Royal Courts of Justice
Strand, London, WC2A 2LL
Before :
MR JUSTICE ETHERTON
Between :
GALLAHER LIMITED | Claimant |
- and - | |
(1) GALLAHER PENSIONS LIMITED (2) C FOSTER (3) D SILVER | Defendants |
Mr Michael Tennet (instructed by Simmons & Simmons) for the Claimant
Mr Paul Newman (instructed by Sacker & Ptnrs) for the 1st Defendants
Mr Richard Hitchcock (instructed by Taylor Wessing) for the 2nd and 3rd Defendants
Hearing dates: 1, 2, 3, 6, 7, 8, 9 and 13 December 2004
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Judgment
Index
Introduction | 1-10 |
The GMP and SERPS | 11-20 |
The Schemes | 21-31 |
Further factual background | 32-84 |
The witnesses | 85-91 |
The 1987 Deeds | |
xxMeaning of the 1987 Deeds | 92-107 |
xxRectification | 108-149 |
xxSetting aside for mistake | 150-161 |
xxThe rule in Hastings-Bass | 162-181 |
The 1989 Deeds | 182 |
Decision | 183 |
Mr Justice Etherton :
Introduction
These proceedings concern deeds of amendment made in 1987 and 1989 in respect of three occupational pension schemes, the Gallaher ‘A’ Pension Scheme (“the A Scheme”), the Gallaher ‘B’ Pension Scheme (“the B Scheme”) and the Gallaher ‘M’ Pension Scheme (“the M Scheme”) (together “the Schemes”).
The Claimant, Gallaher Ltd (“GL”), sues as the Principal Employer under the Schemes. By the 1987 deeds (“the 1987 Deeds”) a new rule 7A was introduced into each Scheme providing for “pensions in payment” to be increased every year for 10 years at a rate, colloquially known as 2% limited price indexation (“2% LPI”), equal to the lower of (a) 2% or (b) the increase in the Retail Prices Index.
GL seeks a declaration that, on its true interpretation, the reference to “pensions in payment” in the new rule 7A introduced by the 1987 Deeds means pensions in payment in excess of the Guaranteed Minimum Pension (“the GMP”) payable to individual members, or those claiming through them.
GL claims, in the alternative, rectification of the 1987 Deeds on the ground that the common intention of GL and the First Defendant, Gallaher Pensions Ltd (“GPL”), the trustee of the Schemes, was that the increases under the new rule 7A would not apply to the GMP element of the pensions.
In the further alternative, GL seeks an order that the 1987 Deeds be declared void or set aside (under the rule in Re Hastings Bass [1975] Ch 25) on the ground that GPL failed to give proper consideration to all relevant matters when it executed the 1987 Deeds, or (under the principle in Gibbon v Mitchell [1991] WLR 1304) on the ground that GL was mistaken as to the effect of the 1987 Deeds.
The new rule 7A introduced by the 1987 Deeds provided for the 2% LPI increases to continue for a 10 year period from 1 April 1986 until and including 1 April 1995. By deeds of amendment executed in 1989 (“the 1989 Deeds”) the 10 year limitation imposed by the 1987 Deeds was deleted.
In the further alternative to its other claims for relief, GL seeks an order that the 1989 Deeds be declared void or set aside, under the rule in Re Hastings Bass or under the principle in Gibbon v Mitchell, on the ground that GPL did not take proper account of all relevant matters when it executed the 1989 Deeds or on the ground that GL executed the 1989 Deeds under a fundamental mistake as to the effect of the 1987 Deeds.
The Second Defendant is a pensioner member of the A Scheme. He is sued as a representative of all members entitled to a GMP in respect of their service between 6 April 1978 and 5 April 1988 under the A Scheme or the B Scheme. The B Scheme was wound up and its assets and liabilities transferred to the A Scheme in January 1990. The interests of former beneficiaries of the B Scheme are, for all material purposes, identical to those of beneficiaries of the A Scheme.
The Third Defendant is a pensioner member of the M Scheme. He is sued as a representative of all members entitled to a GMP in respect of service between 6 April 1978 and 5 April 1988 under the M Scheme.
GPL, represented by Mr Paul Newman, has taken a strictly neutral position in the proceedings, including the hearing before me.
The GMP and SERPS
It is convenient, at the outset of this judgment, in order to elucidate the factual background and the issues, to describe briefly GMPs and their place in the provision of retirement benefits.
The State retirement pension is in two parts: a basic flat rate pension, that is to say the basic State pension, and the State Earnings Related Pension Scheme (“SERPS”).
SERPS was introduced by the Social Security Pensions Act 1975 (“SSPA 1975”), and came into operation in 1978. It was financed by additional National Insurance Contributions made by both the employer and the employee.
Part III of SSPA 1975 permitted employment to be contracted – out of SERPS (so avoiding the need to pay additional National Insurance contributions) provided that the employer operated an occupational pension scheme which gave, in respect of pensionable service from 6 April 1978, a GMP. The GMP was intended to be approximately the same in value as the pension which would otherwise be payable under SERPS.
GMPs cease to accrue after 5 April 1997, but no change was made to the way they were to be calculated or paid in respect of preceding years. Accordingly, subject to certain immaterial exceptions, contracted-out schemes were required to provide a GMP to all members (and those claiming through them) in respect of the members’ pensionable service from the tax year 1978/79 to the tax year 1996/97. It is not necessary, for the purpose of this judgment, to describe the arrangements for contracting out of SERPS since 6 April 1997 (under the Pension Schemes Act 1993) or the current statutory provisions relating to the calculation and time of payment of GMPs (now contained in Part III of the Pensions Act 1993 and part VII of the Occupational Pension Schemes (Contracting-out Regulations) 1996).
The GMP is calculated in a similar way to the SERPS pension. It is sufficient, for the purpose of this judgment, to say that the effect of the calculation is that the GMP accrues over the years of the employee’s working life which fell after 5 April 1978. Accordingly, the pension of a scheme member retiring before April 1978 would have no GMP element, however large that pension might be. A member retiring in April 1980, with 20 or so years of service, would have a small GMP (two years’ accrual) no matter how large the overall pension might be. A member who had 19 years of service between April 1978 and April 1997 would have a large GMP in comparison to the overall pension.
Prior to 5 April 1988 GMPs were not treated as coming into payment until the State retirement age, that is to say age 65 for men and age 60 for women. Accordingly, a male who retired at 60 would have no GMP until age 65, but a female, who retired at 60 on the same date, with exactly the same period of service and the same salary on that date, would have had a GMP from the outset of retirement.
When the GMP was introduced in 1978, the statutory provisions did not require the GMP to be increased, when in payment, by the pension scheme which provided it. The GMP element of the pension was, in effect, increased by the State through increases to the SERPS element of the State pension: a person in receipt of a GMP remained entitled to such increases.
That position, in relation to increases to the GMP in payment, was changed by the Social Security Act 1986 (“SSA 1986”), which came into force in April 1988. SSA 1986 required pension schemes to increase that part of the GMP which accrued after 5 April 1988 at the rate of 3% LPI when in payment, thereby avoiding the necessity for the State to do so. SSA 1986 did not, however, affect the position regarding GMPs which had already accrued during the previous 10 years. Responsibility for increasing those GMPs continued to rest with the State.
Many occupational pension schemes dealt with the SSA 1986 requirement by adding a separate rule requiring post 1988 GMPs to be increased by 3% LPI.
The Schemes
The Gallaher Group of companies (“the Gallaher Group”) carries on business as, among other things, a manufacturer of cigarettes and other tobacco products.
The Schemes were established by the Gallaher Group for the benefit of its employees.
The B Scheme was established on 27 June 1958. The A Scheme was established on 9 February 1962. The M Scheme was established on 2 June 1980.
Members of the A Scheme and the B Scheme contributed to benefits until 1 January 1988. Members of the M Scheme contributed until 1 July 1988.
At all relevant times prior to 1 January 1981 the Principal Employer under the Schemes was the company in the Gallaher Group then known as Gallaher Limited. In consequence of an internal reorganisation of the Gallaher Group in about December 1980, the business, assets and undertaking (so far as relevant to the Schemes) of the Principal Employer were transferred to the Claimant, GL, another company in the Gallaher Group. As from 1 January 1981 GL became the Principal Employer under the Schemes by virtue of deeds of novation made in February 1981. For simplicity, in this judgment I shall refer to both companies as GL.
GPL has been the sole trustee of the Schemes at all relevant times.
Gallaher Tobacco Limited (“GTL”), a wholly owned subsidiary of GL, was the company through which the Gallaher Group managed matters relating to employees employed in the tobacco side of the business, including pension matters, unless a decision was required to be made by the Principal Employer.
At all material times prior to the 1987 Deeds, the A Scheme was governed by the provisions of a deed and rules brought into effect by a deed of amendment dated 18 December 1979 (“the 1979 A Deed and Rules”); the B Scheme was governed by the provisions of a deed and rules brought into effect by a deed of amendment dated 19 February 1981 (“the 1981 B Deed and Rules”); and the M Scheme was governed by the provisions of a definitive deed and rules dated 19 February 1981 (“the 1981 M Deed and Rules”).
Prior to the 1987 Deeds, none of the Schemes contained any provision for automatic annual increases to pensions in payment. All the Schemes, however, provided that the trustee might, at the request of the Principal Employer, and subject to funding by the Principal Employer, award, to persons already in receipt of pensions, additional pensions of such amount as the Principal Employer might decide: see Rule 7B(d) of the 1979 A Rules; Rule 7(d) of the 1981 B Rules; and Rule 7(d) of the 1981 M Rules.
Each of the three Schemes contained powers to amend the Scheme. In the case of the A Scheme and the B Scheme, amendments could be made by the trustee, with the consent of the Principal Employer: see clause 17 of the 1979 A Deed, and clause 17 of the 1981 Deed. In the case of the M Scheme, amendments could be made by the Principal Employer, with the consent of the trustee: see clause 17 of the 1981 M Deed.
Following the coming into force of SSPA 1975, the Schemes became contracted-out of SERPS with effect from 6 April 1978. Accordingly, subject to certain immaterial exceptions, the Schemes were required to pay a GMP to all members (and those claiming through them) in respect of the member’s pensionable service from the tax year 1978/79. Provision for the payment of a GMP was made by Rule 28 of the 1979 A Rules, Rule 26 of the 1981 B Rules, and Rule 25 of the 1981 M Rules
Further factual background
The following is a summary of sufficient further background facts to understand the factual context in which the proceedings have been brought.
In 1980, shortly after GMPs began to accrue, various persons with responsibility for pensions in the Gallaher Group (“the Pensions Team”) considered and circulated papers on the issue whether it would be appropriate for the Schemes to pay discretionary increases on the GMP element of pensions. In one paper, dated 4 September 1980 and written by Mr Martin Watson, who was the finance director of GL, the matter was addressed in the following way:
“Retired Gallaher employees receive the basic State Pension together with the Gallaher pension. Each are reviewed at different times and different rates of increases are granted. In determining the Gallaher augmentation, account is taken of known increases in the basic State Pension.
