Contract Law & Order: 3 terms every Contract Manager needs to know

Privity, Estoppel and Document Precedence

A contract can be defined as: “A legally binding agreement between two or more parties”. Contract law, which forms the legal basis for contract management, is an interesting and complex topic. But there are three terms of contract law that are particularly important for a Contract Manager to understand to ensure contract delivery and best practice supplier management. They are privity, estoppel and document precedence.

Privity

Privity means that only the parties of a contract can enforce the contract. In the real world, this means that if a subcontractor is engaged via the supplier, there is no contractual relationship between your organisation and the subcontractor.

Privity in action

A subcontractor has been engaged by the supplier to install new light switches at your office. It would be unwise for your organisation to ask the subcontractor to change a light bulb because there is no contractual relationship between your organisation and the subcontractor. Asking for the additional work to be conducted creates a new oral contract. This exposes your organisation to price risk (no cost has been agreed) and to legal risks (no insurance requirements have been agreed).

Estoppel

This is one of the most significant issues in contract management. Estoppel occurs when people’s behaviour when delivering services differs from what is outlined in the contract. What is actually being delivered, if not challenged, can change the contract to the actual behaviour.

• It is also known as “variation by conduct”
• Estoppel can occur if contract conduct differs from the “contract” or actual behaviour of the parties changes contract
• It’s likely that it is occurring in most contracts. You know it happens if you hear someone say “that’s not the way we do it anymore”
• The facts of the dealings contribute to the legal agreement
• Estoppel is one of the most significant issues in contract management.

Estoppel in action

You engage a supplier to build a brick fence but instead they build a cheaper wooden paling fence. Following a site inspection, the business didn’t officially notify the supplier of the breach of contract. The argument ended up in court and it was judged that business had accepted the variation because of their conduct ie not giving notification.

Document precedence

It is fundamental to the appropriate delivery and operation of a contract to have a clear understanding of the levels of precedence of various documents comprising the contract proper.

Document precedence clearly state what happens if one part of the contract contradicts another and which part will take precedence if this occurs. Quite often, the terms and conditions of the contract take precedence over any clauses in the schedules, the attachments, any documents incorporated by explicit reference or in invoices.

Document precedence in action

During an audit you discover that new services have been included in the supplier’s invoicing along with a clause that says ‘in the event that amounts invoiced for new services aren’t rejected within 30 days, they form part of the contract’. You check the precedence clause in the original contract and it says that if there is an inconsistency between the contract and an invoice, account or document the Contract prevails. The precedence clause in the contract voids the additional clause on the invoice.