In an important judgment the Court of Appeal has allowed an appeal by Britvic concerning the meaning of its pension increase rules.

The rules provided for capped RPI-based increases "or any other rate decided by the Principal Employer".  The High Court had previously held that, taking into account various background matters, "any other rate" should be construed as meaning "any higher rate".  However the Court of Appeal held that the words were unambiguous and that there was no reason not to give them their natural meaning which allowed the employer to choose any other rate whether higher or lower.  Addleshaw Goddard LLP and Andrew Short QC of Outer Temple Chambers acted for Britvic.

The judgment is important because the Court reviewed a number of recent cases setting out "golden rules" for how to interpret contracts and trusts and in particular when a court is justified choosing an interpretation which departs from the clear or natural meaning of the language. It makes clear that when interpreting pension scheme rules, courts should start from the presumption that the drafter meant the words to say what they did.  If wording is unambiguous, it is not normally appropriate for the courts to delve into the background to the wording to establish whether the drafter might have intended something else.  

What was the rule the court had to interpret?

The scheme's pension increase rule provided for pension (in excess of GMP) to increase on 1 October each year.  It said: "The rate of increase is the percentage increase in the retail prices index during the year ending the previous 31 May but subject to a maximum of [5 / 2.5] per cent (or any other rate decided by the Principal Employer)." 

What did the parties argue and what did the original judgment say?

Britvic argued that the words "or any other rate" should be given their natural meaning, thus allowing the employer to decide on a higher or lower rate of increases (subject to statutory minimum requirements). Members argued that when various background matters were taken into account, the words should be interpreted as meaning "any higher rate".

The High Court agreed with the representative member that the words should be taken to mean "any higher rate" even though the judge himself acknowledged that "construed strictly literally" the phrase "any other rate" clearly did not mean "any higher rate".  The judge gave a lot of weight to the background to the rules, particularly the fact that the Britvic scheme had been established as a result of a demerger of the soft drinks business of Six Continents plc and the words "any other rate" were said to be inconsistent with some information given to members about the demerger. The judge also held that the employer's interpretation would, taken literally, allow the employer to decide a rate lower than required by overriding legislation, and this was not what the draftsman would have intended.

The employer appealed.

What did the Court of Appeal decide on the main question?

The three Court of Appeal judges unanimously agreed that the appeal should be allowed.

Where a drafter had used unambiguous language, the key principle was that the courts were required to apply it.  This principle applied particularly strongly to pension schemes, as pension scheme members needed to be able to rely on the wording of the rules without being parties to the scheme documents or having knowledge of relevant background information.  The words "or any other rate" were not ambiguous and did not naturally mean "or any higher rate".  They allowed the employer to decide on a lower rate of increase as well as a higher one.

The Court noted that there had been a mismatch between what the active members of the Six Continents schemes had been told and what the Britvic scheme in fact provided.  However, it concluded that this did not justify the inference that the mistake was in the drafting of the Britvic pension increase rule.  The mistake might equally have been in the drafting of the letters to members or the drafter may have deliberately chosen not to replicate the Six Continents scheme wording.

The Court considered the argument that the drafter would have wished to create a pension increase rule which was consistent with statutory minimum pension increase laws. The Court accepted that how the rule would interact with the legislation could potentially give rise to practical difficulties if the words "any other rate" were interpreted literally, whereas the interaction with legislation would be more straightforward if the rule was interpreted to mean "or any higher rate". Whilst the statutory regime meant there would have been benefits if the drafter had drafted the pension increase rules differently, that wasn't the question for the Court.  The question was what the drafter actually did.  

The Court recognised that under a process called "corrective construction" courts may construe the words of a document as meaning something other than their literal meaning.  However, that is only appropriate where (a) there is an "obvious mistake" on the face of the document, and (b) it is obvious what the document should have said.  The Court held that neither of these tests were satisfied in relation to the Britvic scheme's pension increase rules.

Case law has also established that where two possible interpretations of the same wording are possible, courts should ask themselves which interpretation makes "commercial common sense" or, in the case of a pension scheme, gives reasonable and practical effect to the scheme.  However, the Court held the meaning of Britvic's pension increase rules was unambiguous, so the question of weighing up the merits of two possible interpretations in this way did not arise.

Our thoughts

The Court of Appeal's judgment confirms a very important point of interpretation for pension scheme rules generally.  Where the wording of the rules is unambiguous and there is no obvious mistake on the face of the document, then courts should apply that wording. They should not to delve into other background documents to see if there was anything to suggest the drafter might have intended something else.  We think such an approach is plainly right and is consistent with recent higher court rulings on how to interpret contracts and trusts. Interpreting pension scheme rules can be complex enough without having to work out whether their meaning should be something different from plain language used based on a potentially wide universe of background material or member communications. This is also consistent with the long established principle adopted by the courts and the Pension Ombudsman that summaries about pension schemes given to members, including inaccurate ones, do not usually override the wording of pension scheme rules. 

The 2011 change from RPI to CPI as the basis for statutory pension increases meant that the question of whether a scheme's rules "hard wired" RPI into the benefit structure became very relevant for many pension schemes. As always, the answer invariably hinges on the precise wording of the scheme's rules.  More than ten years on from the announcement of the change, cases related to RPI/CPI issues continue to occupy the courts.