Rio Football Services Hungary KFT v Sevilla Futbal Club SAD

This is a renewed application for permission to appeal a judgment given by Master Eyre on 23 June 2010 by which he gave summary judgment for the Claimant on eight out of ten issues that were argued before him. As a result, he also gave judgment for the Claimants in the sum of €225,000.

Mr Caspar Glyn, who appeared for the Defendants, very sensibly, if I may say so, concentrated his arguments on only three of those eight issues. So far as the remaining five issues are concerned, I am in complete agreement with the reasons given by Master Eyre and adopted by the single judge, Akenhead J, when he refused permission on paper on 9 August 2010 and so I need say no more about them.

The action is about financing agreements by which finance companies fund or contribute to the cost of transfer fees when professional footballers are transferred from one club to another. It is important to make it clear at the outset that when one speaks of a player being "transferred" what is actually being transferred is the right to have the registration of the player and certain economic rights arising out of his employment by the club.

In this case a predecessor in title of the Claimant funded the transfer of the well-known Brazilian football player, Fabiano Clemente ("the Player"), when he moved to a Portuguese football club, FC Porto ("Porto") by providing €5.65 million which represented 75% of the transfer fee. Without going into unnecessary detail, in due course the Player was transferred to the Defendant and the financing arrangements were effectively "rolled over" so that the Claimant’s predecessor in title retained 75% of the economic rights in the Player whilst he was employed by the Defendant. Subsequently the Defendant paid €1.2 million to acquire a further 10% interest, so that ultimately the Claimant had a 65% interest and the Defendant a 35% interest in the economic rights relating to the Player.

I turn now to the details of the agreement made between the Defendant and the Claimant’s predecessor in title, a company called Selkan Limited ("Selkan"). For convenience I will refer to both of them where appropriate as “the Claimant”. It is dated 12 August 2005. The recital to the agreement recorded that Selkan had acquired from Porto 75% of the economic rights over the Player and that the Defendant had acquired the remaining 25% of those rights. It also recorded that the Defendant was interested in acquiring further economic rights, and the agreement itself provided for the transfer to Selkan of a further 10% at a price of €1.2 million as I have already mentioned. The agreement also gave the Defendant an option to purchase Selkan's 65% share for the sum of €7,150,000 at any time up to 15 April 2007. That option was never exercised.

The term of the agreement was to be for the duration of the contract of employment between the Player and the Defendant or for any extension of the contract. The Player was employed by the Defendant on a four year contract which expired at the end of June 2009, but was extended or, more accurately, replaced by a new contract made in July 2008, which provided for the employment to continue until 2011.

The clauses with which this application is particularly concerned are clauses 6 and 7 of the agreement. I will set them out, noting that the wording that follows suggests that parts of it may have been drafted by someone whose mother tongue is not English (that is not intended as a criticism, but is merely an observation to explain the language).

The agreement also provided that the Defendant would pay an annual fee of €450,000 for each sporting season. This was, in effect, a substitute for interest on the principal sum provided to fund the transfer.

The three grounds particularly relied on by Mr Glyn in this application were what he called the penalty argument, the restraint of trade argument and the slavery or servitude argument.

The essence of the penalty argument was that clause 6.4 did not say in terms that if the Defendant exercised its Right of First Refusal and paid the sum stipulated by the contract, it acquired any rights in return. In other words, Mr Glyn submitted, it would have to pay a sum equivalent to its 65% share and receive nothing in return. Accordingly, the clause amounted to a penalty and was therefore unenforceable.

The essence of the restraint of trade argument was that the restriction on the Defendant's right to transfer the Player as it wished or, putting it another way, the fact that the Claimant could require the Defendant to “sell” the Player under clause 6.4 coupled with the prohibition by clause 7 of transferring the Player or any economic rights arising from the agreement without the prior consent of the Claimant, amounted to an unreasonable restraint of trade because it adversely and unreasonably affected and constrained the rights of the Player.

The slavery argument was essentially based on Article 4 of the Human Rights Convention, but Mr Glyn realistically accepted that if his argument based on restraint of trade failed, the slavery argument must fall with it. In reality, I think that the slavery argument was advanced as a vehicle for emphasising the human rights aspect of the arrangements on which Mr Glyn relied.

Mr Adam Lewis QC, who appeared on behalf of the Claimant, submitted that the penalty argument was based on a reading of clause 6.4 of the agreement that was unsustainable and simply wrong as a matter of construction. As to the argument based on restraint of trade, his fundamental submission was that if there was any restraint of trade, which he did not accept, that restraint was imposed by the underlying contract of employment between the Player and the Defendant, and not by the agreement between the Claimant and the Defendant.

It is in my view quite clear from reading the agreement as a whole that the Claimant (or its predecessor), having funded a proportion of the transfer fee for the Defendant’s acquisition of the Player, was to have two principal benefits. First, the entitlement to the annual fee of €450,000. Second, in the event of the Player being the subject of an acceptable transfer offer by another club, its share of the proceeds or alternatively a matching payment by the Defendant if it wished to retain the Player. It is evident from the agreement as a whole that the commercial objective, from the funder's point of view, was the hope and expectation that the Player’s transfer value would increase with time so that, in addition to the annual payment, it could expect to make a capital gain at some time during the term of the agreement if and when another club made a higher offer for the Player.

Given the background of the agreement and its terms as a whole, I cannot see how clause 6.4 could sensibly be construed as doing anything other than transferring the Claimant’s share of the rights in the Player to the Defendant if the latter exercised its Right of First Refusal.

