Implied contracts: have you formed contracts between group companies without knowing it?

Written on 13 Jul 2016

In today’s global economy, most businesses operate through group structures organised on various different, often overlapping, bases. Group companies often have informal arrangements, such as sharing or seconding an employee’s time between different parts of the business.

In the first reported case on this issue, the Court of Appeal has held that a legally binding contract between group companies could be inferred from conduct, in the absence of any written contract. The implied contract imposed significant pensions liabilities on one of the group companies after the other went into administration.

What was the case about?

Heis and Others v MF Global UK Services Ltd was a dispute about the pensions liabilities for a group of employees within the MF Global group. The administrators of MF Global UK Ltd (MFG UK) applied for a determination as to whether MFG UK owed pensions liabilities to MF Global UK Services Ltd (MFG Services), relating to certain employees. MFG UK and MFG Services were both wholly owned subsidiaries of MF Global Holdings Europe Ltd (MFG Holdings).

The issue was that MFG Services employed the staff in question and paid their wages, but those staff were seconded to MFG UK. MFG Services recharged MFG UK for the payroll costs associated with the staff as they were incurred, but there was no express contract between them. MFG Services did, however, have a written contract in place with the mutual parent company, MFG Holdings, under which MFG holdings agreed to procure that all payroll costs relating to seconded staff would be paid for by the group company using their services.

The parties disputed whether a legally binding contract existed between MFG UK and MFG Services, and if so, whether that extended to meeting any pensions liabilities associated with the seconded staff.

What were the arguments?

The first instance judge in the High Court found that a contract should be implied between MFG UK and MFG Services. MFG UK appealed this decision.

MFG UK’s argument on appeal was that a contract should only be implied if the parties’ actions could only be explained by the existence of a contract between them. It argued that this was not the case, as its payment to MFG Services for the seconded staff was equally consistent with a number of other possibilities, such as:

  • it having an implied contract with MFG Holdings, rather than MFG Services, to pay for the secondees;
  • it being procured by its parent company, MFG Holdings, to make the payments;
  • it acting simply in the knowledge that it could be procured by MFG Holdings to make the payments; or
  • in order to ensure the continued service of the secondees.

What did the Court of Appeal decide?

The Court of Appeal found that a contract could be implied between MFG UK and MFG Services.

Vos LJ, giving the leading judgment, referred to several principles that had been established by case law:

  • no contract should be implied unless it is necessary to do so in order to give business reality to a transaction;
  • contracts are not to be lightly implied;
  • the court must be able to conclude with confidence both that the parties intended to create contractual relations and that the agreement was to the effect contended for; and
  • in most cases, the court must be able to identify the mechanism of offer and acceptance.

While he did not doubt that these principles were “helpful”, Vos LJ found that they should not be taken as a strict test that needed to be satisfied in order to imply a contract. The essential point was whether the arrangements between the parties amounted to:

  • an agreement on essential terms of sufficient certainty to be enforceable; and
  • took place in circumstances in which it was necessary to infer a contract and an intention to create legal relations.

Looking at the evidence, the judge concluded that the relationship between MFG UK and MFG Services could only really be explained on the basis that a contract existed between them.

The judge noted large corporations often use a service company, and then second staff to other parts of the business, and that the inference of a contract in these circumstances was a “significant step”. It was also relevant in this respect that the business had been instructed by City lawyers, who had drawn up a contract between MFG Services and its parent company, but not between MFG Services and its fellow subsidiary.

However, the judge could not imagine that an arrangement which involved the payment of some US$330 million each year would be left to a non-contractual arrangement. The judge also held that it was permissible to consider evidence of subsequent conduct when deciding whether to imply a contract. To this end, MFG UK’s statement of accounts on entering into administration recorded it as owing the pensions liabilities in question. Although this was not conclusive, it assisted the judge in reaching a decision that MFG UK did in fact owe those liabilities.

Having concluded that a contract should be implied between the parties, the judge had little trouble in finding that this included an obligation to meet any pensions liabilities associated with the seconded staff.

What does this mean for businesses?

The type of arrangement in this case, involving employment by a service company and secondment to other group companies is common in large or even medium-sized businesses.

Even where this is not usual practice, employees can often spend periods working for the benefit of more than one group company. The judge acknowledged that it may be more difficult to imply a contract where an employee splits their time between two or more group companies, but in certain circumstances this may still be the case.

If your business uses similar arrangements, the terms of that arrangement should be captured in a written contract, including the extent of liabilities that each entity will be responsible for.