UK: Documenting Responsibility For Contributing To DB Schemes

Last Updated: 25 July 2016
Article by Mark Howard

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) [2016] EWCA CIV 569, [2016] 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 [2001] EWCA Civ 1447, [2001] 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.

Documenting Responsibility For Contributing To DB Schemes

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Mark Howard
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions