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 !

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.