But even if I took the view that Mr Glyn was right to the extent that clause 6.4, read literally, had the meaning for which he contends, I would have no difficulty in construing it so as to give it a sensible effect and an effect which I consider would accord with the intention of the parties. The literal meaning for which he contends is obviously absurd and is one which in my view the parties could never have intended. There is plenty of authority for the proposition that if a literal reading of the language of a contract leads to an absurd result, and one which reflects an intention which the parties could never have had, the law does not require a court to attribute to the parties such an intention: see for example, the well known dictum of Lord Diplock in The Antaios [1984] AC 191 ("if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must yield to business commonsense"), and the observations of Lord Hoffmann to similar effect in Investors Compensation Scheme v West Bromwich Building Society [1998] 1 WLR 896, at 913.

For these reasons, I have no hesitation in rejecting Mr Glyn's penalty argument. It is therefore unnecessary to consider the further point, referred to by Akenhead J, that the law in relation to penalty clauses is part of the law of damages and is therefore not applicable in this context.

I now turn to the argument based on restraint of trade. In my view, this is in part based on a misconception as to the true effect of clause 6.4. Clause 6.4 requires the Defendant to make a choice in the event that a particular situation arises. If an offer for the Player is made that the Claimant regards as acceptable (and complies with the requirements of the agreement), it can require the Defendant to accept it and take its proportion of the consequent profit or, if the Defendant cannot or does not choose to accept the offer, to make a matching payment in lieu representing the Claimant’s share of the proceeds of the offer.

Whether or not the Defendant will wish to accept an offer is likely to depend on, first, whether it considers that the price reflects the market value of the Player; second, whether it can afford to pay the sum required by clause 6.4; and, third, whether or not the Player is willing to be transferred.

If the terms of the Player's contract of employment with the Defendant are such that he can refuse to be transferred, and he does refuse, then the Defendant cannot accept the offer (at least not without being in breach of its contract with the Player) and must pay the sum required by clause 6.4. Second, if the Defendant regards the price as unacceptable, it can exercise its Right of First Refusal and pay the stipulated sum. Third, if the Player wishes to be transferred, but the Defendant does not wish to accept the offer, then the Defendant’s options will probably be determined by its rights under the Player’s contract of employment. Fourth, if the Defendant and the Player both want the offer to be accepted, then the Defendant can accept it.

In this case I can find nothing in the contract between the Player and the Defendant which entitles the Defendant to require the Player to move to another club. The replacement contract of July 2008, which was the relevant contract at the time, requires the Player to pay a very substantial sum if he unilaterally terminates the contract and prevents him from soliciting an offer by another club.

It seems to me that clause 6.4 imposes no constraints upon the options of the Player, because they are determined by his contract of employment with the Defendant. If that contract purported to give the Defendant a right to transfer him to another club against his wishes, possibly because the Claimant has issued a Selkan Notice, then the Defendant would have been likely to find itself faced with a claim by the Player based on the ground that the relevant terms of his contract of employment constituted an unreasonable restraint of trade.

If, when a Selkan Notice is issued, the Defendant cannot afford the fee and the Player refuses to agree to the transfer, then the Defendant will find itself in the position that it must refuse the offer (or risk a claim by the Player) and face the consequences. It takes the commercial risk when entering an agreement such as this that it might not be able to meet its financial obligations under the agreement. However, there is nothing particularly unusual about that - businessmen take such risks every day.

Similar points arise in relation to clause 7. If the Player’s contract of employment with the club provides, as effectively this one does, that he is obliged (and therefore entitled) to remain with the club for the duration of the term of the contract, then it is hard to see how clause 7 imposes any additional restraint. The Player has no right to insist on a variation of his contract and, in consequence, an agreement between the Defendant and a third party that provides that the Defendant should not transfer the Player to another club without its consent does not impose any restraint on the Player which does not already exist. Whilst it is true that in certain respects the agreement between the Claimant and the Defendant affects the Defendant’s ability to vary the terms of its contract with the Player, at least not without putting itself in breach of the agreement, this does not affect the Player’s rights as against the Defendant: what it really affects is his ability to negotiate a variation of those rights. At most that is the loss of an opportunity, not the loss of a right.

However and more generally, if a player’s contract of employment did permit him to seek a variation of its term, perhaps by means of some form of break clause, then the player will be entitled to exercise that right irrespective of any provisions of any agreement made between a funder and the club. If the exercise of rights under such a break clause were to put the club in breach of its agreement with the funder, so be it: that is a problem that the club should have anticipated when it entered into an agreement with a funder containing a provision such as clause 7.

Mr Lewis submitted that if clause 7 was objectionable it could be struck out leaving the rest of the contract unaffected. Mr Glyn submitted that this would not be possible because it would alter the fundamental basis of the agreement. In the light of the conclusions that I have reached, I do not have to decide this point and so I will say no more about it.

Mr Glyn also mentioned a change in the FIFA regulations that came into force in January 2008 which effectively prohibited clubs from entering into contracts with third parties that enable the third party to influence the club in employment and transfer related matters. Since the agreement between the Defendant and the Claimant’s predecessor in title was made well before this, I do not see that it advances the Defendant’s case.

For these reasons, I reject Mr Glyn's arguments based on restraint of trade, attractively and persuasively though they were presented. Accordingly, the argument based on slavery or servitude must fail also.

I regard the grounds of appeal that are in issue as virtually unarguable, and in my judgment they have no real prospect of success. They are points which could properly be decided on an application for summary judgment. In my judgment they were correctly decided on that application.

Since the Claimant only wished to pursue its own application for permission to appeal the remaining two issues if the Defendant succeeded today, its application for permission will also be dismissed and the claim will go to trial on the remaining issues, which relate principally to the validity of the Selkan Notice.