Harmony at the price of principle: the impact of Mercato Sports (UK) Limited & McKay v Everton FC [2018] EWHC 1567 (Ch) (“Mercato”)

Introduction and Summary

In July the High Court in Mercato considered the circumstances in which parties, not including the FA, who are subject to the FA Rules, will be bound to arbitrate disputes between them under FA Rule K.

The judgment follows, and attempts to reconcile, two decisions of the same Court in 2017 on the same topic: Davies v Nottingham Forest FC [2017] EWHC 2095 (“Davies”) and Bony v Kacou & Ors [2017] EWHC 2146 (Ch) (“Bony”).

It is suggested that in seeking to reconcile those decisions, by emphasising a “fact sensitive” approach, the decision will result in a loss of certainty and consistency in this area, and an increase in the number of preliminary disputes on jurisdiction. The Court also drew a problematic distinction, for the purposes of inferring agreement from participation, between playing sport and engaging in other activities connected to sport.

A better approach, it is suggested, would have been to apply the principle in Clarke v The Earl of Dunraven (“The Satanita”) [1897] AC 59, free from the constraints placed upon that principle in Bony.

The decision is of significance to any dispute in which one side contends that a multilateral contract (including but not limited to an arbitration agreement) has arisen by virtue of a sports governing body’s rules.

The Issue 

The claimants were Mark McKay and an associated company. They alleged that they had brought AB, a professional footballer, to the attention of the defendant, Everton FC. Everton FC then entered into a contract of employment with AB. The claimants sought remuneration for their alleged services under an implied contract of retainer, alternatively under the law of unjust enrichment. There was no written agreement between the Claimants and Everton.

The defendant applied for a stay of the claim under s.9 of the Arbitration Act 1996, contending that an arbitration agreement existed between the parties, by virtue of Rule K of the FA Rules, requiring the dispute to be submitted to a Rule K arbitration.

Mr McKay was a registered intermediary and did not oppose the stay. The issue for the Court was (1) whether Mercato was bound by the FA Rules and (2) if so whether that resulted in an arbitration agreement arising between Mercato and Everton.

The tensions between Davies and Bony 

In determining those issues, it was necessary for the Court in Mercato to consider the tensions in this area between the decisions of the Court in Davies and Bony.

The conflict between the two decisions may be summarised as follows:

1. Under Davies a Rule K arbitration agreement will arise whenever each side is bound by the FA Rules (even, it would appear, where the parties seek as between themselves to contract out of those rules).
   
2. Under Bony such an agreement will only arise, in the absence of specific and express provision between the parties, by necessary implication on the particular facts (with necessity being a high bar).
   

Davies concerned a dispute between Nottingham Forest FC and their former manager, Billy Davies. Mr Davies issued a claim in the English Courts alleging breach of a written services agreement with the Club. Whereas his original services agreement had contained a Rule K arbitration clause, his current agreement contained no such clause. Moreover, the current agreement contained an entire agreement clause.

The Court in Davies nonetheless considered the parties bound to arbitrate their dispute under Rule K, on the following basis (at §§14 to 18 of the judgment):

1. The decision of the House of Lords in The Satantia recognised the legal efficacy of “multilateral contracts of accession”, whereby one document could be acceded to by a number of individuals in succession so as to put them all in contractual relations with each other (the Court also cited The Zephyr [1984] 1 Lloyds Rep 58 at 72).
   
2. It was common ground that each side was bound (in contract) by the FA Rules, as between that party and the FA (see §14 of the judgment).
   
3. Each of the Club and Mr Davies knew full well that they were each bound (at least between them and the FA) to adhere to the FA Rules. That finding (at §16(c) of the judgment) appeared to be premised upon the fact that ‘[a]nyone who participates in the game of football (certainly at the professional level) is fully aware of the importance and the standing of the rules.’
   
4. FA Rule K(1)(a) provides that ‘any dispute or difference between any two or more Participants [as defined]…shall be referred to and finally resolved by arbitration under these Rules’. Each side had agreed to that rule, and a Satanita contract containing that term arose between them.
   