The 1975 Act introduces a complication. The Gallaher Scheme pensions have to include a Guaranteed Minimum Pension (based on the best 20 years’ service after 1978). This GMP is increased at rates determined by the Government and these increases are paid to pensioners by the Government with the basic pension, at no cost to the Company. It follows that part of the total augmentation of some Gallaher pensions will in future be payable by the State, the number of pensioners concerned rising steadily to a maximum over the next 20 years.
In these new circumstances, there are three courses of action:-
To ignore the increases in the GMP paid by the State, and increase the full Gallaher pension to all. The cost of this would be very high and there is no equitable reason for doing it.
To deduct the basic GMP from the Gallaher pension and apply the increase to the balance.
To apply the increase to the total Gallaher pension and deduct from the result the actual increase in GMP to be paid by the State.
…..
There is a further factor to take into account. The increase in the GMP paid by the State applies from aged 60 for women and aged 65 for men – i.e. the starting dates for the basic State Pension. If we are going to be exactly fair between male and female pensioners in the 60 to 65 age zone, then method (c) should be adopted, with men being treated exactly as at present until age 65.”
This process of consultation and deliberation within the Pension Team culminated in a paper dated 22 September 1980 which had originally been drafted by Mr Watson, and was then revised by Mr William Hitchings and Mr Michael Newberry of the Pensions Team. It recommended that the GMP element of any pension should be excluded from any increase granted under the Schemes. Material passages of that paper are as follows.
“It therefore follows that if the State is giving the increases on the ‘Notional Additional Component’, so far as the occupational pension scheme is concerned this is tantamount to the pensioner receiving increases on the GMP element of the Company Scheme Pension. The Company therefore only needs to review and grant increases on the remaining Company pension after deducting the GMP at the revalued level at State Pension Age (men 65, women 60).
….
If the rate of increase awarded by the Company takes into account the increasing Basic State Pension as in the past, the amount of Company pension to be reviewed should be the Company pension less the GMP.
….
An anomalous situation arises in the case of those married women who have elected to pay reduced rate National Insurance contributions, and who therefore, do not qualify for GMP or NAC. These women will therefore not be receiving any State increases and will continue to require Company increases to be calculated on their full pension.
A further alternative not recommended is to disregard the fact that the State is granting increases on NAC’s. It would be illogical not to take account of these increases in the design of the arrangements for Contracting-Out and would involve the Company in substantial pension increase costs by duplicating increases that are being granted by the State.
We have spoken to our Actuaries and asked what is their advice to clients on this matter. They recommend the same method as advocated in this paper, which is to grant our increases on the Company pension after having deducted our GMP liability (the amount advised by the DHSS as being applicable to the pensioner once State Pension Age is attained).”
That paper was presented on 29 October 1980 to the Gallaher Pensions Advisory Committee (“the PAC”), which was the principal consultative forum for Gallaher Group companies concerning the Schemes, and was attended by employee representatives. The minutes of that meeting recorded that discretionary increases, on future pension reviews, would be on that part of the pension in excess of the GMP. The minutes said:
“It was pointed out that whilst the Company’s Pension Fund was responsible for paying a pension equal to, or better than, the GMP, the State have undertaken to grant and pay the increases on the GMP content of the person’s retirement income. Therefore to avoid duplication of increases on the same portion of pension the Company would ignore that part of the Company pension equal to the GMP when granting increases each year in future.”
Those minutes, like the minutes of all other PAC meetings, were posted on notice boards at the premises of each UK company in the Gallaher Group.
It seems likely that on about 10 November 1980 there was a meeting of the Group Executive Committee (“the Group Executive”), which reviewed a possible increase in pensions in April 1981 for the “home trade tobacco” (“HTT”) companies within the Gallaher Group. The Group Executive was an operational body which managed, and was responsible for, the Gallaher Group as a whole. It comprised various Gallaher Group directors.
That was followed by a meeting of the board of directors of GL on 20 November 1980, at which it was resolved to increase by 10% HTT pension payments from April 1981. The minutes of that meeting made no express reference to the increase being only on that part of the pension in excess of the GMP. The board had before it, however, a paper which costed the proposed increase of 10%. It is not in dispute that the costing was on the basis of the increase being applied only to pensions in excess of the GMP.
Mr Newberry produced, for computer services personnel, a document dated 26 November 1980 relating to the pensions review for April 1981. The document (“the 1980 Formula Document”), under the heading “Formula”, stated, among other things, that persons whose pensions commenced on or before 1 April 1980, and who at 23 November 1980 had attained aged 65 (male) or 60 (female), would receive a 10% increase “after first deducting any GMP held in Field 72….” The reference to “Field 72” was to a computer feature. The document also indicated that an increase in the pension payable to widows of deceased employees, whose pensions commenced on or before 1 April 1980 “where a GWMP is held in Field 73”, would be after deduction of the GMP.
The approach of the Gallaher Group to the treatment of GMPs, in the context of reviews of discretionary increases on pensions, was the subject of an article in “Smoke Signals” on 14 January 1981. Smoke Signals was a newspaper produced by GL and distributed to all HTT employees. That article said, among other things, as follows:
“He [Mr Newberry].. went on to explain…. that an individual’s GMP was fixed by the Department of Health and Social Security. In those cases where a company had contracted out, the GMP was paid as part of the company pension.
It was a fixed sum as far as the company was concerned but the Government would provide increases on it in line with inflation, and this would be paid direct to the pensioners with the state basic pension.
The vital point to be understood … was that this would affect the annual pensions review of those pensioners receiving a GMP, only about 100 at present.
Gallaher in future will not be reviewing that part of the pension which is being increased by the state.
Mr Newberry quoted examples and said that pensioners concerned would be receiving letters of explanation at the time of the next company review.”
At a meeting of the board of directors of GPL on 18 February 1981 the increase to pensions in payment under the Schemes which was to take effect on 1 April 1981 was approved. A paper on the April 1981 review, which was before the meeting on that occasion, stated that GL had agreed that the basic rate of increase to be granted was 10%, and made reference to the “review formula”, which was attached. The review formula was the 1980 Formula Document produced by Mr Newberry.
Letters were then sent by GL to pensioners informing them of the review and the agreed increase effective from 1 April 1981. The letters stated that, when calculating the increase for the pensioner, it was necessary to make a adjustment to take account of the State pension. Reference was made in the letter to an attached explanatory document. That explanatory document said, among other things, as follows.
“This Guaranteed Minimum Pension is not, in fact, being paid to you directly by the State, but is being paid to you, by us, on behalf of the State as part of your Company pension. However, although the Company will continue to pay you this Guaranteed Minimum Pension on behalf of the State, you will receive annual increases on it directly from the State, as an addition to your State Pension.
Not all our pensioners qualify for this State increase and we feel it is only fair, therefore, that we take it into account when calculating the Company pension increase.”
At a meeting of the PAC on 15 April 1981 reference was made to the 10% increase in pensions and widows’ pensions from 1 April 1981. The minutes recorded that:
“It was noted that the Company did not grant increases on the Guaranteed Minimum Pension element of the Company payment as increases on this part of the pensions are paid by the State as part of the contracting-out arrangements.”
Annual pension reviews thereafter took place each year until after execution of the 1987 Deeds. Increases on pensions in payment were decided each year by GL, and approved by GPL. In every case the increase was costed, and paid, in respect only of the excess over the GMP.
As regards the 1982 review, the GL board of directors agreed a 6% increase at its meeting on 17 December 1981. The minutes of that meeting did not expressly record that the GMP was excluded.
At a meeting on 17 February 1982 GPL’s board of directors approved GL’s decision concerning increases to take effect on 1 April 1982. A formula document (“the 1982 Formula Document”), similar to that produced the previous year, was placed before the board. It stated that persons whose pensions commenced on or before 1 April 1981, and who at 23 November 1981 had attained age 65 (male) or 60 (female), would receive a 6% increase “after first deducting any GMP held in Field 72…”. It also indicated that the increase in pensions of widows of deceased employees whose pensions commenced on or before 1 April 1981, “where a GMP is held in Field 73”, would be after deduction of the GMP.
An increase of 5% in pensions in payment, in excess of the GMP, was paid from 1 April 1983. That increase was noted and, in effect, retrospectively approved, at a meeting of the board of directors of GPL on 7 September 1983. The minutes of that meeting did not record that the increase was only on that part of the pension in excess of the GMP.
At a meeting on 14 February 1984 the board of directors of GPL approved, with effect from 1 April 1984, a 4% increase in pensions in payment for those pensioners who retired before April 1981, and a 3% increase in pensions in payment for those pensioners who retired after April 1981. The increases were, as I have said, costed and paid in respect of that part of the pension in excess of the GMP, but there is no record in the minutes of the meeting that the increases were only on that part.
The preliminary findings of the triennial valuation of the Schemes by the Schemes’ actuaries, Duncan C. Fraser & Co (“Duncan Fraser”), in 1984 disclosed that each Scheme had a substantial surplus.
Mr John Holland, who held the position of Manager, Group Pensions, within the Gallaher Group and was also the company secretary of GPL, prepared a paper dated 3 October 1984, which he forwarded to the chairman of GL, Mr Stuart Cameron, under cover of a memorandum dated 9 October 1984. He commented in the paper that, in the light of the surpluses:
“…the basic options are a reduction in the Company contribution rate, and a funding for an annual pensions increase; and, if the latter, whether it should be guaranteed or not.”
In a memorandum dated 18 October 1984 prepared by Mr George Henderson, who was a director of GTL and part of the Pensions Team, and sent to the members of the board of GTL, it was recommended that provision should be made “to dynamise” the A Scheme and the B Scheme for increases of 1% per annum (that is to say, pre-fund for future increases to pensions in payment of 1% per annum) from their surpluses. The memorandum said:
“The sub-committee see this as part of a long-term strategy in that it is anticipating that the next two evaluations will throw up surpluses sufficient to dynamise by a further 1% on each occasion (i.e. six years from now the Schemes will, hopefully, be dynamised to 3% and the effect on profits of pension increases will then be negligible).”
It was observed in that memorandum that there was insufficient surplus in the M Scheme to dynamise it; but the company might, at some time, wish to dynamise the M Scheme for increases of 1% to keep it in line with the A Scheme and the B Scheme. The cost of such increases was set out in the memorandum. The memorandum did not expressly state that the proposed dynamised increases of 1% per annum were to be only in respect of that part of the pension in excess of the GMP, but it is clear from other contemporaneous documents that they were costed on that basis.
At a meeting on 12 February 1985 the board of directors of GPL approved increases in pensions in payment of 4% with effect from 1 April 1985. Neither the minutes of the meeting, nor any other document placed before the board at the meeting, indicates that any express reference was made to the increases being only on that part of the pension in excess of the GMP. Costings of the increases were placed before the board, and it is not in dispute that they were calculated on the basis of the increases being only on that part.
