The recent case involving Henning Berg and Blackburn Rovers highlighted a number of problems that currently engulf the club but it also raised an interesting legal question. Does a Managing Director of a football club have authority to sign and enter into a contract of employment with a football manager on behalf of the club?
Berg was appointed Blackburn manager in November 2012 following the sacking of Steve Kean. The negotiations leading up to Berg’s appointment were primarily conducted by the club’s Managing Director, Derek Shaw. The owners of the club, Venky’s, had no direct involvement with the negotiations. After antecedent negotiations between Berg, Derek Shaw and, to a lesser extent, Shebby Singh, global advisor to the club’s owners, Berg signed a service agreement on 16th November 2012 with Derek Shaw signing the agreement on behalf of the club. Clause 3.1 of the agreement confirmed that it would continue until 30th June 2015 and it was agreed, pursuant to Clause 15.3, that:
“In the event that the Club shall at any time wish to terminate this Agreement with immediate effect it shall be entitled to do so upon written notice to the Manager and provided that it shall pay to the Manager a compensation payment by way of liquidated damages in a sum equal to the Manager's gross basic salary for the unexpired balance of the Fixed Period assuming an annual salary of £900,000"
On 27th December 2012, Blackburn terminated the agreement with Berg thus entitling him to payment of the remainder of his salary under Clause 15.3 of the agreement, that being £2.25 million. However, payment from Blackburn was not forthcoming and so Berg issued proceedings for breach of contract in February 2013 for the sums due to him.
Following the issue of proceedings, Blackburn’s solicitors filed a formal admission confirming that they admitted liability for the claim. However, due to cash flow difficulties arising from their relegation from the Premier League, Blackburn were only able to offer to pay by instalments of £562,500 per month. The Court listed a hearing to take place on 16 April 2013 to determine whether Blackburn should be given time to pay, however, at that hearing, Blackburn no longer sought time to pay but instead made an application to withdraw the admission previously filed on its behalf in an attempt to defend the claim for breach of contract brought by Berg.
The permission of the court is required to withdraw an admission to a claim and in deciding whether to grant permission for an admission to be withdrawn, the court will consider all the circumstances of the case including, inter alia, the grounds upon which the applicant seeks to withdraw the admission, the conduct of the parties, any prejudice to the parties in granting or refusing permission and whether it is in the interests of the administration of justice to grant permission (See Civil Procedure Rule 14.1(5) and Paragraph 7.2 of Part 14 Practice Direction). The hearing of Blackburn’s application took place on 26 April 2013 and in deciding whether to grant Blackburn’s application to withdraw from the admission, His Honour Judge Pelling QC (“HHJ Pelling”) had to consider whether Blackburn had a “realistically arguable defence” if it was permitted to withdraw the admission.
Blackburn sought to raise two defences to Berg’s claim for breach of contract:
The first defence that Blackburn intended to rely upon was that the payment due to Berg under clause 15.3 effectively amounted to a penalty for Blackburn breaching the contract and, therefore, unenforceable under English law.
HHJ Pelling did not accept that clause 15.3 amounted to a penalty clause as the words “shall be entitled to do so” expressly permitted Blackburn to terminate the agreement with immediate effect and thus termination of Berg’s employment prior to the expiry of the fixed term was not a breach of contract. HHJ Pelling followed the decisions in Campbell Discount Company Limited v. Bridge  1 QB 445 and Export Credits Guarantee Department v. Universal Oil Products Company  1 WLR 391 where it was held that payments that become due on the occurrence of an event rather than a breach of contract do not amount to penalty clauses and so HHJ Pelling dismissed the first defence that Blackburn intended to rely upon:
“In a fixed term contract a party is either entitled to terminate before expiry of the fixed term or it is not. Here it is. Once that is understood the law relating to penalty clauses is entirely immaterial.”
Blackburn’s main defence to the claim, however, was that the agreement between Berg and Blackburn was not binding on the club because Derek Shaw only had authority to enter the club into an agreement on the basis that it could be terminated on 12 months notice and compensation limited to 12 months salary. HHJ Pelling’s view was that the specific authority given to Derek Shaw was largely irrelevant to the claim between Blackburn and Berg. The sole issue for HHJ Pelling was whether Derek Shaw had authority to enter into an agreement with Berg on behalf of Blackburn in accordance with his employment as Managing Director. If Derek Shaw did have such authority, then the agreement was binding on the club.
It was clear from the evidence in the case that Derek Shaw did have authority to negotiate and conclude a contract with Berg. Derek Shaw actually confirmed in his witness statement that the owners directed him “to negotiate a contract for the Claimant's services” and that he was “the usual signature for footballing matters like this” In addition, Blackburn's solicitor filed a witness statement which confirmed that “the owners instructed Mr Shaw to enter into a contract with Mr Berg” and Article 7.1 of Blackburn’s Articles of Association also provided Derek Shaw, as Managing Director, with the power to do so.
Blackburn adduced no evidence to suggest that Derek Shaw was not authorised to enter into the agreement or that Berg or his advisors were ever made aware that Derek Shaw’s authority was ever restricted. The club’s owners provided no witness evidence and whilst directors Karen Silk and Paul Agnew and company secretary, Ian Silvester, all adduced witness evidence, none of them suggested within their evidence that Derek Shaw was not authorised to sign contracts on behalf of Blackburn. Blackburn attempted to argue that Berg should have been aware that the agreement would have to be authorised by Blackburn’s owners however it was never suggested during the pre-contract negotiations “that approval would have to be sought before the contract could be signed or that if signed the contract could not take effect until such approval had been obtained.” Berg also relied upon a witness statement from Olaf Dixon, the Deputy Chief Executive of the League Managers Association who confirmed “that it is perfectly normal and proper for a manager to accept that a managing director or finance director, but especially a managing director, has the authority to offer the terms they are offering to the manager on behalf of the club.”
In the absence of any evidence to the contrary, HHJ Pelling found that as Managing Director, Derek Shaw had “the usual authority of someone holding that office” i.e. authority to make decisions for the company in the ordinary course of its business (see Hely-Hutchinson v. Brayhead Limited  1 QB 549). HHJ Pelling, therefore, held that Derek Shaw was authorised to negotiate and conclude the agreement with Berg and that it was binding on the club.
As a result of HHJ Pelling’s findings, Blackburn’s application to withdraw the admission to the claim was dismissed and the club was ordered to pay the outstanding balance due to Berg which was estimated to be £843,750 following earlier payments being made.
Blackburn have yet to comment on the judgment and it is understood that a similar claim is being pursued by Michael Appleton, the latest manager to be sacked by the club. Blackburn have been heavily criticised for attempting to avoid paying Berg the money he was contractually entitled to and by portraying Derek Shaw as a rogue director taking actions without the owners authority. It will, therefore, be interesting to see whether Blackburn deal with any subsequent claim brought by Michael Appleton any differently.
The League Managers Association issued a strongly worded statement following the judgment calling on The Football League “to take a long hard look at the High Court’s judgment in this case. It is unacceptable for a Football League club to allow the state of affairs to arise whereby its own case before the High Court is that its Managing Director is out of control and operating outside the authority of the Club’s owners”.
The Football Association have previously confirmed that they have been investigating events at Blackburn for two years although the full nature of their investigation is unknown. Whilst football’s governing bodies are now willing to regulate club spending with impending financial fair play regulations, they appear reluctant to extend their powers and regulate how football clubs actually operate the running of their business and the commercial decisions taken. Any such regulatory reform would undoubtedly be vigorously opposed by member clubs so, as things stand, clubs are only answerable to the courts.