5. Perhaps controversially, the Court also appeared to consider the parties incapable of contracting out of adherence to the FA Rules. In the course of considering the entire agreement clause in Mr Davies’ services agreement, the Court appeared to regard those rules obligatory, and equivalent to professional regulatory obligations (at §18):
   

‘There is nothing in the latest service agreement which contradicts the terms of Rule K. As a matter of fact, the rules bind both parties. Part of the price to be paid for the privilege of involvement with a professional football club is adherence to the rules. Just as a firm of solicitors could not, as a matter of private contract, excuse a junior fee earner from the need to comply with his or her professional obligations, so a contract between a football club and its manager cannot in my view excuse a manager from compliance with the rules.’

Whereas points (1) to (4) in Davies above proceed as a matter of contract law, point (5) does not. The first sentence in the quote above might be taken as an attempt to narrow the clause by construction, but without explanation or further development it plays a sad second fiddle to the (non-contractual) reasoning thereafter.

One month later, the decision in Bony was handed down, without reference to Davies. It took a different approach. The claimant was a professional footballer. He brought a claim against his former agents (D1 and D3), their respective corporate vehicles (D2 and D4) and his former club (D5) for recovery of secret commissions. The material facts were as follows:

1. D1 had never been registered with the FA and was an unauthorised agent. D3 was registered with the FA in the material period. Neither of their corporate vehicles had been registered with the FA.
   
2. There were written representation agreements between the Claimant and each of D1 and D3.
   
3. The Claimant’s contract with D1 contained no arbitration clause.
   
4. The Claimant’s contract with D3 contained a clause providing that disputes between those registered with the same national association would be ‘the responsibility of the respective national association’ and that all other disputes would be submitted to the FIFA Players’ Status Committee. Perhaps surprisingly, there was no argument that this could be construed as a Rule K arbitration clause so far as D3 was concerned.
   

The Court in Bony sought to distinguish The Satanita on its own facts. It effectively confined the principle (at §§42 to 48) to cases where:

1. each of the parties had expressly (rather than impliedly) agreed to the relevant rules (a “vertical” contract);
   
2. they had done so to the knowledge of the other;
   
3. no express “horizontal” contracts existed between the relevant parties; and
   
4. it was necessary to imply a “horizontal” contract between those parties ‘in order to give effect to what each had agreed to the knowledge of the other with the club.’
   

The bar for such necessity was a high one (at §49): it would be ‘fatal to the implication of a contract that the parties would or might have acted as they did without any such contract.’

On that basis, no Rule K arbitration agreements arose (§§50 to 52). The Claimant’s relations with each of D1 and D3 were the subject of express contracts which did not include (and were inconsistent with) a Rule K arbitration clause, and the Claimant had entered into no relations at all with D2 and D4 (who had simply received the secret commissions). The defendants had failed to establish, on the facts, that it was necessary to imply a Rule K arbitration agreement between the Claimant and each or any of them (at §50).

The Decision 

The attempt to reconcile the tensions between Davies and Bony

Perhaps surprisingly, the Court in Mercato declared (at §27) that there was no incompatibility between the decisions in Davies and Bony. They were said to be reconcilable on their own facts. The relevant analysis is at §§29 to 41 of the decision. The key points were as follows:

1. The Court considered Davies to be an example, on its own particular facts, of the circumstances in which, following The Satanita, a “vertical” contract was found to give rise to the “implication” of a “horizontal” contract (at §34).
   
2. Davies provided no support for the proposition that participation ‘in activities connected with professional football’ bound such a participant ‘necessarily and automatically’ to the FA Rules (§34). Whether that was so was, instead, a question of fact in each case.
   
3. §18 of Davies was wrong, insofar as it suggested that parties were unable to modify by agreement their contractual obligations as against each other, including obligations which would otherwise flow from each party’s relationship with a relevant governing body.
   
