Pension plan texts, both current and historical, are key documents governing employee and employer rights and obligations under a registered pension plan. As such, plan texts are typically complicated lengthy documents—particularly when a text relates to a defined benefit (DB) plan that was established many years ago. The very nature of these detailed texts seems to invite drafting mistakes when these documents are updated from time to time. Anyone who has ever been involved in preparing a restated plan text or other plan amendment will understand how easily a drafting error can occur.
In an important recent decision of the Ontario Superior Court of Justice, Kraft Canada Inc. v. Pitsadiotis, Kraft, as sponsor of the plan at issue was allowed to correct a drafting error in a prior plan amendment that would have otherwise resulted in the granting of additional pensionable service to members, and a corresponding additional cost to Kraft.
At issue in the Kraft case was the effect of a 1992 amendment to Kraft’s DB plan (the “Plan”). Prior to the 1992 amendment, the Plan had provided that pension benefits would be based on a member’s service with the company, while a member of the Plan. However, when the Plan was amended in 1992 the words that tied pensionable service to membership in the Plan were deleted, with the result that the Plan provided that pensionable service was to be calculated from the point of hire.
In 2003 a union representing certain members of the Plan became aware of the Plan language and subsequently sought to have the Financial Services Commission of Ontario (FSCO) compel Kraft to include continuous employment from date of hire as pensionable service under the Plan. Kraft opposed the union’s position in the FSCO proceedings that followed, and in 2007 Kraft filed an application with the Ontario Superior court of Justice seeking rectification of the Plan’s language respecting pensionable service.
The legal remedy of rectification is available in cases where the true intentions of a party (or parties, as the case may be) are not accurately recorded in the written instrument. As noted in the Kraft decision, the legal principle of rectification was developed by the Courts to relieve against a mistake in a document.
The unchallenged evidence presented to the Court by the employer in this case demonstrated that the words that tied pensionable service to Plan membership had been unintentionally deleted in the 1992 Plan amendment. Specifically, the Court considered and found as persuasive the following evidence respecting Kraft’s intent in making the 1992 Plan amendments:
• the individuals involved in preparing the 1992 Plan amendment provided unchallenged testimony that there was no intention to include any period of pre-enrolment employment as pensionable service in the Plan, and the consultant who drafted the 1992 Plan amendment provided unchallenged affidavit evidence that he was certain that the change was a drafting or clerical error;
• there was an absence of testimony from the union or any of its members that they expected the Plan would be amended to include pre-enrolment employment as pensionable service under the Plan;
• the Plan was consistently administered as though the 1992 Plan amendment did not delete the words that tied pensionable service to membership in the Plan; and
• member communications were consistent with the administrative practice of excluding from pensionable service all pre-enrolment employment.
The Court held that this was convincing proof of Kraft’s intent respecting the 1992 Plan amendment, thereby satisfying the evidentiary burden necessary for a successful claim of rectification. Karen Pitsadiotis, the representative respondent appointed by the Court, raised a number of reasons why the Court should decline to exercise its discretion in Kraft’s favour, all of which were rejected by the Court.
The Court concluded that the equities favoured the relief sought by Kraft. On this point, the Court stated that “for [Kraft] to be denied rectification and required to fund additional pension benefits that were never intended…, and that plan members could not reasonably expect to receive, would create an injustice to [Kraft].” The result was that the Court ordered the Plan terms be revised so as to restore the previously existing tie between pensionable service and membership in the Plan. The Court confirmed that plan members should not receive a pension windfall as a result of a drafting error.
The Kraft decision is an important addition to the ever-expanding body of Canadian pension law jurisprudence. It is the first Canadian case to order rectification as a remedy to correct pension plan documentation that included a drafting error. It will inevitably be an important precedent for other plan sponsors who from time to time are surprised to learn that the terms of the governing plan text do not accurately reflect the intended benefit provisions. It is obviously particularly important when a drafting error results in a grant of additional rights and/or benefits to members, at the employer’s expense.
On a practical note for plan sponsors, in order to rely upon the legal doctrine of rectification in the future (if necessary), a plan sponsor will have to provide the Court with convincing evidence of the “true” intended provision. This is yet another reason why all correspondence relating to a plan and its terms, meeting notes and draft documents should be retained indefinitely. If a mistake makes its way into a plan text, correspondence, meeting notes and drafts may provide the evidence needed to invoke the doctrine of rectification.
Terra Klinck and Jordan Fremont are partners in the Pension and Benefits Group at Hicks Morley in Toronto.
terra-klinck@hicksmorley.com
jordan-fremont@hicksmorley.com
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