Building complex contracts
Complex commercial agreements rarely consist of one single document. Instead, agreements are frequently made up of a number of contractual documents including, for example: (1) main terms and conditions; and (2) specific schedules or appendices that deal with certain issues such as 'defined' terms, payment arrangements, service levels and the delivery timetable.
It is also commonplace – especially on larger projects – that different personnel from each party are involved in the negotiation of these contractual 'parts'. This can make it challenging to reach a fully 'harmonised' contract at the point of signature.
As a result, parties often insert a 'hierarchy' or 'order of preference' clause into their contracts to safeguard against potential discrepancies between an agreement's various provisions and parts. Such clauses typically provide that, in the event of a conflict or inconsistency between contractual clauses or parts, certain clauses or parts will prevail over others to resolve the conflict.
The Courts' general approach
Hierarchy clauses have been considered in some detail by the English Courts, including in the 2009 case of Data Direct v Marks & Spencer and the Court of Appeal's February 2014 ruling in RWE Npower v Bentley. What these decisions demonstrate is that the Courts are reluctant to hold that contract documents are inconsistent, but will rather seek to give effect to an interpretation which avoids or reconciles the conflict. In essence, the Courts will attempt to make sense of the contract by reading all of the contractual documents in context as complementing each other in expressing the parties' commercial intentions. It is only where there is a clear and irreconcilable discrepancy that the hierarchy clause should be resorted to. Effectively, it is a clause of last resort, not first resort.
VAT or no VAT? The new case of CLP v Singh
The recent decision of CLP Holding v Singh is an example of where the Court of Appeal found an irreconcilable conflict and had no choice but to rely on the hierarchy clause. In this case a conflict arose between the special conditions and the standard conditions of an agreement for the sale of a commercial property. The dispute concerned whether the buyers were liable to pay to the seller the VAT charge on the transaction. The purchase price was defined under the special conditions as '£130,000'. However, the standard conditions of sale provided that the obligation to pay included an obligation to pay any chargeable VAT (and that all sums payable were exclusive of VAT). The agreement also contained a hierarchy clause stating that the special conditions took precedence. Lord Justice Kitchin explained that it was not possible to interpret the purchase price as being exclusive of VAT when the relevant background knowledge of the parties was taken into account – including that the buyer was evidently not aware that the price was subject to VAT. Accordingly, the Court ruled that the special conditions prevailed. The buyer was only obliged to pay £130,000 and was not liable to pay the VAT.
How to tackle a potential conflict
The key message from these decisions is that, when a possible contradiction in a contract arises at first sight, one should not simply jump straight to the 'hierarchy' clause to resolve the problem. The question to consider is whether, in light of the relevant factual background, the relevant provisions or parts can be read together in a sensible and commercial way. If so, the 'hierarchy' clause may not be relevant because there is, in reality, no conflict or inconsistency. Having said this, the Singh case shows that 'hierarchy' clauses still do have real value.