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Service contract implied between group companies

Can a contract be implied between group companies?  In the case of Heis v MF Global UK [2016] the Court of Appeal unanimously decided that there was an implied high-value contract between two sister companies for the secondment of employees from a service company to an operating company.

This is the first reported case where a contract was inferred through conduct between well-advised and substantial companies that decided not to record their mutual obligations in writing.

Background

A service company, which was part of a large corporate group, employed and seconded employees to an operating company within the group pursuant to an agreement with its parent company. This agreement contained a commitment by the parent to procure payment from the operating company to the service company for its employee services. However, there was no direct contract between the operating company and the service company.

Both companies went into administration and it transpired that over £35 million was due to the pension fund. The question arose as to whether the operating company was required to indemnify the service company in respect of its liability to pay into the service company's defined benefit pension scheme. 

The High Court determined that a contract should be implied and that the operating company should indemnify the service company for the pension contributions. The operating company decided to appeal, citing previous case law that no contract should be implied unless it was necessary.  

Decision

The Court of Appeal agreed with the High Court, stating that the case boiled down to two key issues:

  • Were the reimbursement arrangements sufficiently certain to amount to a contract? The answer in this case was yes; and
  • Was it necessary to infer a contract and an intention to create legal relations? The court acknowledged that it was a 'significant step' to infer a contract between companies within a group who have not recorded their mutual obligations in writing. However, in this case the established relationship between the companies was only explicable on the basis that there was a contractual foundation. The parties must have intended for there to be a legally binding arrangement in view of the email correspondence, the accounting documentation and the significant sums involved.

What are the wider implications?

Although the facts relating to this case are specific, it is certainly possible that this case could pave the way for further contracts to be implied between group companies. 

Auditors, potential buyers of a company and insolvency practitioners will all be particularly interested to scrutinise intra-group arrangements to determine whether any unexpected balance sheet issues could arise as a result of implied arrangements.

If there is any uncertainty over intra-group arrangements, particularly if they are informal in nature, it would be advisable to draw up written terms to set out each of the companies' obligations.  If necessary, the terms should also allocate the parties' responsibilities for any previous period which has not been documented to clarify the parties' intentions. 

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at August 2016. Specific advice should be sought for specific cases. For more information see our terms & conditions.

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