Intra-group service arrangements might be legally binding implied contracts
  • 19th Dec 2016

It is common for large corporations, which operate in a group structure, to have intra-group arrangements that are not set out in express contracts between the companies in the group.  Certain functions will often be concentrated in a single subsidiary, on a charge-back basis (e.g. borrowing, buying, selling or seconding of staff).  In a recent case (Re MF Global UK Ltd) the Court of Appeal held that an intra-group arrangement, where one subsidiary in the group seconded staff to a sister company, amounted to a binding contract between the two companies even though no express contract was in place between them.

The arrangements between the companies were on a scale of some $330 million a year and had been in place for four years until the group went into administration.

The Court found that the established relationship between them could only be explained on the basis that it had a contractual foundation.  It simply would not make commercial sense that an arrangement involving such large annual amounts would not be contractual.  The Court found that an implied contract was in place between the companies and this in turn resulted in an obligation on the one company to satisfy certain pension liabilities of the other company.

One important implication of this decision is that an intra-group arrangement could now, in a corporate insolvency situation, permit recourse to the assets of another company within the group.  In light of this decision, companies that operate in a group structure with intra-group service arrangements may wish to review the way in which they structure and document such arrangements.