On 22 May 1985 Kenneth Trott of Duncan Fraser, on the instructions of GPL, produced the formal triennial report on the actuarial valuation of the A Scheme as at 31 March 1984. That report recorded that it had been decided that provision should be made for post-retirement pension increases at the rate of 1% per annum (i.e the dynamised increases), to be reviewed at the next actuarial valuation; and that those increases would apply to pensions in excess of the GMP. The report recorded that such provision would increase the liabilities of the Scheme by £6,359,000.00, so that the balance of liabilities to be met by Company contributions was increased to £47,609,000.00.
At a meeting of the board of directors of GPL on 11 September 1985 the final reports prepared by Duncan Fraser and the Scheme changes were noted. A “Review of Pensions” document, which was placed before the meeting, stated that a 4% increase was awarded to pensioners on 1 April 1985 and that, after allowing for the 1% annual pension increase provision within the A and B Schemes, the remaining capital cost of the review (as certified by Duncan Fraser) was £1,312,850.00.
At a meeting of the board of directors of GPL on 19 February 1986 a 3.5% increase on pensions in payment, with effect from 1 April 1986, was approved. A “Review of Pensions” document, which was placed before the meeting, noted that the A Scheme and the B Scheme were currently pre-funded for an annual 1% increase. The cost of that increase was specified. There is nothing in the minutes of the meeting or in the Review of Pensions document which refers to the fact that the increase was to be only on that portion of the pension in excess of GMP; but it is not in dispute that the increase was in fact costed and paid on that basis.
Mr Holland sent Mr Henderson a memorandum dated 8 April 1986 concerning pension proposals in the 1986 Budget. The memorandum was copied to Mr Watson. The memorandum stated, among other things, that the Budget proposals would require that, where an actuarial valuation indicated that assets exceed liabilities by more than 5%, the “surplus” had to be reduced to 5%. It was observed that the regulations would come into force in April 1987; the next full valuations of the Schemes would be at March 1987, with the results available in August 1987. Mr Holland said that there was a further matter he intended to raise, regardless of the Budget proposals, but which was not unrelated, namely the funding of discretionary pension increases. In that connection, he said:
“In considering the results of the 1984 valuation, the GTL Board agreed the funding of a 1% p.a. increase, with the objective of reaching 3% following the next 2 valuations, 1987 and 1990. It is likely that we are heading for another surplus in the 1987 valuation. It is possible for the actuary, as part of the interim valuation at March 1986, to estimate whether an additional 1% p.a. could be funded from 1987, a year early, which would have an effect on this year’s trading profits. There would then be the option to consider a further 1% following the 1987 valuation. I think this is well worth considering.”
Mr Holland sent to all the directors of GPL, namely Mr Watson, Mr Philip Hamilton-Grierson, Mr Clive Stone and Mr Howard Clark, a memorandum dated 11 April 1986 in which he said that, in connection with the Budget proposals on pension scheme surpluses, he was attaching an extract from the 1984 valuation report on the A Scheme, which, he said, illustrated in some detail the basis on which the actuary carried out the valuation of the Schemes. That extract comprised 8 pages of the actuaries’ valuation report, including the passage concerning the dynamisation of 1% annual increases on pensions in excess of the GMP, to which I have referred earlier.
Mr Trott of Mercer Fraser (now William M Mercer Fraser Ltd) was asked to carry out a formal valuation of the Schemes as soon as possible, so in effect bringing forward the date of the next triennial report. On 4 September 1986 Mr Trott sent Mr Holland a letter giving preliminary results of the valuation, in which he said that, if provision were made in the valuation of the A Scheme for (dynamised) pension increases at the rate of 2% per annum on the excess over the GMP, instead of 1% per annum, that would increase liabilities by £9,713,000 and hence would reduce the surplus to £8,531,000.
Mr Henderson sent the directors of GTL a memorandum dated 15 October 1986, in which he observed that the due date for the next triennial valuation was 1987, but the valuation had been advanced by one year to March 1986 because of the impending pensions legislation which would include provision for distribution of surpluses in some circumstances. Having noted that the valuation showed healthy surpluses in each of the Schemes, and having made reference to the paper which he wrote for the GTL board in October 1984 concerning a policy of dynamising the Schemes, he recorded that since 1984 the A Scheme and the B Scheme had provided for an annual increase in pensions of 1% but the M Scheme was not dynamised at all. He said that Mr Clark, Mr Burchell (a director of GTL) and he jointly recommended that the A Scheme and the B Scheme be dynamised by a further 1% and the M Scheme by 2%, thereby bringing “inflation proofing” up to 2% for all Schemes – “… precisely in line with the policy decided in October 1984”. He set out the costs of dynamisation, giving the figure of £9.7 million as the cost of a further 1% dynamising of the A Scheme (being the figure specified by Mr Trott in his letter to Mr Holland of 4 September 1986). There was no express reference in the document to the increases being on that part of the pension in excess of the GMP.
Mr Trott produced a report dated 9 December 1986 on the capital cost of the increase of 3.5% payable in respect of pensions in payment under the Schemes as from 1 April 1986. In his report he recorded that the 3.5% increase was on that part of the pension in excess of the GMP. He also referred to the fact that provision was made in the valuation of the A Scheme and the B Scheme as at 31 March 1984 for post retirement pension increases at the rate of 1% per annum on pensions in excess of the GMP. He said that, in the calculations for the cost of funding the pension increases granted with effect from 1 April 1986, allowance had been made for that provision in the funding basis.
At a meeting on 15 December 1986 about US federal accounting standards (the Gallaher Group’s ultimate parent then being a US Corporation, American Brands, Inc.) (“the USFAS meeting”) attended by, among others, Mr Holland and Mr Trott, there was a discussion about dynamising increases in pensions in payment by 2% “over GMP”. The minutes of the meeting, which were copied to Mr Watson, recorded that:
“A lengthy discussion took place on the grounds for inclusion of the 2% dynamisation as a ‘substantive commitment’. If the intention is to limit a change in the rules to a 10 year initial period was this a commitment? On the other hand the 2% is funded for all time and there is an expectation by pensioners as a result of past practice, although it is difficult to determine a percentage commitment on this basis.”
The minutes of a meeting of the Group Executive held on 23 December 1986 recorded that consideration was given to a change in the Rules of the A Scheme and the B Scheme whereby pensioners would become entitled to an increase of 2% each year for 10 years, assuming inflation at that rate or above, and that such a change was thought beneficial. It was recorded that a final decision would be taken before the end of the year. There was no express reference in the minutes to such an increase being only on that portion of pensions in payment in excess of the GMP.
A board meeting of GL was held by telephone on 30 December 1986. The directors participating were Mr Cameron, Mr Watson, Mr Hamilton-Grierson, Mr Peter Wilson and Mr Anthony Househam. It was agreed that the Schemes should be amended to include provision for annual increases from 1 April 1986 until 1 April 1995 at 2% LPI. The minutes recorded this decision as follows.
“Following discussions at the Group Executive Committee on 23 December it was proposed and agreed that the Company give its approval and consent to the rules of the Gallaher Limited pension schemes being amended so as to entitle all pensioners from time to time of the said schemes to increases in pensions on 1st April 1986 and on each subsequent 1st April until and including 1st April 1995, such increases in each year being whichever is the lower of (a) 2% and (b) the percentage increase in the Retail Price Index over the 12 month period ending on 31st December prior to the date of increase. ”
That decision of the GL board was noted and, in effect, approved by the board of GPL at its meeting on 18 February 1987. The directors attending were Mr Watson, Mr Hamilton-Grierson, Mr Stone and Mr Clark. The minutes of that meeting recorded as follows, in that connection.
“CHANGE OF RULES ‘A’, ‘B’, ‘M’ & ‘S’ SCHEMES
It was NOTED that the Board of Gallaher Limited have approved an amendment to the rules of the Gallaher Limited pension schemes entitling all pensioners to annual increases in pensions for 10 years from 1st April, 1986, of 2% or the percentage increase in the RPI over the 12 months ending the previous 31st December, whichever is the lower; it was resolved that the appropriate deed of amendment be executed.”
On 23 March 1987 Mr Trott produced a formal report on the actuarial valuation of the A Scheme as at 31 March 1986. That report recorded the decision to increase the provision for post-retirement pension increases to 2% per annum, to be reviewed at the next actuarial valuation. The report noted that the provision was to apply to pensions in excess of the GMP.
The 1987 Deeds were prepared by Herbert Smith. The relevant provisions of those Deeds were the same in respect of each of the Schemes. They provided as follows, so far as material:
“The Trustee hereby declares that with effect from 1st April 1986 Rule 7 of the Rules is amended:
(A) by its division into two new rules, to be numbered “Rule 7A” and “Rule 7B” respectively of which Rule 7B will be identical with the existing Rule 7 and Rule 7A will read as follows, namely:
PENSION INCREASES
7A (a) Pensions in payment from the Fund will be increased on 1st April 1986 and thereafter on each subsequent 1st April until and including 1st April 1995 at the rate being the lesser of _______
(i) 2% and ________
(ii) the increase in the UK General Index of Retail Prices during the period of twelve months ending on 31st December immediately preceding the relevant 1st April. ______
(b) Pensions in payment from the Fund will be reviewed annually or at such shorter intervals as the Trustee considers appropriate and shall be increased (additionally to the increase if any made under sub-Rule (a) above) by such amount (not exceeding when added to any such increase under sub-Rule (a) the corresponding increase in the UK General Index of Retail Prices since the last increase under this sub-Rule or the commencement of the pension, whichever is later) as the Trustee with the consent of the Company shall at its discretion decide.”_________
On 18 June 1987 the 1987 Deeds were executed by Mr Wilson and Mr Brian Rudd, the company secretary, on behalf of GL, and by Mr Hamilton-Grierson and Mr Holland, the company secretary, on behalf of GPL.
Following execution of the 1987 Deeds, there were annual increases in pensions in payment under the Schemes with effect from 1 April 1987, 1 April 1988 and 1 April 1989, in each case such increases being costed and paid in respect only of the part of the pension in excess of the GMP. There is nothing to indicate that, at the meetings of GL and GPL at which such increases were approved, any reference was made to the increases being only on that part.
In respect of each of those annual increases Mr Trott wrote a formal report on the cost (dated respectively 1 October 1987, 24 June 1988, and 14 August 1989), in which it was recorded that the increase was on that part of the pension in excess of the GMP.
It appears that, following each of those pension increases, letters were written by GL to pensioners informing them of the increase, and informing them, where appropriate, of the fact that the increase was on that part of the pension in excess of the GMP.
The annual pension increase, effective from 1 April 1989, was the subject of an article in Smoke Signals on 11 April 1989. In that article the relationship between the GMP and the annual increase was explained as follows.
“The four per cent is double the guaranteed level provided by the pension scheme and has been made possible through an additional contribution by the company.
In certain circumstances, however, it is necessary to adjust the amount of the increase for certain pensioners who are also receiving a State pension.
