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	England and Wales Court of Appeal (Civil Division) Decisions
You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Armitage v Staveley Industries Plc [2005] EWCA Civ 792 (01 July 2005) URL: http://www.bailii.org/ew/cases/EWCA/Civ/2005/792.html Cite as: [2005] EWCA Civ 792

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IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM CHANCERY DIVISION
The Hon. Mr. Justice Lewison
[2004] EWHC 2320 (Ch)

		Royal Courts of Justice Strand, London, WC2A 2LL
		1 July 2005

The Vice-Chancellor :

Introduction
1. Roderick Donald Armitage ("Mr Armitage") joined Staveley Industries plc ("the Company") on 1st December 1979. He was then a little over 36, having been born on 14th September 1943. In due course he became legal director and company secretary and retired on 1st May 1999. Throughout his employment with the Company he was a category A member of the Staveley Executive Pension Scheme (or the Staveley Industries Retirement Benefit Scheme which later undertook its liabilities) to which I shall refer as "SEPS".
2. SEPS was a defined benefit scheme based on final salary. In addition it was an exempt approved scheme under Chapter I of Part XIV Income and Corporation Taxes Act 1970. Accordingly the defined benefits payable under SEPS were necessarily restricted to those permitted by the Inland Revenue as a condition for its continued approval. The defined benefits relevant to this appeal are (1) the pension to which a member is entitled on retirement at normal retirement date, which was 60, and (2) the annual increases due in respect of pensions in payment on 1st January in each year. In relation to each of those benefits the Inland Revenue imposed limits.
3. The relevant benefits and limits applicable to Mr Armitage, shorn of their irrelevant details, are:

Pension Benefit: 2/3 x Final Pensionable Salary (as defined) at Normal Retirement Age (as also defined).

Pension Benefit limit: in the case of members with 'Pre 17 March 1987 Continued Rights', 2/3 Final Remuneratoin (as defined) on retirement at Normal Retirement Age after 10 yeaers' Pensionable Service (as defined).

Pension Increase: 5% per annum, compound.

Pension Increase limit: 3% per annum, compound, or, if greater, the % increase in RPI since the pension came into payment.

4. In July 1992 Mr Armitage received two letters each dated 16th July 1992, one from the Company the other from the Management Committee of SEPS. The letter from the Company read as follows:

"I am writing to confirm that the Board has reduced your retirement age for the purpose of your service contract to your 58th birthday.

Your pension entitlement will be calculated as though the term Normal Retirement Age used in the rules of [SEPS] is this age. If it is not possible to pay the whole of the pension out of the Scheme because of Inland Revenue limits, then the balance will be paid by Staveley Industries."

5. The letter from the Management Committee was in the following terms:

"I refer to the Company's letter to you of 16 July 1992 informing you that for pension purposes your Normal Retirement Age will be your 58th birthday. I am pleased to be able to tell you that the Management Committee of [SEPS] has agreed that your benefits under the Scheme should be augmented as far as is reasonably practicable to this end under clause 18 of the Scheme's governing documents, within Inland Revenue limits. The exact level of pension that the Scheme can provide will depend on your earnings and inflation in the period up to your retirement; but the likelihood is that an element of the overall pension promise will have to be met from the Company."

