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Priority clauses do not always take priority in contract interpretation

18 February 2015

The High Court has reminded us that when there are allegedly conflicting terms in a contract the court will analyse whether the terms can be sensibly read together before considering a priority clause.

In this case the claimant Mr Alexander had a “buy to let” mortgage granted by West Bromwich Mortgage Company Limited (the “Bank”) [1]. The Bank had sent Mr Alexander an Offer of Loan which provided that the interest on the mortgage was fixed for a specified period of time after which it reverted to a variable rate. The variable rate was described as the same as the Bank of England Base Rate plus a premium of 1.99%.

Mr Alexander was also sent by the Bank Mortgage Conditions which stated:

“These Mortgage Conditions incorporate any terms contained in the Offer of Loan. If there are any inconsistencies between the terms in the Mortgage Conditions and those contained in the Offer of Loan then the terms contained in the Offer of Loan will prevail.”

The Mortgage Conditions provided a list of circumstances in which the variable interest rate could be altered by the Bank.

During the time when the interest rate was variable the Bank informed Mr Alexander that it would be increasing the rate.

Before the High Court Mr Alexander argued that the Offer of Loan provided for rates to vary (after the fixed rate period) in accordance with the Bank of England Base Rate but not otherwise. The Mortgage Conditions purported to enable the Bank to vary the interest rate in other circumstances but this was inconsistent with the Offer of Loan and in the event of inconsistency the Mortgage Conditions provided that the terms of the Offer of Loan prevailed. Therefore the Bank was not entitled to increase the variable interest rate.

The High Court noted that it was the Court’s task to read the provisions together and if possible give a sensible effect to each of them. In this case the Court ruled that the provisions in the Mortgage Conditions on the variable interest rate modified or qualified the Offer of Loan by providing that in certain circumstances the rate could be varied. The Court did not find a contradiction between these provisions nor a clear and irreconcilable discrepancy. There being no inconsistency between the provisions the priority clause did not come into play.

This judgment serves as a reminder for commercial lawyers to ensure that all provisions incorporated into a contract work together and do not conflict as the courts will first review whether the terms can be sensibly read together before looking to a priority clause. Priority clauses are often used in contracts but they cannot guarantee the way in which the provisions in the contract will be interpreted by the courts in the event of a dispute.

[1] Mark Robert Alexander (as representative of the “Property 118 Action Group”) v West Bromwich Mortgage Company Limited [2015] EWHC135