy to a lifetime contract if need be. However, the actual cap hit should be the average of the current season and the next 3 seasons…. generally speaking, the cap hit should reflect the current and near term state of the team. This would likely stop teams from signing players to anything over 5 years or so as the economic upside would disappear.

Posted by awould on 08/04/10 at 01:06 PM ET

Avatar

In my opinion, the NHL screwed up by allowing this gaping loophole.

More than that, I think it was a genius move on the part of the owners to get this loophole into the CBA in the first place.

The wording of the CBA is very odd and not at all logical when you think about it.  Why would you decide that the average salary is the cap hit rather than the actual salary every year?

It’s pretty clear that some owner or some group of wiling-to-spend owners thought this up and slipped it in there under the guise of “well, it’s just easier to keep track of it this way” while fully intending to use the loophole to their advantage.

Posted by Garth on 08/04/10 at 01:57 PM ET

Avatar

This is a gaping hole that the NHLPA apparently fought for when they and the owners negotiated the last CBA. Everyone seems to forget that the players do not want length of contract to be set and it is something that the owners agreed to in order to get a CBA in place. In fact, the large market teams love this loophole since it allows them to spend additional money while complying with the cap. If this loophole is closed in the next CBA look for another to be opened such as allowing teams to trade cash with contracts or retain a portion of the cap hit in any trade.

In the end who this helps most are the players on mid-level of the NHL pay scale.  Without this kind of cap management they would all be squeezed into league minimum deals in order to maintain the 54% of revenues while the top players ate up the bulk of the salary structure.

Posted by hockey1919 from mid-atlantic on 08/04/10 at 01:58 PM ET

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About SENShobo

Native of Northern California.  Hockey fan since 1998... sort of... there's a hiatus in there that I still can't explain.

I want to know about anything and everything related to the sport and the spectacle.  I watch, I react, I write it down.

My interest in the Sharks was initially a matter of geographic convenience and regional loyalty because that seemed to be how it worked.  I had no prior interest (at all-- AT ALL) in professional sports of any kind.  When I met hockey, it might have set off a chain reaction of general sports fandom.  It hasn't, I don't think it will.  At all.

Since then, that interest developed into full blown (mostly sort of usually almost completely) exclusive loyalty to the Sharks.

I started blogging a couple years ago on wordpress. I still occasionally put things there that I don't think fit here because they are not about the Sharks. Wherever my words wander, here on Kuklas Korner, they will (usually) hang on to a teal thread.

I can be found in cyberspace on Twitter @petshark47, or emailed at talkingstick@petshark.net