Explained Michael Newberry, pensions manager Group services: “It is a pity State pension arrangements are so complicated. For a number of our pensioners who have retired since 1978 and who are now receiving their State pension, part of that pension known as the Guaranteed Minimum Pension, is being paid for through the company scheme on behalf of the State. Pensioners are informed of this by the State when they reach State pension age and it is usually shown in the pension book. The important point to note is that the pensioner receives annual increases directly from the State on the Guaranteed Minimum Pension that we are paying on their behalf. Consequently we are required to apply our pension increases to the balance of the company pension in excess of the State guaranteed minimum scheme.”
On 6 April 1988 there came into force the provisions of SSA 1986 requiring schemes to confer 3% LPI increases on GMPs earned after 5 April 1988.
In 1988 discussions began among members of the Pensions Team and Mr Watson about extending the guaranteed 2% annual pension increases without limit of time. Mr Trott was asked to provide valuation calculations for the Schemes for that purpose. Mr Holland wrote a memorandum to Mr Henderson dated 16 December 1988, copied to Mr Burchell, Mr Clark and Mr Watson, concerning those calculations. He attached to it a document setting out the methods and key factors which had been used. That document referred to “Provision [being] made in perpetuity for pension increases of 2% p.a. on the excess of GMP”.
At a meeting of the board of directors of GL on 23 March 1989 it was agreed that GL would give its approval and consent to amend the Schemes so as to entitle all pensioners to a 2% LPI increase on pensions in payment on 1st April each year. It was noted in the minutes of the meeting that, until then, the Schemes had provided for such increases only until and including 1 April 1995. The minutes contained nothing to indicate that any express reference was made at the meeting to the increases being only in respect of that part of the pension in excess of the GMP.
Pursuant to SSA 1986, on 31 March 1989 deeds of amendment were executed by GL and GPL which, among other things, conferred 3% LPI increases on GMPs earned after April 1988.
On 22 May 1989 the 1989 Deeds were executed removing the 10 year limitation on the 2% LPI annual increases on pensions in payment. Those Deeds provided for the amendment of Rule 7A(a) of the Rules of the Schemes by deleting the words “until and including 1 April 1985”.
In May 1989 Mr Trott prepared a report on the actuarial valuation of the M Scheme as at 31 March 1988. In November 1988 he wrote reports on the actuarial valuation of the A Scheme and the B Scheme as at 31 March 1988. Each of those three reports referred to the earlier decision that, for a 10 year period, pension increases of 2% per annum would be guaranteed on pensions in payment in excess of the GMP with effect from April 1986, and the subsequent decision that, with effect from April 1989, the 2% annual increases were guaranteed throughout life.
In December 1989 a booklet was prepared for the M Scheme. It explained the way in which pension increases were made, and stated that the 2% LPI increase was on that part of the pension in excess of the GMP. It said :
“Guaranteed increases are applied to your pension as follows:-
• Each 1st April that part of your pension which is in excess of the Guaranteed Minimum Pension (GMP) will increase by 2% per annum or the increase in the Retail Price Index over the 12 month period ending on the preceding 31st December, if less. If you have been retired for less than a year a proportionate increase will be applied.
• When you reach State Pension Age, that part of your GMP earned after 6th April 1988 will be increased by the Scheme by the lesser of 3% per annum or the increase in the Retail Price Index. The State is responsible for all increases on your GMP earned prior to 6th April 1988 and for increases in excess of 3% on your GMP earned after 6th April 1988.
In addition, the Company has discretion to award further increases. Pensions are kept under regular review and over the years, the Company has been able to increase pensions annually.”
At about the time when the B Scheme was wound up and its assets and liabilities were transferred to the A Scheme in January 1990, a revised booklet was prepared for distribution to members of the A Scheme. That booklet made clear that the 2% annual increase on pensions in payment applied to that part of the pension over and above the GMP. It said:
“Once you start to draw your pension its purchasing power can quickly be eroded unless it is increased regularly. To protect the value of your pension the Scheme guarantees to increase the part of it over and above the GMP by 2% a year once you retire.
The Company also has the discretion to award further increases. Pensions are kept under regular review and over the years, the Company has been able to award increases annually.
When you reach State Pension Age the Scheme will also increase the Guaranteed Minimum Pension (GMP) you have earned for service since April 1988, by 3% a year. The State will provide further increases to your GMP earned over this period in any year when the cost of living increases by more than 3%.
The State will also provide increases to your GMP earned for service before April 1988.”
All members of the M Scheme were sent a memorandum from Mr Holland dated 18 January 1990, to which were attached accounts for the M Scheme, the auditors’ report and the actuarial statement required under the Occupational Pension Schemes (Disclosure of Information) Regulations 1986. The actuarial statement explained that, in reaching his opinion that the Scheme’s assets on 31 March 1998 fully covered its liabilities at that date, Mr Trott had allowed for pensions in payment to increase at 2% per annum, such increases only being applied to the excess of a pension over any corresponding GMP in payment, that being the rate guaranteed in the Scheme Rules.
An article in Smoke Signals on 16 April 1991 concerning an increase in pensions from 1 April 1991 mentioned queries that had been raised by some pensioners concerning adjustments resulting from their receipt of State pension benefits. The article explained:
“This is because their pension includes what is called their minimum pension (GMP) which is increased directly by the state.
It means that Gallaher’s nine per cent is applied to the difference between the GMP and the rest of the pension.”
On 28 October 1996 GL sent a letter to pensioners which stated that pensioners were currently guaranteed an inflation increase up to a maximum of 2% and any increase over and above that was at the discretion of the company. The letter then confirmed various increases for different categories of pensioners. It then said:
“None of these increases apply to the guaranteed minimum pension (the GMP) or any pension provided through an insurance company in respect of additional voluntary contributions. The GMP is the pension which the scheme pays instead of the state as a result of being contracted-out of the state earnings related pension scheme, which was introduced in April 1978. The GMP is increased with price inflation: the scheme pays the first 3% on the GMP earned after 5 April 1988 and the balance is paid by the state with the basic state pension.”
Annual increases at 5% LPI have subsequently been paid on the part of the pension in excess of the GMP.
The witnesses
GL relied upon the evidence of 17 persons, who served at different levels within GL, GPL and GTL during the 1980s, including all the directors of GL and GPL who passed the resolutions at the relevant board meetings of GL and GPL leading to the 1987 Deeds and the 1989 Deeds, and also the company secretaries who executed the 1987 Deeds and the 1989 Deeds on behalf of GL and GPL.
All those persons made witness statements. They all gave oral evidence at the hearing before me, other than Mr Clark and Mr Stone. Mr Clark is now mentally unfit to give evidence. GL relied on his witness statement, which was provided at an early stage of the proceedings. Mr Stone was abroad during the trial. In addition to making two witness statements, he gave evidence by deposition.
No witnesses were called by the Representative Defendants.
At the request of Mr Richard Hitchcock, counsel for the Representative Defendants, I directed that the witnesses should not, in advance of giving their own testimony, listen to the oral evidence given by others in court.
All the witnesses, other than one, have retired from GL and GPL. That witness, Mr Nigel Bulpitt, was not a director or company secretary of either GL or GPL at the time of, or prior to, execution of the 1987 Deeds.
All those who gave oral evidence at the hearing before me were manifestly honest witnesses, doing their best to assist the Court to the best of their recollection and ability. It has not been suggested, on behalf of the Representative Defendants, that the evidence of Mr Clark or Mr Stone should be regarded as being any less honest than the other witnesses.
Although all the witnesses have given evidence strongly supportive of GL’s claims, it is to be noted that most of them have given such evidence against their financial interest, as pensioners in the M Scheme with service at a time when GMPs were accruing.
The 1987 Deeds
Meaning of the 1987 Deeds
GL’s case is that, properly interpreted, the words “Pensions in payment from the Fund” in Rule 7A, introduced by the 1987 Deeds, mean pensions in payment in excess of the GMP.
Mr Michael Tennet, counsel for GL, referred to, and relied upon, the following well-known statement of Lord Hoffmann in Investors Compensation Scheme Ltd –v- West Bromwich Building Society [1998] 1 WLR 896, 913B:
“The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax: see Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1999] AC 749”
Mr Tennet submitted that relevant and admissible background to the 1987 Deeds, for the purpose of interpreting Rule 7A, includes the decision or consensus in late 1980 that future increases in pensions in payment under the Schemes would not be applied to the GMP element, the implementation of that policy in every year since then, and the approval of such increases every year by the directors of GL and GPL without any express reference at the relevant board meetings to the increases being only on that part of the pension in excess of the GMP, but with the common understanding and assumption that they were to be so limited.
Mr Tennet submitted that, against that background, GL and GPL (and their directors), when referring to pensions in payment, in the context of increases, are to be taken as using a “shorthand” meaning pensions in payment in excess of the GMP.
In support of his submission, Mr Tennet also referred to, and relied upon, Hearn –v- Younger [2002] EWHC 963 (Ch.), [2002] WTLR 1317. In that case, the trustees of an occupational pension scheme sought directions in the winding up of the scheme as to whether certain members were entitled under the scheme to have the whole GMP increased annually after State Pension age by 5% LPI. Central to the issues were a notice issued by the employer in April 1983, signed by its joint chairmen, announcing that the employer and the trustees had agreed “to guarantee future increases to pensions in payment” at the level of 5% LPI, and the minutes of a meeting of the trustees on 10 May 1993 recording the agreement of the trustees that “in future pension increases would be guaranteed” at 5% LPI. Having reviewed the background material, I said in my judgment:
“[81] The inevitable conclusion from this analysis of the documentation leading up to the decisions of the company and of the trustees in April and May is that the company and the trustees, when referring to their agreement to guarantee’ future increases to pensions in payment at 5% LPI in the company notice signed by the joint chairmen, and in the minutes of the trustees’ decision on 10 May 1993, and indeed in the actual discussions to which the minutes refer, were using a shorthand. The company and the trustees, or at any event the majority of the trustees, understood, and any reasonable person having their background knowledge would reasonably have understood, that shorthand to be a reference to the rate specified in Rule 23.1. Accordingly, applying the ordinary objective test applicable to the interpretation of contracts and the principles of interpretation set out in the speech of Lord Hoffmann in the ICS case at [1998] 1 WLR 896, 912g-913e, both the company and the trustees intended and agreed to amend the rules by increasing the rate specified in Rule 23.1 to 5%.
“[82] This analysis, and application of the objective test, against the background of the documentary material to which I have referred, does not depend upon the existence of any ambiguity in either the company notice or the minutes of the trustees’ decision on 10 May 1993. Were it necessary to do so, however, I would hold that such documentary material is, in any event, admissible because there is uncertainty as to whether the amendment was to be made by altering the wording of Rule 23.1 or Rule 23.2 or both or whether a wholly new Rule was to be introduced.”
In my judgment, the words “Pensions in payment from the Fund” in rule 7A bear their natural and ordinary meaning, and not the meaning for which GL contends.
It is not in dispute that, in interpreting the 1987 Deeds, the subjective intention of the parties must be ignored. The Deeds must be interpreted objectively, in their context, and against their factual background. Nor can the meaning of the Deeds be coloured by subsequent conduct of the parties.
