UK: High Court Grants Uncontested Rectification Of Drafting Mistake In Pension Scheme Documentation

In the recent case of Hogg Robinson plc v Harvey, the Court granted rectification of a drafting mistake in a deed purporting to amend the Scheme rules, holding that the correct intention of the parties was clearly established.  Maybe the more liberal approach to putting right documentation errors taken in the BCA Pension Plan case, which we looked at our  January 2016 Bulletin, was not such a one-off after all.

The deed of amendment was intended to reduce the rate at which annual increases were made to pensions in payment and in deferment in the Hogg Robinson (1987) Pension Scheme (the "Scheme").  However, the Scheme's administrators made a mistake in the drafting of the deed so that the deed only amended the rate applying to pensions in payment, and not to deferred revaluation.  The judge held that there was convincing evidence of the intentions of the trustees and the employer, dating from before and after the deed of amendment, which made it clear that a mistake had been made in the drafting of the deed. 

The law of rectification

Rectification is founded in equitable principles and is a form of remedy which is discretionary, and which can only be granted on an application to the Court.  It is available where the following two conditions are met:

• A written instrument fails to reflect the true intentions of its parties due to a mistake.
• The mistake cannot be easily correct by other means.

If the Court grants rectification, it will amend the written instrument retrospectively so that it expresses its intended terms.  The aim of rectification is to put the parties in the position which they would have been in had the mistake not been made.

The burden of proof is on the party seeking rectification and convincing evidence is required to rebut the presumption that the parties intended to agree to the terms actually set out in the written instrument.

In this case, the judge applied the law on the rectification of pension trusts established four years ago in IBM United Kingdom Pensions Trust v IBM United Kingdom Holdings.  In IBM it was held that in order for rectification to be granted, there needs to be persuasive evidence of the intentions of the trustees and employer (where the scheme power of amendment requires the consent of both), and their collective intentions must be established objectively at the time of the execution of the deed of amendment.  It was also held that evidence from a later date is admissible to establish the intentions of the parties.

The Court has granted rectification on summary judgment on several occasions in recent years, in cases such as Industrial Acoustics v Crowhurst.  In order for an application on summary judgment to be successful, the claimant must demonstrate that the other party has no real prospect of successfully defending the claim and that there is no other reason for a trial to go ahead.  For further information on the rules relating to applications on summary judgment, please click here.

The facts of the case

Prior to 1999, the Scheme rules provided that pensions in payment should be increased, and deferred pensions revalued, by fixed 5% compound annual increases.  In 1998 the Scheme's secretary, its actuary and a trustee considered an amendment to the Scheme rules, which would reduce the increases made to pensions in payment and deferred pensions for future service, so that benefits would increase at the rate of annual RPI increases subject to a maximum of 5% (known as limited price indexation, or "LPI").  This was proposed because by 1998, the rate of inflation was considerably below 5% and was expected to stay at this level.

Further, under the Minimum Funding Requirement established by the Pensions Act 1995 the Scheme was underfunded, and therefore providing a fixed 5% increase would be very expensive.  The actuary had calculated that if the Scheme's rules on pension increases continued without amendment, the Scheme would require employer contributions to rise from 8.7% of salaries to 17.5%.  However, he calculated that if the rate of escalation and revaluation was reduced as suggested, contributions of 11.7% would be sufficient.

Under the power of amendment in the Scheme's trust deed and rules, the Company was able to amend the provisions of the Scheme rules by deed or resolution, subject to the consent of the Trustees.

The scheme actuary presented to the Main Board and Executive Board of the Company on the proposed changes, by reference to slides and a draft valuation of the Scheme as at 6 April 1998.  The draft valuation provided that the benefits in payment and in deferment would be increased on an LPI basis only for pension accrued from April 1999, and that the Company would contribute 12% of pensionable salaries.  The Executive Board recommended the changes at its meeting on 22 July 1998 and the changes were approved by the Main Board on 26 and 27 October 1998, conditional on the consent of the Trustees.

When the Trustees met in October 1998 it was noted that they anticipated that the Company would resolve to make the changes.  At a Trustee meeting in February 1999, it was noted that the Company had decided to make the amendments, and in the Trustee meeting in May 1999 the minutes recorded that the Trustees agreed to the proposed changes and noted that the members' booklet should be amended accordingly.

The Company prepared a member announcement, which was issued in July 1999, which provided that annual LPI-based increases would be applied in respect of pensionable service after 1 August 1999 to both escalation of pensions in payment, and revaluation of deferred benefits.  The Scheme's members' booklet was also amended to reflect the changes and was sent to the Trustees for their approval on 10 June 1999.

The deed of amendment was executed by the Company on 27 July 1999, and then by the Trustees on 8 September 1999.  However, the deed only amended the Scheme's rules in relation to pensions in payment, and neglected to amend the rule in relation to deferred pensions.  It also provided that the changes had effect from 1 August 1999, even though the deed was not executed by the Trustees until 8 September.

After the execution of the deed of amendment, the intentions of the Company and the Trustees to amend the increases for pensions in payment and in deferment continued to be evidenced in Scheme documentation.  For example, the Trustees' annual report for the financial year 1998/1999, published at the end of 1999 and subsequently issued to members, outlined how the rules had been changed so that pensions (both in payment and in deferment) would be inflation-proofed on an LPI basis in relation to pensionable service from 1 August 1999 onwards.

The Court's decision

The Court granted rectification of the drafting mistake in the deed of amendment so that LPI-based annual increase applied to both pensions in payment and deferred benefits.

The Court held that on the facts of the case and in the light of considerable evidence, the test for rectification established in IBM had been satisfied.  The judge found that the evidence acted to "compellingly establish that a mistake was made in the drafting of the Deed" such that the Company's and Trustees' intentions to amend the rules were not reflected in the documentation produced.  

It was held that there was "no doubt that, objectively assessed, the Company and the Trustees intended to amend the rules to reduce the rate of increase of benefits in payment and in deferment", when they decided to amend the rules and when they executed the deed of amendment.

The application was not challenged by either the appointed representative beneficiary, or the Trustees of the Scheme.  The judge held that he was "quite satisfied that every potential defence to rectification has been investigated, weighed and finally correctly rejected as a realistic basis on which to defend the claim". He found that there was no other reason for a trial to take place; and, in fact, that it was in all of the parties' interests that a full trial did not take place. 

The judge also indicated he would make a declaration that the changes introduced by the deed only applied to benefits accrued from 8 September 1999 (when the deed of amendment took effect), rather than the earlier date of 1 August 1999 that it erroneously stated.

WB comment

This is one of a number of recent cases where the Court has adopted a more practical approach towards the correcting of drafting mistakes in scheme documentation.  It demonstrates how, provided the necessary evidence is available, it is possible to dispose of an action in a quick and proportionate manner.  Where there is a good case for rectification, summary judgment is a time efficient and cost-effective approach to obtaining the necessary order or declaration. 

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