In Honda Motor Europe Limited and another v Powell and another [2014] EWCA Civ 437, the Court of Appeal has held that construction was not the appropriate remedy to interpret a deed of adherence in such a way so as to ensure that the correct scale of benefits applied to a new class of members (nor could the deed be interpreted as an amendment to the scheme rules to that effect). The deed extended the benefits of a pre-existing scheme to a new class of members. Though a different scale of benefits was intended to apply to those new members, the deed made no mention of this new scale and the new scale was not formally incorporated into the trust deed and rules until 1998, resulting in a significant unintended liability.  

Background facts

Honda Motor Europe Limited (“HME”) is the sales and marketing arm of the Honda group based in the UK. Until 1986, HME was the sole participating employer in the Honda Group UK Pension Scheme (the “Scheme”). The Scheme was governed by a Definitive Trust Deed and Rules dated 24 November 1981 (the “1981 Trust Deed and Rules”). Under the Scheme, members were entitled to HME scale benefits, as set out in the Scheme’s governing documentation. There was also provision in the rules for HME and the trustees to extend the Scheme to other associated employers.

Around 1985, Honda in Japan decided to establish a manufacturing base in the UK. Honda of the UK Manufacturing Limited (“HUM”) was incorporated for this purpose with recruitment of workers to commence from August 1986. It was decided by HME and HUM that pension benefits for HUM workers would also be provided via the Scheme but that a less generous benefit scale would apply. Contemporaneous evidence reflected this intention.

An announcement to HUM employees dated 1 August 1986 (the “Announcement”) was produced. This stated that the HUM employees would be included under the Scheme and gave details of the (lower) HUM benefit scale to which they would be entitled. A “Notice of Intention” was also signed by HME. This was addressed to HUM employees and attached a copy of the Announcement setting out the HUM benefit scale.

A deed of adherence was also executed by HME, HUM and the then trustees in October 1986 (the “Deed of Adherence”). Clause 1 of the Deed of Adherence extended “the benefits of the Scheme” to the HUM employees. No reference was made to the Announcement. The Scheme booklet was subsequently amended to contain the HUM scale benefits in respect of HUM members and the Scheme was administered on that basis. However, the HUM scale benefits structure as set out in the Announcement was not formally integrated into the Rules until 10 December 1998 when a Consolidating Trust Deed and Rules was entered into.

Issues

HME and HUM sought a declaration that, on the true construction of the Deed of Adherence, “the benefits of the Scheme” to which the HUM employees were entitled were those appended to the Announcement and not the benefits to which the HME employees were entitled. The claimants based their case on a purposive interpretation, taking into account the Announcement and Notice of Intention as well as evidence recording the trustees’ intention in the build up to the execution of the Deed of Adherence. They submitted that against this background, the Deed of Adherence could operate not only to adhere HUM as a participating employer and admit its employees as beneficiaries of the Scheme (pursuant to the power to extend the Scheme to associated employers) but also as an amendment introducing the HUM scale benefits, (pursuant to the separate Scheme power of amendment).

The first respondent (the representative beneficiary) submitted on the contrary, that, on its true meaning, “the benefits of the Scheme” could only be interpreted by reference to the 1981 Trust Deed and Rules. There had been no effective amendment of the benefits to which employees would be entitled to under the Scheme by virtue of any of the documents entered into in 1986. The Announcement and Notice of Intention set out the HUM scale benefits; however neither complied with the requisite formalities to amend the 1981 Trust Deed and Rules. This failure did not mean that the Deed of Adherence could be construed as containing the information contained in the other documents so as to act as an amendment to the Scheme benefits. Therefore, the HUM employees would be entitled to the HME scale benefits.

The claim and the appeal were argued solely on the basis of construction with the parties agreeing to reserve the issue of rectification.

