Table of contents

Drafting contracts

(g) The parties defined

To refer to a contract party in the agreement, either use the functional reference (e.g. Seller, Licencee, Service Provider, Lender) or the short name of the party (e.g. Weagree, Shell, Philips, Sony). It is appropriate to refer to your own party by its short name and to the other by a functional reference.

Do not provide for alternating defined terms to refer to the same party (i.e. not: hereinafter Purchaser or Weagree). It serves no purpose and does not make reading easier (rather, it conceals careless copy-paste work from different contract sources by the drafter). Define either term in the party introduction clause, immediately following the identifying details of each party. Do not include the defined term in the definitions article.

Individuals. Individuals are typically defined by their family name without title (i.e. without Mr, Mrs, Ms), except in letter agreements, where the title would normally be included. Professors are often defined with their title, abbreviated.

Short name. Whenever possible use a defined term equal to the company’s trade name or one composed of words from the entity name. This is preferred over an abbreviation or fancy acronym. Nevertheless, an acronym is appropriate when the party is known by it, if its name includes that acronym or if the contracting parties are affiliates (with  similar names).

Functional references. Generally, a contract would be easier to read when using the short name as opposed to a functional reference. However, functional references, such as Purchaser or Shareholder, are appropriate in the following contexts:

  • in ordinary course business contracts, to identify the other party, unless that other party is a major company;
  • if, traditionally, the type of contract uses functionally referenced defined terms, such as facility agreements and loans;
  • if a single entity is the subject of the legal document, such as in articles of association, deeds of share transfer and corporate resolutions;
  • when the identity of a signatory is not yet known, for example in case of share purchase agreement used in the context of a ‘controlled auction’.

If you use a functional reference to define a party, the noun should indicate the functional role of the party in the agreement (e.g. Seller, Licensor, Lender). Alternatively, it could refer to the form of legal entity of the party (Company; Corporation). There are contract drafters who prefer to avoid ‘paired’ defined terms that differ only in their final syllable (e.g. Lessor-Lessee, Licencee-Licensor).
When using a functional reference, omit the definite article (i.e. prefer Purchaser over the Purchaser). This will make it much easier when using contract assembly applications, where replacing the reference by a name reference is very easy, but more difficult where the article is used (i.e. requiring two replacement algorithms, for both The and the). Anyhow, be consistent in using or not using the definite article throughout the contract.

Grouped party definitions. Many contracts are between groups of counterparties. It makes sense to define each party individually (and remember to use the specific defined term when referring to that party only) and in addition define each side by grouping the individual parties.
For example, in an Asset Purchase Agreement, there are often several sellers (and purchasers), one for intangible (IP) assets, one for each international tax unit, financing companies for shareholder loans, and often also the parent company for some operational assets. Another example can be found in joint venture agreements (or shareholder agreements), where the ultimate holding company will often be the main party whilst the actual shareholder will be a tax-efficient local entity (or even a shelf company). In those examples, it is recommended to refer to Sellers or to ABC on the one hand and to Purchasers or to XYZ on the other.
If you do group affiliates, be aware that such treatment may also trigger questions regarding joint and several liability for performance of an affiliate’s obligations. In many enterprises this triggers only theoretical issues, but addressing joint and several liability in a separate clause is nevertheless advisable. Where there is joint and several liability, this may trigger questions or notice requirements under (the covenants of) a master loan or facility agreement of that enterprise.

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