Drafting contracts

(a) Principles related to the use of defined terms in contracts

1) Defined terms and definitions are used to make the interpretation of a contract easier: they make contract provisions concise; whereas the use of defined terms should at all times reduce any risks of ambiguity.

A proper use of definitions also conveys a strong sense of consistency and accuracy as regards the contract as a whole. The general drafting principles apply to definitions (and the use of defined terms) as well.

For example, a defined term should not include “(s)“: a defined term is either singular or plural. The singular and plural can be used interchangeably regardless of whether the definition refers to the singular or plural term. If a clarification is desirable, use the plural and embed the definition of the singular:

Licence Agreements mean collectively, the Trademark Licence and the Technology Licence; and Licence Agreement means either of them.

Realise that the plural encases the risk of ambiguity, so the singular would be preferable (see paragraph 1.1(d)).

2) The first letter of the defined term should be capitalised. If a defined term consists of more words, each word should be capitalised, except for conjunctions and prepositions (e.g. and, but, or, on, in, under, beside, of, by, for, with, as, about).

Defined terms should not be in all-capitals, unless this is desirable in view of the language (e.g. the German language capitalises all nouns, which may justify a full-capitalisation of defined terms).

If a name or reference, such as an institution, report or statute, that is usually written with a first capital (or all caps) is not defined as such in the contract, it should be clear that the term is not a defined term. This may be achieved by printing the reference in italics.  Note the ‘break’ between the reference to the institute and its rules in the following example:

All disputes in connection with this Agreement, or further agreements resulting from this Agreement, shall be finally settled in accordance with the Arbitration Rules of the Netherlands Arbitration Institute.

When a reference is made to an Article or Section of a statute, regulation or another contract, write “article” or “section” (without capital). For example:

Unless explicitly stated otherwise in this Agreement, the Parties waive their rights, if any, to annul, (partly) rescind, (partly) dissolve or cancel this Agreement, or to request annulment, (partial) rescission, (partial) dissolution or cancellation of this Agreement after Completion on the basis of articles 228 or 265, book 6 or title 7.1 of the Dutch Civil Code.

3) A defined term must be ‘used’ in the body text (or in definitions) by capitalising the term as defined.

The contractual provision must be interpreted by substituting the definition for the defined term. If the drafter intentionally avoids the definition, the capitalisation should also be avoided (but mistakes are made all too often); in view of this error-sensitivity, the drafter may prefer to use a synonym.

4) A term defined in the body text should not be used before it is defined.

Occasionally, a term may be defined after the first time it is used, for instance if this is in an immediately following article or section. Cross-references such as “(as defined below)” are redundant either because the definitions article should tell a reader where the agreement’s definition is or because the place of defining the term is otherwise immediately apparent (e.g. as part of the same paragraph or section).

5) Once a term is defined, do not repeat any part of the definition in connection with the use of the defined term.

For example, you should never refer to the Management Board of the Company in the body text, if the definition of “Management Board” is already defined as the management board of the Company.

6) Do not create a defined term unless you will use it more than once, and once you create it, use it each time the definition is appropriate.

Despite the best practice principle, you may use a defined term only once if its use will considerably enhance a provision’s readability. Specifically, sometimes a concept is so complicated that putting it in the middle of a sentence, as would otherwise be normal, makes the provision difficult to understand. In such case, you may prefer to split the provision into two sections. Put the defined term and its definition in the first section and the substantive provision in the second.

7) Do not create a defined term when the ordinary meaning of the word or phrase expresses the concept.

For example, the following definition of Resume Performance is superfluous.

Resume Performance means to recommence performance after it was suspended because of a Force Majeure Event.

Similarly, definitions of “Parties” and this “Agreement” are generally unnecessary.

8) Create only one defined term for each definition, and use it exclusively.

For example, you should not refer both to Product and to TV Sets, if they are both defined as “tv sets as specified in Annex 1“.

If a defined term originates from, and refers (or must refer) to exactly the same definition in another (related) contract or document, refer to that contract or document; you should not repeat such definition. In large transactions, it may be useful to work with a separate cross-contract definitions schedule. In practice, however, this does not necessarily make the negotiation and drafting process easier.