In an important and, in some respects, ground-breaking judgment, the Court has upheld a claim by the Trustee of the Mitchells & Butlers Pension Plan (the "Plan") to rectify the pension increase provisions in three deeds that were executed in 1996, 2002 and 2006.
The Court considered evidence from 19 witnesses (16 of whom were cross-examined) and heard an argument by the Plan's Principal Employer, Mitchells & Butlers plc ("M&B"), that it was a "bona fide purchaser for value without notice" and so had a defence to the Trustee's claim to rectify the deeds executed in 1996 and 2002.
In another aspect of the case, Mr Justice Trower declared that the amendments by which the pension increase provisions were introduced should be set aside.
Gowling WLG's Pensions Disputes Team (instructing Michael Tennet KC, Edward Sawyer and Jonathan Chew) acted on behalf of the Trustee and the over 20,000 members it represented.
The Mitchells & Butlers case was unusual in various respects. It was a rectification claim made on behalf of members of a scheme against the scheme's employer, whereas most claims to rectify that the courts have had to consider were claims made by an employer. Further, it appears to be the first case in which a court had to consider a defence to rectification based on the argument that an entity became the scheme's Principal Employer as a bona fide purchaser.
Background in brief
Before the deeds in question were executed, the increase rule provided that pensions in payment in excess of Guaranteed Minimum Pension (GMP) were to be increased by reference to the percentage increase in the "Official Index of Retail Prices", which was defined as "the index of retail prices published by the Department of Employment or any other index selected by the Trustees" up to a maximum of 4%, which was later increased to 5%.
In other words, members received 5% LPI increases, subject to the Trustee's ability to choose another index (the "Index Selection Power") by reference to which increases would be made.
In 1996, a new Definitive Deed & Rules was executed. The Index Selection Power was (it turned out mistakenly) replaced by a power held by the Principal Employer (at that time, Bass plc) by which pensions in payment would be increased by reference to the percentage increase in the "Retail Prices Index … subject to a maximum increase of five per cent. per year … (or any other rate decided by the Principal Employer" (the "Increase Alteration Power").
In other words, the Trustee lost its power to move away from the default index by which pensions in payment were increased and the power to select the rate of increase moved to the Plan's Principal Employer.
The Increase Alteration Power was repeated in a further iteration of the Plan's Deed & Rules in 2002, by which time Bass plc had been re-named Six Continents plc.
The judge found that the parties to the 1996 deed had not intended to replace the (Trustee) Index Selection Power with the (Principal Employer) Increase Alteration Power, and that the 2002 deed had mistakenly perpetuated that error. M&B accepted that position (although in order to grant rectification it was still necessary to satisfy the Court of the same). However, M&B argued that, when it became Principal Employer in 2003, it did so as a "bona fide purchaser for value without notice" and so taking free of the Trustee's claim to rectify the 1996 and 2002 deeds.
As for the 2006 deed, M&B argued that the parties had intended to replicate the pension increase provisions in the form contained in the 1996 and 2002 deeds, so that deed should not be rectified.
As an alternative to its rectification claim, the Trustee argued that the increase provisions in the 1996, 2002 and 2006 deeds were ineffective as their introduction contravened the Plan's amendment power because the Plan actuaries had not been properly consulted (alternatively, the introduction of the increase provisions by the 2002 and 2006 deeds contravened section 67 of the Pensions Act 1995).
The trial was held over three weeks and involved the Court considering evidence from 19 witnesses, 16 of whom were cross-examined, some remotely via video-link from witness "hubs" set up in Gowling's offices in view of the ongoing pandemic.
What follows is only a very brief account of a judgment running to 410 paragraphs and 97 pages.
Rectification of the 1996 and 2002 deeds
Rectification is a remedy by which the Court amends a document so that it reflects the true intention of the parties to it. Convincing proof is needed to persuade the Court that the document did not reflect the parties' actual intention.
Rectification is available, not only where particular words have been misused, but also where words have been used intentionally but the parties mistakenly thought that the words they had used had a meaning different from what which the words in fact have.
