On 15 July 2008, the Borrower entered into a “buy to let” interest only mortgage contract with the Lender which incorporated terms from the Offer Letter and The Lender’s Standard Mortgage Conditions. The Offer Letter set out “the costs, features, terms and conditions of the Loan” and stated that the term of the mortgage would be 25 years and that the interest rate would be fixed at 6.29% until 30 June 2010 but thereafter at a variable rate of 1.99% above the Bank of England Base Rate.
The contract provided that, in the event of any inconsistencies between the terms in the Offer Letter and the Mortgage Conditions, the terms in the Offer Letter would prevail. The clauses that were central to the appeal were:
- Clause 5 provided that interest was payable at the rates specified in the Offer Letter which, except during any period in which interest is expressed to be at a fixed rate, may be varied by the Lender at any time for a number of reasons. The Lender was entitled to vary the interest rate specified in the Offer Letter for any valid reason if it gave two months’ notice in writing of the variation.
- Clause 14 set out various “events” which may result in the Borrower being obliged by the Lender to repay the loan in full together with accrued interest and unpaid charges. The “events” comprised the commonly utilised events of defaults but also gave the Lender the right to require repayment simply by giving one month’s notice, making the mortgage contract terminable at the Lender’s will.
The Borrower contended that these conditions were inconsistent with the terms of the Offer Letter and were accordingly not incorporated into the contract. In the High Court, the Judge held that they were not inconsistent, were incorporated and so could be relied upon by the Lender.
Where a contract contains a clause stating which terms would take precedence in the event of any inconsistency in the contractual documentation, the contract must be viewed without any pre-conceived assumptions as to inconsistencies. When determining what amounts to inconsistency, the Court found that it is not enough if one term qualifies or modifies the effect of another; to be inconsistent a term must contradict another term or be in conflict with it, such that effect cannot fairly be given to both clauses. Inconsistency arises where the provisions “cannot sensibly be read together”. The question should be approached having due regard to considerations of reasonableness and business common sense.
The Court also reaffirmed the principle that a printed standard term must not be construed so as to defeat the main object and intent of the contract. The application of that principle depends upon being able to identify “the main purpose” or the “main object and intent” of the contract, which depends on the construction of the contract as a whole considered in its proper context.
In relation to this appeal, the Court found that the contractual documents made it clear that the Offer Letter contained the “costs, features, terms and conditions” of the mortgage which had been specially agreed, bespoke terms: they defined the particular mortgage contract and set out the the main purpose or object of the contract. The mortgage product defined how the rate was to be variable and it was inconsistent with that specially agreed term to incorporate a printed standard term which provided for an entirely different method of varying the rate. The wide terms of clause 5 conferred on the Lender the right unilaterally to change that product to something else entirely. That is not a matter of qualification or modification; it is a matter of transformation and negation.
It was held that even if the Borrower was not entitled to rely on the inconsistency clause, he could rely on the established principle that special conditions will prevail over general printed conditions in the event of conflict between them. If the Lender wished to have a further right to vary the rate that should have been spelt out in the Offer Letter.
In relation to clause 14, the Court found that the existence of such a right was contrary to the spirit, intent and object of the agreement as a whole and produced a commercially unreasonable result. Even if the Borrower was performing fully in accordance with the contract terms and there had been no event which might give rise to concerns as to his ability to repay, it was exposed to the risk of termination at the Lender’s whim. The court considered that the existence of that right emasculated the obligations being entered into by the Offer Letter. It was held that a printed standard term which entitled the Lender to require repayment on one month’s notice was inconsistent with the stated purpose or object. That again was negation, not modification or qualification.
The judgment emphasises the importance of ensuring that contractual documentation is clear and consistent. If a key term in standard conditions is important to the bargain, best practice would be to highlight it in any document setting out special conditions.