High Court deems rectification law ‘settled’

A judge agreed in September that SPS Technologies, a manufacturer of aerospace nuts and bolts, had not intended to make changes allowing members no longer working for the company to take an early retirement without any reduction to their pension.

Lawyers have said that the judgement confirms that schemes with genuine mistakes in re-drafts of their documents can unwind the changes, but that the heavy burden of proof will still put many off.

The use of a subjective test puts more pressure on obtaining the best possible evidence

Hadassah Shulman, Taylor Wessing

As Chief Master Marsh noted in his summary of the case, heard in February, the SPS schemes' original rules only entitled members to early retirement from the age of 60 if they still worked at the company and had its permission, and this would be subject to an actuarial reduction.

However, the rules were changed in 1998 when three previous schemes were merged. Due to a mistake, deferred members were now able to take early retirement with no reduction to their pension, while current employees were still subject to the old rule. The error was repeated in three further versions of the scheme documents.

Chief Master Marsh noted that the rule change appeared “innately illogical”, but that this was not itself sufficient to grant rectification. However, he referred to earlier case law to confirm that as the error could be shown not to reflect the common intention of the parties involved, it should be rectified. In his judgment, he stated that “the law on rectification can now be regarded as being settled”.

The legal background

Pensions lawyers have been waiting for some time to see how a 2009 case involving a similar principle would apply to pensions specifically. Two recent cases, involving artist product manufacturers Colart, and chemical and ingredient distributor Univar, provided further proof that genuine errors could be unwound.

In June Univar was allowed to switch the basis for its pension increases to the consumer price index, as it showed that a 2008 upgrade from the statutory requirement to the more costly retail price index had never been discussed by any of the parties involved.

Danyal Enver, associate at Arc Pensions Law, told Pensions Expert that in this case, the court showed it was prepared “to uphold rectification claims made in respect of genuine errors, where the subjective intentions of the parties were clear when tested objectively”.

Evidence is essential

The SPS judgment gives further clarity to the issue. Ben Powell and Suzanne Padmore, a solicitor and partner respectively at Burges Salmon, wrote in a briefing note that Chief Master Marsh’s ruling “confirmed several key legal principles in testing intention”.

“These included that the claimant needs to show convincing proof, on the balance of probabilities, of the intention of the claimant; that in the case of a collective body such as trustees or a committee, collective intention is relevant; and that the task is to establish who approved the transaction, not who had authority to do so.” 

But Hadassah Shulman, senior associate at Taylor Wessing, cautioned that the verdict does not make rectification any easier.

“The key point from SPS Technologies is that it confirmed that FSHC has settled the position on the test for rectification — it is subjective,” she said. 

“The focus of future rectification cases should be on the evidence of subjective intention rather than legal arguments over the test itself.”

While that “narrows the scope” of legal argument in future rectification, Ms Shulman said: “The use of a subjective test puts more pressure on obtaining the best possible evidence.

“This can be very tricky, particularly because many pension rectification cases relate to matters that happened a long time ago, so obtaining documentary evidence from the time remains a challenge and witness evidence needs to be treated with caution.”