Sunday, January 30, 2011

Order of Precedence


In the event of a conflict between terms of an agreement, the conflict will normally be resolved by determining the precedence that the parties gave to the various documents. If the parties fail to establish an order of precedence:
  • Unless otherwise stated or agreed the latest writing in time between the parties will have precedence over the prior writings. This means that documents like amendments or change orders need to be carefully written.
  • All documents that are incorporated by reference into a document will have the same precedence as the document.  For example, if you had a Statement of Work that incorporated the Supplier’s specifications into it, and the Statement of Work was silent on precedence, the Supplier’s Specifications would have the same priority as the Statement of Work.
  • Agreements are interpreted as a whole. The simple example of this is if Document 1 required items A through M to be done and Document 2 required N through Z to be done, The requirement would be A through Z.  If part of M conflicted with part of Z only then would you consider the precedence between the two documents that include the conflicting language. 

Order of Precedence only deals with conflicts between documents. In the same situation described above, if you incorporated the Suppliers specifications into the SOW and that contained contract terms,  those would be included in your contract. You need to read and make sure you understand and agree with any document you incorporate.

Precedence is established in several ways:
  1. As between multiple documents the precedence is normally established by an order of precedence provision.
  2. As between documents of the same priority, the precedence is given to the latest writing in time between the parties on the same subject matter.
  3. Precedence may also be established where there is a clear showing of intent shown within the agreement such as stating the requirements included in a specific section shall not apply or not have precedence over what is being agreed to in that section. (This is called a “Trumping” provision).

The more complex your agreement and the more documents you have incorporated by reference into the agreement, the more important it is to have the right order of precedence. For example, if multiple documents will be incorporated into an agreement you should establish the precedence between that agreement and those documents and if some are more important than others create a precedence between those individual documents. If your contract is made up of multiple documents such as Master Agreement. A Statement of Work, individual Work Statements, and Purchase Orders, you need to establish the precedence between those document or they will be considered to be complimentary and equal priority will be given to all.

There are two areas where additional caution should be used in establishing the order of precedence.
  1. When you incorporate Supplier generated documents into your agreement, those documents could contain terms that may restrict or limit the protection of your contract given the precedence that would be given to those Supplier documents. An Order of Precedence only protects against conflicting terms. It doesn’t protect against additional terms. So always read the Supplier documents and exclude any terms in them that you don’t want to be included in your agreement. 
  2. As amendments are a later writing in time between the parties on the same subject matter, the amendment will have priority over both prior amendments that have been written and the agreement that the amendment is written against. Amendments need to be written carefully so it’s very clear exactly what is being amend and for what purpose. For example you may have a single product that you want to have slightly different terms on, if you aren’t clear you could me making that change for all. Here’s a simple example.  A Commodity Manager had a Master Agreement and a Statement of Work with the Supplier.  The Master Agreement was evergreen with no fixed expiration date and the Statement of Work had a 2 year term. The Commodity Manager wrote an amendment that referenced both the Base Agreement and the SOW that extended the term to a specific date. That amendment changed the date of the SOW to the desired date, which is what they wanted to do. That amendment also changed  the Master Agreement from being an evergreen contract to a contract that now had a limited term.  

When purchasing something that involves both drawings and specifications to avoid potential conflicts you may want to add language that says that they are “complimentary and what is required for one is required by all. This is used to avoid potential conflicts between the documents and giving them equal priority so the requirements will be interpreted as a whole by reading both together.

The use of order of precedence language is not limited to documents incorporated into the contract. Documents that are made part of the contract may incorporate more documents, so it may make sense to establish the precedence between those individual documents. For example a specification may be consolidation of a number of different documents such as the Buyer’s RFP, the Suppliers response, clarifying Buyer letters and clarifying supplier letters all of which make up the agreed specification. As there could be conflicts between those documents you may need to establish the order of precedence as between those documents. As part of your final clarifying letter you would also exclude anything in the Supplier's proposal, Supplier clarifying letters that .

In many contracts every time a number is used, good legal writing would require that the number be expressed both alphabetically and numerically.  By including both if the two conflict are in conflict you could look at parol evidence to determine the correct amount. That is why you traditionally don’t see a precedence being established between the written number versus the numeric number. If you were to set a precedence between the two, you need to ensure that the one you established as having priority is accurate in all instances. If you set a precedence between the two the Courts won’t look beyong the four corners of your agreement as there would be no conflict since you established the precedence between the two.

Here’s an example of how order of precedence will work:

Contracts are read to be complimentary and what an order of precedence does is give priority in the event of a conflict. This means that if you had two documents (priority 1 (P1) and priority 2 (P2), if the P1 document required items A-M and the P2 document required N-Z there would be no conflict. It would be interpreted to require A-Z. However If P1 said Supplier will provide X and P2 said Owner will provide X, then you would have a conflict between the two documents and then the order of precedence would come into play. It would be interpreted that the Supplier must provide it because that was established in the higher priority document.

 

2 comments:

  1. Hmm. I have a related problem with two "complete agreement" contracts with a company.

    The first agreement says "This agreement is the entire agreement between parties relating to the subject matter... not changeable except by written supplemental agreement..."

    Then later after the first engagement expired we signed a new agreement "This agreement sets forth the entire exclusive understanding of the parties as to the subject matter therein... there are no representations, understandings, or agreements hereto which are not fully expressed herein."

    The later agreement made no mention of the earlier agreement.

    However, the company argues the earlier contract does not expire and gives them right to "all work relating to the companies anticipated business even when done on contractor's personal time".

    We argue the later contract which is in-force does not establish this, the contractor owns his right to develop ideas on his own, outside an established SOW.

    Is the company making an entirely frivolous claim??

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  2. Dear Anonymous,
    If a contract has expired, only those terms that the parties agreed would survive, will survive. They survive only for what was included in that agreement. For example, if you had a 3 year warranty, only the product you purchased under that agreement would benefit from that and would not be impacted by the different terms in the new agreement.

    The new agreement with the merger clause excluded the prior agreement. For purchases or work under that new agreement, only those terms apply.

    Based on theses two points, your argument makes sense. Their argument doesn't make sense. For it to apply in the original agreement would need to be clear that the specific language was intended to apply to all work, now and in the future, and survive the expiration. Further there should have been a specific carve out from the merger (entire agreement) clause for that specific language.

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