Lewis v Pensions Ombudsman & Ors

This is an appeal by Mr GarethLewis (“Mr Lewis”) against a determination of the Pensions Ombudsman dated June 10, 2004 concerning the Nortel Networks UK Pension Plan (“the Scheme”). Mr Lewis had been employed by ICL plc since 1962. ICL plc was taken over by Standard Telephones and Cables plc (“STC”) in the mid 1980s. STC was taken over in November 1990 by Northern Telecom Europe Ltd, which is now called Nortel Networks plc (“Nortel”), the Second Respondent.

Mr Lewis was the complainant. Nortel is the employer of the Scheme. By his determination dated June 10, 2004 the Pensions Ombudsman dismissed all the complaints against Nortel and the Third Respondent, Nortel Networks UK Pension Trust Ltd, the trustee of the Scheme. Mr Lewis brings this appeal pursuant to section 151(4) of the Pension Schemes Act 1993 only against part of the determination. There is no appeal in relation to the Third Respondent, and the Pensions Ombudsman is no longer a party to the appeal.

Mr Lewis’ complaint arose out of an agreement made on November 3, 1989 between him and STC concerning a change to his pensions entitlement.

By 1989 Mr Lewis was employed by STC as a senior executive at a salary of almost £50,000. In October 1989 he had a row with the Chairman, in the course of which the Chairman told him that he was dismissed, and he walked out. Mr Lewis says that he was prepared to return on negotiated terms. According to an internal note by the personnel director of STC to the group pensions manager dated October 16, 1989, the Chairman wanted to “recover the situation” and Mr Lewis was looking for some enhancement of his pension position should he retire at age 58 in July 1991.

During the course of negotiations between Mr Lewis and STC, Mr Gardner of STC wrote to Mr Lewis on October 18, 1989 offering him enhanced salary and pension benefits:

“I have now looked at the pension arrangements, with a view to seeing what we can do to improve your pension on early retirement at age 58 or thereabouts. The situation is as follows.

As you know, under Inland Revenue limits, the maximum pension you can receive at 62 is 2/3 of your taxable emoluments, calculated in accordance with Revenue rules. Your pension expectation from the STC Plan is 2/3 of pensionable pay at 62. As you are funding AVCs, your total pension at 62 is likely to be nearer the Revenue limit than the STC fund formula. If you retire early, the pension you are entitled to under the rules is the Plan pension expectation at 62 less: a) An early retirement factor, defined in the Plan rules and b) An Inland revenue “N/NS” factor. In your own case, the relevant factors are .94 and .88 approximately and operate cumulatively. Subject to your agreement to the other aspects of your job which we have discussed, I am prepared to give you an undertaking that the Company will provide adjustments to your pension either by means of a salary increase 12 months before you leave the Company or by means of a one-time capital injection into the fund, to produce a pension which is equivalent to the inland revenue maximum pension at age 58, based on your salary before any adjustment for this purpose. You will understand, I am sure, that I cannot give specific figures, as much can change between now and then. We will be able to be specific about the figures at July 1990.

I also confirm that your salary will be increased to £50,000 p.a. with effect from 1^st October 1989.

This represents the limit to which the Company is prepared to go. I hope that you will now return to the office, and we can return to the important tasks ahead.”

On November 3, 1989, STC wrote Mr Lewis a letter (“the 1989 Agreement”) setting out the terms agreed for Mr Lewis’ return:

“Thank you for your letter of 27th October. I was pleased to note that outstanding issues had been settled such that you were able to make an immediate return to work.

As such I am pleased to confirm the following :

i)

Don Beattie’s letter of 20th October and Steve Williams subsequent letter of 24th October are withdrawn.

ii)

The Company will provide adjustments to your pension, either by means of a salary increase 12 months before you leave the Company, or by means of a one-time capital injection into the fund to produce a pension which is equivalent to the Inland Revenue maximum pension at age 58, based on your salary before any adjustment for this purpose.

iii)

Your salary will be increased to £50,000 per annum backdated to 1st  October^, 1989.

iv)

Subject to Board approval, you will be offered options over 20,000 of STC PLC shares in 1989.

v)

There is no break in the continuity of your employment arising out of these issues.