4. The reasoning in Bony on the relevant authorities (recited at §39), including on the scope of The Satanita, was ‘compelling’ (at §41).
   
5. Having just endorsed the analysis in Bony however, the Court in Mercato then explained the outcome in that case by reference to different reasons. Those reasons (at §40) were that in Bony D1, D2 and D4 had never been parties to an agreement with the FA, and that D3 had an express and inconsistent agreement with the claimant. As set out above, the Court in Bony itself decided the case on the basis that there was no necessity to imply any arbitration agreement (see §50). It made no express reference to the reasons now proffered in Mercato.
   

Having purportedly reconciled the two decisions, the Court in Mercato summarised the relevant principles (at §26) as follows:

1. It was possible for an implied contract (“a horizontal contract”) between two persons who had not engaged directly with each other to exist where each of those persons had a separate contract (“a vertical contract”) with the same third party committing them to abide by particular rules laid down by that third party;
   
2. Whether such a contract arose would ‘depend on the facts and circumstances of each alleged party’s entry into the vertical contract in question and the nature of their dealings with the other parties. A careful and fact sensitive analysis of the particular circumstances will be required’;
   
3. Engagement in ‘activities related to a particular sport’ did not ‘without more and inevitably amount to an agreement to be bound by the rules of the governing body of that sport’, let alone ‘to horizontal contracts with all others engaged in that sport’;
   
4. Nonetheless, ‘accession to such rules’ could ‘in appropriate circumstances give rise to such horizontal contracts with other participants in the sport.’
   

Distinguishing off-pitch commerce from the playing of sport

When would these “appropriate circumstances” be made out? In an important passage at §42 of the judgment the Court said the following:

‘In many cases the court will readily conclude that there were both vertical contracts with the relevant governing body and horizontal contracts with other participants. Thus those engaging in a sporting event organised under the auspices of a particular governing body are likely to be held to have agreed with those organising the event to be bound by the rules of that body and to have entered horizontal contracts to the same effect with the other participants.

However, such a conclusion will be less readily reached the further removed the activity in question is from the actual playing of the sport concerned. The conclusions which can be drawn from the actions of a footballer in putting on his or her team’s strip and walking on to the pitch in a match organised by the Football Association are not necessarily appropriate when considering the same footballer’s business dealings even when those dealings relate to his or her professional career.

In my judgment the further removed the relevant activities are from the physical playing of a sport the more care is needed in considering whether persons involved in those activities have acceded to the rules of the relevant governing body and whether horizontal contracts incorporating those rules are to be implied between such persons and the other participants in those activities.’    

The Court accordingly drew a distinction between the playing of sport and off-pitch commerce, and considered that distinction relevant both to:

1. The ease with which a vertical contract with the FA would be implied; and
   
2. The ease with which, thereafter, a horizontal contract with other participants would be implied.

Judgment on the facts

The Court then identified two issues for itself:

1. Was Mercato bound by a vertical contract with the FA?
   
2. If so, did a horizontal contract arise between Mercato and Everton FC requiring the dispute to be submitted to a Rule K arbitration?
   

So far as the vertical contract was concerned, the Court held that by registering itself as an intermediary, and failing to rescind that registration, Mercato had “acceded” (meaning impliedly agreed) to be bound in contract by the FA Rules applicable to registered intermediaries (see §49).

The Court rejected, in that regard, any suggestion that Mercato was bound by virtue of its participation in football transfer activities. In particular:

1. The fact that Mercato qualified as a “Participant” under the FA Rules, did not answer the prior question of whether Mercato had agreed to be bound by those rules. It was emphasised that ‘[t]he Football Association is a private body with its rights and powers deriving from agreement and it cannot exercise control over those who have not agreed, expressly or impliedly, to be subject to such control’ (§46).
   
2. Mercato’s participation in the transfer of AB was (at §42) ‘far removed from the actual playing of football. The dispute is concerned not with AB’s performance on the football pitch but with business dealings between the Claimants and the Defendant which are said to have led to the latter engaging AB as an employee.’
   

