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17 February 2015
The High Court has upheld West Bromwich Mortgage Company's decision to raise interest rates on certain of its buy-to-let tracker mortgages.(1) In doing so, the court found that the contract should be interpreted as a whole and there was no conflict of terms between the relevant provisions in its mortgage offer letter and the Mortgage Conditions 2006.
The claimant, Mr Alexander, represented an action group of more than 350 West Bromwich borrowers who had the interest rate on their tracker mortgages raised despite no movement in the Bank of England base rate.
The June 2008 mortgage offer letter sent to the claimant stated as follows:
A document entitled "Information you need to know about your mortgage" – to which reference was made in the offer letter (and which accompanied it) – contained the Mortgage Conditions. The conditions stated:
"These Mortgage Conditions incorporate any terms contained in the Offer of Loan [offer letter]. 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 also stated that West Bromwich had the right to vary the interest rate payable outside the initial fixed period. The Mortgage Conditions set out a number of reasons for which West Bromwich was entitled to vary, including:
The claimant accepted the offer letter, stating that he acknowledged West Bromwich's right to "vary the rates of interest and monthly payments". The claimant also signed a mortgage deed accepting the Mortgage Conditions.
In September 2013 West Bromwich informed the claimant and other customers who had three or more by-to-let properties (and thus were not regarded as consumers) that it had decided to increase the margin over base rate applicable to their mortgage by 2%. In the claimant's case, the margin was thus to increase from 1.99% to 3.99%.
West Bromwich stated that the decision was made in light of market conditions and in order to carry out its business prudently, efficiently and competitively. The court noted that the margin had since been reduced in light of improving market conditions.
The claimant argued that the offer letter provided for rates to vary (after the initial fixed period) in accordance with the Bank of England base rate, but not otherwise. Although the Mortgage Conditions purported to enable West Bromwich to vary the interest rate in other circumstances, that was inconsistent with the offer letter and, in the event of inconsistency, the Mortgage Conditions provided that the terms of the offer letter prevailed. It was therefore submitted that West Bromwich was not entitled to increase the margin of 1.99% over the base rate.
In contrast, West Bromwich argued that there was in fact no inconsistency between the offer letter and the Mortgage Conditions. The offer letter provided that after the initial fixed period, the rate of interest would be variable (as therein defined), but the Mortgage Conditions qualified that by stating the circumstances in which that rate could be varied. The offer letter did not state that the margin of 1.99% over the base rate could not be varied if the circumstances stated in the relevant clause of the Mortgage Conditions applied. West Bromwich submitted that there was therefore no inconsistency between the offer letter and the Mortgage Conditions; the two documents could and should be read together.
The central question before the court was thus whether there was any inconsistency between the offer letter and the Mortgage Conditions and, if so, whether the priority clause operated in the way that the claimant contended. In considering the first issue of inconsistency, the court particularly relied on comments made by the Court of Appeal in RWE Npower Renewables Limited,(2) where it was held obiter that when a contract provides that one contractual document is to take precedence over another, it is only in the case of "a clear and irreconcilable discrepancy" that it will be necessary to resort to the agreed order of precedence.(3)
Accordingly, the court considered all of the contractual terms as a whole – in particular, whether the provisions in the offer letter dealing with interest and the provisions in the Mortgage Conditions dealing with the same issue could sensibly be read together.
The offer letter had provided for an initial period when the rate of interest was fixed. It also provided that following the initial fixed period, the rate of interest would revert to a variable rate. The variable rate was said to be ("the same as") the Bank of England base rate with a premium of 1.99%. It was to last "until the term end" (which was 25 years). The offer letter envisaged a change in that rate when there was a change in the base rate.
The Mortgage Conditions provided that interest would be payable at the rate or 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 Company at any time" for any one of several reasons. As explained above, these included not only a change in the Bank of England base rate, but other circumstances as well – for example, changes in the law or the need to ensure that the lender's business was carried out prudently, efficiently and competitively.