6. As will have been apparent from the dates I have mentioned in paragraph 1 above Mr Armitage retired four and a half months before his 56th birthday. He took an immediate but reduced pension appropriate to his final pensionable salary (as defined) on the footing of a normal retirement age of 58. Part of the pension so calculated was in excess of the Inland Revenue limit and has been paid by the Company. Over the years since 1999 Mr Armitage has also been paid the annual increases to which he is entitled under SEPS, that is to say 5% subject to the Inland Revenue limit of 3% or, if greater, the percentage increase in RPI. He has not been paid any increase in excess of the Inland Revenue limit.
7. Mr Armitage claims that the effect of the letter from the Company which I have quoted in paragraph 4 above renders the Company liable for annual increases of 5% less any amount thereof which, because it was below the Inland Revenue limit, was paid by SEPS. The Company did not agree and these proceedings were commenced by a Part 8 claim issued by Mr Armitage on 16th March 2004. The matter came before Lewison J who upheld the contentions of Mr Armitage. By his order dated 18th October 2004 he declared that Mr Armitage was entitled to be paid by the Company such increases as would be payable to him under SEPS if the relevant Inland Revenue limit did not apply less the amounts paid by SEPS. He ordered the Company to pay to Mr Armitage £26,002.00 by way of arrears and interest thereon of £3,707.14.
8. This is the appeal of the Company. It contends that the judge attributed to the letter of 16th July 1992 an effect beyond what is justified by the context in which it was written or the words which appear in it. In summary it submits that the context was the reduction of the normal retirement age from 60 to 58 and the Inland Revenue limits referred to are those which, in Mr Armitage's case, restrict the basic pension to 2/3 Final Remuneration and not the distinct limit on pension increases.
The Provisions of SEPS
9. SEPS was originally constituted by a Trust Deed dated 23rd March 1977 and the Rules contained in it. Clauses 1 to 20 of the original Trust Deed and all the original rules were superseded by the provisions of a Trust Deed and Rules thereto attached made in 1996 with effect from 1st April 1995. The arguments addressed to us have assumed that the relevant provisions of the Trust Deed and Rules in July 1992 were to the same material effect as those adopted with effect from 1st April 1995. Counsel for both parties invited us to make that assumption too. Accordingly I will assume that the context in which the letters of July 1992 were written was the same as that provided by the later Trust Deed and Rules.
10. On 7th September 1998 the assets of SEPS were taken over by the Staveley Industries Retirement Benefit Scheme on the undertaking of the latter to provide for the remaining members of SEPS the benefits to which they were entitled under SEPS. The issue we have to determine arises only in relation to the provisions of SEPS so that the terms of the Retirement Benefit Scheme are irrelevant.
11. For completeness I should also mention that when Mr Armitage became a member of SEPS he was entitled to and, in effect, brought with him a service credit of 1 year and 2 months. Whilst he was a member of SEPS he was granted bonus service credits for the years 1986, 1989 and 1991 in the aggregate amount of 11 months. In addition he was awarded an extra service credit of 2 years on his retirement in 1999. Each of these elements is relevant to the calculation of the pension due to Mr Armitage on his retirement. As there is no issue as to that calculation and as the provisions relating to service and bonus credits merely complicate and obscure the point we have to decide I shall not refer to them. It follows that any figures I may refer to are illustrative only and not descriptive of Mr Armitage's actual pension entitlement.
12. The only provision in the Trust Deed to which I need to refer is clause 18. That clause entitles the Management Committee, at the request or with the agreement of the Company, to direct the trustees to increase pensions and other benefits payable under SEPS provided that Inland Revenue approval would not thereby be prejudiced. It is to the exercise of that power that the letter from the Management Committee which I have quoted in paragraph 5 above refers.
13. The Rules are in three parts with an appendix. We are only concerned with Part I and the appendix which sets out the Inland Revenue limits. All references to rules are to rules contained in Part I. Paragraph references are to paragraphs in the Appendix.
14. Rule 1 contains a number of material definitions to which I shall refer in the context of the appropriate rule. Rule 4 specifies the pension benefits to which a member is entitled in the respective circumstances specified in the various sub-paragraphs. The basic provision is in Rule 4(a). This provides that

"upon retirement at Normal Retirement Age a member shall be entitled under the Scheme to the amount by which

(i) his Maximum Pension;

exceeds

(ii) [pension benefits payable to him under other Group retirement benefit schemes]"

"Normal Retirement Age" is defined in Rule 1 as meaning a member's 60th birthday or such earlier date as might be approved by the Inland Revenue and notified to the member by the Employer following a change in the terms of employment of that member. "Maximum Pension" is defined in Rule 1 as two-thirds of Final Pensionable Salary and "Final Pensionable Salary" is defined as the highest rate of basic salary as at the previous 6th April with specified additions for director's fees and bonuses. It is the cumulative effect of these definitions which gives rise to the formula set out in paragraph 3 above, namely that the basic pension entitlement is 2/3 x Final Pensionable Salary at Normal Retirement Age.