I would appreciate written confirmation of your agreement to the above prior to me arranging for their implementation.”

None of the letters referred to in that letter was before the court on the appeal. The letter added the following matters to the letter of October 18, 1989: (a) the withdrawal of STC’s letters of October 20 and 24, 1989, which are not before the court, but which it can be reasonably assumed related to Mr Lewis’ dismissal; (b) the offer of share options to Mr Lewis; (c) the confirmation by STC that there was to be no break in the continuity of Mr Lewis’ employment. The letter contained an agreement on Mr Lewis’ pension in the same terms as the proposal in the letter of October 18, 1989, but without the explanatory material on the formula and the figures.

Mr Lewis’ pension provisions were then subject to the 1987 regime (“the 1987 regime”) as a result of which the “N/NS” factor was applied to early retirement pensions. “N” represented the actual years of service, and “NS” was the aggregate of the actual years of service and the years to normal retirement.

The Income and Corporation Taxes Act 1988 (“ICTA”) Part XIV, Chapter 1, section 590, consolidates earlier legislation and sets out conditions for Inland Revenue mandatory approval of retirement benefits schemes. Approval confers eligibility for valuable tax concessions on both contributions paid and benefits received. Section 591 provides for discretionary approval by the Inland Revenue where one or more of the prescribed conditions in section 590 is not satisfied. Inland Revenue practice on exercise of this discretion is set out in the Occupational Pension Schemes Practice Notes (IR12). In practice the vast majority (almost 100%) of approved occupational pension schemes have been given discretionary approval under section 591, as the section 590 conditions are very restrictive. The Scheme was itself approved under section 591.

Section 590 ICTA was amended by section 75 and Schedule 6 of the Finance Act 1989. Part II of Schedule 6 imposed a cap on pensionable earnings. Part II is deemed to have come into effect on March 14, 1989. Paragraphs 20 and 22 in Part II qualify the operation of the scheme rules so as to impose the earnings cap on employees’ remuneration. These paragraphs apply (a) where a scheme came into existence before March 14, 1989, as regards an employee who became a member of the scheme on or after June 1, 1989 and (b) where a scheme came into existence on or after March 14, 1989, as regards any employee, regardless of when he became a member of the scheme. As Mr Lewis became a member of the Scheme in the early 1960s he was not subject to the earnings cap.

Paragraph 29 of Schedule 6 provides that, in a case where an employee became a member of the scheme on or after March 17, 1987 and before June 1, 1989, and he gives written notice to the administrator of the scheme that Part II of the Schedule is to apply in his case, he shall be deemed for the purposes of Part II to have become a member of the scheme on June 1, 1989. Paragraph 29 contains the only statutory election provisions in the Act, and they did not apply to Mr Lewis, having regard to the dates of commencement of his membership and of approval of the Scheme.

Benefits payable under an approved scheme must not exceed prescribed maxima. Following the enactment of the Finance Act 1989 the Inland Revenue announced certain changes to its discretionary practice. The new regime was introduced by Memorandum 100, published in October 1989 and containing amendments to the 1979 version of IR12 (as updated from time to time prior to revised publication in 1991) at paragraphs 9.1, 9.12 and 10.1A.

Paragraph 10.1A stated:

“There has been a change in discretionary practice concerning the maximum approvable benefits on leaving service before NRA, or retiring before or after NRA. These 3 circumstances together form a package for either the existing or new maximum approvable benefits. For the purpose of calculating the maximum approvable in that package for members retiring before NRA paragraphs 10.2 – 10.4A describe the ‘existing regime’ and paragraphs 10.5 - 10.6 describe the ‘new regime’. The approvable application of each regime depends upon whether the scheme was approved before 27^th July 1989, and is as described in paragraph 9.1; there is no statutory override of existing scheme rules.”

Paragraph 9.1 stated:

“…Schemes approved before 27 July 1989 may continue on the existing regime. They can adopt the new package if they wish and if they do each present and future member may be given the right to elect which regime will apply. [This election must be made at or before the earliest of the member’s retirement, leaving service, leaving pensionable service or 75^th birthday.] However, any member becoming subject to the new regime must also become subject to the permitted maximum and the new maximum for accelerated accrual of lump sum.”

