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Do you enter into contracts as a part of running your business? Do you wonder why certain words throughout the contract have capital letters? These terms likely have a definition somewhere else in the contract. Additionally, these definitions may alter the meaning of clauses within the contract. This article will consider when and why a contract may include defined terms. 

What Are Defined Terms?

Defined terms are words that are given a specific definition in a contract. The term’s definition applies in the context of the particular contract and the definitions are usually only applicable to that contract. If you see a capitalised word in a contract, the chances are its definition is somewhere in the document. You should be sure to check this definition. If you do not read the defined term, you may be agreeing to something different from what you understood the word to mean.

Why Define Terms? 

Defining terms can override the everyday meaning of that particular term. It is also helpful to reduce the risk of ambiguity and uncertainty in a contract. Further, defining terms ensures that certain terms used throughout a contract have the same meaning each time parties use them.

Parties often use defined terms strategically. For example, if you are providing services to another business, they might aim to include a broad definition of ‘Services’ by including wording like: “and includes any services that are necessary or incidental to the services set out in the Contract”. Understanding this definition is important, as it would extend your obligations beyond the services in the scope of services listed in the contract, and beyond what you may have priced for.

Defining terms can also make a legal document shorter and easier to read. This is because long definitions do not have to be repeated continuously. This makes the process of reviewing the contract simpler for both parties and makes the contract easier to read and understand.

How to Define Terms in Your Contract?

You may find definitions of terms in a standalone section at the beginning or end of a contract. Alternatively, the definitions may be embedded throughout the contract. 

For example, a contract might include a sentence like the following: The consultant agrees to provide the consulting and strategy services outlined in Exhibit 1 (‘the Services’).

Each time the person drafting the contract wishes to refer to that definition, they can simply insert ‘the Services’, using the capitalised term, and the parties will know that they are referring to the defined term. If the contract included the word ‘services’ without capitalisation, the definition would not apply, and you would take the word to have been used in its everyday meaning. 

You may not need to use defined terms where the plain language definition of the term is clear and applicable in the context of the contract.

For example, in the context of an agreement where the term ‘third party’ refers to any party other than those party to the agreement. The term should not be defined within the contract as its plain English definition is applicable in the context of the agreement.

What If a Contract Fails to Define Terms?

If the contract does not contain defined terms, this may result in a dispute arising due to the parties having different understandings of the term. In situations where a dispute arises, the parties may not be able to settle the dispute between themselves. In this case, the Court may interpret the relevant terms and generally, the Court will give the term its ordinary meaning. Where the ordinary meaning is ambiguous or the term has multiple ordinary meanings, the Court will: 

  • consider the context of the agreement; and 
  • assess the parties’ intentions when entering into the agreement. 

The Court will also consider the definition of the term from a commercial perspective, that is: 

  • what an ordinary business person would understand the term to mean; 
  • the overall purpose of the agreement and the particular clause; and 
  • any other relevant provisions within the agreement.

Such a situation could leave either party to the contract with an interpretation they did not intend. Therefore, agreeing on clearly defined definitions can reduce: 

  • disputes; and 
  • time and cost involved in dealing with disputes. 

Key Takeaways

Defining terms in a contract can make the contract more concise and reduce uncertainty when interpreting the contract. When reading a contract, it is important to read (and not skip over) the defined terms. If you have any questions about the interpretation of terms within your contract, contact LegalVision’s contract lawyers on 1300 544 755 or fill out the form on this page. 

Frequently Asked Questions 

What are defined terms? 

They are words in a contract that are given a specific definition. The terms will be defined in the context of the particular contract and generally will only apply to that contract. 

Why are defined terms important?

It is important to define terms because it reduces the risk of uncertainty in a contract, especially when defined terms override the usual meaning of a term. Further, it ensures that terms used in a contract are given the same meaning each time they are used.

How do you define terms in a contract?

You can define terms in a standalone section at the start or end of a contract. Alternatively, you can embed the definitions throughout the contract. 

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