Saturday, February 12, 2011

Negotiation - Thoughts on Negotiating Order of Precedence

Contracts are frequently made up of multiple documents that are either attached to or incorporated by reference into the Contract. Those documents may incorporate other documents. The way contracts are interpreted is that all terms will be looked upon as complimentary with one another and will have the same priority unless the agreed differently. In the event of a conflict, in interpreting what has been agreed, you look to the contract to see if the parties agreed on the priority between the individual sections or documents. That priority is what is referred to as the “order of precedence”.

Many standard contracts will have order of precedence provisions that address the order of precedence as between the standard documents that make up the contract such as between the Contract, Statement of Work and Purchase Orders. 

If the Statement of Work in describing a product has both a drawing and specification and the two are in conflict, what happens? Which has priority? 

What if you incorporate the Supplier’s specification into your contract and that specification contains language that could reduce or conflict other requirements of the contract or add additional terms? 

When you have multiple attachments or incorporate multiple other documents into a contract, you need to ensure that you establish an order of precedence between all of the attached or incorporated documents to ensure that in the event of a conflict, the document will be interpreted according to the priority you want.If there a key terms in the agreement that you want to have priority over other terms in the same agreement the order of precedence is usually done by what's called "trumping" terms where you make it clear that if there is a conflict with another section that section has precedence or would specifically exclude other sections in interpreting that term.

Another important thing to remember is order of precedence is only looked to in the event there is a conflict between the documents. For example if Document 1 required Items A through M to be provided and Document 2 required N through Z, the agreement would include items A through Z. If requirement R in Document 2 conflicted with requirement C in the Document 1, you would look to the precedence established between Document 1 and Document 2.  If Document 1 had priority, only the conflicting portion of Document 2 would not apply to the agreement. 

Where this is especially important is when you will be incorporating Supplier generated documents into your Contract like a proposal or their specifications. These documents could include terms that conflict with your terms. They could also reduce their commitments or put additional obligations on the Buyer. Simply relying on the order of precedence and making the Supplier generated documents a lower priority won’t protect you in all instances. It will protect you if something directly conflicts. It won’t provide protection against additional or different terms that may be included in the Supplier’s document that don’t conflict with the terms of other documents. For those situations you can either incorporate only those sections of the Supplier documents that you fully agree to upon or incorporate the document and specifically exclude those problematic terms from the incorporation. If you commonly purchased products that are defined by the Supplier’s specifications, you could also include language in the document that has the highest priority to the effect that any incorporation of Supplier Specifications into the agreement is limited to Supplier’s technical specifications and specifically excludes and business or legal terms contained in the specification.

As a suggestion, if you are dealing with a Supplier that posts their specifications on line take a look at them and you’ll probably see what I mean. I once did an audit looking to see if Suppliers had included use restrictions in their specifications and found a large percentage. They and other problematic terms usually were on the last page of the Specification and some Suppliers went as far as to place the language in much smaller print !

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