Implied horizontal contract prompts stay of proceedings S9 AA 1996

In Mercato Sports v Everton[1], the English High Court found that two parties were bound by an implied horizontal contract containing an arbitration clause. Accordingly, it granted a stay of proceedings under section 9 of the Arbitration Act 1996 ('S9 AA 1996'). In this case, a football agent (the Claimant)[2] sought payment for bringing a player to the attention of Everton (the Defendant) and by doing so, it enabled them to sign the player. While Claimant and Defendant had no direct contractual relationship, the Court established that both were bound by the Football Association's Rules ('FA Rules'), in particular by the arbitration agreement therein. While the Court emphasized that such arrangements would not always automatically lead to an implied horizontal contract, the parties' dealings in this case did lead to an implied contractual relationship, governed by the FA Rules.

1.            Background

The Claimant brought a claim against the Defendant in the English High Court for payment for their services after it had brought AB, a professional football player, to the attention of the Defendant who then entered into an employment contract with AB. The Defendant sought to stay the proceedings pursuant to S9 AA 1996. The Defendant invoked the arbitration clause contained in the FA Rules and claimed that this clause operated as an arbitration agreement between the Claimant and Defendant. The Claimant argued that it was not a FA registered intermediary and thus claimed not to be bound by the FA Rules. However, during the hearing it came to light that the Claimant's invoice bore a FA registered intermediary membership number, giving a strong indication that the Claimant did act as such.

2.            Issues

First, the Court followed the approach set out in Joint Stock Company Aeroflot Russian Airlines v Berezovsky[3]; the burden of proof is with the party that asserts that there is (i) a concluded arbitration agreement, and (ii) that it covers the disputes that are the subject of the court proceedings. This approach was undisputed by the parties. Nor did any of the parties contest the scope or validity of the arbitration agreement. Thus, the Court’s judgement was limited to determining whether the parties were bound by the arbitration clause.

For there to be an arbitration agreement, there must be a contract between those parties. An implied contract between two parties who have not engaged directly with each other ("a horizontal contract”) can arise where each of those parties has a separate contract ("a vertical contract") with the same third party committing them to abide by particular rules laid down by or stipulated for by that third party.[4] Such a vertical contract can arise where a person's actions amount to an accession to the rules laid down by the relevant third party. Whether a series of vertical contracts gives rise to a horizontal contract between particular parties will depend on (i) the facts and circumstances of each alleged party's entry into the vertical contract in question and (ii) the nature of their dealings with the other parties.

Was there a vertical contract between each party and the FA?

The Court noted that whether the parties have entered into a vertical contract is largely a fact based decision. In the context of sports, as in this case, the Court considered that those engaging in a sporting event organised under the auspices of a particular governing body are likely to be held to have agreed to be bound by the rules of that body. However, such a conclusion would less readily be reached the further removed the activity in question is from the actual playing of the sport concerned.

However, while in this case the matters were far removed from the actual playing of football, the Court found that due to the Claimant's registration as an intermediary with the FA, it was bound by the Rules.

Did the vertical contracts give rise to a horizontal contract?

The Court considered both the decision of the House of Lords in Clarke v Earl of Dunraven[5] and Bony v Kacou & Others to determine the relevant circumstances that could lead to finding a horizontal contract.

The Court concluded that the facts showed that the Claimant was dealing with the Defendant as an intermediary and it had explicitly made reference to its position as a FA registered intermediary on the invoice sent. Under those compelling circumstances, Judge Eyre QC found that the dealings between the parties were subject to the FA Rules and accordingly gave rise to an implied horizontal contract between the Claimant and Defendant. As such, they fell within the scope of the arbitration agreement constituted by the FA Rules. The Court stayed the proceedings and referred the claim to arbitration under S9 AA 1996.

3.            Comment

This judgement is a reminder that under specific circumstances (often in the context of sports), dealings that fall within the scope of a certain governing body might contractually bind the parties, even when they have not directly contracted with each other. In this case, the invoice bearing an FA intermediary registration was key to the Court's determination that an implied horizontal contract bound the Claimant and the Defendant. However, an implied horizontal contract will not automatically arise in all such circumstances and the Court noted that any decision should be based on a ‘fact sensitive analysis’ in the context of wider contractual interpretation.

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[1] Mercato Sports (UK) Ltd & Anor v The Everton Football Club Company Ltd [2018] EWHC 1567 (Ch)

[2] The claim was brought by two Claimants. However, the second Claimant accepted from the outset to be bound by the FA Rules. Consequently, the legal question in this case was only relevant in regards to the first Claimant. When this blogpost makes reference of 'the Claimant', the author refers to the first Claimant.

[3] Joint Stock Company Aeroflot Russian Airlines v Berezovsky & others [2013 ] EWCA Civ 784, [2013] 2 Lloyd's Rep 242

[4] Bony v Kacou & others [2017] EWHC 2146 (Ch)

[5] Clarke v Earl of Dunraven [1897] AC 59 (The "Satanita")