In Heis and others v MF Global UK Services Ltd (in administration), the Court of Appeal unanimously decided, on the basis of the parties’ conduct, that there was an implied high-value contract on open terms between two sister companies ([2016] EWCA Civ 569). There are no reported decisions of analogous situations.

Rejecting the claim that there simply was no contract, the court acknowledged that it was a significant step to find that two well-advised substantial commercial companies had entered into a long-term contract worth some $330 million a year without feeling it necessary to have a written agreement. Most parties dealing at arm’s length would have had a written contract and would also have negotiated limitations and protections in a transaction of that type.

The decision highlights a potential chink in the armour of limited liability which, although it does not expose a company’s parent to liability directly, may permit recourse to the assets of another of its subsidiaries. This could also represent an unsuspected hazard or windfall to a prospective buyer of one or other of the subsidiaries (see box "Practical steps").

One reason that persuaded the court to find an implied contract was that a contract would have been usual in the circumstances. The two subsidiaries were members of a Delaware-owned UK group which engaged in broker-dealer activities on the financial markets. One subsidiary, MF Global UK Services Limited (MF Services), seconded staff to other group companies, including the principal UK operating company, MF Global UK Limited (MF Global), on a no-profit charge-back basis. The court accepted that large groups frequently use a service company to employ their staff, and then second those staff to the various operating companies in the group.

Although there was no express agreement between MF Services and MF Global about paying staff-related costs, their immediate common parent, MF Global Holdings Europe Limited (MF Holdings), had agreed in writing with MF Services that it would procure that MF Global reimburse MF Services. It appears that the two subsidiaries duly did as the parent envisaged, with MF Global regularly paying MF Services for all the relevant payroll costs, including pension costs. After four years, the group went into administration and the question arose as to whether MF Global was required to indemnify MF Services in respect of its liability under section 75 of the Pensions Act 2004 (section 75) to pay into MF Services’ defined benefit pension scheme.

The court said that an intention to create legal relations must be established by the party asserting the existence of the implied contract; the terms of the implied contract must be sufficiently certain; and the necessity for implying the contract must be shown (that is, the parties are not merely doing something that they might readily have done without a contract). Evidence of the parties’ subsequent conduct and other circumstantial factors, such as the accounting treatment of the relevant transactions, can be taken into account.

The rules governing implied terms have recently been overhauled by the Supreme Court in Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Ltd and another, but only in the context of written agreements ([2015] UKSC 72; see News brief "The modern law on implied terms: no rescue from uncommercial terms"). Implied terms start with construing the express words of the written agreement, whereas implying a contract must start with the parties’ conduct.

It is not clear to what extent the principles developed for implied terms apply by analogy for implied contracts, but it is not difficult to make out areas of overlap. For example, when it comes to deciding the necessity of implying the contract, one would expect the court to test whether the arrangement between the parties would lack commercial or practical coherence if there were no contract.

This seems to be what guided the court in MF Global. The court found that the established relationship between MF Services and MF Global was only explicable on the basis that it had a contractual foundation. It simply could not be imagined that an arrangement involving such large annual amounts was not contractual.

The court also agreed with the High Court that it was legitimate to use the agreement between MF Services and MF Holdings to work out the terms of the implied agreement. On that basis, MF Global had the burden of the section 75 debt.

The intra-group secondment of staff is not, of course, the only potential area for implied contracts. It is common for a variety of other functions to be concentrated in a single subsidiary on a charge-back basis; for example, buying, selling, licensing and borrowing. These arrangements are not always adequately documented. The more significant the arrangements, and the more regular their occurrence, the less likely the court is to believe that they are voluntary and ad hoc.

The nature of the arrangements might, however, be a factor against the existence of an implied contract. In MF Global, the court acknowledged that group secondments could be complex, so that, if there was an implied contract, it would be more difficult to pin down what its terms were if the contract had to cater for the apportionment of costs where staff moved between various companies. With an implied contract, the court generally has only the parties’ actions to go on, which will inevitably restrict what may be inferred. If there is no certainty as to the terms, the court will not be able to find that there is an implied contract at all. In MF Global, however, the court had the advantage of being able to consider the express agreement between MF Services and MF Holdings.

Informality in intra-group arrangements is understandable. Running the business takes priority and, provided that there are no problems in the business, doing what the parent company ordains is not likely to get a subsidiary’s directors into trouble. In MF Global, as long as the business was running smoothly, the arrangement was financially neutral and suited MF Services and MF Global equally well, but it is not clear whether the directors realised the legal position.

Directors are not doing their duty under section 173 of the Companies Act 2006 (2006 Act) to exercise independent judgment if they abdicate their decision-making role to boards higher up the chain. Nor are they promoting the success of the company in accordance with section 172 of the 2006 Act if, for example, they stand by while the company is made a dumping ground for the group’s failures. Letting their company be party to potentially detrimental arrangements without reward or upside might even fall into the territory of unlawful distribution or improper use of their powers. Directors should consider what protections they would have insisted on if dealing with an outside party.

It is also the directors’ duty to make a sensible assessment of the possible risks facing the company, and this is difficult without a reliable record of the company’s contractual obligations, including intra-group ones. Directors should have a clear idea of the benefit of the arrangement to the company, and whether any detriment outweighs the benefit. As in MF Global, the problems come to light when the company becomes insolvent, exposing directors to personal liability for breach of duty or even for unlawful payments. It is then too late for the directors to avoid liability by seeking shareholder ratification or release of the company’s claims against them.