High Court rules ‘drafting errors’ sufficient to justify switch to CPI

The Univar Company Pension Scheme’s definitive deed and rules, drafted in 2008, made specific mention of the RPI when it came to calculating pension increases, overriding an earlier version of the DDR, which said that only such increases would be calculated on the statutory basis.

While the RPI was the statutory basis up until 2010, the CPI became the standard index thereafter. The result of the updated wording of the Univar scheme’s rules was that members continued to be entitled to increases calculated under the RPI, even as the statutory basis mentioned in the previous draft had changed.

While acknowledging that it was aware of the wording of the revised DDR, the claimant – Univar UK Ltd – held that it had been unaware of the legal implications of that wording. The company thus sought rectification by the High Court on the grounds that the new wording did not represent the “collective intent” of the company when it made changes to the scheme rules.

Any negligence by those who drafted the rules not only did not prevent rectification, but rather was a ground for it

Ian Gordon, Gowling WLG

Much of the case then hinged on whether a lack of evidence proving the claimant was aware of the legal implications of the new wording constituted proof that it had been made by mistake.

In his verdict, the presiding judge, Mr Justice Trower, made reference to precedents such as FSHC Group Holdings Ltd v GLAS Trust Corporation Ltd, in which it was said that “where an important change is made to an existing arrangement between the parties, the absence of any discussion of that change may itself be evidence that the parties did not intend it”.

The judge concurred with an earlier precedent, which held that negligence “not only does not prevent rectification, but is a ground for it”.

Satisfied that the evidence – or lack of it – showed that the effect of the new wording was unintended, the judge said: “In my judgment, the company has established that neither it nor the trustees actually intended that the pension increase rules in the 2008 DDR should have the legal effect that they did.

“It is also the case that none of them appreciated that the CPI might be introduced as an alternative statutory index, and to that extent did not foresee that there was a possibility that the RPI might no longer be the minimum requirement for statutory indexation.”

He added that there was no evidence “that any of them appreciated that the legal effect of the [earlier] DDR was that the pension increases were not hardwired to the RPI, while the legal effect of the 2008 DDR was that they were”.

As they seemed unaware of the distinction, the judge concluded that it would be fair to assume the change did not accurately reflect the collective intent of the company in making the changes it did.

Commenting on the case, Ian Gordon, pensions partner at Gowling WLG, told Pensions Expert: “The Univar judgment will be welcomed by the pensions industry.

“The court reached a clear conclusion that the rules should be rectified because they were not intended to have the legal effect they did, even if the parties may have intended the actual wording of the ‘offending’ provision,” he explained.

“In so doing, the judge also usefully confirmed that any negligence by those who drafted the rules not only did not prevent rectification, but rather was a ground for it.”

‘Keep thorough records’

Significant amounts of money are at stake in the RPI versus CPI debate, with the RPI typically providing a higher level of increase. As Pensions Expert reported in May in the case of the Arup UK pension scheme, a switch from RPI to CPI could have reduced that scheme’s deficit by as much as £85m.

Schemes looking to make the switch to the CPI have long been frustrated by the High Court’s refusal to set a precedent.

While the Univar case does not provide the kind of sweeping precedent many still hope for, it does prove that the option may be available by rectification if a scheme’s rules allow for it.

“Rather than an argument over whether the rules of the scheme allow the trustees to switch from RPI to CPI, the claim was brought on the basis that a drafting error had hardwired RPI into the rules, and the rules should be rectified to go back to the previous position that provided for increases on the statutory basis, which is now the CPI,” said Hadassah Shulman, senior associate at Taylor Wessing.

“Trustees and employers making any amendments to their rules or undertaking a consolidation exercise should keep thorough records of the process,” she said, especially when statutory references are left in legal drafting.

In this case, the existence of statutory references were vital in determining the intent behind the revised wording.

“While this change is unlikely to have been predicted, the drafting gave the employer a significant advantage [over] those with scheme rules that have always specifically referred to the RPI,” Ms Shulman added.