The Inland Revenue Pension Schemes Manual summarises these changes as follows:

“Prior to the Finance Act 1989 Revenue limits were geared to the date of attaining this specified age - generally known as the normal retirement date (NRD) - and are higher where the employee retires later or lower where retirement is earlier than this date. But for members subject to both the Finance Act 1989 requirements and the "new" regime for early/late retirement NRD need not affect the level of benefit provision. Such members may be provided with maximum total benefits of 1/30th of final remuneration for each year of service (up to 20 years) with the employer, on retirement or leaving service at any time between the ages of 50 and 75.”

The Consolidated Definitive Trust Deed and Rules of the Scheme was executed on April 6, 1989. The Scheme had been approved before the date appointed by the Inland Revenue as relevant to the change in its discretionary practice, which was July 27, 1989.

Rule 8(1)(D) made provision for early retirement with the right to an immediate pension. Rule 34 set out relevant maxima in relation to Inland Revenue limits, which had the effect of incorporating the N/NS x P formula for pensions payable on early retirement.

The Inland Revenue’s new regime (“the 1989 regime”) was adopted by the Scheme in its Deed of Alteration executed on November 1, 1990. That amended the Scheme definition of Relevant Maximum by, as from that date, substituting a new rule 34 pursuant to which the provisions of a new Twelfth Appendix were adopted as forming part of the new rule 34. For the purposes of this rule, three categories of scheme membership were created, which were broadly as follows: Maxima 1 membership incorporating members admitted on or before March 16, 1987, Maxima 2 membership incorporating members admitted between March 17, 1987 and May 31, 1989 and Maxima 3 membership incorporating members admitted after June 1, 1989. Paragraph 3.02 preserves the 1987 regime N/NS x P formula for Maxima 1 early retirement, as does paragraph 4.02 for Maxima 2 members, whereas paragraph 5.02 introduces the 1989 regime and limits the maximum to N/30 of final remuneration x years of service (not exceeding 20) for Maxima 3 members. Paragraph 7 permits both Maxima 1 and Maxima 2 members to elect to be deemed to have become a Maxima 3 member. This election must be made prior to payment of benefits, cessation of active membership or the attainment of age 75, unless the Inland Revenue permits a later election.

Mr Lewis was born on July 12, 1933, and was a member of the ICL pension plan, which amalgamated with the STC pension plan in 1989. At his 58^th birthday on July 12, 1991 he had 30 years and 5 months of pensionable service.

As he became a member before March 16, 1987 and never elected to be treated as a Maxima 3 member, Mr Lewis was at all times treated as a Maxima 1 member following execution of the Deed of Alteration. He will continue to be so treated unless he is now permitted to elect to be treated as a Maxima 3 member notwithstanding that he has ceased active membership and is presently being paid his pension benefits.

Consequently, at the time of the 1989 Agreement, the Scheme Deed and Rules did not allow Mr Lewis to elect to come within the 1989 regime. Although the Scheme Deed and Rules were altered to allow for this by the Deed of Alteration dated November 1, 1990, Mr Lewis was not aware of this and consequently did not elect to transfer from the 1987 regime to the 1989 regime when the opportunity arose.

In about July 1990 a pensions estimate was produced by STC’s pensions department and forwarded to Mr Lewis by the personnel department. The estimate was prepared on the basis of the 1987 regime.

In January 1991 STC instituted steps for Mr Lewis’ redundancy. Mr Lewis was 57 at this time. By this time, the 1989 regime, which did not contain the N/NS factor, applied in addition to the 1987 regime.

An internal STC memorandum dated January 30, 1991 from the group pensions manager to the personnel director (which Mr Lewis did not see until these proceedings) explained that the 1989 Agreement could be interpreted in different ways and produced four calculations for maximum pension under both the 1987 and 1989 regimes.

The terms of Mr Lewis’ redundancy settlement were contained in a letter dated March 5, 1991 from the STC personnel director:

“I refer to my letter of 27 February 1991 and to our subsequent discussions.

We have been unable to identify a suitable alternative position for you and your employment contract with STC will therefore be terminated on 6 April 1991 on the grounds of redundancy.

On your termination you will receive:

1.

A termination payment of £57,000 inclusive of the Statutory Payment.