The words in question “Pensions in payment from the Fund” are, in themselves, perfectly clear and free from any doubt, difficulty or ambiguity.
There are cases in which it is apparent, from the background facts objectively ascertained, that the parties have used language or grammar in a way particular to themselves. In such a case, that idiosyncratic usage may colour the meaning of their document.
In the present case, there is no evidence that the directors of GL and GTL, or a majority of them, who participated in the board meetings on 30 December 1986 and 18 February 1987, habitually used the expression “Pensions in payment”, whether in the context of pension increases or otherwise, as meaning pensions in payment in excess of the GMP.
I accept that the matters on which Mr Tennet relies, and to which I have referred, form part of the historic factual background to the 1987 Deeds. They do not, however, lead to the interpretation which GL seeks to place on Rule 7A. I see no reason why those facts would lead a reasonable man, in the words of Lord Hoffmann in the ICS case (at page 913), “to conclude that the parties [to the 1987 Deeds] must… have used the wrong words or syntax.”
The decision or consensus in late 1980 and the payment of annual increases in pensions since then were all in the context of a power to grant discretionary increases from time to time. The 1987 Deeds were concerned with a guaranteed minimum increase, against the background of substantial surpluses in the Schemes and the possibility of legislation that would impose financial penalties on excessive surpluses in pension schemes. In the light of those matters, and ignoring subjective intentions and subsequent conduct, I see no reason why the court should reject, as obviously wrong, the conclusion, consistent with the clear and unambiguous language of Rule 7A, that GL and GPL intended that for a limited 10 year period there should be a guaranteed minimum increase of 2% LPI on the whole pension in payment, rather than simply a discretionary annual increase usually in excess of that amount but limited to the excess over the GMP.
In Breadner –v- Granville-Grossman [2002] 2 WLR 593, 605, Park J said that Mannai Investment Co Ltd –v- Eagle Star Life Assurance Co Ltd [1997] AC 749 and the ICS case
“support the proposition that, if a draftsman uses words which grammatically mean one thing, but it is obvious that he intended to mean something else, the words can be construed to bear the obviously intended meaning, not the grammatically correct meaning”.
In the present case, if evidence of subjective intent and subsequent conduct is excluded, it is not in any sense “obvious” that GL or GTL intended the words “Pensions in payment from the Fund” in Rule 7A to mean something other than those words ordinarily and naturally mean.
Further, I agree with Mr Hitchcock that the argument of GL is not really an application of the “dictionary principle”, interpreting the 1987 Deed in the light of the parties’ habitual idiosyncratic use of language; rather, by reference to past conduct of GL and GTL, it is an attempt to imply a term restricting the increase in pensions under Rule 7A to that part of the pension in excess of the GMP. There is plainly no scope, however, for any such implication in law: the suggested implied term is neither so obvious that the parties did not have to state it expressly, nor necessary to make Rule 7A workable.
No light is thrown upon the meaning of the 1987 Deeds by my decision or analysis in Hearn –v- Younger. That case turned upon its own particular facts, including the feature, absent from the present case, that the rules of the scheme already made provision for, and distinguished between, guaranteed increases of certain pensions in payment, excluding the GMP element, and a discretionary power to increase pensions in payment. The question in that case was which of those existing rules was intended to be the subject of the agreement of the employer and the trustees as to 5% LPI increases.
Rectification
The Court may, in appropriate circumstances, make an order for rectification to bring an amendment to a pension scheme into line with the true intentions of the parties to the deed of amendment. Lawrence Collins J made such an order in AMP –v- Barker [2001] PLR 77. In his judgment, he reviewed comprehensively the jurisdiction to make such an order.
He held that in a case, like the present, where the exercise of the power of amendment by the employer (or trustee) requires the consent or approval of the trustee (or the employer), but not an actual accord or agreement between the trustee and the employer, an order for rectification will only be granted if there is convincing proof that, on the balance of probabilities, there was a continuing common intention by the employer and the trustee as to the amendment, but the executed deed of amendment did not give effect to that intention: see paras [65]-[68] of the judgment. The fact that the deed contains the actual wording it was intended by the parties to contain is no bar to rectification if it has a meaning or effect different from that which the parties intended: paras [70]-[71] of the judgment.
There was disagreement between Mr Tennet, on the one hand, and Mr Hitchcock, on the other, as to whether, in order to succeed in its claim to rectification, GL also has to show evidence of some “objective manifestation” or “outward expression” of the continuing common intention which GL asserts, that is to say the intention that the guaranteed increases were to be restricted to that part of the pension in excess of the GMP. It is well established that such a requirement exists in the case of a claim to rectify a contract: Frederick E Rose (London) Ltd –v- William H Pim Jnr & Co Ltd [1953] 2 Q.B. 450, Joscelyne –v- Nissen [1970] 2 Q.B. 86. Mr Hitchcock submitted, and Mr Tennet disputed, that objective manifestation or outward expression of intention is required even in a non-contractual case like the present.
In support of his submission, Mr Hitchcock referred to, and relied upon, the analysis of Rimer J in Lansing Linde Ltd –v- Alber [2000] PLR 15. That case concerned an application to rectify the new rules of certain occupational pension schemes, which had been introduced by amendment, so as to require the consent of the employer and the trustee to the early retirement of a member between 60 and 65 if such a member was to receive an immediate unreduced pension. Rimer J held that the claim to rectification failed because the claimant, the Principal Employer, was unable to show that the relevant deeds failed to give effect to the intentions of the Principal Employer and the trustees. Having stated, at para [169], that such conclusion made it strictly unnecessary to consider the defendants’ submission that the rectification claims were in any event doomed by reason of the absence of any “outward expression of accord” as to the trustees’ and the Principal Employer’s alleged intentions with regard to early retirement on unreduced pensions, he proceeded, nevertheless, to express his views on the submission.
Rimer J concluded that an outward expression of the continuing common intention was required. Having referred to Rose –v- Pim, Jocelyne –v Nissen, The Olympic Pride [1980] 2 LL Rep 67 and re Butlin’s Settlement Trusts [1976] 1 Ch 251, he said:
“172 I agree …. that the present claim is not one to rectify a contract; and since no authority has been cited to me which expressly identifies the rectification requirements in a claim such as the present, I agree also that it may be said that to apply the Rose v Pim requirement of an outward expression of accord to the present case does involve a development of the principles. If so, however, I take the view that such development requires only the smallest of steps.
173 This case is all about an amendment of the 1977 deed pursuant to clause 20(A). That provides that “[Lansing] may … with the consent of the Trustees by Deed amend the … [1977] Deed or by Deed or Board Resolution amend… the rules”. Any amendment has, therefore, to be proposed, or made, by Lansing with the accord of the trustees. What is required is a bilateral, consensual transaction whose substance is equivalent, or at least very close, to that of a contract save only for the absence of consideration. I cannot see how an amendment pursuant to clause 20 could ever be validly effected except in circumstances in which there is objective evidence of the accord between Lansing and the trustees: if there is not, how can it be shown that the trustees have consented to what Lansing has proposed? Moreover, since any such amendments are potentially of great importance to the scheme members generally (to whom Lansing owes a duty of good faith – see Imperial Group Pension Trust Ltd and Others v Imperial Tobacco Ltd and Others [1991] 1 WLR 589, at 597 – and for whom the trustees act as such ) it is in my view essential that there should be objective evidence showing that the amendment proposed by Lansing has been consented to by the trustees; and I cannot see that the need for such evidence is any less compelling than it is in the case of a contract. The fact that an amendment pursuant to clause 20 does not involve the moving of consideration between the parties appears to me to be irrelevant. The relevant feature of a clause 20 amendment is that, just like a contract, it is a bilateral transaction, involving the need for an accord. It follows in my view that the principles which Denning LJ expressed in Rose v Pim are equally applicable to a case such as the present. I accept Mr Green’s submission that, if Lansing is to succeed in its claim, it must be able to point to an outward expression of what it says were its and the trustee’s true intentions.”
Rimer J went on to find, at para 175, that there was no sufficient evidence of an expression of accord, and so he would have refused the claim for rectification on that ground also.
In paras [63] – [64] of his judgment in AMP Lawrence Collins J referred to Lansing Linde, in particular Rimer J’s conclusion that it is necessary to show an outward expression of accord in a case like AMP. Lawrence Collins J observed, at para [65], that he had the benefit of a more elaborate argument than Rimer J on the requirement of common accord in such a case.
Having concluded, at para [66], that the intentions of the trustees and the Principal Employer had to converge, but they did not have to agree inter se, Lawrence Collins J turned to the question of the need for objective manifestation of intention. He said:
“67 … In some of the earlier cases on voluntary settlements, rectification was ordered on the uncontradicted affidavit evidence of the settlor without any need of objective manifestation of intention: see, eg, Hanley v Pearson (1879) 1 Ch D 545. Mr Nigel Inglis-Jones QC for the Trustees suggested that a similar approach would be appropriate in a case such as this. It may be that the need for objective manifestation in the case of a unilateral transaction is simply one element of the need for convincing proof of the mistake. It was present in the two leading modern cases on mistake in unilateral transactions, re Butlin’s Settlement and Gibbon v Mitchell [1990] 1 WLR 1304, …. The certainty of transactions would be undermined if the court could act, otherwise than in exceptional circumstances, simply on the assertion of a party to the transaction. But when one is considering the intentions of a collective body such as a group of trustees or a committee of a board it is their collective intention which is relevant, and it would be a very odd case (and certainly not this one) if that collective intention were not objectively manifested.”
“68 Consequently, what AMP has to show convincingly is a continuing common intention by the Trustees and the NPI to affect only incapacity benefits. It is clear from the factual findings that there is overwhelming evidence that their intentions were limited to improving the benefits for those leaving on account of incapacity, and they had not the slightest intention to benefit early leavers in general. If objective manifestation of their intentions is a separate requirement, then there can be no doubt that it is fulfilled in abundance. ”
Although the issue of outward manifestation of intention was carefully considered by Rimer J in Lansing Linde, his decision on that point was not, as he himself said, necessary to his decision in the case, since he had already held that the claimant had not made out on the facts a case of mistake and failed intention.
My understanding of paras [67] and [68] of the judgment in AMP is that Lawrence Collins J held that, provided the claimant in a case like the present can show convincingly a continuing common intention by the Principal Employer and the trustee which, by mistake, is not given effect by the deed of amendment, the discretionary remedy of rectification is in principle available, and objective manifestation or outward expression of the continuing common intention is not a separate requirement. His decision in that respect is not plainly wrong, and, accordingly, as a first instance Judge I am bound to follow his decision.
The Representative Defendants say that, on the facts, the claim to rectify the 1987 Deeds fails because (1) GL has not established, on the balance of probabilities, that it was the common intention of both GL and GPL to amend the Schemes, or any of them, so as to provide that the guaranteed annual increases would be limited to that part of the pension in excess of the GMP; (2) GL has not provided “convincing proof” of a mistake in the meaning or effect of the 1987 Deeds; (3) GL has not, and cannot, point to any outward expression or objective manifestation of such common intention; and (4) some 17 years has elapsed since the execution of the 1987 Deeds.
