Right and wrong

Drafting pension scheme documents can be a complex and difficult task. At times, mistakes are made in a scheme’s governing documentation which no party intended. In a recent blog post, we considered the way a court can ‘rectify’ such mistakes and gave tips on how to avoid making the mistakes.

However, if a mistake is discovered, as a result of which members’ benefits would be higher than intended, putting matters to right is not always straightforward. Your lawyer will advise you of the various available courses of action, one of which is likely to be an application to court for rectification of the documents. We look in more detail at the rectification process.

But first…is rectification needed at all?

It may not be, that is if the document in question was not validly introduced and properly executed. Were the necessary formalities of the amendment power satisfied? Did the parties validly execute the document (for example, a company or a partnership are required to execute a document with different formalities)? If the document was not validly introduced or executed, it may never have brought the unintended provisions into effect. Of course, there are likely to be knock on effects on other provisions in the document.

Assuming that the document is valid and does not contain provisions which override or limit the scope of the mistake, the parties need to consider further potential ways round the problem, including rectification.

When will a court grant rectification? 

Before a court will grant rectification, ie order that the document be amended from the date of its execution to be read as intended by the parties, three conditions must be satisfied.

Condition one – true intentions

The document must fail to express the true intentions of the parties, normally the employer and the trusteesIn addition, it is necessary to show that all relevant parties had the same intention in relation to the error. As noted in a recent case [1], there must be “convincing proof that the documents as executed do not accord with the continuing intentions of both parties“.[1]

The judge in this case referred to there being a need for “cogent evidence” to demonstrate this intention. It may be difficult to locate this high level of evidence, particularly if the document was executed several years ago; key individuals may no longer have involvement with the scheme and full documentary evidence may no longer exist.

Useful evidence will include:

  • Witness statements
  • Copies of draft documents
  • Instructions to and correspondence with the adviser who drafted the amendments
  • Trustee and employer board minutes of meetings at which the document and changes were discussed and any evidence that the parties continued to believe the error had not been made. The latter could be demonstrated, as in the case[2], by the continued administration of the scheme on the basis of the unamended provision.

Condition two – no other remedy available

The mistake must be one that cannot be easily remedied in another way.

Other possible remedies include:

  • The document can only be amended without member consent if accrued benefits are not adversely affected and if the amendment satisfies the requirements of the scheme’s amendment power
  • The court can hold that the wording should clearly be interpreted differently from its plain meaning (as the wording really cannot have been intended to read as it does on the face of it, there is no need to change the wording for it to be read properly). Unlike rectification, which looks at the parties’ intentions, this is an objective test. What meaning would be conveyed to a reasonable reader of the document who had all the relevant background knowledge? The parties may even be able to get comfortable that the document should be construed in the intended manner without going to court for a ruling, but this leaves open the possibility that a member may challenge that interpretation at a later date so each case needs to be considered on its own facts.

Condition three – no defence to the claim

For example, the employer and trustees may be prevented from reversing the mistake if members have been told that they would receive the higher level of benefits, perhaps in a scheme booklet or announcement, and they have placed reliance on this.

The court process – summary judgment or full trial? 

Taking a rectification case to a full trial can be protracted and expensive. Recent cases[3] have demonstrated that it is sometimes possible to obtain rectification by way of summary judgment. This avoids the need to have a full trial and makes the process much quicker with significantly reduced costs.

To obtain a summary judgment, the court must be satisfied that there is no real prospect of a successful defence and that there is no other reason why there should be a full trial (such a reason could be that a member, acting as a representative beneficiary, may wish to contest the case to argue that the unintended higher level of benefit should continue to be paid).

This post was contributed by Rachel Stevens. For more information, email blogs@gateleyuk.com.

[1] Citifinancial Europe v Davidson [2014]

[2] AMP v Barker [2000]

[3] Industrial Acoustics Company Ltd v Crowhurst [2012], Misys v Misys Retirement Benefit Transfers [2012], Konica Minolta Business Solutions (UK) v Applegate and others [2013]

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This blog is intended only as a synopsis of certain recent developments. If any matter referred to in this blog is sought to be relied upon, further advice should be obtained.