15. Rule 4(b) provides for the case of retirement after Normal Retirement Age. In that event the member is entitled to a pension commencing on the date of his actual retirement ascertained in accordance with Rule 4(a) but increased by such amount as the Management Committee on the advice of the Actuary may determine to be appropriate. Accordingly in the case of late retirement the pension is still calculated by reference to Final Pensionable Salary at Normal Retirement Age the relevant increase is determined by the Management Committee on the advice of the Actuary rather than by reference to any increase in remuneration at the date of actual retirement.
16. Rule 4(c) deals with the case of early retirement but by reference to the provisions of Rule 5. Rule 5 deals with members who cease to be employed in the group before retirement. Rule 5(b) provides that in the case of an early leaver:

"there shall be payable a deferred pension commencing at Normal Retirement Age equal to the amount if any by which:-

(i) that proportion of his Maximum Pension as the Group Service.....completed by him bears to the Group Service.... he would have completed had he remained in the service of the Employer to Normal Retirement Age;

exceeds

(ii) [pension benefits payable to him under other Group retirement benefit schemes]."

17. It is the provision of Rule 5(b) which gives rise to the fraction or proportion n/ns where n = service actually achieved and ns = service to Normal Retirement Age. Thus, in the case of Mr Armitage, the effect of the letters of 16th July 1992 was to reduce the denominator in the fraction and thereby to increase the proportion of the basic pension due to him in consequence of his retirement in 1999. The basic pension so due was n/ns x 2/3 x Final Pensionable Salary.
18. Rule 4(c), subject to certain immaterial conditions, entitles an early leaver to take an immediate pension:

"equal to the deferred pension he would have been entitled to in accordance with sub-rule (b) of Rule 5....but reduced by such amount as the Management Committee (acting on the advice of the Actuary) shall determine."

That reduction is conventionally known as the Actuarial Reduction.

19. Thus it is plain that the Normal Retirement Age is an essential element in the calculation of the basic pension. It prescribes the date at which Final Pensionable Salary is to be ascertained under Rule 4(a) or (b) for those who retire at or after that age. It is also an element in the calculation of the fraction or proportion which determines the amount of a deferred pension under Rule 5(b) and so also an immediate but reduced deferred pension under Rule 4(c).
20. At this point it is convenient to refer to the relevant Inland Revenue limit. Rule 20 notes that the Scheme is designed to obtain Inland Revenue approval. It provides that the Appendix forms part of the Rules and that:

"It restricts the benefits that can be provided under the Scheme and contributions that members can pay to the Scheme. The Inland Revenue require benefits and contributions to be limited to the amounts described in the Appendix as a condition of approving the Scheme."

21. Paragraph 1 of the Appendix contains a number of definitions to which I shall refer later in the context in which they are relevant. It then sets out in various different paragraphs the Inland Revenue limits on a number of specified contributions and benefits. In relation to benefits such limits are imposed on, amongst others, aggregate retirement benefit, lump sum benefits and increases to pensions in payment.
22. The limits were imposed in relation to different classes. Although Mr Armitage was a Category A member for the purposes of the scheme he was a class C member for the purpose of the Inland Revenue limit. The relevant limit for such a member, as set out in Paragraph 1(a) of the Section headed "Benefit limits for Class B and Class C members", is that

"The member's Aggregate Retirement Benefit shall not exceed:-

(a) on retirement at or before Normal Retirement Age a pension of 1/60th of Final Remuneration for each year of relevant service (not exceeding 40 years) or such greater amount as will not prejudice Revenue Approval of the Scheme;"

Aggregate Retirement Benefit is defined in paragraph 1 as being the pension benefit including the pension equivalent of any lump sum. Final Remuneration is also defined in Paragraph 1 in complicated terms the details of which do not matter. Suffice it to say that the definition of Final Remuneration in the Appendix is materially different to the definition of Final Pensionable Salary in the Rules. As Lewison J noted the latter is greater than the former. Subsequent sub-paragraphs set out comparable limits for late and early leavers but it is unnecessary to refer to their details.

