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Birmingham to sue if McLeish takes rival job

City plan to demand £5m compensation for manager and threaten to involve Premier League in dispute

Aston Villa and Birmingham City were at loggerheads last night over Alex McLeish after Villa told their city rivals they were entitled to talk to the Scot about their vacant manager's job and Birmingham responded by threatening to take the issue to a Premier League commission.

The Villa hierarchy have told officials at Birmingham that they believed they were free to approach McLeish over the possibility of appointing him because of his resignation on Sunday. In response, City told Villa that they intended to sue for full compensation for the Scot under the terms of the remaining two years of his contract.

The Independent understands that there was a sharp exchange of email correspondence between the two clubs' legal departments yesterday, with Villa claiming that because McLeish had walked away from his job, he was effectively a free agent. Birmingham's acting chairman Peter Pannu responded that he was prepared to take up the issue with the Premier League if Villa were not willing to pay compensation.

Under the terms of his contract, Birmingham are due £5m compensation if McLeish joins another club before 30 June. That figure falls to around £2.5m if he were to leave next month, in the final year of his deal. Privately, City have expressed astonishment that Villa and McLeish were not even prepared to wait 15 days for that drop.

That McLeish has walked out of Birmingham so soon is an indicator of the urgency with which Villa now want to resolve their hapless pursuit of a successor to Gérard Houllier. With Villa getting cold feet over both Mark Hughes and Steve McClaren and then having been rejected by Roberto Martinez, the episode now looks farcical.

A source at Birmingham said that they would not simply roll over and allow McLeish to go to Villa without compensation. "Fighting a big club is not easy but fighting a rival big club is even harder and [Birmingham] will seek further advice and may now decide to present a case to the Premier League. Weaker clubs need protection from the Premier League in scenarios like these, as other smaller clubs can also fall into the same trap."

Birmingham are adamant that they would not have granted McLeish permission to speak to Villa had he asked. Having bought Marlon King, Chris Burke, Danny Koevermans and Morgaro Gomis and disposed of 15 further squad players, City claim that they were building for next season in the Championship with McLeish as manager. It is also impossible for Birmingham to appoint a successor until the compensation issue is resolved.

It leaves both Birmingham clubs without managers and in limbo. Should Villa decide to appoint McLeish then they can expect a long and public battle with their neighbours over compensation. Given how quickly Villa have changed their minds over previous candidates, there may be a concern on McLeish's part that the club could move on from him.

Pannu said yesterday that McLeish had not been given permission to negotiate with Villa. "He is still our contracted staff and Birmingham City FC does not grant him any right to speak to any outsiders until the matter is resolved. It's about time discipline is instilled into this game and I am not a person who gets pushed about."

Despite the impasse, the bookmakers last night had installed the Portsmouth manager, Steve Cotterill, as the favourite to succeed McLeish at Birmingham. Other candidates include the former Nottingham Forest manager Billy Davies, sacked over the weekend, as well as Chris Hughton and Alan Curbishley.

The former Villa manager Graham Taylor said that the club had mishandled the appointment of a successor to Houllier, despite knowing for some time it would be unlikely the Frenchman would come back following heart problems in April. Taylor said: "It just doesn't appear to have been thought through, and for the first time the ownership of the club is coming under severe criticism.

"When Gérard became ill it must have occurred to them that he may not come back, even if the signs were that he may have returned. This is not being disrespectful to Gérard in any way, but once he became unwell then you have to immediately start exploring what you might do if he does not come back.

"It doesn't appear to me and many others that this has been done. They seem to be going from name to name. Villa don't seem to have grasped that nettle at all. It is disappointing.

"I still live in the area and have a special feeling for them, as you always do about clubs you have managed, but I have been surprised and disappointed at their handling of this."