England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM Manchester District Registry
His Honour Judge Kershaw QC
MA370039

		Royal Courts of Justice Strand, London, WC2A 2LL
		8 March 2005

Lady Justice Smith:

1. This appeal concerns the amount of compensation that Mr Joe Royle should receive from the Manchester City Football Club (the Club) following his dismissal from his position of manager of the Club on 21^st May 2001. Following his dismissal, the Club paid Mr Royle the sum that it considered was due to him under the terms of his contract of employment. However, Mr Royle considered that he was entitled to a much greater sum and sued for the balance. In July 2004, His Honour Judge Kershaw, QC, sitting in the Mercantile Court in Manchester, found in favour of Mr Royle. The Club now appeals that decision.
2. Mr Royle became a football manager in 1982 after retiring as a player. He managed Oldham Athletic Football Club until 1994, when he was appointed as manager of Everton. He remained there until part way through the 1997/98 season, when he joined Manchester City. At that time, the Club was playing in what was then the First Division of the Football League. Between then and his dismissal on 21^st May 2001, Mr Royle had three different contracts of employment. Only the third, which was dated 1^st June 2000, is relevant to this action. At the time that that contract was signed, the Club had recently been promoted and, in the forthcoming season, was due to play in the Premier League.
3. The contract provided for employment for a period of four years from 1^st June 2000. Remuneration was covered by Clause 6. Clause 6.1 provided for payment of a basic salary depending upon which league or division the Club was playing in at the time. If the team was playing in the Premier League, the basic salary was to be £750,000 per annum. If the team was playing in the First Division, the basic salary was to be £300,000. There was also a bonus scheme to reward the manager for success. Bonuses were payable depending on the Club's end of season position in the League table and on its success in the Football Association Cup and Worthington Cup competitions. The bonuses were higher if the Club was playing in the Premier League than if it were playing in the First Division.
4. Clause 14 made provision for termination of the contract. Under Clauses 14.1.1 to 14.1.5 the Club was entitled to dismiss the manager without compensation for various reasons, such as misconduct, bankruptcy or bringing the Club into disrepute. Clause 14(2) dealt with the position where the manager became incapacitated. None of those provisions is of relevance to this appeal. Clause 14(3) is relevant. It provided:

"14.3 In the event that the Company [meaning the Club] shall terminate this Agreement prior to the expiry of the term specified in clause 2.2 [four years from 1^st June 2000] otherwise than in accordance with clauses 14.1.1 to 14.1.5. (inclusive) or 14.2 (which the Company may elect to do at its discretion), the Company shall pay the manager a sum equal to his gross basic salary for:

14.3.1 twelve months if at the date of termination the Company's first team shall be in the Premier League, or

14.3.2 six months if at the date of the said termination the Company's first team shall be in the First Division."

5. Clause 14.3.2 also provided that deductions for tax and national insurance contributions (NIC) would be made and that the sum payable would be paid in either twelve or six monthly instalments as appropriate. Thus, if the Club was in the Premier League at the date of termination, the manager would be entitled to £750,000, less tax and NIC, payable over a year but if the Club were in the First Division at termination of the contract, the manager would be entitled to only £150,000 less tax and NIC, payable over six months. So the question of Mr Royle's entitlement to compensation on his dismissal on 21^st May 2001 depended on whether the Club was at that date 'in the Premier League' or 'in the First Division'.
6. The Club played its last match of the 2000/2001 season in the Premier League on Saturday 19^th May. It lost and ended the season third from the bottom of the table. Pursuant to Rule B26 of the Premier League, this meant relegation to the First Division. In fact, the match played on 19^th May was not determinative of the Club's relegation. The number of points to its credit was such that, from 14^th May onwards, relegation was inevitable. However, Mr Royle remained in post until the last match had been played. At a meeting on Friday 18^th May, the Board of the Club decided to dismiss him; they wished to appoint Mr Kevin Keegan as manager. Mr Royle knew nothing of this until the morning of Monday 21^st May when he was due to meet the Chairman for a discussion. He was then summarily dismissed. It appears that the Chairman said words to the effect that the compensation payable would be based upon the fact that the Club was now in the First Division.
7. In the Court below, it was contended on behalf of Mr Royle that he was entitled to receive compensation for breach of his employment contract on the basis that, at the date of dismissal, the Club was still 'in the Premier League'. It was contended that being 'in the Premier League' was to be equated with membership of the League. Section B of the Rules of the Premier League determined membership. Within Section B the relevant rules were:

"Membership

2. The League shall consist of those association football clubs playing in England and Wales not exceeding 20 in number which are from time to time members of the Company.