2.

A payment in respect of untaken 1991 holiday leave in accordance with STC practice.

3.

A bonus payment of £5,700 (10% of salary) in respect of EIP 1990.

In accordance with paragraph ii) of the letter you received from the Company dated 3 November 1989 a lump payment of £46,255 will be made by STC into the STC Pension Scheme to secure an enhanced pension on your behalf.

The above terms are subject to your acceptance by signing and returning the duplicate copy of this letter.

Following your termination I will arrange for you to receive payment for the amounts due under paragraphs 1, 2 & 3 above less any tax due.”

On March 15, 1991 Mr Lewis signed the endorsement on the copy which contained the following statement:

“I hereby accept the terms of my redundancy on the above basis in full and final settlement of any claims I may have against STC in respect of my employment or its termination.”

In 2000 Mr Lewis reviewed his financial affairs and was of the view that he might not have received the full pension to which he was entitled. His initial concern was about the funding of his additional voluntary contributions, but subsequently he complained that: (a) the phrase “Inland Revenue maximum pension” meant that maximum permitted by the 1989 regime; (b) in breach of the 1989 Agreement, Nortel failed to ensure that he received a pension equivalent to the 1989 maximum; (c) Nortel failed to inform and consult him about the possibility and consequences of applying different IR limits when calculating his pension; (d) as a consequence of not being paid the maximum pension, he has lost out in not having his AVCs; (e) the Third Respondent failed to inform and consult him about the consequences of applying different Inland Revenue limits when calculating his pension; (f) as a result of not being paid the maximum pension his pension was lower than it should be by approximately £5,800 per annum plus increments thereafter and he should recover this amount, with interest, any adjustment for AVCs and compensation for distress and inconvenience.

The Pensions Ombudsman dismissed the complaint by his determination dated June 10, 2004. His reasoning was as follows:

This appeal is brought pursuant to section 151(4) of the Pension Schemes Act 1993, under which an appeal lies only on a point of law.

Mr Lewis appeals in relation to his contentions that (a) the phrase “Inland Revenue maximum pension” meant that maximum permitted by the 1989 regime; and (b) in breach of the 1989 Agreement, Nortel failed to ensure that he received a pension equivalent to the 1989 regime maximum. In the context of the appeal on this part of the determination, Mr Lewis contends that the Pensions Ombudsman’s finding that Nortel owed no duty to inform Mr Lewis of the 1989 regime amounted to an error in law.

Nortel accepts Mr Lewis’ contention that the Pensions Ombudsman erred in law in failing to consider fully whether or not the settlement clause endorsed on the letter of March 15, 1991 precluded him from determining the complaint or dispute brought by Mr Lewis, or any part of such complaint or dispute. Nortel contends that it bars the complaint. Mr Lewis contends that the settlement clause does not apply to the 1989 Agreement and does not bar Mr Lewis from his complaint or appeal.

The principal issues are: (a) the meaning of the words “Inland Revenue maximum pension” in the 1989 Agreement; (b) whether Nortel was under a duty to inform Mr Lewis of his ability to elect to come within the 1989 regime; and (c) whether Mr Lewis was prevented from bringing the claim by the “full and final settlement” clause in the endorsement signed on March 15, 1991.

Both sides accept that the Pensions Ombudsman’s approach to the question of construction can be criticised, particularly because he impermissibly relied both on subjective intention of the parties and on subsequent conduct in reaching his conclusion.

For Mr Lewis, Mr Grant argued that the Pensions Ombudsman erred in law in determining the meaning of the phrase “Inland Revenue maximum pension” solely or primarily by an assessment of the parties’ intention and/or objective.

The 1989 Agreement does not refer to any fiscal regime and is ambiguous as to whether it is referring to the 1987 regime or the 1989 regime. On a proper construction, and notwithstanding the ambiguity, the phrase “Inland Revenue maximum pension” means the maximum pension permitted by any regime. The 1989 Agreement could have said “…to produce a pension which is equivalent to the maximum pension at 58 permitted by the 1987 regime” or used the words “present Inland Revenue maximum pension”or any variant but it did not. A reasonable person reading the 1989 Agreement with the background knowledge reasonably available to Mr Lewis and STC would conclude that “Inland Revenue maximum pension” meant precisely that – the maximum pension permitted by the Inland Revenue by any applicable or potentially applicable regime.

