Home | News & events | Legal updates | Interpretation of defined terms and recitals
Interpretation of defined terms and recitals
07 October 2009
Defined terms are used in agreements to create certainty and minimise ambiguity. However, a recent court judgment has highlighted that defined terms need not always be given their express meaning.
In the case of Oxonica Energy Limited v Neuftec Limited, the Court of Appeal was asked to construe the meaning of a defined term in a patent and know how licence, granted in accordance with a collaboration agreement.
Under the terms of the licence, royalties were to be paid to Neuftec by Oxonica in respect of the sale of products that incorporated the licensed materials.
A dispute arose when Oxonica used a third party to supply products incorporating materials similar to those licensed to Oxonica by Neuftec, but which fell outside the scope of the narrow patents granted to Neuftec in Europe.
Oxonica denied any obligation to pay royalties to Neuftec in respect of sales of products incorporating third party materials.
The Court of Appeal agreed with the High Court that there was no rational business reason why Oxonica should get free use of the know how for a product made using or originating from the use of that know how in any particular country, just because no patent or patent application, or no patent application with a scope wide enough to cover that product, existed at the time of the transaction.
Effectively, the court’s decision resulted in the disputed defined term being given two different meanings within the same licence: one meaning in the grant clause and a second different meaning in the royalties clause.
In justifying this decision, the Court of Appeal focused on the generically worded recitals and on the wording at the very beginning of the definitions and interpretation section: ‘the following words and expressions shall, except where the context otherwise requires, have the following respective meanings’.
What does this mean?
This case illustrates that the courts will depart from the defined terms of an agreement where there is ambiguity or where strict interpretation does not make business sense.
The use of defined terms in agreements is to create certainty and minimise ambiguity. Practitioners should now be wary about using the words ‘unless the context otherwise requires’ or similar expressions, as they could undermine the objective of defined terms.
Clarity of drafting is needed to mitigate the risks of expensive and time consuming disputes.
What should you do?
A contract review process should be started and maintained to ensure that, in particular:
- account can be taken of any judicial interpretation of contractual provisions
- there is clarity of drafting
- the words ‘the following words and expressions shall, except where the context otherwise requires, have the following meanings,’ or similar, have been used appropriately
- the recitals accurately reflect the background to the agreement and what the parties intend the agreement to mean.
© Shoosmiths. This page is for general information: it is not legal advice. Please read our full terms and conditions for details of the disclaimers and exclusions which apply.
Search the site
Enter the keywords below to search:
Get in touch
Zoe Llewellyn
Solicitor
T: 03700 86 8983
I: +44 (0)118 965 8983
E: zoe.llewellyn@shoosmiths.co.uk