So far as the horizontal contract was concerned, the Court considered such a contract to arise between Mercato and Everton. The basis for that finding was that Mercato had included its FA registration number on an invoice sent to Everton FC billing for its purported services. In the Court’s judgment:

1. This was ‘a powerful, indeed a compelling, indication that the claim for payment was made [in Mercato’s capacity as registered intermediary].’
   
2. That in turn meant that Mercato ‘was acting, and avowedly acting, on the basis that its dealings with [Everton FC] were subject to the Rules.’
   
3. It followed that ‘[t]hose dealings accordingly gave rise to an implied horizontal contract between [Mercato] and [Everton FC].’
   

Comment

A bad middle way

It is respectfully suggested that the attempt in Mercato to reconcile Davies and Bony was well-intentioned but fundamentally flawed. The decisions are irreconcilable. The first treats the answer as provided by The Satanita, the second confines The Satanita and treats the question as a matter of necessary implication.

By seeking to chart a middle course through the two decisions, the approach in Mercato pays a high price in certainty and consistency.

Mercato itself provides a good illustration of the problem. It is unsatisfactory that the decision should have turned upon the inclusion of a registration number on an invoice. In particular:

1. The invoice (by definition) came after the date of contracting and the provision by Mercato of its purported services. There were no factual findings as to the Club’s response to the invoice. At its highest therefore, the number on the invoice was (a) ex-post facto evidence of (b) the subjective views of one party as to the capacity in which it was contracting.
   
2. Even then, there were a number of reasons why the registration number might have been included. It may, most obviously, have been included so as to reassure the Club that it was not dealing with an unauthorised agent (something prohibited under the FA Rules). It may have been included without much thought at all: indeed Mercato originally claimed (wrongly) that it had never registered with the FA.
   

Under Davies, the registration number would have been irrelevant: what would have mattered is that each side was bound by the FA Rules, to the presumed knowledge of the other.

Under Bony, the answer should have been that there was no arbitration agreement. It is hard to see how the registration number makes it necessary to imply such an agreement, when none would otherwise exist. Bony requires the Court to consider whether the parties might have been acting in the absence of such an agreement: clearly they could have been.

The result is an outcome which, on its reasoning, is arbitrary, and which follows neither decision. In particular, having endorsed Bony for most purposes, Mercato nonetheless replaces a test based on necessary implication with a “fact sensitive” survey whose outcome will be pretty unpredictable.

The Satanita principle provides a better basis for the same outcome

It is suggested that a better approach would have been to apply The Satanita, per Davies, without going further and questioning the contractual basis of the obligations (as Davies does).

The Satanita involved a collision between yachts who had entered and participated in a regatta under the rules of that regatta. All three judges of the Court of Appeal ([1895] P 248) were clear that in signing the entry sheet and taking part in the regatta, each participant had undertaken, to every other participant, that they would abide by the rules of the regatta. The point was not appealed, but in the House of Lords [1897] AC 59 Lord Herschell expressed his agreement in the following terms:

‘…the effect of their entering for 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.’

The key elements appear to be (1) that a party agrees to a set of rules which are expressed to be multilateral; (2) in the knowledge that others are agreeing to be bound on the same basis. One difficulty in the latter regard is that neither the Court of Appeal nor Lord Herschell say much about the nature of the requisite knowledge (what needs to be known, does constructive knowledge suffice, etc.)

The principle is now well established as a qualification upon the standard bilateral offer and acceptance analysis of contractual formation. Beyond the world of sport, the principle is of relevance to the relations between, e.g., members of an unincorporated association (see Chitty on Contracts 32^nd edition at 2-117, citing Artistic Upholstery Ltd v Art Forma (Furniture) Ltd [1999] 4 All ER 277), between members of an insurance syndicate, and between the members of banking clearing systems (see Chitty at 34-392).

