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
 
In association with
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
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). 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 & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd 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 or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.