Special K – kicking around a new case on implied contracts

Posted: 07/12/2018

There is a gold rush in the world of football: that of agents rushing to introduce players to clubs. This is a potentially rich seam of work. In 2017-18 alone, the Premier League paid £211 million to agents. Player Paul Pogba’s agent, Mino Raiola, reportedly made £41 million from Pogba’s sale to Manchester United. Given the sums involved then, it is perhaps unsurprising that the legal niceties of contracts and clear terms are sometimes a second thought in the Wild West of player representation.

The Football Association (FA) has sought to bring law and order to this Wild West by requiring agents to be registered with the FA. The FA has also sought to streamline the disputes process by requiring any dispute between two or more participants (ie a club, player or intermediary etc) to be dealt with via a specialist arbitration process known as Rule K.

The unfortunate reality is though that there are occasions where there is no written contract between the parties, even though they are both registered participants. Some parties have attempted to take advantage of the uncertainty created by the lack of a written contract to deny that Rule K applies to the dispute. However, such parties underestimate the creativity and the long arm of the ultimate sheriff: the court. The recent case of Mercato Sports (UK) Ltd v Everton FC [2018] is the latest development in the use of multilateral contracts (ie horizontal and vertical contracts) to govern these seemingly lawless situations.

The law

The doctrine of multilateral contracts can be traced back to the nineteenth century House of Lords case of Clarke v The Earl of Dunraven (The Satanita) [1897]. In that case, yacht owners had entered into a race organised by a yacht club, each entrant expressly agreeing to be bound by the Yacht Racing Association Rules which included a provision that the owner of any yacht disobeying the rules was liable for all damage arising. In the course of the race yacht A breached the rules, resulting in the sinking of yacht B, but the owner of yacht A sought to offer only the maximum sum provided by statute for collisions between merchant ships. The owner of yacht B sued the owner of yacht A for breach of contract for the full amount of his loss, and it was therefore necessary for the court to determine whether there was indeed a contract between the two.

Although the owner of yacht A succeeded at first instance, that decision was overturned in the Court of Appeal. He then appealed to the House of Lords.

The House of Lords affirmed the Court of Appeal’s decision, finding that there was a contract between the yacht owners. The existence of vertical contracts between the yacht club and the owners (who had each agreed to abide by the yacht club’s rules) created an implied horizontal contract between the owners, upon which the owner of the damaged yacht B could sue the owner of yacht A. Lord Herschell’s statement that the (paragraph 63): “… effect of their entering the race and undertaking to be bound by these rules to the knowledge of each other is sufficient, I think, where those rules indicate a liability on the part of the one to the other, to create a contractual obligation to discharge that liability…” is a powerful dictum, albeit dependent on the facts of each case.

More recently, and back on dry land, two 2017 decisions of the High Court (Davies v Nottingham Forest FC and Bony v Kacou) enter the saloon. Both cases concerned the application of Rule K. In Davies there was a written contract, albeit with no Rule K arbitration clause, whereas Bony involved written agreements with only some of the defendants, and again no Rule K arbitration clause. In Davies the High Court held that a Rule K arbitration will arise whenever each side is bound by the Rules of the FA (the FA Rules). However, in Bony, it was held that a Rule K arbitration agreement will arise by necessary implication in the absence of specific and express provisions between the parties.

Against that background, the High Court considered the issue afresh this year in Mercato.

Mercato

The facts
AB was a professional footballer. In 2017, he entered into an employment contract with Everton Football Club Company Ltd. The claimants (Mercato Sports (UK) Ltd and Mark McKay) alleged that they had brought AB to the attention of Everton and in doing so enabled Everton to register the player and enter into the employment contract with him. The claimants sued Everton for payment for their services based on an implied contract of retainer or, alternatively, by reason of Everton’s unjust enrichment.

Everton sought a stay of the court proceedings pursuant to section 9 of the Arbitration Act 1996 on the basis that Rule K applied. It was common ground between the parties that McKay was a registered intermediary with the FA and, as such, Rule K applied to him. However, Mercato contended that it was not a registered intermediary and accordingly not bound by Rule K.

Everton argued that either the claimants were inextricably linked, meaning that Rule K also applied to Mercato, or alternatively, that Mercato was bound by the FA Rules by virtue of its participation in professional football. In any event, it transpired during the course of the trial that Mercato’s invoice bore an FA intermediary registration number (different to McKay’s). Enquiries of the FA revealed that Mercato had in fact been a registered company intermediary since 15 May 2017, but was listed as inactive on the FA’s system in error, when in reality there is no requirement for an intermediary to renew its registration. Further enquiries affirmed that the entry for Mercato included McKay, which, Everton argued, indicated that McKay was the natural person authorised to conduct intermediary activity on Mercato’s behalf.

