Court of Appeal overturns High Court decision in Britvic on pension increase provision

10 minutes de lecture
11 juin 2021

In January 2020, His Honour Judge Hodge QC ("HHJ Hodge") was asked to construe the pension increase rule in the Britvic Pension Plan (the "Plan"), which gave Britvic plc ("Britvic") a power to choose "any other rate" than the default rate under the Plan's rules.

The Judge construed the words "any other rate" as meaning "any higher rate", the effect of which was that Britvic could only choose a rate of increase that was higher than the default rate.

Britvic appealed HHJ Hodge's judgment and on 10 June 2021, the Court of Appeal overturned the decision at first instance.

The decision, another in a line of cases in which the courts have had to construe a pension increase rule, throws light on how the courts will approach "corrective construction" cases where it is argued that something had clearly gone wrong with the drafting.

Gowling WLG (UK) LLP acted for the Trustee of the Plan, Britvic Pensions Limited, (the "Trustee"), which took a neutral position on the issue of construction. Our Pensions team provides more detail on the decision below.



Britvic PLC v (1) Britvic Pensions Limited (2) Simon Mohun [2021] EWCA CIV 867

Background to the issue

The Plan's rules contain a pension increase provision that on its face gives Britvic the power to decide the rate of increase to be applied to pensions in payment under the Plan.

The provision was first set out in Trust Deed and Rules dated 31 January 2003 that established the Plan (the "2003 Rules"), Rule C.10, which contains the following wording:

"(2) The part of a pension which exceeds any guaranteed minimum pension in payment is increased on 1 October in each year. The rate of increase is the percentage increase in the retail prices index during the year ending the previous 31 May but subject to a maximum of 5 per cent. [in relation to Pensionable Employment up to and including 30 June 2008 and a maximum of 2.5 per cent. in relation to Pensionable Employment on and from 1 July 2008] (or any other rate decided by the Principal Employer)." (emphasis added).

The Plan's rules were consolidated in 2007 (the "2007 Rules") and Rule C.10 remained as set out above. The words in square brackets were added by a deed dated 30 June 2008 (the "2008 Deed"). Increases in the revaluation of deferred pensions was addressed by Rule C2(2), which cross-refers to Rule C.10.

HHJ Hodge was asked to construe Rule C.10(2) in the 2003 Rules (and 2007 Rules) as amended by the 2008 Deed and, in particular, the meaning of the words we have highlighted above.

The High Court decision

HHJ Hodge concluded that Rule C.10(2) created a two-stage mechanism for increases to pensions in payment whereby:

  1. The Trustee would calculate and apply guaranteed increases based on the increase in RPI over the year to 31 May capped at 5% or 2.5% depending on period of service, described as the "default rate".
  2. Britvic then had a discretion to direct that a higher, but not a lower, rate of increase should be applied.

HHJ Hodge found that Rule C2(2) provided that increases to deferred pensions should be applied in the same way.

HHJ Hodge stated that he had construed the rule "with an eye to giving reasonable and practical effect to the scheme". Doing this, he concluded that Britvic's interpretation of the provision, which it said enabled it to choose a higher or lower rate of increase, involved an "excessively literal reading of Rule C.10(2)". Further, the judge noted that, even without considering the admissible context, something had clearly gone wrong with the language of Rule C.10(2) in that the word "higher" should have been used rather than "other" in the expression "or any other rate decided by the Principal Employer".

As part of what he considered to be admissible factual background, HHJ Hodge noted an outline benefit summary sent to prospective members of the Plan in 2002 that had stated that Plan benefits would replicate those of the Six Continents Pension Plan and the Six Continents Executive Pension Plan (the "Six Continents Plans"). The latter plan did not include a power to alter the rate of increase and an outline benefit summary for the former stated that increases were guaranteed at RPI up to 5%, with discretion for the employer to award a higher rate of increase. HHJ Hodge stated that members had consented to the transfer of their benefits from the Six Continents Plans to the Plan on the basis of such documents.