Becoming a Member

3. At the end of each Season the Board shall require each of the Clubs relegated from the League in accordance with Rule B26 to execute an instrument transferring its ordinary share in the Company to such of the 3 clubs promoted to the League from the Football League as the Board directs.

4. Upon such share transfers being registered in accordance with the Articles each of the promoted clubs will become a member of the League.

Ceasing to be a Member

5.        A Club shall cease to be entitled to be a member of the League (and upon registration in accordance with the Article of the transfer of its ordinary share in the Company shall cease to be a member of the League) following:

5.1 its relegation from the League in accordance with Rule B26 or……."

8. As I have said, Rule B26 provided that the bottom three clubs in the table at the end of the Season were to be relegated to the First Division of the Football League. The Season is defined in the Rules as the period commencing on the date of the first League match on the League fixture list and ending on the date of the last.
9. The operation of the Football League is also governed by Rules. There is a fixed number of teams playing within each division of the league during each season. The Rules provide for the promotion and relegation of teams between divisions. The provisions relating to promotion from the First Division into the Premier League dovetail with the rules of the Premier League in that three clubs go up and three go down. The clubs to be promoted from the First Division are the two teams at the top of the table at the end of the season and the winner of a play off between the four teams in the third to sixth positions in the table. Thus the third of the three teams to be promoted to the Premier League will not be identified as early as those to be relegated from it.
10. It was contended on behalf of Mr Royle that, even though it might be arguable that the Club had been 'relegated' at the end of the season after the match on 19^th May, the Club was still a member of the Premier League on 21^st May because the share transfer that would bring membership to an end had not yet taken place. It was not disputed that the share transfer had not yet taken place. On 20^th May 2001, the Secretary of the Club had made an attempt to transfer the share out of the Club's name but this had been unsuccessful. At the hearing and before this Court, it was accepted that, on 21^st May, the Club still held a share in the Premier League.
11. For the Club, it was argued below that being 'in the Premier League' was not to be equated with membership as evidenced by the holding of a share certificate but was to be construed by reference to what any reasonable person, with the knowledge attributable to the parties to this contract at the time of making it, would have meant by being 'in the Premier League'. In support of this approach, the Court was referred to the speech of Lord Hoffmann in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 at 912, where there are expounded the five principles by which the meaning of contractual documents is to be interpreted. The first principle is:

"Interpretation is the ascertainment of the meaning which the document could convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract."

It was submitted that any reasonable person, with the knowledge of football that must be attributed to the parties to this contract, would have said that when the last match of the season had been played and the Club had come third from the bottom, they had been relegated and were no longer 'in the Premier League'.

