Bulletins Story: When is a club relegated? The Court of Appeal decides

Date: 30.03.2005

Manchester City Football Club (“City”) have successfully appealed a High Court decision to award their former manager, Joe Royle, substantial damages arising from the termination of his employment contract.  The decision of the Court of Appeal is an important one because it examines the intention of the parties to a contract in the context of what was described as “footballing reality”.

City played their last Premier League match of the 2000/2001 season on Saturday, 19 May 2001.  At the end of the season, they were third from bottom of the table which meant that they would be relegated from the Premier League to the Nationwide League First Division (now the Coca Cola Championship).  Mr Royle was subsequently dismissed on 21 May 2001.

As is common in football managers’ employment contracts, Mr Royle’s remuneration depended to a very large extent on whether City were playing in the Premier League, or the First Division.  In the Premier League his basic salary was £750,000 per annum.  In the First Division it was £300,000 per annum.

Mr Royle’s employment contract provided that in the event of termination, he would receive a sum equal to his gross basic salary for:

1) 12 months if at the date of termination City’s first team was in the Premier League, or

2) 6 months if at the date of termination City’s first team was in the First Division.

So, if City terminated Mr Royle’s contract when they were in the Premier League he would be entitled to £750,000, but if they terminated when they were in the First Division he would only be entitled to £150,000.

In the High Court Mr Royle’s lawyers had successfully argued that, at the date of his dismissal, the club was still in the Premier League because the share transfer that would bring membership of the Premier League to an end had not taken place.  (The Premier League Rules require a club relegated from the League to execute an instrument transferring its ordinary share in the Premier League to one of the three clubs promoted to the Premier League from the First Division.)

On appeal, City argued that relegation should not be defined by reference to the transfer of a share certificate.  Rather, it should be construed by reference to what a reasonable person, with the knowledge of football that the parties to Mr Royle’s employment contract had, would have regarded as being the date at which City were relegated.  It was said that a reasonable person, with a knowledge of football, would contend that at the end of a season, when a club had finished in the bottom three, it was relegated.  Some time later there was the formality of a share transfer, but this was of no real significance.  What mattered was the reality of relegation.

The Court of Appeal was satisfied that the real intention of the parties was to compensate Mr Royle, if prematurely dismissed, for the loss of the earnings which he would have received, but for the premature dismissal.  To that end, the club was certainly going to play in the First Division during the following season and he should receive the lower rate of pay, which is what he lost by his dismissal.

The Court of Appeal said that it was clear that the parties had not applied their minds to the position where dismissal took place at the end of a season when the club had either been relegated or promoted, but before the next season had begun.  Had they done so, they would not have used such imprecise expressions as “in the Premier League”, or “in the First Division” but would instead have defined the end of a football season.

Uncertainties will remain which is perhaps why the High Court was so keen to opt for a share transfer as establishing relegation or promotion.  For instance, the approach adopted by the Court of Appeal does not envisage a situation where a club finishes bottom of the Premier League, but gains a reprieve from relegation because the promoted club in the First Division fails to meet entry criteria.  If the reprieved club had sacked its manager because of his poor performance in leading the club to bottom place, it is questionable whether it would avoid paying the higher damages.

Those responsible for drafting employment contracts (whether for players, managers or administrators) in any sport where remuneration of employees is dependent on league status should ensure that there is no ambiguity in relation to relegation, promotion or league status in the contract.

The decision also has significance in relation to the provisions of agreements between clubs and their commercial partners.  Often, a right to terminate arises expressly upon relegation. Conversely, promotion usually means that commercial partners pay more for their association with a particular club. It is similarly important for commercial agreements to specify when either event can be said to have occurred.

Chris Synnott
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