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How to address conflicting terms in a contract

In the recent decision of Alexander v West Bromwich Mortgage Company Ltd [2016], the court considered the appropriate approach to take where standard mortgage conditions were inconsistent with the terms contained in a lender’s offer letter.  

Background

In this case, the mortgage contract contained a priority clause providing that the terms of the offer letter would prevail over the standard conditions in the event of inconsistencies.

The mortgage company informed the borrower that it intended to increase the interest rate in accordance with the standard mortgage conditions. The borrower subsequently disputed that the mortgage company had the ability to do so and argued that these conditions were at odds with the terms of the offer letter, which should prevail under the priority clause.

In the High Court, the judge held that the priority clause could only take effect in the case of 'clear and irreconcilable discrepancy'. Since, in the Court's view, there was no inconsistency between the two documents, the clause had no effect.

Test applied by the Court of Appeal

On appeal, the Court of Appeal overturned the High Court's ruling, maintaining that an assessment of whether there are any inconsistences in the contract should be carried out without any pre-conceived assumptions. This meant that, when a court is faced with the question of whether a priority clause should take effect, it should not strive to avoid or find inconsistency. 

The Court attempted to approach the conflicting conditions by reading all of the documents together to establish whether they qualified or modified one another. Instead, the Court found that the clauses in the conditions had the effect of transforming the nature of the product specified in the offer letter to something entirely different. That being the case, the priority clause prevailed, and the inconsistent clauses in the conditions were not incorporated into the contract.

Implications

The different approaches taken by the High Court and the Court of Appeal reflect the existing uncertainty in relation to priority clauses.

The High Court did not attempt to examine whether parts of the contract were inconsistent with each other.  The Court of Appeal, on the other hand, decided to give effect to the priority clause after having established that the contract conditions were inconsistent.

The case acts as a rather obvious reminder that it is best practice to review all related documents to ensure that there is no inconsistency and that they can be sensibly read together. It also highlights that care should be taken to ensure that particular terms have been effectively incorporated into a contract and, if appropriate, specified to have priority.

It is worth noting that where inconsistency does exist, the courts are more likely to uphold terms that have been specifically agreed and  are central to the main purpose of the contract rather than a parties' standard terms.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at August 2016. Specific advice should be sought for specific cases. For more information see our terms & conditions.

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