The horizonal effect of an arbitration agreement

In this case, two individuals had separately agreed with the Football Association (FA) to be bound by the FA Rules, including the arbitration agreement in Rule K. 

The Court subsequently found that, as a result, those two individuals had agreed to arbitrate the dispute that arose between them even though they had not entered into an express bilateral agreement with each other to that effect. This is what was referred to as the “horizonal” contractual effect as between the two individuals, as compared to the “vertical” effect of the arbitration agreement as between each individual and the FA.

The background facts

The claimant football agent, Mr Alrubie, acted as an intermediary or introducer between football clubs. The second defendant, Mrs Granovskaia, was, at the relevant time, a director and employee of the first defendant, Chelsea FC, with responsibility for player contracts.

The dispute arose because the claimant contended that he had agreed with Mrs Granovskaia that he would receive a commission if he negotiated a transfer of a particular Chelsa player to another football club for a transfer fee that exceeded Euros 30 million. In this case, the player in question was transferred for about Euros 34 million.
The claimant claimed against Chelsea FC in debt and for damages for breach of contract (for approximately GBP2.1 million) and against Mrs Granovskaia in deceit and for damages for inducing breach of contract by Chelsea FC. The defendants contested the claims brought by the claimant. Mrs Granovskaia denied that there was any contract between Chelsea FC and the claimant and/or that there was any breach of contract. 
The claimant subsequently discontinued his claim against Chelsea FC and concentrated instead on his claim against Mrs Granovskaia.

Mrs Granovskaia sought a stay of the court proceedings pursuant to s.9 Arbitration Act 1996 (AA 1996), arguing primarily that the dispute was subject to arbitration pursuant to Rule K of the Rules of the FA. 

Rule K provides among other things for any dispute or difference between any two or more “Participants” to be referred to arbitration. “Participant” is defined in the FA Rules to include a wide range of entities and individuals who are from time to time participating in any activity sanctioned either directly or indirectly by the FA. 

It was not disputed that the claimant was a Participant in his capacity as a registered Intermediary, and from 2024 as a registered Football Agent, and that Mrs Granovskaia was a Participant as a director and employee of Chelsea FC at the relevant time. Both the claimant and Mrs Granovskaia each separately agreed with the FA to be bound by the FA Rules (including the arbitration rule, Rule K), but they did not enter into a bilateral express agreement with each other to that effect. This gave rise to a dispute as to whether the FA Rules have “horizontal” contractual effect as between the two of them, as well as “vertical” effect as between each of them and the FA.   

The Commercial Court decision

Having reviewed the relevant authorities, the Court stated that it would not imply merely from the participation by persons in a sport or related activity that they were bound contractually as between each other by the rules of a governing body. The implication of such a horizontal contract depended on all the relevant facts and circumstances and it had to be necessary to give business reality to the transaction in question.

Here, the claimant and Ms Granovskaia were each required to enter into an express agreement with the FA to be bound by the FA Rules, including Rule K, as a condition of their participation in activities governed by the FA — respectively, acting as a registered Intermediary and acting as a director of a club. By separately acceding to the FA Rules in that way, each should be taken as having assumed a contractual obligation to each other Participant making a similar accession agreement with the FA, and therefore to each other. 

Rule K could not achieve its intended purpose of providing for the arbitration of disputes or differences between Participants unless it had contractual effect as between Participants. Any person expressly agreeing to be bound as a Participant by Rule K must be taken to have understood and intended that. 

Therefore, the arbitration agreement in Rule K was contractually binding as between the claimant and Mrs Granovskaia. This was so even though Mrs Granovskaia ceased to be a Participant when she left Chelsea FC. In the Court’s view, the phrase in Rule K “any dispute or difference between any two or more Participants” referred to persons who were current Participants at the time the dispute or difference arose. In this case, the dispute arose when Mrs Granovskaia was still at Chelsea FC.

The Court, therefore, dismissed the argument that the arbitration agreement ceased to be effective as between the parties when Mrs Granovskaia ceased to be a Participant. It was well established that an arbitration agreement was separable from the main agreement and survived the termination of the parties’ other contractual rights and obligations.

The Court also stated that the arbitration agreement in Rule K was very widely drafted and intended to cover the broadest range of disputes. The dispute between the parties in this case came within the broad scope of Rule K.
The Court, therefore, granted a stay of the court proceedings.

Comment

This is a useful example of how and when the Court may imply an arbitration agreement between those who have not separately expressly agreed to arbitrate with each other. 

In circumstances where entities or individuals have undertaken to observe a set of rules that create liabilities and obligations between those who are bound by them, the Court may conclude they have also agreed to arbitrate any disputes that arise between them if that is what the rules, on their true construction, provide.