To the extent that considering prior documents and/or the parties’ intentions is permissible, the parties’ aim was a pension 2/3 of Mr Lewis’ final salary, and the flexibility provided by the unqualified words “maximum pension”is consistent with the statement in the October 18, 1989 letter that “You will understand, I am sure, that I cannot give specific figures, as much can change between now and then. We will be able to be specific about the figures at July 1990.”

What could have changed (and did with the 1989 regime) is the applicability of the N/NS factor to reduce the amount of early retirement pensions from a benchmark of 2/3 final pay. The fact that the 1989 Agreement did not specify a regime is consistent with the phrase in question having the meaning contended for by Mr Lewis.

The Pensions Ombudsman was wrong not to apply the contra proferentem rule to construe the 1989 Agreement in the sense least favourable to Nortel on the basis that it seemed clear to him what the parties had in contemplation when the 1989 Agreement was made. Nortel accepted that the phrase “Inland Revenue maximum pension” was ambiguous. There can be no other explanation for the fact that four pension calculations were provided in the January 30, 1991 memorandum.

For Nortel, Miss Rich argued that there was no reason why the Pensions Ombudsman should not have considered what the parties’ “objective” was, whether or not “objective” was synonymous with “intention”, provided that such consideration was undertaken in accordance with the test set out in Investors Compensation Scheme v West Bromwich Building Society [1998] 1 WLR 896 (H.L.).

The background knowledge reasonably available to the parties in the situation in which they were at the date of the 1989 Agreement was as follows: (a) the Finance Act 1989 provisions were in force and the details of the new Inland Revenue limits had been published, but Mr Lewis did not have any statutory right to elect for the 1989 regime to apply, as such right was restricted to those who joined the Scheme between March 17, 1987 and May 31, 1989 (Finance Act 1989, Schedule 6, Part II, paragraph 29); (b) Mr Lewis was accordingly subject to the 1987 regime; (c) the Scheme Deed and Rules did not then allow Mr Lewis to come within the 1989 regime and did not do so until execution of the Deed of Alteration on November 1, 1990.

Both parties can reasonably be understood to have been considering a defined rather than an open-ended commitment. The STC letter of October 18, 1989 had made explicit reference to the maximum pension available to Mr Lewis at 62 in terms which were quite clearly derived from the 1987 Inland Revenue maxima. Although the letter also stated that “I cannot give specific figures, as much can change between now and then,” the variation contemplated by STC did not specifically include changes to the regime and/or Mr Lewis’ right to elect to take the benefits of those changes. The letter went on to state “We will be able to be specific about the figures at July 1990”. The only relevance of this date was that it was 12 months before Mr Lewis’ 58^th birthday and thus referred to the date on which a decision would be made whether to increase Mr Lewis’ salary or make a “one-time capital injection into the fund”. The parties were contemplating “some enhancement” of Mr Lewis’ pension provision in a manner which was as closely defined as possible. Although the 1989 Agreement does not itself refer to any fiscal regime, there is nothing in any intervening correspondence to suggest that the letter was anything other than a summary of the position as set out in the letter of October 18, 1989. The court is entitled to have regard to the letter of October 18, 1989 as evidence showing that the parties negotiated on the basis that the phrase “Inland Revenue maximum pension” had the meaning contended for by Nortel.

Nortel does not accept that it has made any concession as to whether or not the phrase “Inland Revenue maximum pension” is ambiguous. Any ambiguity that there may have been in the phrase can be resolved by the process of construction without resort to the contra proferentem rule. The content of documents made subsequent to the 1989 Agreement cannot affect the interpretation of the 1989 Agreement itself, and to that extent the content of the January 30, 1991 memorandum is irrelevant.

Mr Grant argued for Mr Lewis that the Pensions Ombudsman erred in law in determining that STC was not under an obligation to inform Mr Lewis of the 1989 regime. Mr Lewis accepts that the general rule is that, in the absence of any contractual duty, express or implied, by an employer to advise employees in respect of the employer's pension scheme, no duty of care in tort arises: Outram v Academy Plastics Ltd [2001]ICR 367.