12. The Judge held that the parties must be taken to have been aware of the rules applicable to the Premier League at the time of making the contract and that the only sensible way of deciding whether a Club was 'in the Premier League' was by reference to the holding of the share. Any alternative construction would give rise to unacceptable uncertainty. He noted that the dates on which share transfers had taken place in the past were variable but, he said, the date of transfer was always capable of being ascertained and therefore gave an acceptable degree of certainty to the question of whether, on a particular day, a club was 'in the Premier League'. The Judge found for Mr Royle because being 'in the Premier League' meant being a shareholding member of it and the Club was still a member on 21^st May.
13. On appeal before this Court, the same arguments were deployed as had been put before the Judge. Mr Harvie QC for Mr Royle contended that the Judge had been right and that the Club being 'in the Premier League' could only sensibly be construed as being a member of it according to the Rules, of which both parties must be taken to have been aware at the time of forming the contract.
14. Mr Pannick QC for the Club submitted that any reasonable person with the knowledge of football that must be attributed to these parties would say that, on 21^st May, the Club had already been relegated from the Premier League to the First Division and was no longer 'in the Premier League'. They would not say that it was going to be relegated. He submitted that the process of transfer from the Premier League to the First Division took place in two stages. At the end of the season, when a Club's final position in the table had been ascertained, the club was relegated. Some time later, the formality of share transfer took place but this was of no real significance. What mattered was the reality of relegation.
15. Further, he submitted that the construction he contended for was consistent with good commercial sense. The thinking behind Clause 14.3 was to ensure that the manager was rewarded for success and should not be rewarded for failure. He suggested that the parties could not sensibly have intended that, if the manager had been unsuccessful so that the Club was relegated, he should be 'rewarded' by a severance payment based on the earnings applicable to his status as a Premier League manager. That would or might be the consequence if, as here, the club dismissed the manager before the formal share transfer had taken place. If being 'in the Premier League' or 'in the First Division' were construed by reference to the relegation or promotion which took place at the end of the season (regardless of whether share transfer had taken place) a sensible result was obtained. He suggested that the position was even clearer when looked at in reverse. If a manager had worked successfully and the Club had achieved promotion, it seemed almost unthinkable that, if the manager were then dismissed before the formal share transfer into the Premier League had taken place, the manager should be deprived of the fruits of his success.
16. Leading on from this last of Mr Pannick's submissions, the question arose in oral argument as to the purpose of clause 14.3. Was Clause 14.3 intended as a proxy assessment of the damages that the manager would receive at common law if he sued following the premature termination of his fixed term contract? It is well established that, at common law, such damages are assessed by reference to the future earnings which the employee has lost by premature termination of the contract. From that sum must be deducted his/her actual earnings since the termination (if the damages are calculated some time later) or, if the calculation takes place soon after the breach, an assessment of the likely earnings the employee will receive in the balance of the contract period. In respect of both figures, the incidence of tax must be taken into account and a discount will be given for accelerated receipt. It was accepted on both sides that it is entirely proper for parties to an employment contract (provided they are contracting at arms length) to seek to short-circuit the process of assessment of damages due on premature termination by reaching a broad brush compromise formula which provides a proxy for common law assessment.
17. Mr Pannick submitted that this was the purpose behind clause 14.3. Seen in that light, it was, he said, clear why the parties had reached agreement in the way that they had. If the Club was in the Premier League, the manager would be earning £750,000 per annum gross and would be eligible to receive the higher rate of bonuses for success. If he was dismissed, he might find it difficult to find comparable replacement employment because only Premier League clubs (or some foreign clubs) would be prepared to pay such high emoluments. The position would be different for the manager if the Club was in the First Division. Not only would the manager be in receipt of a lower basic salary and lower rate bonuses, it would be much easier for him to find replacement employment. The manager would be able to look for work among both Premier League and First Division clubs and was therefore likely to find alternative work more quickly. Those factors accounted for the way in which compensation under clause 14.3 was to be calculated. The manager only received 6 months pay at the lower rate if dismissed from the Club while in the First Division but 12 months at the higher rate if dismissed while in the Premier League.
18. If that was the explanation for the way in which clause 14.3 had been drafted, it was clear, submitted Mr Pannick, that the intention of the parties must have been to provide for compensation by reference to the emoluments which the manager would have received in the period immediately following the premature termination. That in turn threw light on what the parties must have meant by the Club being 'in the Premier League or 'in the First Division'. If the termination took place at the end of a season, it must have been intention of the parties that compensation would be determined by reference to the league or division in which the Club would now be playing. That would ensure that the manager would receive compensation referable to the loss of earnings he would suffer by premature termination. This argument, he said, strongly supported his contention that the parties had intended to look to the 'footballing realities' rather than to the technicality of when a share transfer took place. He accepted that an anomaly could arise if the Club dismissed the manager in the short period between the date on which it became clear that the Club was bound to be relegated and the end of the season. During that period, it was clear that the Club was still in the Premier League because it still had matches to play. A dismissal during that period would result in the manager receiving compensation by reference to his Premier League earnings when, in reality, what he had lost was his future earnings in the First Division. However, as soon as the season had ended and it could properly be said that the team had been relegated, a dismissal should sensibly result in the payment of compensation based upon the earnings that the manager would have received as manager of a First Division Club. That is what the Club contended for here. A contrary construction would not resolve the admitted anomaly but would compound it.
19. Mr Harvie accepted that, in agreeing to the terms of clause 14.3, it may well have been the intention of the parties to agree a formula as a proxy for the assessment of common law damages for premature termination. However, he said, even if that were so, the words used in clause 14.3 were clear and being 'in the Premier League' could only sensibly refer to being a shareholding member. If so, no resort to an underlying purpose or to extraneous aids to construction was permissible.
20. In my view, it is unfortunate that, at the hearing in the Court below, neither party invited the Judge to consider the purpose of Clause 14.3 and the parallels which can be drawn between the structure of the compensation provisions in the contract and the way in which damages for breach of an employment contract are assessed at common law. At common law, the important criteria for assessment are the earnings that the employee would have earned but for the breach and the difficulty that he or she will have in replacing those lost earnings by other employment. It seems clear to us that clause 14.3 was intended to provide a proxy for a common law assessment. If the manager were in charge of a Club in the Premier League, he would lose higher earnings and would find it more difficult to replace his earnings than if he were the manager of a First Division Club. We think that this is what the parties had in mind when agreeing Clause 14.3. They did so against the background of a Premier League rule (B.3) which drew an explicit distinction between relegation and subsequent share transfer.
21. However, it is clear that the parties did not apply their minds to what the position would be if the 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. If the parties had applied their minds to that eventuality, they would surely not have used such imprecise expressions as 'in the Premier League' and 'in the First Division', when defining the position of the Club. These expressions are ambiguous and the arguments advanced on either side as to their meaning are both tenable. In the context of the period just after the end of the season when the team has been relegated, the question of whether the Club was on any particular day 'in the Premier League' could reasonably be determined either by reference to relegation which, in our view, takes place on the last day of the season or by reference to the share transfer which will take place some days or weeks later. If the parties had thought about this problem, they would have made it plain, by the use of such words as 'relegation' or 'membership' of the League, which event was to determine the position of the Club for the purpose of clause 14.3.
22. I can understand why, in the absence of any consideration of the purpose of clause 14.3, the Judge came to the conclusion that he did. However, in view of my conclusion that, at the time of formation of the contract, the parties' intention was that clause 14.3 should provide a broad brush proxy assessment of common law damages, I think that the judge reached the wrong answer. I am satisfied that it must have been the intention of the parties to compensate the manager, if prematurely dismissed, for the loss of the earnings he would have received but for the premature dismissal, and that it is this which resolves the ambiguity in the Club's favour. Whether the Club was about to be or had just been relegated, it was ineluctably going to play in the First Division in the next season, and the manager would have received the lower rate of pay. That is what he lost by his dismissal. Seen in that way, the precise date on which the Club moves from the Premier Division to the First Division becomes of less significance. The compensation package is not intended as a precise assessment of loss but as an approximate one. The fact was that, within a few days or possibly weeks after 21^st May, the manager would have been paid at the lower rate if he had not been dismissed. It follows that this interpretation of the clause 14.3 not only makes commercial sense but also renders explicable the use of the imprecise words 'in the Premier League'. If the intention was to focus upon the status that the manager would have had in the future, it would not matter greatly at what precise date the Club moved from the Premier League to the First Division or vice versa.
23. For those reasons, therefore, I am of the opinion that the appeal must be allowed and the Judge's order set aside. The precise terms of the order which should now be made must be considered in the light of this judgment, as must the costs position.