23. The alternative greater amount permitted by the paragraph I have quoted in paragraph 22 above is described in IR 12 (2001) Part 7. In the case of a member, such as Mr Armitage, who was entitled to 'Pre 17 March 1987 Continued Rights' the greater limit is that prescribed by paragraphs 7.40 and 7.47. The effect of these paragraphs is common ground between the parties and, accordingly, I will not further describe them.
24. These provisions and definitions are the source of the formula set out in paragraph 3 above that, in Mr Armitage's case, the Inland Revenue limit on the basic pension, on retirement at Normal Retirement Age after 10 years Pensionable Service is 2/3 Final Remuneration (as defined). It is on its face materially different to the pension benefit for which, absent that limit, the scheme provides.
25. The provisions relating to annual increases are simpler. Rule 11(b) provides that

"Every pension or annuity in course of payment under the Scheme shall be increased on each Pensions Increase Date by:-

(i) in the case of a pension payable to a member, the Increase Percentage of the total of such pension....immediately prior to such Pensions Increase Date;"

Pension Increase Date is defined in the same rule as 1st January. The Increase Percentage is defined by Paragraph 1 of the Appendix in relation to a Category A member as 5%.

26. By contrast the Inland Revenue limit is contained in paragraph 3 under the heading "Other limits on benefits relating to all members". It is in the following terms:

"The maximum amount of a pension ascertained in accordance with the previous provisions of the Appendix.....may be increased by 3% or if greater, in proportion to any increase in the [RPI] Index since the pension commenced."

The Judgment of Lewison J
27. Lewison J described the issue before him and set out or summarised the relevant provisions of SEPS and the Inland Revenue limits. In paragraph 27 he pointed out that the issue was to what, if any, annual increase Mr Armitage was entitled in accordance with the letters dated 16th July 1992. He considered that the letters were open to four possible interpretations of which the second and fourth were:

"(ii) the top up pension [namely the part payable by the Company] would be increased in line with permitted Inland Revenue limits; that is at the rate of 3 per cent per annum or RPI since inception if greater;"

"(iv) the top up pension would be increased not only by 5 per cent per annum of the top up pension itself, but also by the difference between an annual 5 per cent increase on that part of the aggregate pension payable out of SEPS and the annual increase allowed by the Inland Revenue."

28. The Company contended for the second interpretation and Mr Armitage for the fourth. In considering the argument for the Company the judge thought that it necessarily involved the implication of words as set out in paragraph 35 of his judgment. In paragraphs 37 to 41 he concluded:

"37. I have not found the choice between the rival interpretations an easy one. [Counsel for Mr Armitage] relies heavily on what he says is the plain meaning of the words. I have no real doubt that, with the benefit of hindsight, the interpretation for which Mr Armitage contends represents a generous benefit at Staveley's expense. A guarantee of 5 per cent annual increases, which Mr Armitage could not have enjoyed under SEPS, bears no apparent relationship to the change in his pension entitlement under consideration in the letter. On the other hand, if inflation had continued to run at the rates prevailing in the years preceding 1992, it would not, in retrospect have been so generous. Indeed there is the possibility that it would not have cost Staveley anything at all. But as Viscount Simon said in British Movietonews Ltd v. London and District Cinemas Ltd [1952] AC 166 at 185:

"The parties to an executory contract are often faced, in the course of carrying it out, with a turn of events which they did not at all anticipate - a wholly abnormal rise or fall in prices, a sudden depreciation of currency, an unexpected obstacle to execution, or the like. Yet this does not in itself affect the bargain they have made."

38. It might be possible to reformulate the implied term so as result in the interpretation that [Counsel for the Company] says is the right one. But the greater the difficulty in formulating the implied term, the less obvious the implication becomes. Equally the more complex the implied term becomes, the less obvious it becomes. I do not consider that this is a case in which I can properly imply a term.

Conclusion

39. I recognise the force of [Counsel for the Company]'s points about the background. But in the end, the primary source of the parties' legal rights and obligations is to be found in the words they used. If I accede to [Counsel for the Company]'s argument I would, I think, be making a contract for the parties, albeit one which, with the benefit of hindsight, would have been a more sensible one for Staveley to have made.

