Case law: Court implies contract requiring group companies to reimburse pension costs of staff employed centrally by group 'service' company

Groups of companies setting up a service company to employ all staff working in the group should ensure there are express contracts setting out which costs each group company is liable to reimburse to the service company, or risk a contract being implied by the courts, following a recent Court of Appeal ruling.

A subsidiary in a group of companies had been set up specifically as a 'service' company, to employ all the people who worked in the group. The employees then worked for other group companies, each of which reimbursed the service company for the employment costs incurred in relation to 'its' employees. This arrangement is common in groups as it makes it easier to carry out HR-related administration, but is often left as an informal arrangement that is not formally documented.

In this case, there were no express contracts between the service company and each group company, putting the arrangement into effect - although there was a contract between the holding company and the service company saying the holding company would procure that any group company using employees would reimburse all the costs of their employment to the service company.

The companies in the group all went into administration. There was a deficit in the pension scheme. The administrators of one of the group companies asked the court to declare whether or not their company was required to make a payment to the service company to cover the pension costs of 'its' employees. They argued that it was not, as there was no express contract between the group company and the service company to that effect.

The counter argument was that, even if there was no express contract between the service company and the group company to that effect, the court should imply one.

The Court of Appeal cited helpful principles established in previous legal decisions:

  • Contracts should only be implied if that was necessary to give business reality to a transaction – implying a contract should be rare
  • The court should be confident all parties intended to be legally bound by the terms being argued for
  • The court should usually be able to identify the offer, and acceptance of the offer, required to make a legally valid contract

However, the Court said the key question was whether there was sufficient certainty about the essential terms to be implied, and the circumstances meant it was necessary to imply a legally binding contract. The burden of proving there was an implied contract was on the party alleging that there was.

In this case, the court decided that the relationship between the group company and the service company could only be explained if there was an implied contract that the group company should reimburse the service company for all the employment costs of the employees it used.

Relevant circumstances included:

  • Documents before the court showed that the intention was for the group company to indemnify the service company for every single employment-related cost of employees it used, including pension scheme costs
  • The statement of affairs filed by the group company directors when it went into administration showed the directors considered their company was financially liable for all the employment costs of the staff they used, including pension costs
  • Group employment costs were high (around US$330m per year). It was unlikely the parties did not intend the service company to have an effective legal right to recoup this money direct from other group companies
  • Nothing in the documents supported the argument that the group company was not obliged to meet all employment costs relating to the employees it used

This is the first reported case of such a contract being implied.

Operative date

  • Now

Recommendation

  • Groups of companies that set up a service company to employ all staff working in the group should ensure there are express contracts setting out which costs each group company using such staff is liable to reimburse to the service company, or risk a contract being implied by the courts, following a recent Court of Appeal ruling

Case ref: Heis v MF Global UK Services Limited (in administration) [2016] EWCA Civ 569

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