Point (3) does not, in principle, arise since I have held that there is no legal requirement of outward expression or objective manifestation of intention in the present case. Nevertheless, in fairness to all the parties, it is right that I should consider Mr Tennet’s fall-back position that, even if there were such a requirement, it would be fulfilled on the facts of the present case.
I shall now consider, in turn, each of the four issues raised by the Representative Defendants’ defence to the rectification claim.
Extensive oral and written submissions were made by both sides as to the intentions of the directors participating in the board meetings of GL and GPL on 30 December 1986 and 18 February 1987 respectively. In the case of GL, those directors were Mr Cameron, Mr Watson, Mr Hamilton-Grierson, Mr Wilson and Mr Househam. In the case of GPL, those directors were Mr Watson, Mr Hamilton-Grierson, Mr Stone and Mr Clark.
Although Mr Hitchcock did not challenge the honesty of any of the witnesses, or suggest that they were not attempting to give their evidence to the best of their ability, he stressed a number of reasons why the Court should be cautious in evaluating their evidence in support of GL’s claim. First, he emphasised that the material events occurred between 1980 and 1989, that is to say between 24 and 15 years ago. He emphasised the need, in those circumstances, for the Court to view with circumspection recollection which does not accord with, or goes beyond, the documentary evidence. Second, he said that the witnesses felt that they had to explain why the alleged policy of excluding the GMP from increases in pensions in payment was absent from the documents at board level. This resulted, he submitted, in the tendency of witnesses at times to present argument, rather than evidence. Third, he described some of the witnesses, including in particular Mr Hamilton-Grierson and Mr Burchell, in colourful language as falling from time to time into the “work out where the question is leading and respond to that” school of testimony.
The submissions of Mr Hitchcock on the intentions of the directors of GL and GPL at the time of the relevant resolutions and the execution of the 1987 Deeds may be broadly summarised as follows. First, there is no direct objective evidence of any GMP policy decision (that is to say, a policy of excluding the GMP from increases in pensions in payment) having been made by the Group Executive or GL’s board or GPL’s board. Second, the documents demonstrate, and some of the witnesses, Mr Watson, Mr Cameron and Mr Holland among them, accepted that the GMP issue was articulated at the Pensions Team level but not at board level. Third, other than the Pensions Team, it was plain that very few witnesses with knowledge of events in late 1980 could actually recall what had happened in any material detail. Fourth, the annual increases, and issues associated with them, such as the opportunity to build in dynamisation in order to “mop-up” surplus, were routinely discussed at board level without any document making it apparent that the GMP issue was either known to board members or (if it had been known) remembered by board members as time proceeded from 1980. Fifth, objective evidence, that is to say contemporary documentation, does not support the claim that the alleged GMP policy was ever decided upon or adopted by GL “as a once-and-for-all (unless specifically changed) strategy” in relation to pension increases, or that, even if it was so understood by the Pensions Team, others at board level knew this. Sixth, there were changes in relevant personnel between 1980 and the relevant resolutions of GL and GPL in 1986 and 1987 and the execution of the 1987 Deeds. Mr Watson, Mr Hitchings, Mr Newberry and Mr Henderson were identified in the evidence as being responsible for the recommendation which led to the alleged GMP policy decision in 1980, but, of those, only Mr Watson was present at the board meetings of GL on 20 November 1980 and 30 December 1986. None of those individuals signed the June 1987 Deeds. Seventh, the resolutions at the board meetings of GL and GPL on 30 December 1986 and 18 February 1987 respectively could not have been more clear; and nor could the 1987 Deeds. No one reading them could have been mistaken as to their meaning.
There were numerous other matters that I was invited by Mr Hitchcock specifically to take into account in assessing the evidence in support of GL’s claim, and which are set out in sections 16 of his written closing submissions on behalf of the Representative Defendants. I have taken them all into account.
Mr Tennet, on behalf of GL, analysed the evidence in support of the alleged continuing common intention of GL and GPL and their directors in great detail in 20 pages of his written closing submissions.
My conclusions on the evidence in relation to this topic are as follows.
A decision in principle was taken in late 1980 within the Gallaher Group that annual discretionary increases in pensions in payment should be restricted to the part of the pension in excess of the GMP. Whether or not there was a formal decision by GL’s board to that effect does not matter. I find, on a balance of probabilities, that the decision in principle was taken by the Group Executive at its meeting on about 10 November 1980. That policy was consistently implemented each year thereafter. The contemporaneous documents overwhelmingly support the conclusion that a decision in principle was taken at that time in relation to future increases. Such documentation includes the minutes of the PAC meetings on 29 October 1980 and 15 April 1981; the 1980 Formula Document; the article in Smoke Signals on 14 January 1981; and the terms of the letters written to pensioners following the decision to make the 1981 increases.
I am satisfied that all the directors who attended the board meetings of GL and GPL on 30 December 1986 and 18 February 1987 respectively, and also Mr Rudd and Mr Holland who signed the 1987 Deeds as the company secretaries of GL and GPL respectively, were aware at the time of those meetings and at the time of the execution of the 1987 Deeds that the consistent policy of GL and GPL was that increases on pensions were only in respect of that part of the pension in excess of the GMP. Whether or not they participated in any decision on that issue in 1980, they were aware of that continuing policy from what they had seen in Smoke Signals, what they had read in the minutes of PAC meetings, what they had read in the actuaries’ reports, and what they had learned from discussions with others within the Gallaher Group.
So far as concerns the actuaries’ reports, the evidence of Mr Watson, Mr Cameron, Mr Hamilton-Grierson, Mr Stone and Mr Househam, both in their witness statements and in their oral evidence, was that they were in the habit of reading those reports. Further, as I have previously mentioned, on 11 April 1986 Mr Holland sent a memorandum to all the directors of GPL, that is to say Mr Hamilton-Grierson, Mr Clark, Mr Stone and Mr Watson to remind them of the basis on which Mr Trott carried out his valuation, and attached an extract from Mr Trott’s 1984 valuation report on the A Scheme. In that extract it was made clear that increases were only on that part of pensions in payment in excess of the GMP.
While it is fair to say that the evidence of most of the witnesses was largely consistent with Mr Hitchcock’s contention that, at the board meetings of GL and GPL on 30 December 1986 and 18 February 1987 respectively, most of the directors were not consciously thinking about restricting increases to the part of the pension in excess of the GMP, I am satisfied that the positive intention of the directors at those meetings was to provide neither more nor less than a guarantee for a ten year period of increases which had previously been made on an annual discretionary basis, limited to 2% LPI. The positive intention was, therefore, twofold: (a) to guarantee for a 10 year period that there would be annual increases, which had previously been given on a discretionary basis; and (b) to fix the guaranteed annual increase at 2% LPI. There was no intention to change existing practice or policy in any other respect.
I set out below evidence of the witnesses, which, in my judgment, clearly supports those conclusions. Save where I indicate otherwise, the evidence mentioned is their oral evidence in Court.
Mr Cameron said that he recalled discussing the principle behind the GMP policy with Mr Watson in late 1980, and had asked him to put the issue to the Group Executive. He recalled supporting option (b) in Mr Watson’s paper of 4 September 1980. Further, he was a member of the board of GPL in 1981 and 1982, and was satisfied that the 1980 Formula Document and the 1982 Formula Document, which were then before the board of GPL, spelt out the GMP policy and would have been considered by the board. He also gave evidence that he was reminded from time to time of the GMP policy when he studied the actuaries’ reports. While his evidence, as to what took place at the board meeting of GL on 30 December 1986, is consistent with the GMP policy not being in the forefront of his mind, his evidence, taken as a whole, is consistent with it having been at the back of his mind.
Mr Watson played a central role in the decision made in late 1980 that increases should be limited to that part of the pension in excess of the GMP. It is quite clear that, in his capacity as the finance director of GL and as a director of GPL and the chairman of the PAC, he was at all times well aware of that policy. He was well aware of the actuaries’ reports, the 1980 Formula Document and the 1982 Formula Document, and the contents of Smoke Signals. On 22 December 1986 he was sent a copy of a note of the USFAS meeting on 15 December 1986 attended by Mr Holland, Mr Trott and Mr Bulpitt, which makes it clear that the proposal being discussed was for dynamised 2% increases on pensions in excess of the GMP. I agree with Mr Tennet that Mr Watson is hardly likely to have forgotten, just 8 days later, that the GMP policy applied to the dynamised increase. Mr Watson’s evidence was that the intention, at GL’s board meeting on 30 December 1986, was definitely to apply the guaranteed increase only to that element of the pension in excess of the GMP.
Mr Hamilton-Grierson had a clear recollection of having come to a firm conclusion, at the time of the dissemination of the papers in 1980 about the GMP policy, that option (b) in Mr Watson’s paper of 4 September 1980 was what he and others chose. He particularly remembered the document setting out the various options. He said, in cross-examination, that there was no logic to support the company giving increases on the GMP which had already been supported by the State. He also said that it would have been discriminatory to have taken a different position since not everybody had the same proportional GMP element in their pension. He summarised by saying that a different position in respect of pension increases to that actually taken would have been illogical, discriminatory and not a good use of money. He, like other board members, would have read Smoke Signals. He also referred to the PAC minutes. He, like Mr Watson, was a member of the board of GPL as well as a director of GL. He said the position was clearly stated in the actuaries’ reports, which the directors went through very carefully in order to see whether the Schemes were properly funded. While he, too, accepted that at the board meetings on 30 December 1986 and 18 February 1987 the GMP issue was not in the front of the minds of the directors, his evidence was that they were not thinking particularly about that issue because they were not changing practice. There was, he said, no suggestion from anywhere at that point that they were changing the practice of the previous 7 or 8 years.
Mr Wilson’s evidence was that he would have been aware of the GMP policy because it was published in Smoke Signals. He said that he was certain that, at the board meeting of GL on 30 December 1986 and at the time of execution of the 1987 Deeds, although the GMP as an issue was not in the forefront of his mind, what would have been in his mind was that they were introducing a guarantee of precisely what had been done on a discretionary basis in the past. He remembered that they thought long and hard about the introduction of the guarantee in the discussions leading up to the board resolution on 30 December 1986, and considered whether they could afford to make the guarantee, and his frame of mind was that they were merely removing the discretionary element up to 2%.
Mr Househam recalled very clearly having discussions in 1980 with Mr Richard Harris, then the deputy chairman of GL, about the GMP issue. Further, he said he read Smoke Signals, and certainly would have picked up the policy from there. His evidence was that what stuck very much in his mind was that the GMP was payable from the State pension age, whereas the Gallaher pension was payable at age 60; and further, since the GMP was being indexed by the State, it seemed to him totally illogical to have increases on increases. He said that he would be astonished if anyone was not aware of the GMP policy. He did not accept that knowledge of that policy fell out of people’s minds, including his own, at any stage. He said that, if at any time anyone had decided to include increases on the GMP, he would have expected to see calculations of the cost of such increases, and no such calculations were ever produced. In addition, he referred to the actuaries’ reports which always made clear that the GMP was excluded. He also said that, because he was in charge of the non-tobacco companies, his feeling was that to increase the GMP element would have meant that the non-tobacco companies had much less favourable terms of remuneration, and that was a factor that stuck in his mind. He was very clear that the GMP element was always excluded from increases, including at the time of the 30 December 1986 GL board resolution and the execution of the 1987 Deeds.
