In the case of Renishaw Plc v Ross Trustees Services Limited, the court has applied the principle of “corrective construction” in holding that a scheme’s rules should be construed as having a meaning that was not their literal meaning where it would have been apparent to a reasonable and informed person that the literal meaning did not reflect the parties’ intentions.

Principle of “corrective construction”

“Corrective construction” reflects the principle that a court will in some circumstances construe words as having a different meaning from their literal meaning where it is clear that the literal meaning did not reflect the parties’ intentions.  For corrective construction to apply, it must be clear that something has gone wrong with the language used, and it must also be clear what a reasonable person would have understood the parties to have meant.

Application of corrective construction to the scheme’s rules

In the case in question, the scheme’s rules provided for a member to accrue a pension of one sixtieth of Final Pensionable Salary for each year of pensionable service.  They then stipulated that, “The amount of pension thus calculated shall, if necessary, be increased so as not to be less than the Member's Pension Account”, and that for this purpose the Member’s Pension Account meant “an amount equal to twice the contributions paid by the Member”, adjusted for investment returns as prescribed by the rules. 

On a literal reading, a member was thus entitled to a pension every year equal in value to the Member’s notional pension account accrued over the member’s entire period of active membership.  The judge accepted the principal employer’s argument that there had clearly been a mistake in the drafting.  All contemporaneous evidence indicated that the “Member’s Pension Account” wording was intended to give effect to a money purchase underpin.  However, a literal reading would mean that, rather than operating as an underpin, the pension based on the Member’s Pension Account would produce a significantly higher benefit in every case compared to a pension calculated by reference to sixtieths of Final Pensionable Salary.  The “inordinate generosity” of the underpin benefits relative to the Final Pensionable Salary benefit would have been apparent to any reasonably informed reader of the document.  

The judge noted that on a literal interpretation of the rules, a member’s entire Pension Account would be exhausted in the first year of paying a pension.  This meant that the “underpin” would have been by reference to an entirely unrecognised form of benefit.  That would have led any reasonable reader with a basic understanding of the scheme’s tax approved status to conclude that what the drafter intended was to provide a conventional money purchase underpin.  The judge also observed that on a literal interpretation, the rules would produce “irrationally generous” benefits which would have exceeded the Inland Revenue limits in force at the time.

The judge was also satisfied that the second element of the test for corrective construction was satisfied, namely that it was also clear what a reasonable and informed person would have understood had gone wrong, and what needed to be done to correct it.  The solution was for the rule to be construed as meaning that a member’s pension based on Final Pensionable Salary would be increased as necessary so as not to be less than the annual amount of pension that could be purchased with the Member’s Pension Account.  That was the way in which the scheme had in practice been administered since the introduction of the “money purchase underpin”.

Our thoughts

In a case where a literal reading of scheme rules produces an absurd result and it is clear what the real intention was, it is good news that the courts are willing to apply principles of corrective construction to arrive at the intended meaning.  The parties to this case were in some ways lucky that that the drafting error in question produced such an absurd result that it would have been difficult to reasonably argue that a literal interpretation should apply.  Drafting errors can result in benefits that are more costly than the intended benefits, but still within the range of what might be considered “normal” scheme benefits.  In such circumstances it is likely to be much harder to persuade a court that a non-literal interpretation should apply.