An Ontario Superior Court ruling that allowed IBM Canada Ltd. to retrospectively rectify drafting errors that created unintended additional pension benefits for employees on disability leave augurs well for plan sponsors seeking similar relief going forward.
“The case clarifies that there is a specific test for rectification of pension plans and other unilateral instruments, which differs from the stringent test applied to the rectification of bilateral contracts,” says David Stamp, a litigation partner at Osler, Hoskin & Harcourt LLP and who represented IBM in the case.
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More particularly, Justice Peter Osborne noted that “it is only the intention of the maker that is in issue” when dealing with rectification of unilateral contracts. “[For bilateral contracts] the test requires consideration of both ‘the knowledge and intentions of the other party,’ but in the case of unilateral instruments, there is no ‘other party.’”
The court ruled IBM had demonstrated that its pension plan was a unilateral instrument because:
- The company established the plan in 1947 and had repeatedly amended it without negotiating with members;
- The 2014 restatement project that led to the drafting errors was initiated by IBM, was undertaken solely to reflect new legislative requirements and wasn’t the subject of negotiations; and
- IBM had reserved the right to amend or discontinue the plan in whole or in part subject to statutory requirements.
Furthermore, IBM had met the test for rectification of a unilateral instrument by demonstrating that the company’s true intention “was objectively manifested,” said Osborne. In particular, he noted the drafting mistakes were unintended and unauthorized as they were based on a miscommunication to a pension consultant. As such, they were never implemented or communicated to members — who, in any event, didn’t request or expect a change to the rules — and had been corrected prospectively.
Although the 210 current and former employees who were impacted by the changes consented to IBM’s application after lengthy negotiations resulting in a settlement that included a payment formula, their acquiescence wasn’t determinative.
“Even where there is a settlement with affected members, it remains necessary to satisfy the court that the test for rectification is met on the merits,” says Stamp.
Had the strict test for rectification not been met, Osborne was firm that he would have approved the settlement agreement that included the rectification sought — effectively achieving the same result without actually rectifying the plan, says Ari Kaplan, a pension lawyer and mediator at Kaplan Law and who served as counsel to the court-appointed representatives of the impacted plan members.
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“There’s some new law here that stands for the principle that where the requirements for rectification are arguably not met, a settlement that provides for the repair and binds the affected member class can be approved where it benefits them.”
Indeed, Stamp believes the process that led to this decision could be instructive going forward. “The case could serve as a helpful precedent for settling similar cases, particularly with regard to the mechanics of negotiating a settlement with court-appointed representatives of affected plan members and coordinating with [the Financial Services Regulatory Authority of Ontario].”
The FSRA appeared at the hearing but took no position on the application.