Kelly v Mersey Docks and Harbour Company

Under amended occupational pension rules, an employer’s consent to ill-health retirement may operate as a filter, rather than as a primary determination of incapacity. The employer must consider whether the available information gives a real chance, possibility or prospect that the trustees would find the member entitled to a pension. Refusal of consent must not be arbitrary or capricious. Dismissal can constitute retirement for this purpose. Where breach causes loss of the opportunity for a non-party decision-maker to award a benefit, causation is assessed on the balance of probabilities and the lost chance is valued as a percentage, unless the outcome is obvious. General exclusionary wording in pension rules will not exclude such liability if its scope and intention are unclear.

Miss Kelly was employed by Mersey Docks and Harbour Company until her employment was terminated on medical grounds. She sought an ill-health pension under the Harbour Company’s pension fund rules. The rules required employer consent before the trustees could consider whether permanent total or partial incapacity existed.

The employer withheld consent, treating itself as responsible for deciding whether her medical condition met the pension requirements. The first-instance judge held that the employer had acted arbitrarily and awarded damages for the lost chance of obtaining a pension, assessed at 50%. The employer appealed on construction, breach, causation, contractual exclusions and limitation. The central issue was the proper division of responsibility between the employer and the pension trustees.

Disposition. Mance LJ gave the leading judgment and Waller LJ agreed with it. The appeal was dismissed, with the 50% assessment of damages upheld.

1. Construction of retirement. The pension rules defined retirement to include a member being retired by the employer. An employee dismissed on medical grounds could therefore be regarded as retiring from service by reason of incapacity under Rules 9.b.i and 9.b.ii.
2. Employer’s function. The 1994 amendments shifted primary responsibility for determining incapacity to the trustees. The employer’s consent operated as a filter. The employer had to ask whether the information available disclosed a real chance, possibility or prospect that the trustees would regard the member as entitled to an ill-health pension. It was not entitled to act as the primary decision-maker on the ultimate merits of incapacity.
3. Breach. The employer applied the wrong test. It treated the 1991 rules as governing the claim and required severe and permanent medical incapacity. On the correct approach, it would probably have concluded that there was a real prospect of the trustees awarding a partial-incapacity pension. Refusal to consent on the basis actually adopted was arbitrary or capricious.
4. Causation and loss. Applying the principles in Allied Maples v. Simmons & Simmons [1995] 2 AER 907, the employer’s hypothetical decision was assessed on the balance of probabilities. The trustees’ prospects were assessed as a percentage, taking account of evidence they would or might have obtained. Despite substantial doubts in the medical evidence, the lost chance was properly valued at 50%.
5. Defences. Rules 17 and 18 did not clearly exclude liability for unjustified failure to consent. The limitation defence also failed: consent could have been given up to termination and might have been given retrospectively.
6. Separate opinion. Sir Christopher Staughton LJ accepted liability and loss of chance but questioned the implied term against arbitrary or capricious conduct and would have valued the chance at 33%. The majority upheld the 50% assessment.

The appellant was ordered to pay the respondent’s costs, subject to detailed assessment by the Legal Services Commission.

• Court of Appeal (Civil Division): Appeal from the judgment and order of His Honour Judge Kershaw QC dated 19 January 2004 in LV290155. Appeal dismissed: [2004] EWCA Civ 1676.
• First instance: The judge held that the employer’s conduct was arbitrary and awarded damages for the lost chance of an ill-health pension, assessed at 50%.