The Court of Appeal’s decision in the case of Heis v MF Global highlights the importance of documenting just who has responsibility for contributing to a defined benefit pension scheme.
EIS AND OTHERS V MF GLOBAL UK SERVICES LTD (IN ADMINISTRATION)  EWCA CIV 569,  ALL ER (D) 125 (JUN)
The Court of Appeal, Civil Division, dismissed an appeal by the administrators of a company regarding an implied contract between it and the respondent company. The judge had been correct, on the evidence, to have implied a contract between them pursuant to which the appellant company paid the expenses of staff seconded to it by the respondent company. That implied contract had included an obligation on the appellant to indemnify the respondent in respect of its debt pursuant to section 75 of the Pensions Act 1995 (PA 1995).
What was the background to the case?
The MF Global group, a broker-dealer business, entered into insolvency in October 2011.
In the UK, MF Global UK Services (MFG Services) went into administration. It was the sole employer of a defined benefit scheme, which had a section 75 deficit of approximately £35m on insolvency. MFG Services provided employees for MF Global UK Limited (MFG UK), which was the operating company for the UK operations of the MF Global group.
The Pensions Regulator commenced an investigation with a view to imposing a financial support direction on MFG UK. However, shortly before the Pensions Regulator was due to issue its warning notice, the administrators of MFG Services and MFG UK entered into a settlement agreement with the trustees of the scheme and with the Pension Protection Fund on 15 October 2013. A sum of £29m was paid by MFG UK, on behalf of itself and MFG Services, to the trustees in full and final settlement of the section 75 debt. This allowed the pension scheme to be wound up outside of the PPF and the Pensions Regulator discontinued its action for a financial support direction. The Pensions Regulator issued a section 89 report summarising its actions.
At the same time as this settlement, MFG UK and MFG Services agreed arrangements for the funding of the sum paid to the trustees and agreed to use their reasonable endeavours to reach a settlement of a contractual claim by MFG Services against MFG UK for an indemnity in relation to the section 75 debt. It was agreed that if no settlement was achieved within six months, the parties would apply to the court for determination of the issue. No settlement was reached and this lead to the case.
What were the issues before the Court of Appeal?
At the time that the MF Global group was established by an IPO from the Man Group, a services agreement had been put in place between MFG Services and MF Global Holdings Europe Limited (MF Holdings) in 2007. MF Holdings was the parent company of both MFG Services and MFG UK. The services agreement dealt with the provision of staff by MFG Services. This provided that MF Holdings would procure the payment by the ‘Service Recipient’ of all payroll costs including pension contributions. MF Holdings did not receive any staff from MFG Services—but there was no express contract between MFG Services and MFG UK, who did receive staff from MFG Services.
The questions for the Court of Appeal were simply:
- Could a contract be implied between MFG UK and MFG Services?
- If so, did it include an obligation to indemnify MFG Services in respect of the section 75 debt that it owed to the scheme?
At first instance, the judge had found in favour of MFG Services on both points.
On the first point, MFG UK had argued that it had paid pension contributions, but as a result of an implied contract between MFG UK and MF Holdings, and that MFG UK would pay the pension contributions to MFG Services in consideration of MF Holdings procuring the secondment of staff by MFG Services. However, this was rejected as the evidence pointed against any real involvement by MF Holdings after the entry into the services agreement in 2007 and all the payments and dealings had taken place directly between MFG UK and MFG Services. The judge held that it was overwhelmingly likely that MFG UK and MFG Services intended to enter into legal relations between each other, governing the provision of and payment for seconded staff.
The judge held that it was legitimate to construe the implied contract against the terms of the service agreement between MFG Services and MF Holdings and, as that required the payment of all costs for ‘all salary, bonus, and contractual and discretionary cash and non-cash benefits’, it would cover any section 75 debt due.
What conclusions did the Court of Appeal reach and what were its reasons?
The Court of Appeal had to consider an additional issue: the withdrawal of the concession by MFG UK during the first instance hearing that the payments were as a result of a contractual obligation (which, on MFG UK’s case, was an implied contract between MFG UK and MF Holdings).
The Court of Appeal concluded that the concession could be withdrawn. The concession was only made during oral submissions by MFG UK and in response to the judge’s questions. It had also meant that the judge had ‘gone off track’ and only considered with whom MFG UK had made the implied contract, rather than whether it was appropriate to imply a contract at all. Finally, MFG Services was unable to demonstrate any prejudice by the withdrawal of the concession as it had argued almost of all of its case at first instance before the concession was made.
The Court of Appeal did consider whether the case should be remitted to the Chancery Division for re-hearing following the withdrawal of the concession. However, neither side wanted that outcome and as there had been no oral evidence the Court of Appeal concluded it could still consider whether it was appropriate in all the circumstances to imply a contract between MFG UK and MFG Services, under which MFG UK paid the costs of the seconded staff.
The Court of Appeal noted the dicta in Modahl v British Athletics Federation  EWCA Civ 1447,  All ER (D) 181 (Oct) that ‘[for] there to be a contract, there must be (a) agreement on essentials of sufficient certainty to be enforceable, (b) an intention to create legal relations and (c) consideration’. In this case, the intent to create legal relations was the central point, as MFG UK argued that its actions were consistent with other scenarios, not just an intent to contract with MFG Services directly. (MFG UK had argued that alternative interpretations were that it had been procured to do so by MF Holdings; had acted in the knowledge that MF Holdings could direct it to make payment; or had acted to ensure that the seconded staff continued to provide their services to MFG UK).
The evidence all pointed towards a clear understanding that MFG UK would pay all the costs, including the pension costs, incurred by MFG Services for the seconded staff. However, that did not establish that MFG UK was expressly thinking that it was contractually obliged to pay for the costs. On the other hand, the Court of Appeal quickly rejected the notion of an implied contract between MFG UK and MF Holdings as ‘wholly artificial’ given that there was no evidence of any involvement by MF Holdings after it had entered into the services agreement in 2007.
The Court of Appeal concluded that the issues came down to whether:
- the arrangements between MFG UK and MFG Services amounted to an agreement on essentials of sufficient certainty to be enforceable
- it was necessary to infer a contract and an intention to create legal relations, rather than an informal arrangement
The Court of Appeal noted it was a significant step to infer a contract between well-advised substantial commercial companies and there were no reported cases where such a contract had been inferred by conduct in this kind of situation. But the key conclusion was that the size of the payments—some $330m per annum—meant that the parties must have intended it to be a legally binding arrangement.
Having concluded that there was an implied contract the Court of Appeal concluded that it covered the section 75 debt, rejecting an argument that the section 75 debt did not arise during the ‘period of any assignment’ of staff. The Court of Appeal considered that staff would still have been seconded immediately before the administration when the section 75 debt is deemed to have arisen under PA 1995.
Does the Court of Appeal's decision have any implications for the sponsoring employers of defined benefit occupational pension schemes?
The decision shows the importance of documenting who has responsibility for contributing to a defined benefit scheme—either directly as an employer or indirectly as another company within the same group as a multi-employer scheme.
Trustees, when assessing the employer covenant, need to understand which companies have a legal obligation to support the scheme and it could be dangerous to rely on an implied contractual argument. In this case, there was only one group company to which staff were being provided, so the Court of Appeal only had to consider whether there was an implied contract between two parties. If there had been multiple operating companies then the answer, in this case, might have been different—the Court of Appeal noted that in such a case the inferred contract might need implied terms as to apportionment which would be hard to pin down.
This article was first published on LexisNexis on 13 July 2016.