Document precedence – the complexities, hidden traps and consequences of precedence clauses in Commonwealth technology contracts
When advising our clients on any conflict between clauses in their contract, we always refer back to the precedence clause. We do this first, so we can determine which clause takes priority, and how any standard vendor documents are treated.
Sounds simple, right? Precedence clauses look innocent enough on paper, and if written appropriately, they may be your best tool!
However, the consequences of not closely checking all of your contract (including terms and documents incorporated by reference) and not getting the order of priority right in the precedence clause can be significant.
It may be of value to incorporate standard vendor documents by reference (e.g. to describe the services being performed or the specifications for the product being purchased). However, it is important to be careful about how these documents apply to a contract. Those documents may seek to impose terms which are inconsistent with the terms of your carefully negotiated contract, or which impose additional risks.
We are often asked to advise clients when it is too late (i.e. when the contract has been signed and the issue has bubbled to the surface). Unfortunately the consequences are not always ideal and could have been managed earlier.
Common issues include:
- rights for the vendor to unilaterally change a clause that impacts the charges (this may often result in the vendor imposing un-scoped costs on the buyer, which the buyer is likely not to have not budgeted for);
- strong audit, security, confidentiality and privacy provisions in the main terms of the contract being overridden by a reference in the contract which results in the vendor’s standard and less protective policies applying instead;
- provisions which reduce the carefully negotiated risk framework in the contract (including inconsistent or additional warranty restrictions); and
- unexpected rights for the vendor to access buyer data for analysis and audit purposes.
The above issues often arise because contract forms such as a work order (e.g. the contract details) or documents incorporated by reference, take priority over the main contract terms in the precedence clause.
What is a precedence clause?
There are two types of precedence clauses that we commonly see in contracts.
The first is a provision that sets out the order in which all of the clauses and schedules (including references to other documents) are to be interpreted to the extent of any inconsistency.
This precedence clause assists the parties to determine what clauses have priority in the event that there are any conflicts and inconsistencies within the document. For example, the parties may agree that the main clauses in an agreement take precedence over a schedule to the agreement.
The second is a clause which explains how any standard vendor documents which have been incorporated by reference will apply to the contract. This clause may:
- provide that they apply only to the extent that the documents describe the service or specifications;
- explain that any clauses in those standard vendor terms which are inconsistent with the contract (including clauses that vary the liability arrangement, usage rights or security arrangements or impose any additional unacceptable terms) do not apply to the contract; and
- allow any vendor terms which are inconsistent with the contract to apply, but only to the extent that they are expressly called out in the contract and approved by the buyer.
It is important to understand that a clause may operate in addition to, and not in a manner that is inconsistent with, another provision in the contract. This is why your second precedence clause should clearly cover vendor terms that are both inconsistent with, and additional to, the terms in your contract.
Why is it so important to get it right?
It is important to get this right for government contracts because standard vendor terms will often include terms and conditions incorporated by reference (e.g. hyperlinks) that reduce the benefits of the main terms of the contract.
It is very important to review and understand the content of each document in the contract document set (including any terms incorporated and hyperlinks) before execution. This can lead you down a rabbit warren. Unacceptable terms could be innocently hiding away in a ‘midnight’ clause that you skipped over too quickly because you got to the point where you just wanted the deal closed!
You also need to carefully manage the application of inconsistent or additional terms throughout the term of the contract. This is because if you allow these terms to apply once, or do not enforce the precedence clauses, there is a risk that you have agreed that these sorts of clauses will apply. The consequences of this situation can be tricky or impossible to get out of.
Where we see these issues commonly arise and what do we include to protect buyers?
The growth in this ICT landscape has been fuelled by government buyers’ entry into standing offers with major ICT vendors (panel and single arrangements). Similarly, government buyers are purchasing more cloud services and similar products which increasingly rely on the use of standard ICT vendor terms. Under a standing offer (e.g. head agreement) buyers place contracts with an ICT vendor on the terms set out in the head agreement.
The general precedence approach is for the head agreement to have priority over terms in a contract placed under the head agreement. The contract document may include standard ICT vendor terms and policies incorporated by reference or hyperlink. The precedence clause needs to limit the application of those terms and policies to ensure negotiated head agreement protections are not removed or reduced.
This does not mean that the ICT vendor’s standard terms cannot apply. As noted above, it may be appropriate to allow those terms to apply, but with limits (e.g. only to the extent that they describe a service or deliverable).
What should I be looking for when I review a draft agreement/contract?
We suggest you take the following steps:
- check the precedence clause in the contract;
- check whether your contract seeks to change that precedence clause and/or to add additional terms (e.g. by hyperlink);
- remove or modify the changes or additional terms, if not acceptable;
- include some default protections if needed (e.g. a prohibition on any vendor rights to unilaterally change its security obligations);
- check whether the details of variables permitted to be agreed in a contract are acceptable (e.g. variables arising from clauses such as ‘if specified in a contract …’); and
- obtain any approvals needed (e.g. from the Digital Transformation Agency if using a whole-of-government agreement).
What can I do in my agreement or contract to reduce this risk?
Check every item in your contract to ensure it includes the details required by the head agreement and does not override the head agreement or add additional terms unless:
- a clause in the head agreement allows this e.g. ‘unless otherwise specified in a contract’; or
- you accept the terms in your contract (and have obtained any required approvals).
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