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England and Wales Court of Appeal upholds finding of implied contract between group companies in the context of secondment arrangement

It is very common for group companies to arrange a company within the group to be the employing entity of all the staff members within the group. The England & Wales Court of Appeal held that a contract would be implied in an intra-group arrangement where the employing entity seconded employees to another group company.

In this case, MF Global UK Services Limited (the “Service Company”) was the employing entity of all the staff members within the group. MF Global UK Limited (“MFGUK”) was one of the group companies to where the staff members were seconded. There was no express contract in place between the Service Company and MFGUK, but the group’s holding company MF Global Holdings Europe Limited (the “Holding Company”) had a contract with the Service Company (the “Service Agreement”) to procure that the group company which used the employees should pay their employment costs.

The group went into administration and the issue arose as to which company should meet certain pension liabilities.

The Court of Appeal considered that it is important to consider all the circumstances (in particular, the conduct of the parties) to decide whether to imply a contract. For there to be a contract, there must be (a) an agreement on essentials of sufficient certainty to be enforceable; (b) an intention to create legal relations; and (c) consideration. When the case is that a contract should be implied from the parties’ conduct, it is for the party asserting a contract to show the necessity for implying it.

In this case, the question of the parties’ intention to create a legal relationship is the key point of consideration. MFGUK submitted with some force that what it did was consistent with the intention to contract directly with the Service Company as it was under a number of other possible scenarios e.g. (i) pursuant to an implied contract between MFGUK and the Holding Company; (ii) simply having been procured to do so by the Holding Company; (iii) in the knowledge that the Holding Company could direct it do so to satisfy its procuring obligation; or (iv) so as to ensure that the seconded employees continued to provide their services to MFGUK.

In considering the intention of the parties, the Court of Appeal considered all relevant facts.

The starting point was the way in which the arrangements came into being. The Service Agreement was drafted by lawyers, and the arrangements appeared to have been carried forward without further express consideration of the contractual position. According to the numerous documents produced to court, it was never doubted that MFGUK would keep the Service Company indemnified against all the costs associated with the seconded employees e.g. ongoing employment costs, social security costs, and the funding deficits in the pension scheme. Detailed consideration was given from time to time to the way in which these costs were accounted for and how they could be reduced, but it was never doubted that MFGUK would have to reimburse the Service Company for each and every expenses it incurred that was relating to the seconded staff.

In addition, after MFGUK and the Service Company had gone into administration, the directors of MFGUK filed a Statement of Affairs that recorded in detail various employee liabilities totally some £39million. The court considered that it should not ignore the statements of these directors verifying their view that MFGUK was legally liable for the employment costs of its staff.

The Court of Appeal was of the view that the documents available to it all pointed one way, that was towards a clear understanding by all concerned including specifically the directors of MFGUK, that it would pay all the costs incurred by the Service Company in respect of the seconded staff.

Based on the evidence available, the Court of Appeal concluded that the established relationship between MFGUK and the Service Company, by which the Service Company employed MFGUK’s staff and recharged all the costs of doing so to MFGUK, was only explicable in the particular circumstances of this case on the basis that it had a contractual foundation. The parties must have intended there to be a legally binding arrangement. One could not imagine that the entitlement to payment of some US$330million per annum could have been left to a non-contractual arrangement. There was nothing in any of the documents that suggested that MFGUK was not legally liable to reimburse the Service Company for all the costs associated with the seconded staff. Looking at all the circumstances and all the documents, it was right to infer that such reimbursements were made pursuant to the implied contract.

The Court of Appeal did not agree that the Service Company and MFGUK might have acted as they did without a contract, bearing in mind the presence of the Service Agreement. The documents reflect an understanding that MFGUK would pay all the costs incurred by the Service Company in respect of the seconded staff, and such understanding was correctly recorded by the directors of MFGUK in its Statement of Affairs.

On consideration of all evidence, the Court of Appeal concluded that an implied contract existed between MFGUK and the Service Company, pursuant to which MFGUK was obliged to pay all the costs in respect of the seconded Staff.

The Court of Appeal noted that such arrangements are common in large corporations, and that this is the first reported case in which a contract has been inferred from the conduct of well-advised substantial commercial companies within a group.

Take away

In the light of this decision, it would be prudent for companies to review how they structure and record in writing their intra-group service arrangements. It is possible that a contract can be implied between the employee of a group company and an entity which is not intended to be the employer.

Key Contacts

Elsie Chan

Partner | Employment and Pensions

Email or call +852 2825 9604

Related Services and Sectors:

Employment and Pensions

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