Get your priorities straight: inconsistencies and priority between contract clauses

Written on 13 Jul 2016

Commercial contracts often comprise a number of separate documents, which taken together form the contractual bargain. This is typically the case for complex, technical contracts such as construction, IT or financial services agreements, but can equally apply to consumer contracts such as mortgages. Priority clauses are used to set out the order of importance of those documents in the event of inconsistency, for example, so that specially agreed terms can be imposed on top of general terms and conditions.

A recent case provides guidance on what constitutes inconsistency and when terms can be read together.

What was the dispute about?

Alexander v West Bromwich Mortgage Company was a dispute about the terms of consumer mortgages provided by West Bromwich to Mr Alexander and other members of an action group represented by him.

Mr Alexander’s mortgage contract consisted of documents including an offer of loan letter, a set of special conditions and a set of general terms and conditions.

  • The offer letter stated that the terms of the loan would be 25 year and that the interest rate would be 6.29% for an initial fixed period, after which the rate would be 1.99% above the Bank of England base rate (it was a “tracker” mortgage).
  • The general conditions stated that interest would be payable at the rates specified in the offer letter, but stated that those rates may be varied by West Bromwich for one of a number of different reasons, including any “valid” reason. The general conditions also provided that West Bromwich could demand repayment in full on one month’s notice.
  • The general conditions provided that, in the event of any inconsistency between the offer letter and the mortgage conditions, the offer letter would prevail.

Mr Alexander argued that the terms allowing West Bromwich to vary the interest rate and to demand full repayment at any time on one month’s notice were inconsistent with the terms of the offer letter, so could not be relied upon.

The first instance court found in favour of West Bromwich, holding that the general conditions in question were not inconsistent with the offer letter, so the contractual priority clause did not need to be considered. The judge considered that the general terms and conditions modified or qualified the offer letter, but that there was no “clear and irreconcilable” difference between the terms. Mr Alexander appealed that decision.

What did the Court of Appeal decide?

The Court of Appeal found in favour of Mr Alexander, reversing the first instance judgment.

Hamblen LJ, giving the leading judgment, found that when considering two terms in a contract that contains a priority clause:

  • A court should not assume that the two terms are consistent. The fact that the contract contains such a clause suggests that the parties envisaged there being inconsistency – for example between specific agreed terms and standard form terms and conditions.
  • On the other hand, a court should not assume that there is an inconsistency, since the parties chose to make the contract subject to such general terms and conditions.

A stark example of an inconsistency is where one term of the contract requires a building to be painted white, whereas another term of the contract requires it to be painted black. In this case, in a very literal sense, the terms cannot be read together. However, the test for finding inconsistency does not require such a literal incompatibility between the terms. Rather, the terms are inconsistent if they cannot “fairly” or “sensibly” be read together.

It may also be relevant if one of the terms is specially agreed and concerns the main purpose or object of the contract. If so, then a printed standard term which is inconsistent with that purpose or object is likely to be found to be inconsistent with the specially agreed term.

Taking these principles into account, Hamblen LJ found that the parties had agreed to contract on the basis of a clear product description, encompassing both the interest rate and the term of the mortgage. It was inconsistent with those specially agreed terms to incorporate a general term which allowed the rate and term to be significantly varied. The general terms did not simply modify or qualify the specially agreed terms, they transformed or negated them.

The Court of Appeal therefore found that neither the term allowing West Bromwich to vary the rate for various reasons, nor the term enabling it to demand repayment on one month’s notice, were incorporated into the contract.

Comment

Different contractual documents are often drafted with very different considerations in mind. For example, in an IT contract, the statement of works may be highly technical, and led by those best placed to understand the complexities of the technology. However, if due attention has not been given to framework agreements negotiated by commercial and legal teams, there is a risk of inconsistency that is inadvertent, rather than planned and understood by all.

The Court of Appeal’s judgment in this case emphasises the importance of the fundamental deal that the parties have agreed to. If you want to qualify any of those expressly agreed terms, you should make this clear and consider including the qualification in the highest priority document, rather than relying on incorporated standard terms.

Best practice is to work through the documents, in terms of priority, and spell out in the contract where specific terms are intended to work together and where there are any inconsistencies, in addition to a catch-all priority clause in case anything has been missed.