The offer letter set out the rate (or rates) at which interest was payable by the claimant. The Mortgage Conditions expressly recognised that the offer letter did this, but went on to state that the rates specified therein (except during any period when the rate was expressed to be fixed) could be varied by West Bromwich in the circumstances listed therein.
The court considered whether this represented a clear and irreconcilable discrepancy. It concluded that while this may have been the case had the offer letter provided that the only circumstances in which the rate could be varied were those set out therein – in effect, where there was a change in the Bank of England base rate – the offer letter did not state in terms that the rate could not be varied in any other way or for any of the reasons set out in the Mortgage Conditions.
The court noted that it is well recognised that one term of a contract may qualify another without contradicting it or conflicting with it; the distinction between a conflicting provision and a qualifying one is generally accepted.(4)
Taking this approach, the court considered that effect could sensibly be given to both clauses if the interest provision in the Mortgage Conditions were regarded as qualifying the interest provisions in the offer letter – the reason being that the offer letter specified the rate of interest to be paid after the initial fixed period, but the Mortgage Conditions modified or qualified the offer letter by providing that in certain circumstances the rate specified in the offer letter could be varied. In coming to this conclusion, the court also noted that when West Bromwich sought to vary the rate pursuant to the Mortgage Conditions, it was accepted that West Bromwich had to exercise its power honestly and in good faith – not arbitrarily, capriciously or unreasonably.
Although the offer letter did not expressly indicate that the rate of interest could be varied in circumstances other than those set out in the offer letter, the court's task in such cases is not simply to examine one contractual provision and compare it with another. Rather, the court's task is to read the provisions together and, if possible, give sensible effect to each of them. This can be done by regarding one as modifying or qualifying the other.(5)
The claimant also sought to argue that the inclusion of the words "until the term end" in the offer letter indicated that from the end of the initial fixed period until the end of the 25-year term, there could be no variable rate other than that described in the offer letter. The court did not agree with this interpretation, particularly when considering all of the contractual terms as a whole, as it was required to do.
In considering the points above, the court noted that despite the mortgage product being marketed and labelled as a 'tracker' – a product that is often taken by borrowers to identify and limit the circumstances in which the rate of interest may change – the process of contractual construction is not dependent on a label which may be attached to a certain type of mortgage but which is not to be found in the wording used by the parties. In declining to accept this argument, the court again emphasised the need for the whole contract to be read together.
There being no inconsistency between the offer letter and the Mortgage Conditions, the court did not consider the question of how the priority clause would operate.
The questions before the court on this occasion concerned only construction. The issue of fairness was not engaged, as the claimant did not act as a consumer. The comments of the court can be distinguished on this basis from cases concerning consumers, where fairness would be an important consideration.(6)
Should conflicting provisions appear in a suite of contractual documents, it is clear that the court will look to interpret the contract as a whole before turning to any priority provisions. This case therefore provides a useful reminder of the care required to avoid inconsistent contractual provisions, particularly where a number of documents govern the contractual relationship, as the parties' intentions recorded in any priority clause may not fall to be considered by the court should a dispute arise.
For further information on this topic please contact Laura Martin or Simon Hart at RPC by telephone (+44 20 3060 6000), fax (+44 20 3060 7000) or email (email@example.com or firstname.lastname@example.org). The RPC website can be accessed at www.rpc.co.uk.
(1) Alexander (as representative of the "Property 118 Action Group") v West Bromwich Mortgage Company Ltd  EWHC 135 (Comm).
(2) RWE Npower Renewables Limited v JN Bentley Limited  EWCA Civ 150.
(3) Id, Paragraph 15.
(4) Cobelfret Bulk Carriers v Swissmarine Services  EWHC 2883 (Comm).
(5) RWE Npower Renewables Limited v JN Bentley Limited  EWHC (TCC) (at Paragraph 24) applied.
(6) See, for example, Deutsche Bank v Khan  EWHC 1020 (Comm).
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