Establishing Precedence Clauses in Cross-Border Earn out Agreements
Explicit precedence clauses in cross-border earn-out agreements prevent accounting schedules from overriding core legal risk allocations and governing law provisions.
Order of Precedence Drafting
Meaning
Multi-document commercial agreements must establish a clear hierarchy to resolve inconsistencies that may arise between different parts of the contract. Through order of precedence drafting, the contracting parties specify which document controls when a conflict occurs between the main agreement, schedules, and purchase orders. This legal technique prevents long disputes over contradictory terms by creating a clear path for interpretation.
It ensures that negotiated commercial terms take priority over boilerplate legal clauses or technical specifications.
Clause Hierarchy
A typical priority clause places the main agreement at the top, followed by the schedules, and lastly the general purchase conditions. If a technical schedule contains a clause that contradicts a payment term in the main agreement, the main agreement dominates. This structure protects the negotiated commercial intent of the parties from being diluted by technical annexes.
Conflict Resolution
Judges and arbitrators refer directly to this clause when bilateral disputes over inconsistent terms are brought to them. Instead of trying to reconcile the conflicting provisions, the adjudicator applies the rule of priority to discard the subordinate term. This provides an immediate resolution and avoids costly litigation over the subjective intent of the contract.
Risk Mitigation
Procurement departments use this technique to maintain control over supplier relationships. It prevents standard supplier terms from overriding the negotiated framework agreement. The priority clause protects the buyer from unexpected liability shifts.