Where a consolidating deed repeats a rectifiable error in an earlier deed, it may be possible to rectify the later deed if the evidence shows that the parties intended that the consolidating deed should reflect members' substantive legal entitlements under the earlier deed, including the right to rectify. If, however, the intention was to replicate the language of the earlier deed as it then stood, a claim to rectify might not be established. It is necessary to consider carefully evidence of what the parties intended at each relevant point in time.
Although M&B conceded that the 1996 and 2002 deeds were rectifiable against Bass plc/Six Continents plc (the Principal Employer under those instruments), the Court had to be satisfied that this concession had been rightly made. In light of the evidence the Trustee had obtained in support of its case, Mr Justice Trower concluded that M&B had rightly made that concession.
The evidence that the introduction of the Increase Alteration Power by the 1996 deed, and its continuation by the 2002 deed, were mistakes was strong. The witnesses were clear that they thought that members were entitled to RPI-based increases on their pensions, up to a maximum of 5%.
To the extent any decision-makers read the pension increase provisions in the 1996 deed, they did not appreciate the effect of the Increase Alteration Power. This, the Judge considered, was a case in which the importance of the purported change to the Plan's increase provisions which the 1996 deed effected was such that, because it was neither identified to, nor discussed with, the decision-makers before the 1996 deed was executed, it was to be inferred that there was no intention for that instrument to make any change.
The 2002 deed was a consolidation exercise. The evidence was compelling that the parties did not intend to change the basis on which pensions were increased, namely, RPI increases up to a maximum of 5%.
Accordingly, subject to M&B's "purchaser defence", both the 1996 and 2002 deeds should be rectified.
"Bona fide purchaser for value without notice"
M&B became the Plan's Principal Employer in November 2003. M&B argued that it did so as a "bona fide purchaser for value without notice" enabling it to avoid the Trustee's claim to rectify the 1996 and 2002 deeds.
This aspect of the case was novel because, the Judge noted, this argument by a pension scheme's employer was not one that had been previously been presented to any Court or considered by legal commentators.
There was no dispute that rectification will not be granted to the prejudice of someone who purchased property in good faith for value without notice of the ability of another party to rectify. The issue was whether the doctrine applied to the circumstances in which M&B had become the Principal Employer.
The Court decided that the defence was not made out. Mr Justice Trower decided that, given the terms of the power of substitution under which M&B became the Principal Employer, the defence did not apply to M&B. Rather than being a "bona fide purchaser", M&B had succeeded to the position as Principal Employer and took everything that came with that position, including being subject to the Trustee's claim to rectify the 1996 and 2002 deeds.
An important aspect of the Court's conclusion was the Judge's finding on the nature of the power pursuant to which M&B had become Principal Employer, the primary purpose of which was for the new Principal Employer to agree to "assume its position". This made clear, the Judge held, that the power was concerned with substitution and succession, not with the sale of property or the transfer of rights.
The Court concluded that the purpose of the power of substitution was to ensure a seamless transition from one entity holding the position of Principal Employer to another. The effect of the substitution was limited to changing the entity of the person holding that position.
Rectification of the 2006 deed
M&B argued that whether or not the Court should rectify the 2006 deed would be affected by the Court's conclusion on the bona fide purchaser defence because, if the 2002 deed were not rectified, it could be said that the parties intended to do no more in 2006 than perpetuate the substance of the unrectified provisions of the 2002 deed.
Since it did not uphold M&B's defence to the rectification of the 2002 deed, on M&B's argument the Court could have proceeded to rectify the 2006 deed. However, Mr Justice Trower was not convinced that M&B was right that the claim to rectify the 2006 deed stood or fell by his conclusion on the company's defence to the claim to rectify the 2002 deed. The evidence of the decision-makers for the 2006 deed was that, although they had not intended to make any substantive changes to the 2002 deed, they had an actual (and erroneous) belief that the pension increase provisions in the 2006 deed had a meaning different from their true meaning and effect.
Accordingly, the 2006 deed was rectified too.
Mr Justice Trower also set out his conclusions the validity of the pension increase provisions in the 1996, 2002 and 2006 deeds.