But the principle in Scally v Southern Health and Social Services Board[1992] 1 AC 294 applies. Mr Lewis was ignorant of the existence of the right in question and had no means of ascertaining its existence unless told of it by STC, which (as evidenced by the January 30, 1991 memorandum) was aware of the 1989 regime.

Accordingly, if the proper meaning is maximum pension under the 1989 regime, there was a duty to inform Mr Lewis how to maximise the amount to which he was entitled and which STC agreed to pay into his fund. Were STC not to have been under a duty and/or the failure of Mr Lewis to make the necessary election be determinative of Mr Lewis’ complaint, it would undermine the 1989 Agreement of its full meaning and/or strip such duty of any force.

Miss Rich argued that even if Mr Lewis’ argument on construction is correct, and the phrase “Inland Revenue maximum pension” did oblige the employer to fund Mr Lewis’ pension in accordance with the 1989 regime, nothing in the 1989 Agreement itself or in the general law imposed any obligation on the employer of the kind alleged by Mr Lewis.

There was no independent duty in tort on the employer to give advice or information to Mr Lewis, nor any breach of an implied term of trust and confidence in the contract of employment. To the extent that Mr Lewis seeks to argue for an implied contractual duty arising from the fact that the 1989 Agreement made available to him a valuable right contingent on action being taken by him to avail himself of its benefit, it is clear from the judgment in Scally that such a term will not be implied as a matter of business efficacy, but only as an incident of a definable category of contractual relationship. The 1989 Agreement did not fall within this category of contractual relationship: (a) the 1989 Agreement was a compromise of an employment dispute, negotiated directly and with the benefit of legal advice, between Mr Lewis and his then employer, whereas the contracts of the claimants in Scally were block negotiated contracts which governed the terms and conditions of their employment at all material times; and (b) the 1989 Agreement included an obligation on the employer’s part to make a defined contribution to an enhanced pension payable to Mr Lewis on early retirement. The 1989 Agreement did not otherwise define or regulate the terms of Mr Lewis’ pension, which was governed by the Scheme Deed and Rules administered by their own trustees.

Nortel’s argument is that the only reasonable interpretation of the words “in respect of my employment or its termination” in the letter of March 5, 1991 is that they included any adjustment to Mr Lewis’ pension. Mr Lewis’ entitlement to a pension was an incident of his employment; the negotiations about the date of termination of his employment had consistently proceeded on the footing that he would take an immediate pension on termination, notwithstanding that he had not reached the Scheme’s normal retirement date; and the enhancement of his pension had been a material feature of the 1989 Agreement, as reflected and recorded in the March 5, 1991 letter.

Mr Lewis’ complaint included the claim that Nortel and/or STC as Mr Lewis’ employer had failed to advise him of the possibility of electing for the application of the 1989 regime to his pension benefits. This claim seeks vindication of a right additional to those conferred by the 1989 Agreement. Nortel does not accept that a consequence of this argument is that it would be entitled to withhold payment of the pension without any redress being available to Mr Lewis. Payment of Mr Lewis’ pension is a matter for the trustees of the Scheme, not for the employer, and the only obligation undertaken by Nortel and/or STC pursuant to the 1989 Agreement was to make a contribution towards an enhanced pension payable under the Scheme.

Mr Lewis’ argument is that the settlement clause has no application to the complaint. Mr Lewis’ complaint is not in respect of his employment or its termination but about the level of his pension which is of a very different nature to the terms set out explicitly in the letter dated March 5, 1991 which clearly are in respect of his employment or its termination.

The clause only refers to the matters agreed in March 1991. On a proper construction, the words “the above terms” in “the above terms are subject to your acceptance by signing and returning the duplicate copy of this letter…” relate to the three numbered sub-paragraphs in the March 5, 1991 letter and not also to the 1989 Agreement. That being so, “terms” in “the terms of my redundancy…” in the clause has the same meaning, i.e. limited to the three sub-paragraphs of the March 1991 letter.

If, contrary to Mr Lewis’ primary case, the complaint is construed as being in relation to his employment or redundancy, he is not claiming for any right in addition to the 1989 Agreement. If Nortel is right, Nortel would be able to withhold payment of the pension without any redress being available to Mr Lewis.