40. In my judgment, for the reasons given by [Counsel for Mr Armitage], the natural reading of the letter leads to the conclusion that it means what Mr Armitage says it means. I do not think that, trying to recreate the mindset of the parties in 1992, that meaning produces a result which should lead me to conclude that something "must" have gone wrong with the language and that the natural meaning of the words attributes to the parties an intention that they "plainly" could not have had. The meaning for which [Counsel for the Company] contends does, to my mind, and with the benefit of hindsight, produce a more sensible bargain, but that for which [Counsel for Mr Armitage] contends is not so extreme as to "flout business commonsense".

41. I propose, therefore, to make the declaration sought in the claim form."

The Arguments
29. It is not suggested that the judge failed to direct himself by reference to the appropriate principles of interpretation. Both parties accepted as correct the approach to interpretation he summarised in paragraphs 15 to 19 of his judgment. It is a helpful summary of the propositions to be derived from five well-known cases, namely Philips Electronique Grand Public SA v. British Sky Broadcasting Ltd [1995] 1 EMLR 472; Mettoy Pension Trustees Ltd v. Evans [1990] 1 WLR 1587; Investors Compensation Scheme v. West Bromwich BS [1998] 1 WLR 896; National Grid plc v Mayes [2001] 1 WLR 864 and Commerzbank AG v. Price-Jones [2003] EWCA Civ 1663. I would adopt them in a slightly abbreviated form as follows:

(1) The words of the letters must be interpreted in the light of the background;

(2) The background includes the rules of SEPS and the fiscal limitations on pensions that can be paid without jeopardising the status of SEPS as an exempt approved scheme;

(3) The interpretation must be one that is practical and purposive, rather than detached and literal;

(4) If more than one interpretation is possible, the correct choice may depend on the practical consequences of choosing one interpretation rather than another;

(5) If one would conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention that they plainly could not have had;

(6) If detailed semantic and syntactical analysis of words in a contract leads to a conclusion that flouts business commonsense, it must be made to yield to business commonsense;

(7) The ultimate question is what meaning would be conveyed to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the date of the contract.

(8) The court must not construct from the background alone a contract that the parties did not make.

(9) There are strict fetters on the ability of the court to imply further terms.

(10) Whether a term is to be implied is to be determined as at the date of the contract.

