Order of Precedence Clauses & Alternatives

KEY TAKEAWAYS:

• Order of precedence can be used to solve for potential ambiguities or inconsistencies.
• But there are other solutions, such as using a higher standards clause.
• Even then, especially for long agreements with multiple drafters, the ideal solution is to give contract teams time to harmonize their contracts.

Construction and industrial supply contracts (and other complex commercial contracts) are often lengthy documents containing numerous schedules, appendices, specifications, and attachments. Each with different authors and audiences.  It is not unusual to have legal, technical, procurement, and commercial teams all working on separate aspects of the same contract. And no one group is responsible for reviewing the contract in its entirety. This can lead to a risk that the agreement is not fully understood, vetted, or cross-referenced for inconsistencies.

To avoid ambiguity between and within the various documents forming part of a contract, drafters often revert to a simple patch–the “order of precedence” clause. But there are more nuanced approaches for contract drafters to resolve inconsistent and ambiguous contract terms (both between and within documents).  One alternative is a “higher standard” clause, which will be discussed more thoroughly in this article.

While this article is specific to my experience with construction and supply contracts in the Canadian context, there are likely broader applications to other complex commercial contracts, such as software, technology, and complex services agreements.

Purpose and Pitfalls

An order of precedence clause is a provision commonly found in construction and industrial supply contracts. The clause specifies the “default ranking” of various documents forming part of the contract. It establishes priority in terms of how the various documents are to be interpreted by the parties and judicial bodies to resolve ambiguities or inconsistencies.  

From experience, the “certainty” of an order of precedence clauses is often illusory.  Some of the problems created by “order of precedence” clauses include:

1. Conflict Within Documents

Order of precedence clauses generally address conflict or ambiguity between various contract documents, but not within each one of the contract documents. For instance, it would generally not resolve any conflict or ambiguity within the Scope of Work (which itself can often be hundreds of pages in multiple sections). 

2. Similar Provisions

A dispute over whether there is even a conflict or ambiguity between two provisions is not uncommon in an order of precedence dispute. This most often happens when two different parts of the contract speak to a similar concept, but in a different way. For example, quality requirements are often addressed in both the “General Conditions” and the “Scope of Work”.

3. Unintended Consequences

Order of precedence clauses often result in unanticipated consequences. In part, because there was not a full review of the agreement by one party or team.  Contracts teams often rely on the “order of precedence” clause as the rationale for dispensing with a detailed review or mitigating the risk of ambiguity. However, without confirming that there are no conflicts, it is difficult for any one member of the contracts team to confidently predict in advance what the governing standard will be.

4. Legacy Terms

Many contracts teams rely on existing standard form documents and use precedent materials from one project to the next, frequently in the form of hundreds or thousands of pages of technical material. A requirement from a different project will often slip in that is at odds with the intended requirements of the current project. 

Further, if a significant and expensive conflict arises, the presence of an order of precedence clause is unlikely to deter a disgruntled party from refusing to perform or resorting to dispute resolution.

Another Alternative: Higher Standards Clause

One alternative to an order of precedence clause is a higher standards clause. While the wording may vary, a higher standard clause is written to ensure that the highest level of quality or standard specified in the contract must be adhered to.

Instead of risking a desired requirement falling below a lesser requirement in a higher “ranked” section of the contract, a higher standard clause requires a party to meet the requirements of the highest specified standard, wherever it may be found in the contract.

In a construction or industrial supply contract, a higher standard clause will typically shift the risk of inconsistent contract terms to the party undertaking the work (i.e. the contractor, subcontractor, or supplier).

However, a higher standard clause, while more specific, does not completely escape subjectivity concerns–determining what is the “higher standard” can be a thorny interpretation issue, and in the context of a dispute, can require expert evidence.

In most construction and industrial supply contracts, a “higher standards” clause will favor the owner or purchaser and will result in resistance from contractors and suppliers.  Contractors or suppliers faced with a higher standards clause must take the time to fully review and understand the technical requirements of the contract documents.

Comparative Examples

To compare, an example of a order of precedence clause can be found in the CCDC template documents frequently used in the Canadian construction industry. This clause is taken from CCDC 2-2020, section 1.1.5:

A similar concept can be found internationally in the FIDIC documents, see for example section 1.5 of the FIDIC Red Book (2^nd edition, 2017).

In contrast, below is a simple “higher standard” clause I have used in the past:

If there is a conflict or discrepancy between, among or within any provisions of this Agreement imposing obligations on the Contractor, the more stringent requirement, specification, standard, criteria, warranty or obligation governs. 

A Better Alternative: Eliminating Inconsistencies and Ambiguities from the Contract

Ultimately, these approaches are not necessarily mutually exclusive. There are advantages and drawbacks to each.

The best risk mitigation strategy is a detailed and thorough review of the entire contract package to eliminate inconsistencies and ambiguities. There are a few steps that can promote this:

1. Early in the drafting/negotiation process, engage legal, technical, procurement, and commercial teams to align on what topics will be covered and where in the contract.
2. Before adding a new concept or clause, canvas the entire package and assess if the topic has been addressed elsewhere.
3. Provide those teams with the necessary resources to complete a review of other related areas of the contract and allow for enough time for the internal folks to harmonize the contract. One suggestion is to ensure your legal team has undertaken at least a cursory review of the entire package specifically to identify inconsistencies and ambiguities. 

Realistically, these steps will not be possible in every situation. Therefore, regardless of the time allowed for a review, thought should be given to whether an order of precedence clause or higher standards clause is more likely to result in the intended interpretation of the contract. Generally, mixing the two concepts in one contract should be avoided, except to the extent a “blended” rule applies to strict sections of the document (for example, an order of precedence clause between documents, but a higher standards clause within the Scope of Work)

As with many aspects of contract drafting and negotiation, there is no inherently right answer. The key takeaway is to be aware of the issues in the interpretation of long, complex contracts prepared by multiple drafters, and take active steps to mitigate the potential for confusion or inconsistent interpretations.