The parties are agreed (subject to one point) on the general approach to construction. The modern law is to be found in Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749; Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896; and Sirius International Insurance Co v FAI General Insurance Ltd [2004] 1 WLR 3251, at 3258. In this context, the relevant principles are that words should be interpreted in the way in which a reasonable commercial person would construe them, and literalism should be resisted in the interpretative process. The search is for the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.

The question on which they disagree is the weight (if any) to be attached to the letter of October 18, 1989. The reason for this is obvious. If the terms of that letter can be taken into account, and if the correspondence as a whole shows that Mr Lewis had agreed to the whole of the formula in that letter, and that accordingly the reference to “Inland Revenue maximum pension” in the 1989 Agreement was understood to incorporate or refer to, or reflect, the explanatory material in the October 18, 1989 letter, it would follow that what the parties had in mind when the 1989 Agreement was entered into was the 1987 regime.

In Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, 913 Lord Hoffmann said:

“The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. They are admissible only in an action for rectification. The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life. The boundaries of this exception are in some respects unclear. But this is not the occasion on which to explore them.”

The material on the utility of the rule is discussed in McMeel, Prior Negotiations and Subsequent Conduct (2003) 119 LQR 272. See also Yoshimoto v Canterbury Golf International Ltd [2001] 1 NZLR 523, revd [2002] UKPC 40; Lewison, Interpretation of Contracts, 3^rd ed. 2004, para 3.05.

One situation in which evidence of prior negotiations is admitted is where the prior correspondence or notes of meetings show that the parties have been negotiating on an agreed basis, with the consequence that the extrinsic evidence can be relied on to see whether the parties have used an expression in a particular sense. In Partenreederei M.S. Karen Oltmann v Scarsdale Shipping Co Ltd [1976] 2 Lloyd’s Rep 708, 712 Kerr J said:

“If a contract contains words which in their context are fairly capable of bearing more than one meaning, and if it is alleged that the parties have in effect negotiated on an agreed basis that the words bore only one of the two possible meanings, then it is permissible for the Court to examine the extrinsic evidence relied upon to see whether the parties have in fact used the words in question in one sense only, so that they have in effect given their own dictionary meaning to the words as the result of their common intention”.

Such an approach underlies the decision in Engineering Training Authority v The Pensions Ombudsman [1996] Pensions LR 409, which was an appeal against the decision of the Pensions Ombudsman in a case concerning an agreement to end the complainant’s employment after a certain date which would benefit his pension entitlement. In that case evidence of a meeting prior to conclusion of the written contract was admissible because the written agreement was expressed to be in confirmation of “the substance of our discussion” at the earlier meeting, and it would have been odd, as a matter of common sense, if one could not look at the agreed evidence of that meeting in order to resolve any doubts about what was intended by the reference to a pension.

The question on this aspect, therefore, would be whether the combination of the two letters meant that Mr Lewis and STC negotiated on an agreed basis. This is a strong case for an application or extension of the “agreed basis” exception to the admissibility of negotiation documents, since the wording of the pension obligation in the October 18, 1989 letter and the 1989 Agreement is identical. Although I consider that common sense suggests that there was an agreed basis, I prefer not to rest my decision on this point. Consent by silence is not easily to be inferred, and a party to negotiation may well decide not to raise a point where he sees an ambiguity.

But I am satisfied, although not for the same reasons as the Pensions Ombudsman, that the 1989 Agreement has the meaning for which Nortel contends. The matrix or surrounding circumstances plainly point to the conclusion that the parties had, or should be regarded as having, the 1987 regime in mind. Prior to the execution of the Deed of Alteration in November 1990, Mr Lewis had no right of election to have his maximum pension on early retirement calculated in accordance with the “new” regime promulgated in 1989.

The statutory right of election pursuant to Finance Act 1989, Schedule 6, paragraph 29 (a) did not apply to him and (b) would not in any event have made him subject to the “new” regime. No other provision of the Finance Act 1989 imposed any obligation on the Scheme to amend its provisions so as to confer any right of election on Mr Lewis. The Inland Revenue’s promulgation of the “new” regime in October 1989 did not impose any obligation on the Scheme to amend its provisions so as to confer any right of election on Mr Lewis, although it permitted it to do so.