30. Counsel for the Company eschewed any reliance on any implication. The construction for which he contended, in effect the second of the four possible constructions to which Lewison J referred, is, so he submitted, the plain meaning of the words used in the letter when read against the background of the terms of SEPS and the Inland Revenue limits. He submitted that it was quite clear that the third sentence, beginning "If it is not possible......" was not a free-standing promise but was governed and limited by the context of the first two sentences.
31. Thus the context is set by the first sentence as the reduction in Normal Retirement Age in the case of Mr Armitage from 60 to 58. "Your pension entitlement" referred to in the second sentence is that payable on retirement if the age of 58 is substituted for 60 as the "Normal Retirement Age" for Mr Armitage. The third sentence recognises that the consequence is likely to be that the Inland Revenue limit will be exceeded in the light of the increase in the basic pension that such a reduction generates. He submits that there is no justification for reading the phrase "Inland Revenue limits" in the third sentence as referring to other limits irrelevant to the calculation of the basic pension or to the "Normal Retirement Age". He submits that it is permissible to refer to the letter from the Management Committee as clearly confirming this construction of the letter from the Company.
32. This was disputed by Counsel for Mr Armitage. He pointed out that the pension to which Mr Armitage was entitled was derived from two sources, SEPS up to the Inland Revenue limits and the Company for all amounts in excess of those limits. He submitted that there was no justification for imposing Inland Revenue limits on the part of the pension payable by the Company. He relied on the fact that the split between SEPS and the Company has to be recalculated annually. In times of inflation the RPI increase will be greater than that permitted by the Scheme and will, to that extent, 'frank' a larger proportion of the total pension for payment out of SEPS. By contrast in times of low inflation the increase permitted by the scheme will exceed the Inland Revenue limit so that the proportion payable by the Company will go up. He relied on the phrases in the letter "your pension entitlement" and "whole of the pension". They refer, he submitted, to the pension payable for the time being and so, necessarily, include the annual increases. The "balance" mentioned in the third sentence is the whole of the pension SEPS cannot pay because of any of the Inland Revenue limits. In summary he contended that though the reduction of the normal retirement age was the occasion for the letter it did not exhaust or limit its effect.
Conclusion
33. I prefer the submissions for the Company which, I should add, appear to be markedly different to those advanced before Lewison J. There is no doubt that the context for the letter was the reduction in the normal retirement age for Mr Armitage from 60 to 58. Under the terms of the scheme this would affect the calculation of the Maximum Pension, as defined, because the Normal Retirement Age, as defined, was the time for ascertaining the final pensionable salary to be used in the calculation of the initial pension benefit. In addition it was an essential element in the calculation of a deferred pension for an early leaver because it provided the denominator of the fraction to be applied. Similarly it was relevant to the calculation of the immediate but actuarially reduced pension paid to an early leaver.
34. It follows that the calculation referred to in the second sentence of the letter is the calculation of the initial pension to which the reduction is relevant. Once that amount has been ascertained there is no occasion to revisit it. It is true that there will be an annual calculation so as to ascertain the amount of the annual increase and the amount of the liability of the Company; but the figure for the initial pension is carried forward in all later years as the figure together with previous annual increases from which that year's increase is to be ascertained. Thus in year 1 the amount of the initial pension will be ascertained and compared with the Inland Revenue limit for the basic pension. Any excess of the former over the latter is payable by the Company. In the second year the annual increase will be added. That increase is the lower of 5% or the higher of 3% compound or the increase in RPI over the RPI at the date the pension came into payment. In the third and subsequent years the annual increase will be calculated on the same basis, taking into account previous increases. The normal retirement age is of no relevance to the calculation of the annual increase or the Inland Revenue limits in respect of annual increases.
35. Accordingly in my view "the Inland Revenue limits" referred to in the third sentence must be confined to those applied to the basic pension. There are in fact three, the earnings cap referred to in the definition of Final Pensionable Salary and the alternative limits to a Class C member's Aggregate Retirement Benefit set out in the Appendix. It is those limits and no others which define the Company's liability.
36. Even if the words "your pension entitlement", "the whole of the pension" and "the balance" mean what they say and refer to the totality of Mr Armitage's entitlement in any particular year that is no reason to extend the words "Inland Revenue limits" to limits or excesses over those limits which are unconnected with the Normal Retirement Age. Quite simply the parties were not directing their minds to calculations or Inland Revenue limits unaffected by the reduction in the Normal Retirement Age.
37. This is amply confirmed by the terms of the letter of the same date from the Management Committee to Mr Armitage. The "augmentation" there referred to is the increase in prospective pension consequential on a reduction in normal retirement age. Thus the Inland Revenue limits referred to in that letter are necessarily confined to those which restrict a member's aggregate retirement benefit, not those which restrict subsequent annual increases. It was not suggested by Counsel for Mr Armitage that this letter was not relevant to the construction of the other. Apart from the fact that both deal with the same subject matter and were written on the same day the same individual, Mr B.H.Kent, the Chairman and Chief Executive of the Company, signed each of them.
38. I would only add that the Company's liability may be reduced by an increase in the Inland Revenue limit on annual increases in excess of the Scheme increase of 5% because, as recognised in paragraph 32 above, such an increase may 'frank' a pre-existing excess. But the converse cannot increase the Company's liability because the Inland Revenue limit on annual increases is not a limit to which the letter refers and by reference to which the liability of the Company is to be measured.
39. For these short reasons I would allow this appeal. I do not consider that the question posed in the Part 8 claim form, which was answered by the Judge in the affirmative, is very helpful in identifying the issue as it treats the initial pension and annual increases in the same way. I would invite counsel to agree the form of a declaration which distinguishes between the two and clearly reflects the decision of this Court, whatever it may be.

Lady Justice Arden

40. I agree.

Lord Justice Keene

41. I also agree.