In Univar UK Limited v Stephen Smith and others, Mr Justice Trower rectified the rules in a definitive deed and rules dated 13 March 2008 (the "2008 DDR") of the Univar Company Pension Scheme (1978) (the "Scheme") which provided for increases to pensions in payment and revaluation of deferred pensions (together, "pension increases") in the Scheme's final salary section.
The Court granted the application by Univar UK Limited (the "Company") to rectify the 2008 DDR by deleting its reference to an inflation-linked pension increase calculation based on the Retail Prices Index (RPI) and replacing it with a reference to statutory pension increase requirements. This means the Scheme will only be required to pay statutory minimum pension increases, which are currently calculated by reference to the Consumer Prices Index (CPI) and which usually produce a lower increase than RPI.
Univar UK limited v Stephen Smith and others
The 2008 DDR was principally intended to be a consolidation of the rules of the Scheme, reflecting the benefit structure of a deed and rules executed in 1996 and a deed of amendment executed in 2006, albeit there were some changes the 2008 DDR was intended to make, none of which is relevant for current purposes.
The Company's legal advisers highlighted the changes to be made in the 2008 DDR in a schedule presented to the Trustees before the 2008 DDR was executed. That schedule included a reference to the pension increase rules but only the reduction in the cap from 5% to 2.5%, not the substance of the changes the 2008 DDR made to the Scheme's pension increase provisions which were the subject of the Company's application to rectify.
The problem was that, on its face, the 2008 DDR made the following changes to the Scheme's pension increase provisions:
- Pension increases were to be calculated by reference to RPI rather than by reference to the statutory rate of increase and covered periods of service different from those required by statute.
- The revaluation of deferred benefits was to take place on 1 May each year, rather than when pensions came into payment as required by statute.
The evidence before the Court was that the combined effect of the above (the Company said, unintended) changes would increase the cost of funding the Scheme by £26.2 million.
The Trustees adopted a neutral position to the Company's application, which was opposed on behalf of Scheme members by a representative beneficiary (Rep Ben). In addition to disputing the Company's evidence in support of its rectification application, the Rep Ben argued that:
- Former members of two schemes which had closed in 2002 who had joined the Scheme were entitled to have their pensions increased by reference to RPI as a consequence of the contents of announcements made when they joined the Scheme and which were appended to the 2008 DDR (the "Announcements Issue").
- Members of the Scheme's final salary section who had opted-out in 2010 in exchange for a promise that they would be admitted to its defined contribution section were entitled to the revaluation of their deferred pensions by reference to RPI on the basis that what had been said to them gave rise to arguments based on extrinsic contracts and estoppel, a defence of bona fide purchaser for value without notice and an argument that the Company had exercised its power to determine that revaluation of deferred pensions be calculated by reference to RPI capped at 5% (the "Opt-Out Issues").
The Court had the benefit of "almost all … the relevant contemporaneous documentation" as well as oral evidence from over a dozen witnesses, including individuals who had been involved over the relevant period on behalf of the Company and Trustees, as well as the legal advisers who had drafted the 2008 DDR.
Mr Justice Trower decided that neither the Company nor the Trustees had intended the pension increase provisions in the 2008 DDR to have the legal effect they did. Applying the decision of the Court of Appeal in FSHC Group Holdings Ltd v GLAS Trust Corporation Ltd (FSHC) and the need to examine what the parties to the instrument subjectively intended, the Court concluded that the parties to the 2008 DDR intended to make no changes to the Scheme's rules other than those reflected in the schedule prepared by the Company's legal advisers. Although a number of individuals had read the reference to RPI in the 2008 DDR, to enable the Court to rectify it was enough to show that the parties to the document did not understand the legal effect of the changes purportedly made by the 2008 DDR.
In reaching his conclusion, the Judge gave weight to the fact that the Company's former legal advisers were "frank in their admission that a mistake was made for which they were responsible …" and that they had not been instructed to draft the pension increase rules in the way they were drafted. He agreed with what Mr Justice Lawrence Collins had said in AMP (UK) Plc v Barker, namely, that negligence "not only does not prevent rectification, but is a ground for it".
Most of the long, 398-paragraph, judgment is concerned with the facts, the judge's elucidation of the law on rectification and his conclusions on that issue. However, he also considered in detail the Announcements Issue and the Opt-Out Issues, all of which he resolved in favour of the Company. In a pensions context, arguments based on extrinsic contracts, estoppel and bona fide purchaser for value without notice have proven difficult, albeit not impossible, to make out. That proved to be the case in Univar and the Court rejected the arguments made on behalf of the Rep Ben.
The situation before the Court in Univar is not uncommon, namely, the inadvertent hardwiring of RPI into a scheme's pension increase rules. Although each case turns on its facts, the decision in this case is likely to be welcomed in the pensions industry. Further, aspects of the judgment are likely to have a wider application, albeit the case does not create new law in the field of rectification but confirms the position as it was generally understood to be.
First, the Court stated that, for the purposes of rectifying the 2008 DDR, it was sufficient that the Company and the Trustees did not understand the legal effect of the changes the 2008 DDR made. Accordingly, the fact that parties to an instrument intended to use the very words it contained will not defeat an application to rectify if they did not understand the effect of what they were signing.
Secondly, in rule consolidation exercises it is often the case that, apart from a few amendments to reflect, for example, changes in the law, the parties intend to do no more than perpetuate the substance of the scheme's provisions as set out in previous deeds. They are unlikely to have addressed their minds to all the provisions in the draft consolidation and will often have no specific intention as to whether a particular rule should be included in the consolidation or not. In that context, it is useful that Mr Justice Trower agreed with the view expressed by Mr Justice Henry Carr at first instance in FSHC that "where an important change is made to an existing arrangement between the parties, the absence of any discussion of that change may itself be evidence that the parties did not intend it".
Thirdly, it is worth noting that establishing that an instrument should be rectified does involve looking at the subjective intentions of the relevant parties. The Court heard evidence from a number of witnesses, emphasising the importance of taking the time to speak to all relevant witnesses and get evidence from them when a mistake is identified and rectification is being considered.
If you wish to find out more, please contact us.