Definition clauses in contracts!

A contract is a legally binding promise or agreement. The person who makes a promise is termed the ‘promisor’ and the person to whom the promise is made is termed the ‘promisee’. The law of contract is concerned with the formation and enforcement of agreements which are recognised as contractual in nature.

An important element of a contract, is the definition clauses. Definition clauses in contracts define the meaning of words that are used throughout the contract. Where disputes arise concerning a contract, the dispute usually relates to a specific provision and it's meaning. When a dispute occurs with a provision of a contract, and the purpose or meaning of the clause is not clear or is ambiguous, the meaning of the clause may be resolved by assessing the definition of clauses to determine the meaning of words used in the provision.

Contracting parties are free to express definitions of words as they require in the contract. Then if there is a dispute in relation to a specific word, the court in determining the meaning of the word will up hold that meaning that has been documented in the definitions of the contract. If there is no defined meaning of the word in the definition clauses, the court will determine the meaning of the word based on the words ordinary meaning, and how that word was expected to be used in the provision and the contracts entirety.

Where a word is defined in the definition clauses as having a totally different meaning to the words ordinary meaning, the court in a dispute will uphold the meaning of the word as defined in the definition clause. This point alone is a warning for all contracting parties that they should read the definition clauses in the contract and understand what meanings are being applied to specific words that are used throughout the contract.

In Re George & Goldsmiths & General Burglary Insurance Association Ltd [1899] the court said:

“They have chosen to frame for themselves a definition … for the purposes of their contract, and by that definition their rights in this case must be determined.”

Then in Kelly v The Queen (2004) the court said:

“Once … the definition applies … the only proper … course is to read the words of the definition into the substantive enactment … To construe the definition before its text has been inserted into the fabric of the substantive enactment invites error as to the meaning of the substantive enactment … The true purpose of an interpretation or definition clause is that it shortens, but is part of, the text of the substantive enactment to which it applies.”

Where a contract has a defined word in the definition clauses, there is no permissible basis for ignoring that definition, unless the defined meaning of the word is absurd, given the factual background known to the contracting parties. If a word can be construed in various ways and the definition clauses requires the word to be defined in a specific manner, which is not better in commercial sense than another option of meaning for the same word, the word will be construed on the basis of the definition clause meaning.

All contracting parties should read the contract before signing the document and understanding the same or engage a solicitor to review and act for them. There is risk in all contract transactions, and with the fast pace environment of digital agreements, the key element is to appreciate contract risks and how they may be mitigated. So get that legal advice to protect your legal rights and interests.

The comments in the aforementioned do not constitute legal advice and are general in nature, and if legal advice is required please contact: John Melis at Legal AU Pty Ltd (03) 9999 7799

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