On an application of that principle to the facts of Mercato, an arbitration agreement existed:

1. Having agreed to be bound by the FA Rules, Mercato had agreed to be bound by Rule K(1)(a);
   
2. Rule K(1)(a) is expressed to impose a multilateral obligation: it requires not only disputes with the FA, but also disputes between participants, to be submitted to arbitration;
   
3. Mercato must have known, or should be presumed to have known, the content of the FA Rules to which it had agreed. The FA Rules are publicly available;
   
4. Mercato must have known, or should be presumed to have known, that Everton FC was bound by the FA Rules. It is a football club.
   

The Satanita principle is not based upon necessary implication

With respect to the Court in Bony, nothing in the The Satanita itself supports the characterisation of the resulting multilateral contract as an implied contract, premised on necessity. The judgments in the The Satanita are instead based upon the (multilateral) nature of the contract agreed and the knowledge of the parties at the time of that agreement.

The Satanita principle does not require express agreement

Equally, there was no good basis in Bony for restricting the application of the principle to circumstances in which a party has expressly agreed, rather than agreed by conduct, to the relevant rules. No such condition was stipulated in The Satanita and, indeed, one of the Court of Appeal judges (Rigby LJ at 262) specifically held that participation in the race, with knowledge of the rules, would suffice, and that the entry forms signed by the parties were only material as evidence of such knowledge.

The distinction in Mercato between playing sport and other connected activities is unhelpful

To the mix Mercato now adds the distinction drawn at §42 between the actual playing of sport and other activities related to sport. There are a number of problems with that distinction:

1. Whether participation in any particular activity can constitute agreement by conduct to a set of rules expressed to govern that activity is a question of fact, to be assessed having regard to all the surrounding circumstances, as are the terms of any resulting contract: Modahl v British Athletic Federation Ltd [2001] EWCA Civ 1447 at §§49 and 100-105.
   
2. It is unclear why the application of the FA Rules to, e.g. footballing transfers, should be any less obvious to an individual than the application of those rules to matches themselves. The asserted distinction appears to be premised, without authority, upon an overly narrow view of the world of sport and what the FA’s rules can be presumed by an individual to cover.
   
3. Once a party has agreed to the relevant rules (whether expressly or by conduct), the distinction is of little or no use in ascertaining whether the rules have resulted under The Satanita in a multilateral contract. It will be of no use to assessing whether the rules agreed to are expressed to be multilateral. It will be of little or no use to assessing whether the party knew that others were agreeing to the same rules on a multilateral basis.
   

Contracting out of Rule K

One aspect of Mercato which should be welcomed is its affirmation that parties, as between themselves, may contract out of any obligations that might otherwise exist (as between them) from their having agreed to the FA Rules.  

Where the specific contention is that the FA Rules have given rise to an arbitration agreement, i.e. a contract, then it must follow that the parties to that contract are able to vary it or bring it to an end.

More generally however, the comparison in Davies (at §18) between the FA Rules and the regulatory obligations of solicitors is inapposite. The powers of the Solicitors Regulation Authority derive from its designation as an “approved regulator” under the Legal Services Act 2007 (to which the Law Society has delegated those functions). There is no equivalent statutory basis for the obligation to engage in a Rule K arbitration (nor has any other case suggested otherwise: see in particular Stretford v Football Association [2006] EWHC 479 (Ch) and [2007] EWCA Civ 238).

As between two “horizontal” parties (and, indeed, as between any party and the FA), the FA Rules can only bind as a matter of contract. That must mean, as a general matter, that parties are able, as between themselves, to vary or exclude any such obligations.

Conclusion

The decision in Mercato is an important one. Its immediate consequence will be to create a space for additional “fact sensitive” arguments in jurisdictional disputes. It has potential application however, beyond jurisdictional issues, and beyond football, to any dispute where one party contends that a multilateral contract arises by virtue of the rules of a sports governing body. For the reasons set out above, it seems unlikely to be the last word on this topic.