Lord Justice Sedley:

24. Although it seemed to me for much of the argument that Mr Harvie was probably right in saying that clause 14.3 was self-explanatory, or at least sufficiently explained by the requirement in the Premier League's rules for a completed share transfer in order that membership could be relinquished and relegation take effect, the oddity of the consequences became plainer as the argument progressed. It was highlighted when Smith LJ pointed out the analogy between the clause 14.3 formula and the common law entitlement of a manager who found himself dismissed on none of the recognised grounds for dismissal set out in the other parts of clause 14 but because – as happens in football – a sacrifice was required to propitiate the gods of the game.
25. If clause 14.3 had spelt out plainly that which division the Club was in was to depend on formal membership, I would accept Mr Royle's case whatever the anomaly in terms of his prospective loss, for this provision, as Smith LJ says, is a rough and ready means of avoiding resort to law. But once it is seen to be ambiguous, one has to look for a tie-breaker. One finds it, first, in the distinction made in the Premier League's rule B.3 between relegation and share transfer and, secondly, in the purpose which clause 14.3 was manifestly trying to achieve. Although neither of these directly tells us at what point of time relegation occurs, and although I do not accept Mr Pannick's assertion that any fan would have said on 20 May 2001 that Manchester City had been relegated rather than that they were due for relegation, relegation is not the test spelt out in clause 14.3. The sense both of the league structure and of Mr Royle's contract is that if Mr Royle was dismissed prematurely (and thus in breach of contract) at a time when the Club had lost its entitlement to play in the Premier League, and so was in that material sense no longer "in" it and instead "in" the First Division, he should be compensated at a First Division rate; and that by parity of reasoning, if for some reason he was dismissed prematurely at a time when the Club had earned promotion to the Premier League but had not yet taken up its share, it was at a Premier League rate that he would be compensated. This makes an intelligible and fair contractual arrangement.
26. The fact that the Club evidently thought that a share transfer was necessary if they were to be able to pay Mr Royle off at the lower rate may well explain Mr Royle's belief that, having failed to effect it before dismissing him, the Club was obliged to pay him at the higher rate. But, although it may be embarrassing for the Club, it cannot affect the true meaning of the contract.
27. For these reasons and for those given by Smith LJ I agree that this appeal succeeds.

Lord Justice Gage:

28. I agree with both judgments and have nothing to add.