When does a mistake form a contract?

Mark Grant

Introduction

Until recently, it was generally accepted that where members were given incorrect information on their benefits their remedy was to be compensated to the extent that they had changed their position to their detriment in reliance on the incorrect information. They would not usually be entitled to claim the full amount of any over quoted benefits. However, the Ombudsman is now applying a contractual analysis in some cases meaning that the member becomes entitled to the full amount of any benefits overquoted regardless of whether any detriment has been suffered.

A recent Ombudsman Decision

A good example of the Ombudsman’s approach can be found in a recent case involving a Mr Webb. An offer was made to Mr Webb by Mr Fletcher, the in-house pensions manager to treat an earlier period of pensionable service as though it were joined with the current period of pensionable service. This meant that the frozen deferred pension rights of the member relating to service with the employer between 1960 and 1980 would become linked to his current salary. The pensions manager had no authority from either the company or the trustees to do this.

After the member left service in 1996, the new (third party) administrators of the scheme wrote a standard leaver letter to the member, signed "on behalf of the Trustees" advising him of his various options under the scheme. One of them was a deferred pension based on pensionable service dating back to 1960, reflecting the scheme records as amended by the pensions manager.

The error was subsequently discovered and the member was advised that instead of receiving a pension of £15,985, he should only get £9,601. The member subsequently complained to the Pensions Ombudsman.

Authority

The Ombudsman accepted that the pensions manager had no actual authority to make the offer to Mr Webb. However, on the issue of apparent authority he decided that: ?"... by their conduct in not expressing to the members any limits as to Mr Fletcher’s authority, the Trustees represented to Mr Webb and the other members that Mr Fletcher had "apparent authority" in all matters relating to the scheme."

We would criticise this reasoning on the basis that there must be some reasonable limits within which a scheme member would expect a pensions manager to operate. Is it really reasonable for a member to assume that the pensions manager has the power to commit the trustees and employer of a pension scheme to valuable augmentations of benefits without getting their express agreement?

Ratification

The Ombudsman continued his analysis by stating that even if no apparent authority existed, the subsequent letter sent "for and on behalf of the trustees" by the third party administrators amounted to ratification of Mr Fletcher’s earlier decision. Again, this analysis seems flawed as ratification requires actual knowledge and understanding by the ratifying party.

Consideration

It was argued before the Ombudsman that even if it could be shown that a contractual offer had been made, a contract could not have been formed because there was no 'consideration'. However, the Ombudsman concluded that the member gave consideration by giving up his existing rights to a deferred pension in return for the new benefits. However, in practical terms Mr Webb did not "give up" anything, he struck a deal with the pensions manager which produced a windfall benefit for himself.

Binding trustees personally

The final, and most worrying aspect of the Ombudsman’s conclusion, concerned the scope of the pensions manager’s authority. The trustees argued that Mr Fletcher could not have committed them to the particular deal as the trustees did not have power to award such increased benefits under the pension scheme rules. The Ombudsman stated that even if Mr Fletcher’s apparent authority was limited to the power of the trustees, it would have been possible for the trustees to have agreed to granting these benefits in their personal capacity. This analysis must be wrong as it cannot possibly be within the apparent authority of a pensions manager to form contracts which bind trustees personally.

What schemes should do now

In an ideal world the obvious answer would be to get the facts right in the first place. However, given that errors inevitably arise from time to time, trustees and employers should urgently take advice to ensure that communications to members by pensions administrators are drafted in a way that makes it clear that the trustees and company will not be bound to provide benefits in excess of those provided under the scheme rules.