As the evidence and submissions on this issue were made in writing following the hearing, HHJ Eyre QC (sitting as a judge of the High Court) was hesitant to make any findings of fact in the absence of the evidence being tested in cross-examination. Nonetheless, the fact that Mercato had its own FA registration number that it printed on its invoices was a significant factor in the judge’s thinking.

Incompatibility?
Rejecting Everton’s submissions that Mercato was inextricably linked to McKay or, alternatively, was also bound by the FA Rules by virtue of its participation in professional football, HHJ Eyre QC reviewed the relevant case law authorities, including Davies and Bony, to identify the correct applicable test.

Despite Everton having sought to persuade the judge that Davies and Bony were incompatible and the approach in Davies was to be preferred (with Mercato and McKay favouring Bony), the judge concluded that in fact Davies and Bony were far from incompatible. When properly examined, both cases applied the principles laid down in The Satanita and the judge extensively cited HHJ Pelling QC’s analysis of The Satanita in Bony with approval.

The test
HHJ Eyre QC determined that in order for Rule K to operate as an arbitration agreement between Mercato and Everton, there needed to be a contract between the two litigants:

• the existence of which required the application of the normal rules governing formation of contracts; and
• which could be implied between persons who have not engaged directly with each other (a ‘horizontal contract’) but by virtue of each person having a separate contract (a ‘vertical contract’) with the same third party committing them to abide by a particular set of rules laid down by or stipulated for by that third party.

Mere participation in a sport is not of itself sufficient to trigger a horizontal contract. Indeed, HHJ Eyre QC stated that the further removed an activity is from physical participation in the sport, the more care is needed in considering whether persons involved in those activities have acceded to the rules of the governing body.

Application of the multilateral contract test
While the judge rejected the grounds advanced by Everton as a matter of law, in light of the revelation that Mercato was a registered intermediary company, he held that there was a vertical contract between Mercato and the FA and, therefore, a horizontal contract between Mercato and Everton:

• Mercato had acceded to the FA Rules by virtue of its registration and related actions, and was consequently bound by them. As such, there was a vertical contract in place between Mercato and the FA.
• The fact that Mercato’s invoice bore its FA intermediary registration number was a ‘powerful, indeed a compelling’ (paragraph 52) indication that the claim for payment derived from services as a football intermediary, thereby giving rise to an implied horizontal contract between Mercato and Everton.

The judge held that even if Mercato had not been a registered intermediary, it would still be bound by the FA Rules because it was caught by the definition of participant therein, by conducting an activity sanctioned by the FA. It thus followed that all parties were bound by the FA Rules, the dispute was consequently within the scope of Rule K, and a stay was granted to enable the dispute to be referred to Rule K arbitration.

Conclusions

Although it may at first seem strange that a contract can be implied between parties who share no direct relationship, case law demonstrates that this is not a new concept, but one that dates back to the days of the Wild West. The Mercato  judgment is no spaghetti western, but a modern and timely take on the legal principles of horizontal and vertical contracts, as applied to the complexities of today’s sporting world. In reconciling Davies and Bony and in emphasising the principles first set out in The Satanita, Mercato has brought an end (for the moment at least) to debate over which is the correct approach.

Nonetheless, it is clear from the judgment that each case will turn on its own specific facts, which leaves open the possibility of some sharp-shooting argument going forward, and could well lead in turn to more complex legal documents and proceedings: the very thing that Rule K was intended to avoid.

Mercato also emphasises a few salutary lessons that sporting clients and those who represent them would do well to remember:

• Always, always have a written contract in place. This is the only way to avoid costly and unnecessary arguments on contract formation.
• Scrutinise every document, both when it is produced, and in the course of any subsequent dispute. Mercato turned on the key evidence of the invoice printed with Mercato’s registration number: a seemingly small point of detail which had enormous implications.
• The further away a participant is from the actual sport, the clearer they need to be regarding the terms under which they are operating.

Given that questions of jurisdiction frequently arise in international sport, Mercato will not be the last word on this subject. What is clear though is that the courts are more than capable of bringing law and order to the Wild West of football representation and beyond.

A version of this article was first published in the November / December 2018 edition of the Commercial Litigation Journal.

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