The changes to the Scheme rules effected by the 1990 Deed of Alteration were consequential on changes to Inland Revenue discretionary policy announced in October 1989. This change of policy was associated with legislative changes effected by the Finance Act 1989 but was not in itself prescribed or required by any enactment.

Consequently, the relevant background was that, although the details of the new Inland Revenue limits had been published, STC had no obligation to change the Scheme rules, and Mr Lewis had no right for the 1989 regime to apply. If the 1989 Agreement was intended to have the meaning for which Mr Lewis contends, it would have had to spell it out in much greater detail.

The other issues do not arise, but I will state my views on them briefly. I would not have found that Nortel was under an obligation to notify Mr Lewis of the existence of the 1989 regime and of his right to elect. Scally v Southern Health and Social Services Board [1992] 1 AC 294 was a case in which it was held that Northern Ireland Health Boards were liable in damages for not informing doctors who had joined the health services too late to complete 40 years’ service before retirement that they had the right to purchase “added years” to make up the full 40 years’ contribution. The reasoning was: (a) the claim in tort could be no more extensive that the claim in contract; (b) this was a case for the implication of an implied term, not on the basis of business efficacy, but on the basis of a term implied “as a necessary incident of a definable category of contractual relationship” (at 307); (c) the relevant contractual relationship was one where: (i) the terms of the contract had not been negotiated with the individual employee but resulted from negotiation with a representative body or were otherwise incorporated by reference; (ii) a particular term of the contract made available to the employee a valuable right contingent upon action being taken by him to avail himself of its benefit; (iii) the employee could not, in all the circumstances, reasonably be expected to be aware of the term unless it was drawn to his attention; (d) it was not merely reasonable, but necessary, in the circumstances postulated, to imply an obligation on the employer to take reasonable steps to bring the terms of the contract in question to the attention of the employee.

In University ofNottingham v Eyett [1999] Pensions LR 17 the complainant was entitled to take early retirement with the consent of the university provided that he had reached the age of 60. His sixtieth birthday was in July 1994, and he inquired as to what his entitlement would be if he were to retire on July 31, 1994. After receiving a quotation, he retired, and it transpired that if he had retired on August 31, 1994 his pension would have been larger. He complained that the university should have alerted him to this situation, since the university would undoubtedly have allowed him to retire later had he requested it. Hart J (allowing an appeal from the Pensions Ombudsman) held that there had been no breach of duty, and that Scally was to be distinguished: Scally was the furthest that the courts had gone in recognising a positive obligation to draw to the attention of an employee his pension rights. In Eyett the complainant knew of the existence of his early retirement rights, and he could have worked out for himself how best to avail himself of those rights by studying the information in the explanatory booklet. The decision was approved in Outram v Academy Plastics Ltd [2001] ICR 367. In that case no contractual duty was relied upon, and it was held that if there was a duty of care in tort it was only co-extensive with the contractual duty.

I would not have considered that there was any basis for implying the term for which Mr Lewis contended. Mr Lewis was a senior employee, negotiating a contract arising out of his dismissal and re-employment, well able to seek professional advice. None of the factors in Scally (except possibly the third) could have applied to Mr Lewis. The implication of such a term could not be regarded as necessary.

I am also satisfied that the settlement clause would have applied to a claim that Mr Lewis was entitled to a greater sum than the lump sum specified in the letter of March 5, 1991, or was entitled to claim for breach of a duty (if any) to give him information and advice about the 1989 regime and its application to the revised Scheme rules. I do not accept that the words “the above terms” in “the above terms are subject to your acceptance by signing and returning the duplicate copy of this letter…” relate to the three numbered sub-paragraphs in the March 5, 1991 letter and not also to the un-numbered reference to the payment under the 1989 Agreement. The point on the clause is not capable of much elaboration. I am satisfied that the wording of the “full and final settlement” endorsement, both in its natural sense, and in its literal sense, applies to claims of the kind made by Mr Lewis.

The appeal will therefore be dismissed. I am indebted to the thorough arguments of Mr Grant and Miss Rich, and in particular to a joint agreed note by them on the complex taxation scheme.