How to interpret a contract when the use of a defined term does not make sense?

By 13/03/2018Contract
defined terms

Contracts generally contain a ‘definitions’ clause setting out defined terms which are used repeatedly in the contract.

Often the definitions clause will provide that the defined terms shall apply ‘unless the context otherwise provides’.  This can leave the door open for creative contractual interpretation.

So how do the Courts approach disputes over the use of defined terms when interpreting a contract?

The Courts have developed the following principles:

  1. The meaning of the terms of a commercial contract is to be determined by what a reasonable businessperson would have understood those terms to mean.
  1. This requires consideration of the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be secured by the contract.
  1. Unless there is a contrary intention in the contract, the Court will give a commercial contract a businesslike interpretation on the assumption that the parties intended to produce a commercial result. A commercial contract is to be interpreted so as to avoid it making commercial nonsense or bringing about commercial inconvenience.
  1. Defined terms must be read in light of the context in which they appear in the contract, and any contrary intention.
  1. The sense in which a definition is used cannot be determined mechanically. It is necessary to consider the purpose as well as the text, of the definition and the context in which it is used.
  1. The absence of the words ‘unless the context otherwise provides’ in a definitions clause does not mean that the defined term will be applied without regard to the context in which it appears in the contract.
  1. However in a contract drafted with legal advice as part of a complex and sophisticated commercial enterprise, the deliberate use of defined words is not to be lightly passed over, even where the definition leaves open the possibility of another meaning for a defined phrase.

Feel free to contact me if you require legal advice on the interpretation of a contract.

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