UK: High Court Grants Rectification Of Pension Scheme Documentation

Last Updated: 2 December 2019
Article by Ian J Gordon and Richard Meers

In Chas A Blatchford and Sons Limited v Brian Stephen Blatchford and others (the Trustees) ("Blatchford") the High Court applied the Court of Appeal's decision in FSHC Group Holdings Limited v Glas Trust Corporation Limited ("FSHC") to a case involving a pension scheme.

In FSHC the Court of Appeal had clarified the test the courts should apply when deciding whether to rectify a document because of a common mistake of the parties. In summary, it concluded that it was necessary to establish the subjective intentions of the parties, that is, what they actually intended, as opposed to what an observer would have concluded they had intended. We previously reviewed the FSHC decision in our insight - 'Court of Appeal hands down key judgment clarifying the law on rectification'.

FSHC did not involve a pension scheme and so, trustees and employers of occupational pension schemes who are considering applying to court to rectify mistakes in their scheme's legal documentation will be interested in Blatchford as it is the first case in which the courts have given judgment in a rectification case involving a pension scheme post-FSHC.

Chas A Blatchford and Sons Limited v Brian Stephen Blatchford and others (the Trustees) ("Blatchford")

The facts

In 1996, a new set of rules were introduced that provided that one category of member (the least senior and bulk of the membership) would be entitled to pension increases calculated by reference to the "greater" (as opposed to the "lesser" under the previous rules) of 5% and the increase in the RPI, such that they would be entitled to a minimum 5% increase.

The Claimant company brought rectification proceedings arguing that the very substantial change to the benefits of affected members in 1996 could only be explained as a drafting error and applied for summary judgment.

The decision

In circumstances in which it is argued that the pension scheme's employer and trustees did not intend to make the amendment made but there was no evidence that they addressed their minds to the words constituting the purported amendment at all, the Court said that the following questions should be asked:

  1. Did the company and trustees have a common intention that there should be no change to the relevant provisions of the scheme?
  2. Did that common intention persist up to the execution of the relevant instrument?
  3. Was a change made to the scheme's provisions which conflicted with their continuing common intention that no such change should be made?

The Court stated that it was clear from FSHC that it was the parties' subjective intention which was relevant and that no outward expression of accord was required in such a case.

Granting the application to rectify, the Court held that there was a strong case for rectification based on convincing proof of a common continuing intention of the company and the trustees to make no change.

The Court commented that it would consider evidence from witnesses saying that no change was intended, which could be tested against the contemporaneous documents. The Court said it was legitimate to have regard to what had happened after the deed had been executed in order to ascertain the intention at the time of execution.

The Court concluded that the absence of any mention in the documents of the proposed change, the absence of any discussion about and approval of what were said to be the offending words (especially if there is discussion of a significant number of other changes in the documents) and the absence of any change to the administration of the scheme after execution of the revised scheme documentation amounted to powerful evidence to establish the existence of a mistake which would justify rectification.

In reaching its decision, the Court pointed to the following principal factors that established the failure of the wording of the rules to accord with the intention of the company and the trustees:

  1. The drafting of the 1996 amendment was inconsistent with the previous structure of the pension increase provisions and amounted to a "radical departure".
  2. There was no reason why the company and the trustees would have wished to increase the benefits of the affected members at a time when the company was concerned about the overall cost of the scheme.
  3. There was no evidence that such a rule change had been given any consideration by the company or the trustees and there was no assessment of the costs of the change that was made.
  4. The scheme was administered as if there had been no change.

The Court also commented on the appropriateness of bringing construction proceedings in advance of applying for rectification. In this case, the company had chosen to make its claim solely based upon rectification. The Court considered that it was legitimate to leave aside a doubtful case on construction where there was, or at least the claimant contended there was, a strong case for rectification. That approach also avoided the Court having to undertake two separate and conflicting exercises.

Analysis of the judgment

Applications for rectification of pension scheme deeds continue to be made, with many of them being resolved by consent between the parties on the basis that the case for rectification is powerful and difficult to resist (as was the case here).

The court provided some useful comments on the value of gathering evidence to prove a negative i.e. that the parties did not intend to make a change. This is particularly useful in a case of "serial rectification", where a deed executed earlier in time is rectified and a party seeks an order rectifying a later deed which reflected the mistake in the first deed in circumstances in which no separate consideration was given to the provision it is sought to rectify.

The court said that "a review of the documentary evidence about what was said and, crucially, what was not said, is the best evidence about what the intention of the directors and the trustees must have been". In particular, evidence that shows that significant discussion of other changes took place which do not mention the change in question was compelling evidence that the change was not intended.

Furthermore, the fact that none of the witnesses could recall any discussion of the draft rules due to the passage of time was "merely neutral" and unequivocal evidence from one of the trustees that, had there been a proposal to change the benefit for those members, he would have been aware of it, would have drawn the rules to the attention of his fellow trustees and directors and required them to be altered was "telling".

It also provided useful comments that a party need not run a construction argument where there is a strong case for rectification.

All in all, this is an interesting and useful decision as it sheds more light on what the courts will look for, and the approach they will take when dealing with applications to rectify pension scheme documentation. That is something to be welcomed.

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