Drafting definitions and recitals requires care
OXONICA ENERGY v NEUFTEC (CA) [2009]
This decision concerned the interpretation of the definitions clause in a patent licence was at issue. The case has interesting implications for the drafting of commercial agreements and for the interpretation of the vast majority of existing commercial contracts. In looking at the possible alternative meanings of a definition, the Court of Appeal (CA) upheld a decision that a single defined term could potentially have two different meanings when used in different parts of the agreement. The CA also considered the effect of the recitals (those introductory words at the beginning of an agreement which attempt to ‘set the scene’) when interpreting the agreement.
decision:
- The CA was asked to interpret the meaning of the term ‘Licensed Product’ as it was used both in the licence grant clause and the royalties clause. It was held the term had a different meaning when set out in each clause. The context required that both the patent application and any ensuing patents should be licensed. However, given the context, the CA held it was unnecessary to link the payments to precisely what was being licensed, as the payments were also for valuable know-how and the benefit of a non-competition clause.
- The beginning of the definitions section stated the words that followed were to have their respective meanings “except where the context otherwise requires”. This wording gave the CA the authority to re-define ‘Licensed Product’ declaring simply that the context required it. The rewrite meant royalties were payable on all sales of a product, even in countries where the product was not within the scope of the patent. The recitals were also used to support this interpretation. It is perhaps debatable that, given what the judge described as “an appallingly drafted document”, the CA may have felt able to come to this conclusion in any event but the ‘context’ reference certainly gave them some justification for their decision.
points to note:
- Many commercial contracts routinely contain the words: “The following terms shall have the following meanings unless the context otherwise requires” or similar. We would suggest this ‘catch all’ wording (which was presumably originally included in agreements as a safeguard against inappropriate use of defined terms) should be omitted. Instead, greater care should be taken when defining terms and, if the context requires a separate definition, one should be expressly created to ensure that the defined terms used create certainty and minimise ambiguity in the contract.
- The case is also a reminder that whilst the recitals may seem to be of comparatively little importance (and do not strictly form part of the contract itself), when the words of an agreement are ambiguous, the recitals may be used to assist interpretation. Even though the recitals are generally not binding, it is nevertheless worth being careful when drafting them to ensure they accurately reflect the background to the agreement and what the parties intend the agreement to mean.