This article originally appeared in Leasing Life magazine in September 2016.
Where standard printed terms and conditions of a contract are inconsistent with its special terms and conditions, and cannot fairly or sensibly be read together, the special conditions will prevail so as not to defeat the main object and intention of the contract.
The Court of Appeal has provided a reminder of this basic proposition in Alexander (as representative of the "Property 118 Action Group") v West Bromwich Mortgage Company Ltd. Alexander took out a 25 year "buy-to-let" interest only tracker mortgage with the lender. Interest was fixed for the first two years and thereafter was to be at a variable rate of 1.99% above Bank of England base rate. The lender sought to increase the variable rate to 3.99%.
Alexander argued that the lender's standard printed conditions on which it was relying were not consistent with the terms of the offer of loan (the Offer) and were therefore not incorporated into the contract.
The two clauses in particular in issue in the standard mortgage conditions were those which gave the lender the right to
- increase the variable rate of interest for any reason, including to reflect market conditions generally and
- request repayment of the loan in full on the giving of one month's notice.
The interest rate clause
Alexander argued that it is well known that a tracker mortgage interest rate is variable only in line with a specified base rate and not for any other reasons.
He also relied on the 'inconsistency clause' in the standard conditions which stated that if there were any inconsistencies between the standard terms and those in the Offer, then the terms contained in the Offer would prevail.
At first instance, the Commercial Court held that the lender's general terms and conditions were not inconsistent with the special terms in the Offer but, taken together, they could be read as modifying or qualifying one another. The lender was entitled to increase the rate of interest for any reason. Alexander appealed.
The Court of Appeal, allowing the appeal, held that it was the Offer document that set out the features and specially agreed bespoke terms and conditions of the particular mortgage being agreed and described and defined it. The reference to the interest rate in the Offer was part of, and integral to, the product description. The Offer clearly indicated that the rate of interest would only be varied in accordance with (and so as to reflect) changes to the Bank of England base rate. There was no suggestion in the Offer that the rate could ever be raised (or lowered) other than by reason of, and strictly in accordance with, a change to the Bank of England Base Rate. That was entirely consistent with reasonable parties' general understanding of a tracker mortgage.
If incorporated, the lender's widely drafted standard condition gave it the unilateral right to change the product offered to something else entirely. A printed standard term which conferred such a right was inconsistent with the specially agreed description of the loan in the Offer. It would mean that there was no enforceable obligation on the lender to provide the product that it had agreed to provide.
The right to vary the variable rate as the lender suggested should have been clearly spelt out in the Offer but had not been and was inconsistent with the Offer.
The repayment clause
Alexander argued that if the clause enabling the lender to request repayment in full on one month's notice absent any default by the borrower was incorporated, this effectively gave the lender an unqualified and unrestricted right to terminate the contract despite no default by the borrower.
Alexander contended that such a right was contrary to the spirit, intent and object of the loan agreement as a whole and produced a commercially unreasonable, if not absurd, result. The Offer made it clear that the sum was repayable in full at the end of the 25 year term and that the borrower should ensure sufficient funds were then available to be able to repay it. This could not sensibly be read together with a term that provided for a right to require repayment on one month's notice where there was no default, as that would expose him to the risk of termination at the lender's whim.
The Court of Appeal agreed that this term was also inconsistent with the purpose of a 25 year term buy-to-let mortgage.
Both the standard terms complained of were incompatible with the intent and purpose and specific terms of the Offer, which reflected the agreement reached between the parties. They could not fairly or sensibly be read together with the Offer and were not therefore incorporated into the contract.
Things to consider
The starting point where the issue of inconsistent terms arises is that the courts are generally reluctant to hold that parts of a contract are inconsistent with each other.
Where there is an 'inconsistency clause', as in this case, the approach is slightly different. The court should approach the issue objectively without any pre-conceived assumptions and not strive to either avoid or to find inconsistencies.
In either event, inconsistency is likely to be found where one clause would deprive another almost entirely of any effect.
Lessors should review their documents to ensure there is no inconsistency between the standard printed terms and the special terms of the specific lease being entered into. In the event of conflict, special conditions will normally prevail unless expressly provided to the contrary. For the sake of certainty, if a particular term is essential to the lessor, it should be clearly provided for as a special condition to make sure there is no issue as to its incorporation into the contract.