In his witness statement, Mr Stone recalled Mr Watson telling him about the GMP policy after he joined the board of GPL. He stated that he recalled the conversation relatively clearly. Mr Stone confirmed that it was his habit to read actuarial reports and costings. In cross-examination, he described the GMP policy as written in “tablets of stone”. His evidence, in cross-examination, was to the effect that the GMP policy was so “manifest” and “fundamentally obvious” to anybody at board meetings that there was no need to keep repeating the policy, anymore than it was necessary to keep telling someone to drive on the left. He was not questioned as to whether the GMP policy was in his conscious thoughts at the board meeting of GPL on 18 February 1987.
In his witness statement, Mr Clark stated that he was as sure as he could be that he was aware at the time of the board meeting of GPL on 18 February 1987 that the GMP was not to be increased. He specifically recalled the point that it was unnecessary and expensive for GL to have increased the GMP as well as the State. He also stated in his witness statement, with reference to the board meeting of 18 February 1987, that increases in the GMP element in the pensions “was not what was intended”.
Mr Holland, as the company secretary of GPL, executed the 1987 Deeds on behalf of GL. He was also part of the Pensions Team who reported to Mr Watson. He was undoubtedly at all times fully aware that annual increases were made only to the element of the pensions in excess of the GMP. He would have been fully aware of the content of the actuaries’ reports, as well as of the relevant articles in Smoke Signals. From 1981 until his retirement in 1990 he was a member of the PAC. He sent the memorandum of 11 April 1986 to Mr Hamilton-Grierson, Mr Clark, Mr Stone and Mr Watson, reminding them of the GMP policy by enclosing an extract from Mr Trott’s 1984 valuation report on the A Scheme which pointed out that the dynamisation of 1% annual increases was only for increases on that part of the pension which exceeded the GMP. He clearly understood GL’s decision to dynamise at 2% to be only on that part of the pension since, on 9 January 1987, he wrote to Mr Trott informing him that a decision had been taken, following Mr Trott’s valuation as at 31 March 1986, to fund the A Scheme and the B Scheme for a “further 1% p.a. increase” from April 1987.
Mr Rudd, as the company secretary of GL, executed the 1987 Deeds on behalf of GL. He said that, from reading the actuaries’ reports, he became aware that increases to pensions under the Schemes were not applied to the GMP element. Indeed, he said that, quite apart from reading the actuaries’ reports, he was aware, by the latter part of 1986, that the GMP element was not to be increased under the discussions at that time. His evidence in cross-examination was that, at the time of GL’s board meeting on 30 December 1986, he knew that it was not intended to include an increase to the GMPs. Although Mr Rudd, in another part of his cross-examination, did accept that the GMP issue was not then “on his mind”, it is clear, from his evidence as a whole, that he was accepting only that he cannot have been consciously thinking about the GMP issue at the time.
It is permissible, in claims for rectification, to have regard to events after the transaction is entered into, as evidence of the parties’ intention at the time of the transaction and (where required) as objectively manifesting that intention: McCormack –v- McCormack (1877) 1 LR Ir 119, 124-125; Dormer –v- Sherman (1966) 110 Sol Jo 171; Westland Savings Bank –v- Hancock [1987] 2 NZLR 21 at 31; and Anfrank Nominees Pty Ltd –v- Connell (1989) 1 ACSR 365 at 388.
The common intention of GL and GPL and their directors at the time of the relevant board resolutions on 30 December 1986 and 18 February 1987 that guaranteed annual 2% LPI increases should apply only to that part of the pensions in excess of the GMP was manifested by the following matters after those dates: the restriction of annual increases in pensions in payment in 1987, 1988 and 1989 to that part of the pension in excess of the GMP; the letters sent by GL to pensioners informing them of those increases; the reports of Mr Trott on those increases; Mr Trott’s reports on the actuarial valuation of the A Scheme, the B Scheme and the M Scheme as at 31 March 1988; the M Scheme booklet and the A Scheme booklet prepared in about December 1989 and January 1990 respectively; the actuarial statement made for the purposes of regulation 8 of the Occupational Pension Schemes (Disclosure of Information) Regulations 1986 for the M Scheme, which was sent to members of the M Scheme (which would have included all managers, including members of the GL and GPL boards) under cover of a memorandum from Mr Holland dated 18 January 1990; the article in Smoke Signals on 11 April 1989; and the letter dated 28 October 1996 sent by GL to pensioners.
Mr Hitchcock submitted that all those documents and matters, to which I have just referred, fail to qualify as evidence of the continuing common intention of GL and GPL at the dates of the relevant board resolutions in 1986 and 1987 and of the 1987 Deeds since the directors of GL and GPL did not remain the same over time.
I reject that submission. I see no reason, in principle, why those matters to which I have referred should not constitute objective manifestation or outward expression of the intentions of GL and GPL at those dates in 1986 and 1987, whether or not the directors changed from time to time. In any event, on the facts of the present case, the objection lacks any realism. Irrespective of when precisely the composition of the boards of directors of GL and GPL changed, all those documents and matters evidence a continuing policy of GL and GPL of limiting increases, whether discretionary or guaranteed under the 1987 Deeds, to the part of the pension in excess of the GMP, and of the knowledge of that policy, without any disagreement, by all those who were directors at the time of and following the board meetings of GL and GPL on 30 December 1986 and 18 February 1987 respectively. In one way or another, whether they saw the actuarial valuations or the Scheme booklets or the Smoke Signals articles, to which I have referred, or received letters in relation to pension increases, the overwhelming probability is that all those directors or former directors would have been fully aware of, even if they did not actually participate in, the continuation of exactly the same policy of limiting increases to the part of the pension in excess of the GMP that had been in operation every year since 1980, and none of them ever protested or otherwise suggested that the policy had been changed in 1987.
As I have said, following the decision of Lawrence Collins J in AMP, in order to succeed in its claim for rectification GL does not have to show objective manifestation or outward expression of the continuing common intention of itself and GPL on 30 December 1986, 18 February 1987 and at the date the 1987 Deeds were executed; but, even if there were such a requirement, objective manifestation or outward expression was constituted by the matters in and after 1987 to which I have referred.
The Representative Defendants also resist the claim for rectification on the ground of delay between the execution of the 1987 Deeds and the present proceedings. In my judgment, mere delay is no ground of defence on the facts of the present case. No one has been prejudiced by the delay, since all members of the Schemes and all those receiving pensions will have accrued or received benefits in accordance with the 1987 Deeds, as rectified. There is no evidence of any kind that anyone expected more than has accrued or been paid in accordance with the continuing common intention of GL and GPL. There is no evidence of any kind that anyone has ordered his or her affairs in such a way as would result in prejudice if the 1987 Deeds were rectified.
At the outset of the hearing, the Representative Defendants resisted the claim to rectification on the further ground that they and the persons they represent gave consideration for their benefit entitlement under the Rules of the Schemes: in effect, it was contended, they are bona fide purchasers (without notice). That defence was rejected by Lawrence Collins J in AMP. He said, at para [79]:
“In my judgment early leavers …. or other members of the Scheme, are not in the position of bona fide purchasers. It is true that they give consideration for their pension rights, but they gave no additional consideration for the “rights” which the rule changes mistakenly conferred on them, and it is wholly unrealistic to treat them as purchasers of anything in the present context other than such rights as were properly granted in the rules.”
In his final submissions, Mr Hitchcock accepted that I was bound to follow that aspect of Lawrence Collins J’s judgment, and he abandoned the point as a separate ground of defence.
For all those reasons, GL is entitled to an order for rectification of the 1987 Deeds.
Setting Aside for Mistake
In view of my decision on GL’s claim for rectification, it is not strictly necessary for me to consider the alternative claims of GL that the 1987 Deeds be declared void or set aside for mistake or under the rule in Hastings-Bass. In view of the extensive submissions made to me on those alternative claims, however, I shall deal with them very briefly.
As Millett J said in Gibbon –v- Mitchell, at p.1307, the equitable remedy of rectification is only one aspect of a much wider equitable jurisdiction to relieve from the consequences of mistake.
In that case, Millett J considered the circumstances in which the Court will set aside a voluntary transaction by a person who intended to confer a benefit on another, but did so under a mistake. Having reviewed the relevant authorities, Millett J summarised the principle as follows, at p.1309:
“In my judgment, these cases show that, wherever there is a voluntary transaction by which one party intends to confer a bounty on another, the deed will be set aside if the court is satisfied that the disponor did not intend the transaction to have the effect which it did. It will be set aside for mistake whether the mistake is a mistake of law or of fact, so long as the mistake is as to the effect of the transaction itself and not merely as to its consequences or the advantages to be gained by entering into it. The proposition that equity will never relieve against mistakes of law is clearly too widely stated: see Stone v. Godfrey (1854) 5 De G. M. & G. 76, and Whiteside v. Whiteside [1950] Ch. 65, 74.”
In AMP Lawrence Collins J observed that there was no reason in principle why this jurisdiction should not be appropriate for the situation which he was considering in that case. The situation in the present case is, for this purpose, not materially different from that in AMP.
As in a claim to rectification, it is for the person seeking to set aside the instrument to produce convincing evidence of the mistake: Anker-Petersen –v- Christiensen [2002] WTLR 313, 330.
There is no requirement, in this jurisdiction, that the claimant must show an outward expression or objective manifestation of the relevant intention of the disponor.
Mr Hitchcock submitted that GL’s claim to set aside the 1987 Deeds for mistake must fail because (1) GL has failed to prove that it made a mistake: that what it did was different in some important or fundamental way from what it intended; (2) GL has failed to prove that any mistake that was made was one as to the effect of the amendments, as distinct from their consequences; and (3) too much time has elapsed between execution of the 1987 Deeds and the present proceedings. A further defence that the Representative Defendants and those they represent, or many of them, are bona fide purchasers (without notice) was not persisted in by Mr Hitchcock by the end of the hearing, in view of the rejection by Lawrence Collins J of a similar defence in AMP.
In the light of my findings of fact, it is clear that the 1987 Deeds were executed by GL, acting by its directors and by the company secretary who executed the 1987 Deeds on its behalf, under a fundamental mistake as to their effect. Those persons intended and believed that the 1987 Deeds did no more and no less than to guarantee for 10 years a continuation of a policy of annual increases, previously made on a discretionary basis, but limited to 2% LPI.
