August 16, 2021

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Defined terms and definitions should only be used to make reading a contract easier. If you are making it more complicated, don’t use them. Here are some helpful rules for using defined terms.

Rule 1. Don’t Introduce Ambiguity When You Don’t Need To!

This should be your lodestar rule when contract drafting and using defined terms. When someone is reviewing a contract, the defined term should be easily substitutable in that sentence.  You use defined terms so you don’t have to repeat yourself or make an individual sentence unnecessarily long.

A great example where  a defined term like the one below:

“Environmental Law” means all Laws, including federal, state, local, foreign and international Laws, relating in any way to pollution, the environment (including ambient air, surface water, groundwater, land surface or subsurface strata), preservation or reclamation of natural resources, the climate, the presence, management or Release of or exposure to Hazardous Materials, or to human health and safety in respect of the foregoing, or the protection of endangered or threatened species.

When you read this Representation and Warranties clause the definition could easily fit into the sentence.

The Company Warrants that: 

neither the Company nor its [Affiliates / Subsidiaries] has received since [date] any notice of or entered into or assumed, by contract or operation of Law or otherwise, any obligation, liability, Order or settlement relating to or arising under any Environmental Law;

Rule 2. Don’t Introduce Substantive Requirements in your Definitions Section

Substantive requirements occasionally seep into the definitions section, which generally is not a good practice. Take for example the clause you see below:

“Purchase Agreement” means the Stock Purchase Agreement dated October 6, 2000 between Buyer and Seller, as amended, modified or supplemented from time to time, provided, that no such amendment may be entered into without each Shareholder’s consent.

The problem arises when a person has to amend the purchase agreement and the shareholders agreement. The requirement is buried in a definition and not in a particular clause. This increases the chance that this provision will get overlooked, because it is not where the reader expects to see it.

As a lawyer your goal should be to create the simplest document to read and work with. Make sure your definitions remain free of substantive requirements.

Rule 3. If the Defined Term is a Common Noun, Use the Singular Form Generally

More often than not defining something in the singular and then using it in the plural would not confuse the reader.  Whenever you’re drafting a provision that refers to a thing or an unnamed person, consider whether you want that provision to apply (1) regardless of the number of things or persons, (2) only regarding one thing or person, or (3) only regarding more than one thing or person. More often than not, the first meaning is the one you’ll want to convey. In that case, make it explicit. ”

If it’s the third meaning you should include the words “one or more…” to highlight that particular meaning.

Nonetheless there may be instances where you might find the plural preferable, take for example this definition found below.

“Anticorruption Laws” Means any anticorruption or anti-bribery Laws applicable to the Company or any of its Affiliates, such as, for example the Foreign Corrupt Practices Act.

Since the plural or singular wouldn’t confuse a reasonable reader in any event, feel free to use it, but as general practice I would caution against it.

Rule 4.  Don’t Alternate Between a Defined Term and Initialism

Don’t use as alternative defined terms both a word or phrase and an initialism or abbreviation. For example if you define what a “SOW” is, don’t then write “Statement of Work”.  Simplicity and Clarity favor using one or the other. Choose one and stick with it.

Rule 5. Circular Definitions Are Okay, But Fix One to an External Reality

Contract definitions are not dictionary definitions, while in a dictionary it would not be help define a “fish” using the word “fish”, but contracts are different. Definitions are meant as a replacement to a repetitive string of words. So it that case its fine to use a self-referential or circular definition.

For example a definition like this would be reasonable:

“Trademark” means a registered trademark or service mark or any trademark or service mark that is the subject of any application, registration, or renewal.

Here, the definition just serves a short hand to increase clarity of what is being discussed in the contract.

Nonetheless, one should avoid using definitions that refer to another definition that in turn refers back to the same definition.

Here is a real life example,

all Governmental Approvals that CUSTOMER is required by Law to obtain, maintain, or provide, other than Supplier Governmental Approvals (collectively, “CUSTOMER Governmental Approvals”)

all Governmental Approvals that Supplier is required by Law to obtain, maintain, or provide, other than CUSTOMER Governmental Approvals (collectively, “Supplier Governmental Approvals”)

One can go on an infinite logical loop based on these two terms where X is defined by Y which in turn is defined by X. It reminds me of a bizarre Dadaist painting rather than a coherent document.

Rule 7. Use Motionize

The last rule is a bit self serving. When drafting Contracts you should use Motionize. With Motionize you can track definitions inside your document and replace them with a few clicks. We make it easy to check for errors when using definitions and quickly correct many of the most frequent contracting errors.