Implied contracts: MF Global UK Ltd (In Special Administration), Re [2016] EWCA Civ 569

In what circumstances will the Courts find that there is an implied contract between companies?

The facts

MF Global UK Services Limited was a service company (the service company) that seconded the majority of its employees to MF Global UK Limited (the UK company).

Both companies subsequently entered administration, leaving a debt of approximately £35 million in the employees’ pension scheme. The question arose of which company was liable for the debt in circumstances where had been no express agreement in place between them. The only contract was between the services company and the ultimate parent company under which the parent agreed to procure that the UK company would reimburse the service company for all costs associated with employing the secondees. The companies could not agree as to how the debt should be funded and asked the Court to decide.

The High Court found there was an implied contract whereby the service company offered to second its employees in return for the UK company meeting all associated costs. The UK company appealed, relying on the principle in Baird Textiles v Marks & Spencer [2001] EWCA Civ 274 that it was not necessary to imply a contract where the parties would or might have acted as they did without the existence of a contract.

The decision

The Court of Appeal based its decision on the following two key rules of interpretation:

• Were the reimbursement arrangements suffciently certain to amount to a contract?
  – The essential terms of the arrangement were that the UK company would pay all the costs (including pension costs) incurred by the service company in respect of the seconded staff. These were suffciently certain to be legally enforceable.

• Was it necessary to infer a contract and an intention to create legal relations?
  – The Court found that the case law was not prescriptive on this point and that the established relationship could only be explained on the basis of a contractual foundation. The parties must have intended there to be a legally binding arrangement because: (i) the sums concerned were so significant (being $30 million per annum); and (ii) nothing in the email correspondence or in the UK company’s accounting documents indicated that the UK company was not legally liable to reimburse the services company for all costs associated with the seconded staff.

Why is this important?

This appears to be the first reported case where a contract has been inferred by conduct between substantial commercial companies within a large corporate group. Though the Courts will not imply a contract lightly, they are willing to imply a contract between commercially sophisticated entities if warranted.

Any practical tips?

Always consider whether there is a need for a contract to be in place between related companies. Leaving no contract in place could lead to a contract being implied with considerably less certainty over its terms.