precedence & interpretation clauses in contracts (altering the interpretation of contracts)

Precedence and Interpretation Clauses: Meaning

There are a series of legal principles which apply to interpret a contract, and resolve internal inconsistencies.  Precedence and Interpretation Clauses look to reduce the need to resort to those common law principles, by expressly stating how the contract is to be interpreted.

The Contract Document

Contracts can be made up of many different and separate documents.

The separate documents may be collated into Schedules or Appendices to the contract, or incorporated by reference into the contract by mentioning them within the contract itself. 

Also, there may be other separate, standalone  documents which were signed - or agreed to - at about the same time.

Like the Terms and Conditions of Business which must be approved by ticking a box to indicate your approval of them on a website when you purchase products or services online.

When contracts are made up of different documents, the question usually arises, what documents forms the contract?

 

Operative Provisions

Any written contract has operative provisions – the main body of terms and conditions which comprise the contract. They're separate from the schedules and annexures.

Those operative provisions may refer to:

1. Schedules, which might include:
   1. Project plans
   2. Payment schedules
   3. Specifications or statements of work
   4. Terms of EULAs or other licences
   5. Lists of personal data to be processed
   6. Service level agreements
2. Documents not reproduced in the schedules (due to their size or for convenience).
   For example:
   1. Policies, such as a procurement policy, statements of corporate social responsibility, codes of conduct, or information security policy
   2. Disaster Recovery Plans, procedures of one of the parties
   3. a Framework Agreement
   4. terms of licences.

When there is more than one document forming part of a contract, (ie from 1 schedule) the potential for a conflict between the multiple documents arises. One schedule might say one thing, and the other schedule might say quite another.

And with more schedules, annexures and other documents, the potential for conflict and inconsistencies between the documents increase exponentially.

 

What happens when a conflict arises?

When a contract has more than on document, all of the documents are considered to form part of a larger single document.

Then the task arises to work out which clause or statement in the document prevails over the other. It’s a matter of considering the contract as a whole.

Which can get very complicated. Very quickly. And usually does.

As a result, uncertainty arises.

And then you are less sure about the legal effect of the document.

To take a simple example:

1. The operative provisions of a contract say that payments will be made to invoice within 14 days of receipt.
2. However the Schedule says that invoices will be paid within 7 days of the date on the invoice.

It’s not as though they can both apply simultaneously: side-by-side. They can’t both be right.

The conflict or inconsistency must be resolved, one way or another. 

 

Which Terms take precedence in a conflict situation?

Precedence clauses aim to reduce, or eliminate ambiguity when conflicts arise. It states the order of precedence between the different clauses.

There are principles of the general law that give precedence to what are known as “Special Conditions”.

That's not to say that those special conditions will be readily identifiable or promote more certainty when interpreting a contract.

Those situations lead to protracted disputes.

Precedence clauses often appear below the definitions at the beginning of the contract, or it may be set out in a freestanding clause of its own amongst other boilerplate clauses.

Such is the dramatic effect that these clauses have on reading a contract, if one is in the contract you want to know about it early.

If there's not one and the contract is comprised of multiple documents, you probably want one. 

Example: Precedence Clause

To the extent of any conflict or inconsistency in the terms of this agreement, the, precedence shall be given to the terms to the extent of the conflict or inconsistency in the following order:
a.   These Operative Provisions
b.   Payment Schedule
c.   Project Plan
d.   Service Level Agreement

Using a precedence clause also allow you to think more clearly about how the different terms in different parts of the contract relate to one another.

Related:

• Boilerplate Clauses
• Contract Reviews
• When a Contract is Formed: Making a Contract