Order of precedence

Construction contracts are complex and are usually made up of a good number of documents. Consequently contractual inconsistencies may occur. If these inconsistencies are key to a matter in dispute it may be up to the court to decide what is the correct contractual interpretation between the inconsistent documents.

Construction contracts frequently contain a clause setting out the priority in which documents should be read should there be any ambiguities between them. However, parties should be careful not to place too much reliance on these as this type of clause is not a substitute for ensuring the contract is clearly drafted and consistent throughout.

In the recent case of RWE Npower Renewables Ltd vs J N Bentley Ltd, the parties were involved in a dispute in relation to various delays that had arisen in the completion of the project. The contract in this case was to carry out civil engineering work in relation to the Black Rock Hydro Scheme in the north of Scotland. A major issue between the parties related to the proposed imposition of LADs due to the alleged failure of JNB to complete section 2 of the works on time. RWE asked the court to make a declaration, which involved the court reviewing the contract clause setting out the order of precedence in which the documents forming the contract should be read.

Mr Justice Akenhead made the following points in relation to order of precedence clauses and contractual interpretation:

• When interpreting a contract he stated: “One needs to determine objectively what a reasonable person with all the background knowledge reasonably available to the parties at the time of the contract would have understood the parties to have meant and one is looking to adopt the more rather than less commercial construction.”
• Construction contracts are commonly made up of several documents and Mr Justice Akenhead made it clear that all the contract documents will need to be reviewed to determine the meaning of a particular issue.
• In this case it was found that the order of precedence clause would only be taken into account if there was a real ambiguity or discrepancy between two or more contractual documents.
• Clause 2 of the contract set out the order of precedence in which the contractual documents were to be read and construed. Clause 2 was prefaced by the words that all documents were “deemed to form and be read and construed as part of this agreement”.

As a result, Mr Justice Akenhead stated that the contract should first be construed by reference to all the documents to “identify a clear and sensible commercial interpretation … which does not produce an ambiguity”.

An order of precedence clause may therefore not have the effect of one contractual document taking precedence over another if an overall reading means there isn’t really an ambiguity. In a dispute involving the interpretation of a contract, the court will first look to all the contractual documents to determine what is a clear and sensible commercial interpretation. Depending on the contractual wording, an order of precedence clause may only be of assistance in cases of irreconcilable ambiguity - for example, where one document in the contract specifies that white paint should be used while another specifies black.

In short, the mere existence of an order of precedence clause will not mean that a document higher up the order automatically cancels out what is said in a document lower down. An overall reading may mean that an apparent inconsistency or contradiction disappears in the broader context of the contract. As such, the order of precedence clause should not be thought of as a “get out of jail free” card.

It is also essential when drafting a contract to be quite clear about whether documents in appendices or schedules form part of the document to which they are attached for the purposes of the order of precedence.

For example, a framework agreement is likely to contain appendices so it may well be necessary and appropriate when setting out the order of precedence to state that the appendices are to be excluded from the document such that the framework terms and conditions are read in isolation.

Clear and careful drafting is key to ensure the scope for disputes is minimised. The uncertainty and expense incurred by asking the court to decide what a contract says should be avoided.

Jane Miles is managing associate at Dentons UKMEA LLP