The terms of definition and interpretation play a crucial role in determining and ensuring a clear understanding, agreement, and compliance with the terms of the contract by the parties involved. Particularly for specialized contracts that involve specialized terms that are difficult to understand, or multiple meanings that are not regulated by law, the terms of definition and interpretation are highly necessary and should be included in contracts. What should be considered when drafting this term? Let’s explore the following article to find out.
I. Concept and meaning of the definition and interpretation in contracts
The terms of definition and interpretation in contracts are understood as the specific provisions, conventions, and conditions set forth in the contract to define the terms and important conditions related to the commitments of the parties.
Within the terms of definition and interpretation, the parties define and clarify the understanding of the terminology to ensure that all parties have a clear understanding of the meaning of these terms and use them accurately during the contract execution process. Meanwhile, the parties usually express the purposes or objectives of the terms in the contract and provide clear explanations of the meaning of these terms. This helps the parties to have a better understanding of their obligations and rights in the contract, thereby avoiding misunderstandings or disputes during the performance contract.
The terms of definition and interpretation create a unified understanding of terms, abbreviations, and content referenced in the contract, enabling the parties to achieve a certain level of clarity and prevent disputes arising from different interpretations of the terminology. For business and commercial contracts involving parties from different countries, the terms of definition and interpretation should be stipulated in contracts as countries often have differences in culture, commercial practices, laws, etc. Thus, it is easy to have the same terms but different interpretations by the parties.
II. Note when drafting terms of definition and interpretation in contracts
In order to properly promote the role of the terms of definition and interpretation in contracts, when drafting this clause, the parties should note the following:
– The drafter should accurately select the terms to be defined in contracts and should not define terms that have a simple understanding or unnecessary definitions. The drafter should avoid defining technical terms that are inappropriate for the common understanding of the term or contrary to the provisions of the law.
– The term should be defined based on the nature, background, and specificity of the contract, and the association of the article containing the term. Drafter should avoid inference, especially for long and complex contracts.
– Note when choosing words for definitions:
• Either “logically” in the drafting process – define terms as they are encountered (also known as referential definitions, interpreted or incorporated into the contract) and include them in terms of definition and interpretation of the contract.
• Or pre-direction of the most important terms (phrases) and most appropriate to the background of the clause/contract. In this case, the terms of definition and interpretation are usually drafted in the first clause of the contract (typically Clause 1). For example, “Contract” means, “Affiliated company” means, “USD” means, “Parties” means, “Force Majeure” means, “Confidential Information” means, “Notice” means, etc.
– Use appropriate formatting (such as bold, italics, and underlining).
– Should include a list of terms or phrases attached to the contract for reference (terms, phrases mentioned in which clause, page of the contract).
III. An example of terms of definition and interpretation in contracts
The following is an example of the terms of definition and interpretation in the Contract for Consulting of feasibility study report/Consulting of construction survey/Consulting of construction design /Consulting for construction supervision is promulgated together with Circular 02/2023/TT-BXD effective from April 20, 2023.
Clause 1. Definition and interpretation
The terms and phrases contained in this contract are construed with the following definitions and interpretations:
1. Investor means… (trade name of investor).
2. The consulting contractor means… (name of the consulting contractor).
3. Project means… (project name).
4. Construction works means … (name of works on which the contractor shall perform the consulting service consult under this contract).
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