Unfair prejudice – a game of two halves

The recent dispute regarding the relegation of football clubs Hearts and Partick Thistle was the proverbial game of two halves, although not one for the football purists.

The case concerned a joint legal bid by the two member clubs against the Scottish Professional Football League (SPFL) to reverse their relegations, which happened as a result of the coronavirus.

Following weeks of acrimony played out in the media about the merits or otherwise of the decision of the SPFL’s member clubs to end the football season early as a result of the pandemic, and the subsequent failed attempt at reconstruction to avoid any clubs being relegated from their respective leagues, there was a sense of inevitability that legal proceedings would follow.

Petition process

The first half was played out before the Court of Session, following the lodging of a petition by Heart of Midlothian Football Club plc and Partick Thistle Football Club Ltd: [2020] CSOH 68. The petition alleged that the SPFL had conducted its affairs in a manner that was unfairly prejudicial to them.

Orders were sought in terms of s 996 of the Companies Act 2006 to (1) suspend the written resolution that had been passed to alter the rules of the SPFL insofar as it dealt with relegation and promotion; (2) interdict the SPFL from implementing the terms of the written resolution insofar as it dealt with relegation and promotion; and (3) reduce the written resolution in that respect.

The case called before Lord Clark at the start of July at a by order hearing which continued over three days. It generated considerable media and public interest, even if the outcome for the football fan was a less than satisfactory score draw.

The interest was understandable, given the importance football plays as the country’s national sport. However, the public and accessible nature of the proceedings was also no doubt a significant factor in keeping the dispute in the spotlight. The hearing was streamed online to what may well have been a record attendance for the Court of Session.

Court v arbitration

To the ordinary supporter, the hearing was no doubt disappointing, given its inconclusive result. There were nevertheless a number of interesting issues that Lord Clark was required to consider, the most significant of which being whether the dispute should be dealt with by the court or by arbitration.

Lord Clark’s conclusion – that he was obliged to give effect to the parties’ agreement as reflected in the articles of association of the Scottish Football Association (SFA), which state that a “football dispute” shall be settled by arbitration – was not surprising, but it was a welcome affirmation of the approach the courts take when faced with such agreements.

Although he acknowledged the considerable public and media interest in having the issues aired in open court (a wish shared by the petitioners), his Lordship found as a matter of law that he was not entitled to refuse the application to sist on the grounds that the public interest should usurp the parties’ agreement.

The parties had agreed to be bound by the terms of the SFA’s articles, which meant that the SPFL and the other respondents were entitled to invoke the arbitration provisions in the articles. As they had done so, the court was obliged to give effect to this.

Two other procedural issues were considered by Lord Clark. The first concerned the motion by the respondents Dundee United, Raith Rovers and Cove Rangers to have the petition dismissed. In refusing the motion, his Lordship made clear that it was not appropriate to deal with such an application at what was essentially a procedural hearing, and that the issues would need to be properly developed in the pleadings and then debated before such a motion could be properly considered.

The second was a motion by Hearts and Partick Thistle for recovery of documents. While recognising the need to respect the powers and duties of the arbitration tribunal, Lord Clark noted the importance of resolving the dispute before the start of the football season on 1 August and decided to make an order for recovery of the documents sought. In doing so, his Lordship was requiring the parties “to put their cards on the table”.

Confidentiality of arbitration

Somewhat frustratingly, although entirely understandably given the procedural nature of the hearing, while the substance of the dispute was referred to, it was not explored before Lord Clark.

The frustration at not hearing the respective arguments on whether the SPFL’s actions were unfairly prejudicial was exacerbated by the knowledge that the second half was to be played out behind closed doors in front of the arbitration tribunal appointed in accordance with the SFA’s articles of association.

The questions of who did what when, why Dundee changed its no vote to a yes vote to carry the resolution, and whether what happened constituted unfair prejudice remain unanswered, at least in public. The arbitration process is confidential and information about the process can only be disclosed in limited circumstances, including where disclosure is authorised by the parties or is in the public interest.

In the week leading up to the start of the 2020-21 football season, the arbitration process was concluded with the claim of unfair prejudice being rejected by the arbitration tribunal. While the decision has been made public, the tribunal’s reasoning for its decision has not. In arriving at its decision the tribunal will have needed to consider the meaning of unfair prejudice and whether the conduct that Hearts and Partick Thistle complained of met this test.

Unfair prejudice

So what is unfair prejudice? The leading authority is the House of Lords decision in O’Neill v Phillips [1999] 1 WLR 1092, and the speech of Lord Hoffmann. His Lordship deals with the meaning of unfair prejudice in the context of s 459 of the Companies Act 1985, although it is accepted his reasoning applies equally to s 994 of the 2006 Act.

Lord Hoffmann commented that context is crucial: conduct that is perfectly fair in a business context may not necessarily be fair between family members. A company is formed for economic reasons, usually with legal advice.

At pp 1098-99 he states that “a member of a company will not ordinarily be entitled to complain of unfairness unless there has been some breach of the terms on which he agreed that the affairs of the company should be conducted. But... there will be cases in which equitable considerations make it unfair for those conducting the affairs of the company to rely upon their strict legal powers. Thus unfairness may consist in a breach of the rules or in using the rules in a manner which equity would regard as contrary to good faith”.

While cases of unfair prejudice are highly fact specific, and cover a wide range of circumstances – everything from the improper withdrawal of funds, to the diversion of business or commercial opportunities to another company in which the respondent had an interest – there are certain principles that can be identified from the authorities:

(1) The conduct must be both prejudicial and unfair. It is not enough to have one without the other.

(2) The prejudice must be to the interests of the shareholder in their capacity as a member, not in any other capacity. A failure to pay salary is not unfair prejudice.

(3) A member of a company will not ordinarily be entitled to complain of unfairness unless there has been some breach of the terms on which they agreed that the affairs of the company should be conducted (although unfairness may arise if the rules are breached or the rules are used in a manner that would be contrary to good faith).

(4) Unfairness is an objective concept, to be judged according to established equitable principles, and requires the conduct complained of to be such as is contrary to good faith.

(5) The petitioner’s conduct is also relevant when assessing whether any prejudice is unfair.

Valid procedure

The conduct complained of in the petition was the decision of the member clubs of the SPFL on 15 April 2020 to pass a written resolution that altered the rules of the SPFL. The resolution was passed after Dundee withdrew its previously-submitted no vote and voted yes, allowing the resolution to pass. The resolution relegated Hearts and Partick Thistle from their respective divisions, and promoted Dundee United, Raith Rovers and Cove Rangers.

Central to the arbitration tribunal’s decision would have been whether the resolution was validly passed, and in particular whether the no vote originally submitted by Dundee should have counted, instead of it being withdrawn later that same day to be replaced the following week by a yes vote.

Had the no vote stood, the resolution would not have been passed and neither Hearts nor Partick Thistle would have suffered the prejudice caused by their relegation.

Being relegated to a lower division of the SPFL will cause financial harm to both clubs.

If the no vote was validly withdrawn, the resolution altering the SPFL’s rules and relegating Hearts and Partick Thistle was lawful and did not amount to unfair prejudice.

The tribunal’s decision indicates that Dundee was entitled to withdraw its no vote and that the subsequent resolution of the SPFL was validly passed.