Armitage v Staveley Industries Plc

Contractual promises concerning pension benefits must be construed in their commercial and legal context, including the scheme rules and applicable fiscal limits. The court must identify the bargain made rather than construct a different bargain from background assumptions. Where a promise is made because normal retirement age has been reduced, a reference to Inland Revenue limits concerns the limits affecting the initial pension calculation, unless the language clearly extends to separate limits on later annual increases. The employer’s liability therefore extends to the excess of the initial pension over the relevant basic-pension limits, but not to shortfalls created by limits on annual increases where those limits were outside the promise.

Roderick Donald Armitage was a member of the Company’s defined-benefit pension scheme. In 1992 the Company reduced his normal retirement age from 60 to 58 and promised to pay any part of his pension which could not be paid from the scheme because of Inland Revenue limits. The scheme provided annual increases of 5%, subject to separate Inland Revenue limits.

After Mr Armitage retired early, the Company paid the excess of his basic pension over the applicable limits but did not pay amounts attributable to the separate limits on annual increases. Lewison J, in [2004] EWHC 2320 (Ch), declared that the Company was liable for those amounts. The central issue on appeal was whether the reference to Inland Revenue limits covered annual increases as well as the initial pension.

Appeal allowed. The Vice-Chancellor gave the leading reasons. Arden LJ and Keene LJ agreed.

1. The court adopted the contractual interpretation principles derived from 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. Contractual words must be read against the background reasonably available to the parties, including the scheme rules and fiscal limitations under the Income and Corporation Taxes Act 1970. The construction must be practical and purposive. The court must not construct a contract from the background alone, and the implication of terms remains subject to strict limits.
2. The context of the Company’s letter was the reduction of normal retirement age from 60 to 58. Under the scheme, that age affected the initial pension calculation, including final pensionable salary and the denominator of the service fraction applicable to early leavers.
3. Once the initial pension had been calculated, normal retirement age had no relevance to the subsequent calculation of annual increases or to the limits governing those increases. The reference to Inland Revenue limits in the Company’s letter was therefore confined to the limits applying to the basic pension, including the earnings cap and the alternative Class C aggregate-retirement-benefit limits. It did not include the separate limit on annual increases.
4. The Management Committee’s contemporaneous letter confirmed that construction. The broad expressions concerning the pension and its balance did not extend the promise to unrelated limits. An increase in the annual-increase limit could reduce the Company’s liability by franking a pre-existing excess, but a lower annual-increase limit could not increase that liability. The Court invited counsel to agree a declaration distinguishing the initial pension from later annual increases.

1. Court of Appeal (Civil Division) allowed the Company’s appeal and directed that the declaration should distinguish the initial pension liability from liability for annual increases.
2. Chancery Division Lewison J, in [2004] EWHC 2320 (Ch), upheld Mr Armitage’s construction, declared that the Company was liable for the relevant pension increases, and ordered payment of arrears and interest.