Reminder of the Facts
On March 17, 2016, Mamadou Sakho tested positive for a fat burner by the World Anti-Doping Agency (WADA) following a Europa League round of 16 second leg match.
This positive test prompted the Union of European Football Associations (UEFA) to launch an investigation into the French defender the following month. Consequently, he was (i) suspended by his then-club Liverpool FC and (ii) not selected for the French squad that competed in the Euro a few weeks later.
As a result, Sakho missed both the Europa League final with Liverpool and the Euro final with France at the end of the 2015-2016 season. Ironically, he was exonerated by UEFA two days before the latter event (on July 8, 2016).
But the damage was done. Since this suspension, Sakho was permanently sidelined from Liverpool’s first team, leading him to join a less prestigious club (Crystal Palace) in early 2017. Moreover, Sakho only made sporadic appearances in the national team thereafter.
Even though UEFA retracted their allegations in 2016, WADA maintained its doping claims in its 2016 and 2017 statements.
Excluded from two major teams at the end of the decade, Sakho did not participate in France’s victorious 2018 World Cup campaign or Liverpool’s triumphant run between 2018 and 2020.
Thus, the French defender took legal action in the UK in October 2018, arguing that WADA’s decision had precipitated his departure from Liverpool, and seeking 14.5 million euros in damages.
On November 4, 2020, during a hearing at the Royal Courts of Justice, WADA announced that it had settled with Mamadou Sakho, granting him an undisclosed compensation.
The Essence of Loss of Opportunity
Loss of opportunity, defined as the certain loss of a favorable eventuality, is traditionally considered a specific category of lost gain.
This category is often characterized by a more challenging causal link between fault and damage. In this case, WADA cited the lack of an evident causal link, highlighting a possible “psychological incompatibility” between the player and his then-coach Jürgen Klopp.
Often undervalued in damage assessment, loss of opportunity is typically limited to evaluating future damages in contractual liability cases (e.g., the loss of a chance to renew a contract, especially if it includes an automatic renewal clause).
When calculated academically, the sole effect of updating can drastically reduce the amount of loss of opportunity, sometimes leading to its abandonment to avoid weakening the robustness of the produced assessment.
Given the fundamental principle of full compensation for damages, we believe this is a methodological error that can be very detrimental to the claimant.
Nonetheless, loss of opportunity also has other uses and can sometimes constitute the main head of damage in a claim. The Sakho case is a perfect example.
Unlike most contracts, footballers’ contracts do not necessarily run their full term. From one season to the next, a club can decide to part with a player for various reasons: change of coach, change of game strategy, recruitment of a competitor, emergence of a young talent, player trading, resale opportunity, player’s injury, perceived underperformance, conflict with the player, fear of a free transfer, etc.
The sports uncertainty from one season to the next significantly complicates a classic reasoning in terms of pure lost gain (excluding loss of opportunity).
Technical Aspects of Loss of Opportunity Calculation
An Occurrence Calculation on the Lost Gain
The calculation of loss of opportunity resembles an occurrence calculation on a classic lost gain; itself calculated by the discounted difference between (i) a counterfactual variable cost margin – calculated as if the chance had not been lost – and (ii) the actual observed variable cost margin.
From a technical standpoint, the calculation of loss of opportunity does not pose other difficulties beyond the usual challenges of lost gain (reliability of documentation, selection of margin modeling assumptions, etc.).
Even the occurrence calculation, a privilege of loss of opportunity, ultimately constitutes a simple financial treatment of uncertainty; applied to any future lost gain or, more generally, to any business plan.
A debate among financiers concerns the financial treatment of uncertainty, which can be carried out:
– during the calculation of the margin differential or financial flows within a business plan,
– during the determination of the discount rate.
Alternative, more technical approaches incorporating uncertainty treatment (such as real options evaluations) are also possible, but the complexity of these methods tends to deter judges, resulting in their limited practical use.
The Treatment of Uncertainty in Margin Differential Calculation
On this first aspect, two methods of uncertainty treatment can be used.
First, it is possible to apply distinct coefficients on the same margin differential calculation covering both (i) the period of lost gain and (ii) the period of loss of opportunity.
This method allows for perfect continuity with a previously calculated lost gain and is particularly interesting for modeling the loss of chance to renew a contract. However, it is relatively binary (either the loss of opportunity exists in a fixed form or it does not) and can be criticized for modeling more complex damages.