First Instance Judgement

The judge rejected the claimants’ case concluding that on its true meaning, the phrase “the benefits of the Scheme” was simply a generalised reference to the advantages of being able to accrue benefits under the Scheme and was not intended to refer to any particular scale of benefits. The Deed of Adherence did not operate as an amendment to the 1981 Trust Deed and Rules, nor was it ever intended to do so. Indeed, there was nothing in the background which suggested that it was to effect any more than the exercise of the power to extend the existing scheme to a new participating employer and new category of members. For our update on the High Court decision click here

HME and HUM attempted to advance a new argument on appeal that the equitable maxim “equity regards as done that which ought to be done” was applicable (such as was held to apply in the High Court decision of HR Trustees Limited v Wernsley plc). On this basis, it was submitted that the parties should be treated as having validly exercised the amendment power in order to incorporate the HUM scale benefits, it having been their shared intention that HUM employees should accrue benefits on the HUM scale.

Decision of the Court of Appeal

The Court of Appeal unanimously dismissed the appeal. The only qualification to the first instance decision was that the Court was comfortable that the reference to “the benefits in the Scheme” could mean HME scale benefits as opposed to simply “generalised references” to the advantages of being able to accrue benefits under the Scheme. The Court also took the opportunity to criticise the parties’ mutual decision not to address the issue of rectification alongside that of construction, describing that decision as “unfortunate”. On its finding (outlined below) that if any error existed it was in the failure of the parties to execute their intentions properly rather than any obvious error with the language of the Deed of Adherence, the Court noted that this was “classic rectification territory”.

Lord Justice Lewison (who gave the leading judgment) summarised the two issues in the case as firstly, the meaning of the Deed of Adherence and secondly, if the reference to the “benefits of the Scheme” meant the HUM scale benefits, whether there had been an effective exercise of the power of amendment. He outlined what he saw as the three guiding principles in addressing these questions: “First the question is not what the parties meant to say; but what is the meaning of what they did say. Second the language that they used is likely to be the most important factor, unless the court can conclude that something has gone wrong with the language. Third, where the parties have themselves defined their own terms, the court must give effect to those definitions”.

The Court concluded that interpreted objectively the Deed of Adherence effected “the exercise of the power […] to extend the existing scheme to a new participating employer and a new category of member”. The exercise of the power of amendment, incorporating the HUM scale benefits was to be dealt with separately. The fact that the exercise of that power ultimately never took place was not “a question of the interpretation of the Deed of Adherence. It is a consequence of the parties’ omission to follow through the whole of what they intended to do”. The Court rejected any notion that this was an “impractical, over-restrictive or technical” interpretation.

The decision includes some discussion of the case of Chartbrook Limited v Persimmon Homes Ltd [2009] UKHL 38. Distinguishing Chartbrook, the Court noted that that the principle in that case would only be invoked where something had “gone wrong with the language, as opposed to the implementation of the bargain, or the relevant decision to exercise powers”.

The Court declined to deal with the new point advanced (i.e. whether the equitable maxim was applicable) on the basis that the point should have been taken at first instance. In any event, it was suggested that if the maxim did apply, it would not change the meaning of the Deed of Adherence; rather, it would deem a document (correctly amending the Scheme so as to incorporate the intended HUM scale benefits) to have been executed where in fact it had not been. That question was held to be beyond the scope of these proceedings, which were limited to questions of interpretation. Lewison LJ went on to suggest that the point could be more appropriately raised as part of a claim for rectification.

Comment

The case provides some clarity as to the dividing line between cases which can appropriately be dealt with by construction and those better suited to rectification. In order to ensure that costs of litigation are kept to a minimum, parties should ensure at the outset that they are seeking the appropriate remedy.

The judgement also imposes what is arguably a narrow gloss on the application of Chartbrook. Parties should be cautious of relying on the Court’s willingness to apply “red-ink” unless there is a clear error which relates to the language or the syntax of the document in dispute.

It is unfortunate that the equitable maxim was not dealt with by the Court. A judgment on this point may have provided some welcome guidance on how the somewhat controversial decision of HR Trustees Limited v Wembley plc might be applied. If the parties decide to pursue the point in future rectification proceedings then the point may be dealt with again; however, it seems that it could be some time before a higher court is called on to assess where the limits of the decision in Wembley might be drawn.