Alternatively, regardless of that positive intent, it is perfectly clear from the evidence of the witnesses that they were unaware that the effect of the resolutions of the directors of GL and GPL on 30 December 1986 and 18 February 1987 respectively and of the 1987 Deeds was to confer a right to 2% LPI increases on the entire pension and that, had they been so aware, they would not have passed the resolutions and would not have caused the execution of the 1987 Deeds. I agree with Mr Tennet that (whether or not sufficient for the claim for rectification) that alternative way of formulating GL’s mistake is sufficient to invoke the Court’s equitable jurisdiction to set aside the 1987 Deeds.
So far as concerns the lapse in time since execution of the 1987 Deeds, I was shown letters from GL and GPL to the solicitors for the Representative Defendants delivered during the course of the hearing, in which GL and GPL have undertaken, notwithstanding any order declaring void or setting aside the 1987 Deeds and the 1989 Deeds, to continue to make payments on the same terms as the 1987 Deeds save only that the GMP would be excluded from any guaranteed increase, and that they will execute deeds of amendment giving effect to such undertaking. GL and GPL have also undertaken in those letters not to seek repayment of any sum which has been paid and would have been due if the GMP had been excluded from the guaranteed increases under the 1987 Deeds.
In the light of those undertakings, I see no reason why mere lapse of time since execution of the 1987 Deeds should cause the Court in its discretion to refuse to exercise its equitable jurisdiction to set aside the 1987 Deeds.
Accordingly, for those reasons, if GL had not succeeded in its claim to rectification, I would have ordered that the 1987 Deeds be set aside.
The rule in Hastings-Bass
I had the benefit of extensive and well argued submissions on the application of the rule in Hastings-Bass from Mr Tennet and Mr Hitchcock. In the course of these submissions, in addition to Hastings-Bass itself, I was referred to Kerr –v- British Leyland (Staff) Trustees Ltd [2001] WTLR 1071, Mettoy Pension Trustees –v- Evans [1990] 1 WLR 1587, Stannard –v- Fisons Pension Trust Ltd [1991] PLR 225, Scott –v- National Trust [1998] 2 All ER 705, Edge –v- Pensions Ombudsman [2000] Ch 602, Breadner, AMP, Hearn, Re Barr’s ST [2003] EWCH 114 (Ch), [2003] 1 All ER 763, a published article by Lord Walker (“The limits of the principle in Re Hastings-Bass”), and a published article by Brian Green Q.C. (“The law relating to trustees’ mistakes – Where are we now?”).
This is a developing area of the law, which has stimulated considerable academic and professional comment, and in which there has been some development and divergence of judicial opinion. Having decided that GL is entitled to succeed in its claim for rectification, I do not consider that it is desirable or appropriate for me to enter upon a wider consideration of the application of the rule in Hastings-Bass to the facts of the present case than is strictly necessary.
The rule in Hastings-Bass was considered at length, and analysed in considerable detail, by Lightman J in Barr. In summary, Lightman J decided that the decision of a trustee is voidable if, in reaching that decision, the trustee, in breach of fiduciary duty, did not take into account a relevant consideration or took into account an irrelevant consideration, and had the trustee not done so, the trustee’s decision would or might have been different.
Mr Tennet submitted that Lightman J was manifestly incorrect in holding that the rule in Hastings-Bass only applies if the trustee’s failure to take into account the relevant considerations, or his taking into account irrelevant considerations, amounted to a breach of fiduciary duty. In this connection, he referred me to AMP and Mettoy and to the spirited criticism of Barr by Mr Green in the article to which I have referred.
Mr Tennet further submitted that, in order to invoke the rule in Hastings-Bass, it is not necessary to show that the trustee ”would” have acted differently; it is sufficient to show that the trustee “might” have acted differently if the relevant material had been taken into account or the irrelevant material ignored. In that connection, he referred me to Stannard, Kerr, AMP, and Hearn.
Further, Mr Tennet submitted that Lightman J was wrong to hold that a trustee’s decision, falling within the rule in Hastings-Bass, is voidable rather than void. In this connection, he referred me to Lawrence Collins J’s observation in AMP, at para [92], “that the language of the cases strongly suggests that the application of the principle leads to the act being void rather than voidable”, and Lawrence Collins J’s conclusion that, absent rectification, he would have held the relevant resolution in that case was void under the Hastings-Bass rule.
For his part, Mr Hitchcock submitted that the rule in Hastings-Bass is not engaged unless the trustee “would” have acted differently.
All parties are agreed that I am bound by the analysis and conclusions in Barr unless, on any particular point, Lightman J was plainly wrong.
Mr Tennet ultimately accepted that it is not possible for me to conclude that Lightman J was plainly wrong in holding that, if the rule in Hastings-Bass is engaged, the trustee’s decision is voidable rather than void.
Despite the temptation to determine the other points of principle which are in dispute between the parties as to the application of the rule in Hastings-Bass, I am able, on my conclusions of fact in the present case, to find that the rule would have led me to set aside the 1987 Deeds, without having to resolve those remaining issues of principle.
Mr Hitchcock submitted that the claim based on Hastings-Bass should fail in respect of the 1987 Deeds because GPL, in resolving to amend (the A Scheme and the B Scheme) and in consenting to the amendment (of the M Scheme), did not take into account anything that was immaterial and did not fail to take into account anything that was material; GPL, in so resolving and consenting, was not in breach of fiduciary duty; GL has not proved on the balance of probabilities that GPL would have done something different; the class represented by the Representative Defendants, or many of them, are bona fide purchasers; and some 17 years have lapsed since execution of the 1987 Deeds.
In my judgment, the Representative Defendants have failed to make out any of those grounds of defence. Leaving aside all other points, it is clear that GPL did not obtain, at any stage prior to the conclusion of the board meeting of GPL on 18 February 1987 and the execution of the 1987 Deeds, any actuarial costings of funding each of the Schemes for guaranteed annual increases of 2% LPI on the entirety of pensions in payment. The only dynamised increase which was costed was an increase in pensions in excess of the GMP. That was, on any footing, in the absence of rectification, a fundamental oversight of an essential matter. The fact that Schemes were in surplus is neither here nor there. The extent to which the surplus would be diminished by guaranteed LPI increases was an essential consideration for GPL. It is perfectly clear that the reason why no actuarial costings were obtained was because GL and GPL were acting on the assumption that the guaranteed increases under the 1987 Deeds did not impose more extensive funding requirements than had already been taken into account.
If, contrary to my findings of fact in relation to rectification, GPL did not intend, by the 1987 Deeds, merely to continue the previous policy of granting increases on that part of the pension in payment in excess of the GMP, then GPL would, additionally, have failed to take into account that it was deviating from its previous policy in relation to all annual reviews since 1981, that the effect of granting increases on the entire pension in payment would have discriminated between those members who retired before or shortly after April 1978 with no or little GMP element to their pension, and those who retired later with a much larger GMP element, and also between males and females since their State retirement age was different, and that members with GMPs would receive double increases on that part of their pension since they were already receiving increases on the SERPS/GMP element from the State.
All the directors of GPL made clear in their evidence that, had they known the true effect and ramifications of the decision they were making (assuming no rectification), they would not have proceeded to pass the resolution at the board meeting on 18 February 1987 or to execute the 1987 Deeds. There is no reason whatsoever to disbelieve that evidence. The witnesses gave evidence that they would have required proper costings to be obtained: evidence which is entirely consistent with the care which GPL took each year to have every annual increase in pensions accurately costed by the actuaries and to ensure that GL made a payment into each Scheme of an amount necessary fully to fund the increase in question. Such annual costings were obtained for each annual increase throughout the 1980s, even when the Schemes (such as the A Scheme) happened to be in healthy surplus. Further, the evidence was that the directors did not regard it as fair, quite apart from issues of cost, for increases to be diverted to providing double increases for some members, reducing the amount available for others with no, or lower levels of, GMP. Accordingly, whether the rule in Hastings-Bass requires that the trustee’s decision would have been different or might have been different, both tests would have been satisfied in the present case.
If, as Lightman J held in Barr, it is necessary to show a breach of fiduciary duty, it is perfectly clear, in my judgment, that such a breach of duty would (on the hypothesis of no rectification) have been committed by GPL. The failure to obtain proper costings of the effect of the guaranteed 2% LPI increases of the entire pension, and the failure to take into account all those other matters to which I have referred, were plainly in breach of fiduciary duty. Mr Hitchcock , gingerly walking a tactical tightrope, submitted that no breach of fiduciary duty was committed by GPL. Having argued, on the rectification claim, that the board resolutions on 30 December 1986 and 18 February 1987 and the 1987 Deeds involved no mistake and gave proper effect to the true intention of GL and GPL and their directors, Mr Hitchcock contended, on the Hastings-Bass point (on the assumption that the rectification claim failed), that the directors were acting on the reasonable assumption that they were not changing the previous practice of limiting increases to the element of the pension in excess of the GMP; culpability lay with the solicitors instructed to give effect to GPL’s board resolution or with Mr Newberry, who gave the instructions to the solicitors.
I reject that submission. Several of the witnesses accepted in cross-examination, and I find, that neither the relevant board resolutions nor the contents of the 1987 Deeds were difficult to understand. Indeed, some of the directors of GPL accepted that the resolutions were poorly worded. It is clear, to my mind, that there was culpability, amounting to breach of duty, on the part of GPL’s directors and company secretary, and GPL as a trustee body, in failing to ensure that the resolutions gave proper effect to the intention not to change the previous policy of restricting increases to the element of the pension in payment in excess of the GMP, and in failing to notice that the wording of the resolutions and the 1987 Deeds was inapposite for that purpose, and in failing to take into account all relevant factors and to obtain proper costings.
GPL’s solicitors did no more and no less than they were asked to do, that is to say to give effect to the relevant resolutions. Indeed, they sought and obtained express approval, in correspondence with Mr Newberry, to the wording proposed to be inserted in the 1987 Deeds.
Furthermore, and as a quite separate matter, I am not satisfied that GPL can avoid responsibility for the actions and failings of members of the Pensions Team, including Mr Newberry, merely because, for corporate convenience, they were employed by another company within the Gallaher Group. The point was not analysed at any length before me, and no reference was made by Mr Tennet or Mr Hitchcock to any authority or statutory provision bearing upon it. In principle, it would seem to me strange if a company trustee, within a group of companies, could avoid liability for the acts and omissions of those working on its behalf in the management of the trusts of which it was a trustee, merely because they are employed by another company within the group. It is not necessary, however, for me to reach a conclusion on the point.
So far as concerns the defence that the class represented by the Representative Defendants, or many of them, are bona fide purchasers for value without notice, Mr Hitchcock ultimately accepted that he was unable to sustain this defence before me in view of the rejection of a similar defence by Lawrence Collins J in AMP.
So far as concerns the lapse in time since the execution of the 1987 Deeds, this is no defence in the light of the undertakings by GL and GPL in the letters to which I have referred in para 159 above.
The 1989 Deeds
In view of my decisions as to the 1987 Deeds, no issue arises as to the 1989 Deeds.
Decision
For the reasons which I have given in this judgment, I order rectification of the 1987 Deeds in the manner stated in paras 2, 3 and 4 of the prayer in the Particulars of Claim.