Second, it is possible to treat uncertainty by scenario modeling of the damage. In the Sakho case, for instance, this would involve modeling, in one scenario, the differential income if he had stayed at Liverpool for five years, and in another scenario, the differential income if he had transferred to Real Madrid from 2018. Comparing these two scenarios would provide a range for damage calculation.
This more technical method can quickly become overly complex for those without financial modeling expertise.
If not rigorously developed, it can be perceived by the judge as an inability to estimate anything other than a range of reparations (and an arithmetic average of the damages between the different modeled scenarios wouldn’t help…).
Conversely, some judges are particularly receptive to this approach, considering it incoherent to present a very precise unique estimate for a loss of opportunity damage, which by definition is uncertain.
The Treatment of Uncertainty by Determining the Discount Rate
To begin with this second aspect, let’s briefly recall the principle of discounting.
Two financial flows from different periods (say 2020 and 2021) cannot be directly compared (or added) because they do not hold the same value considering:
– the preference for immediate liquidity: a euro today is worth more than a euro tomorrow (because it can be reinvested to yield more than a euro tomorrow);
– risk aversion: a euro today is certain and worth more than a euro tomorrow (which is inherently uncertain due to potential inflation shocks).
At a minimum, discounting corrects the value of future damages for the effect of time. In this regard, claims for compensation based on non-discounted future damages should be systematically rejected by the courts.
Besides the time effect, greater discounting can neutralize various risks (including inflation shocks, size risk, COVID-19 uncertainty), among which the risk of non-realization of the lost opportunity can also be included.
In practice, discounting is done using a rate, known as the “discount rate,” calculated based on a risk-free investment rate (the well-known preference for immediate liquidity), supplemented by various risk premiums (size premium, COVID-19 premium, etc.). The discount rate applied to the loss of opportunity years would therefore be increased by a risk premium for the non-realization of the lost opportunity, compared to that used for a simple lost gain.
Seductive from a financial theory standpoint, this method is not the easiest for a layperson to grasp. It also suffers from the same binary aspect – and thus the same advantages and disadvantages – as applying coefficients to the margin differential.
Economic and Financial Aspects of Loss of Opportunity Calculation
While there are a few technical subtleties, particularly related to determining the discount rate, the general modeling mechanism is well-known and relatively simple for any professional in the field to implement.
The challenge in the calculation lies in the sophistication of the analysis and the quality of economic projections required for the loss of opportunity estimation. It is much more a business analyst’s task than an accounting expert’s work (even a forensic accountant).
Returning one last time to our Sakho case: how can one claim to estimate the extent of the loss of opportunity without expert knowledge of football? Could Mamadou Sakho have realistically hoped for victory at Euro 2016? Or a long career at Liverpool?
First, in the national team: he would certainly not have been the key player for a French team that went on to win the World Cup without him two years later. Nevertheless, Sakho was ultra-decisive for the French team in November 2013, during a crucial playoff match against Ukraine. He unquestionably had the qualities to provide the extra combativeness that might have made the difference in a tightly contested final.
But would it have been enough? Would Sakho have been a starter instead of Koscielny or Umtiti? Was he complementary to one of these profiles? And suited to the French team’s game plan? And even if he had won the Euro, would it have significantly changed his career (beyond the bonus he would have received)? Would he have been preferred, two years later, over a central defense pair that became world champions?
And at the club level: would he have been retained a few more years by Liverpool, whose coach demanded increasingly more from his defenders, including high positioning on the pitch, fast retreat speed, and very precise long passing – qualities quite different from Sakho’s pure stopper abilities?
And even if he had stayed: would he have kept his place in early 2018, after Liverpool spent 84 million euros to acquire Virgil Van Dijk (then the most expensive defender transfer in history), who became the runner-up to Messi in the Ballon d’Or the following season? Or, conversely, would Sakho have found numerous synergies with the Dutch defender, playing his best football after the latter’s arrival on Merseyside?
These questions are obviously far from exhaustive
. This brief sample aims to highlight the predominance of business analysis (operational and strategic) in the calculation of loss of opportunity.
In this specific case, it would be absurd to claim to estimate the loss of opportunity suffered by Mamadou Sakho without an in-depth knowledge of the football ecosystem (business), or without a thorough understanding of the technical and tactical considerations of the sport.