The Plan's power of amendment contained the following words:
"After consulting the Actuary the Trustees may … with the consent of the Principal Employer alter or modify all or any of the trusts powers or provisions of this Deed or of the Rules …
Provided always as follows:- …
(iii) no alteration or modification shall be made which in the opinion of the Actuary shall operate substantially to prejudice the rights or interests in respect of service prior to the effective date of the alteration or modification of any person already a Member at such date; …"
M&B accepted that consultation with the Plan actuary was a condition precedent to the effective exercise of the power of amendment. This followed from the language of the power, which opened with the words "After consulting the Actuary." The judge accepted this concession was correct. However, there was an issue as to whether there had been effective consultation with the Plan actuaries before each of the 1996, 2002 and 2006 deeds had been executed.
The Court concluded that there had been no effective consultation. What was necessary, the Judge found, was for sufficient information to be provided by the consulting party (i.e., the Trustee) to the consulted party (i.e., the Plan actuary) to enable him to give advice on the subject matter of the proposed changes from the perspective of the particular professional field of the consulted party (i.e. to advise from an actuarial perspective on the change, not a legal one).
If the proposed changes were not brought to the attention of the person consulted (even inadvertently), effective consultation will not have taken place. In practice, this meant that, for an amendment to be valid, appropriate steps had to be taken to ensure that the Plan actuary was made aware of the proposed amendment on which he was consulted.
It was not enough that the Plan actuary had been sent the draft deed, asking him to confirm that he would approve the proposed changes. The evidence was that the Plan actuary did not appreciate he was being asked to express an opinion on the proposed introduction of the Increase Alteration Power. He relied on the Plan's legal advisers to tell him about the proposed changes and what was conveyed to him did not alert, and would not reasonably have alerted, him to the fact that the Increase Alteration Power would have the meaning and effect that it had.
Mr Justice Trower's conclusion that the Plan actuaries had not been properly consulted before the 1996, 2002 and 2006 deeds were executed is perhaps not surprising given that the Trustee did not think any of the deeds would make any changes to the Plan's pension increase provisions. Accordingly, the Judge declared that the introduction of the Increase Alteration Power and removal of the Index Selection Power by each of the deeds were not valid exercises of the Plan's power of amendment and, as a result, void.
Although not necessary for his decision, the Judge also held that the proposed introduction of the Increase Alteration Power by the 2002 deed was void as it did not comply with section 67 of the Pensions Act 1995 because the actuary had not been directed to the relevant modification. The actuary could not have addressed or answered the question of whether the changes affected accrued rights because he was never asked that question and was unaware of the changes the 2002 deed would make.
The position was different for the 2006 deed because, by then, a breach of section 67 rendered any exercise of a power to modify voidable, not void. The Judge saw no useful purpose in declaring that the purported amendment was voidable under section 67 given he had ordered rectification and found it was invalid under the Plan's rules, in circumstances where the Pensions Regulator that had the power to determine whether the amendment should be avoided.
Mitchells & Butlers can now be added to the long list of authorities on rectification, including in a pensions context. However, it is novel in a number of respects.
First, the Court granted rectification on an application made on behalf of members. Most rectification claims are made by an employer of a pension scheme.
Secondly, the Court rectified a pension increase rule so as to take away an employer power and replace it with a trustee power. Rectifying so as to change the identity of the holder of a power away from the party which appears to possess it (i.e., not just rectifying to change the contents of the power) is unusual.
Thirdly, and usefully in a pensions context, this is another case in which a court has been prepared to order rectification of a number of successive deeds that contained the same mistake even when it could not be shown that the parties had specifically addressed their minds to the provision it was later argued was mistaken.
Fourthly, Mitchells & Butlers appears to be the first case in which a court had to consider a defence to rectification based on the argument that an entity became the scheme's Principal Employer as a bona fide purchaser. The defence was not accepted. Time will tell whether the outcome would be the same in other contexts, for example, a corporate acquisition of an employer by another entity.
Finally, what the Judge said about what is required for an effective consultation in the context of the purported exercise of a scheme's amendment power is likely to be of practical interest for other pension schemes.
If you have any questions or are interested in learning more about pension disputes, please get in touch with Ian Gordon