Home Knowledge Court Decides “Clear and Irreconcilable Discrepancy” Necessary for a Priority Clause to Take Effect

Court Decides "Clear and Irreconcilable Discrepancy" Necessary for a Priority Clause to Take Effect

A mortgage contract was formed on the basis of two separate documents, an offer letter and mortgage conditions. The offer letter provided for mortgage rates to vary after the initial fixed period in accordance with the Bank of England Base Rate. It did not specify any other variation terms. A term in the mortgage conditions provided for the interest rate to be payable at the rate specified in the offer letter but purported to enable the lender to vary the interest rate in other circumstances. A priority clause in the mortgage conditions expressly stated that in the event of an inconsistency arising between the interpretation of the offer letter and mortgage conditions, the terms in the offer letter would prevail.

A dispute arose between the parties when the lender sought to alter the mortgage rate pursuant to the terms of the mortgage conditions (as to vary in this manner was more favourable to the lender). The borrower objected and attempted to rely on the priority clause arguing that the terms of the offer letter prevailed.

In making its decision, the Court held that “where the contract provides that one contractual document is to take precedence over another, it was only in the case of a clear and irreconcilable discrepancy that it would be necessary to resort to the agreed order of precedence”. In ruling for the lender, the Court held that the terms of both the offer letter and the mortgage conditions did not conflict but rather, they qualified one another.

This decision is an important one and highlights the pitfalls with overdependence on priority clauses. Careful consideration should always be given to managing the risk associated with competing terms in large commercial contracts that incorporate multiple schedules.