HHJ Hodge also said that the drafter of Rule C.10(2) would have had section 51 of the Pensions Act 1995 in mind and have had wanted to create a provision that complied with section 51(3) by requiring increases of at least the "relevant percentage" (as defined in the Act).

The Court of Appeal decision

Sir Geoffrey Vos, the Master of the Rolls, gave the leading judgment allowing the appeal, with Lord Justices Coulson and Nugee giving concurring judgments with further explanations of the reasons for their decisions.

Sir Geoffrey Vos stated that, "the main issue … is beguilingly simple. It is whether the words "or any other rate decided by the Principal Employer" ... mean 'any higher rate' or 'any other rate, whether higher or lower' decided by that employer".

The Master of the Rolls concluded that, "this is not a case where there has been sloppy or unclear drafting". It appeared that the drafter of the relevant provision had lifted the wording from the Six Continents Pension Plan, maybe without realising that the words "or any other rate decided by the Principal Employer" were not in the Six Continents Executive Pension Plan.

Summarising the case law on construction (including Rainy Sky, Arnold v Britton, Wood v Capita, and Barnado's), Sir Geoffrey Vos stated that, where unambiguous language had been used, the Court must apply it, despite there being "obvious advantages" to HHJ Hodge's interpretation of Rule C.10(2). Although there may have been a mistake and although HHJ Hodge's interpretation was more consistent with the "admissible factual matrix and legislative background", the Master of the Rolls could not satisfy himself there had been an obvious mistake on the face of Rule C.10(2).

Lord Justice Coulson considered the relevant wording was "clear and unambiguous" and Lord Justice Nugee found that "there is no basis for concluding that the drafter made a drafting mistake".

The other four grounds of appeal

There were other aspects of the case on which Britvic was successful.

First, the Court decided that the words "any other rate" could mean "any other rate or rates" such that Britvic could decide on a different rate in relation to pension attributable to different periods of service.

Secondly, the Court found that Britvic could use its power to decide a rate for more than one year or at any time before the implementation date of 1 October in any year. There was no limitation in the wording, the Court found, as to when Britvic's decision must be made nor a requirement that the discretion only be exercised once the relevant RPI for the year ending the previous 31 May was known.

Thirdly, the Court found that the rate of increase chosen by Britvic could be 0%, given that under the default rate an increase of 0% could be generated if RPI were 0% in any given year.

Fourthly, the Court found that HHJ Hodge had been wrong to decide that any figure decided on by Britvic for the purposes of Rule C.10(2) would automatically be read across into Rule C.2(2) relating to increases in deferred pensions. It was open, the Court decided, to Britvic to set a different rate of increase for deferred revaluation in the Plan.

Section 51

The Master of the Rolls concluded that Rule C.10(2) does not satisfy section 51(3) of the Pensions Act 1995 because the rule does not "require" increases of at least the "relevant percentage". This is because the Court of Appeal has decided that Britvic has the power to reduce the rate below the "relevant percentage" (as defined in the Act) at any given time.

The practical effect of this (as acknowledged by Lord Justice Nugee) is that the rate of increase will oscillate between the rate to be applied under the Plan and the "appropriate percentage" under section 51(2) of the Act.

Conclusion

The Court of Appeal's judgment is another in the long line of cases on the approach to take when interpreting documents.

The Court placed heavy reliance on Barnardo's, in which the Supreme Court said that, in a pension context, it was appropriate to give weight to textual analysis by concentrating on the words chosen and attaching less weight to the background factual matrix.

A body of case law has developed on "corrective construction" whereby a court can, when interpreting a provision, make a correction when something has obviously gone wrong with the drafting. However, the Court of Appeal's decision reflects a limit on such an approach to the interpretation of provisions in legal documentation.

It appears from the Court of Appeal's decision that corrective construction is likely to be limited to cases where either there is an obvious mistake on the face of the provision of the document itself (such as where John is written for Mary, Landlord for Tenant or a decimal point is put in the wrong place) or where applying the natural reading of the words would lead to a wholly irrational result that could not have been intended.

Those situations apart, the words of the document will be given their natural meaning and the parties will need to consider other remedies, such as rectification, if they are unhappy with the consequences of applying that natural meaning.


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