Drafting contracts

(b) Principles related to the place and presentation of defined terms

9) If a contract uses more than one defined term in several places and the contract is more than six or seven pages long, bring the definitions together in one article.

The preferred way of drafting would then be not to define them in the body text but only in the definitions article. Normally, definitions would be located in article 1. The lead-in of the definitions article could be:

In this Agreement:…

If a definition is used in only one article, consider inserting one, initial section in that article for that definition. The lead-in could be:

For the purpose of this Article,…

If the defined terms and definitions are presented in the format of a table (see below), you may prefer to use the following lead-in: “In this Agreement, the following capitalised terms have the meanings ascribed opposite to them:

If one defined term is used in the recitals, it should be followed by “(as defined in article 1)“. If more than one defined term is used in the recitals, the text after the first defined term should be “(capitalised terms are defined in article 1)” or “(a capitalised term has the meaning ascribed to it in article 1)“.

If a term is defined in a separate contract or document, use the defined term (capitalised) and add “(as defined in…)” immediately following the first instance where the defined term is used. Refer to the contract or document only, not to the article or section of that contract or document (provided that the definition can be traced easily upon a prima facie reading) of such contract or document.

For contracts longer than about nine or ten pages, it is recommended that the terms defined in the body of the contract are referenced in the definitions article. The referencing text should refer to the section number in which the definition appears (and the referencing text must be consistent):

Product has the meaning ascribed to it in Section 3.4.

10) In the definitions article, defined terms should be ordered alphabetically, a paragraph for each, together with its definition.

The defined terms should not be numbered (a), (b), (c), or 1.1, 1.2, 1.3 etc.

Sometimes, the defined terms and definitions are placed in a table, visually distinguishing the defined term (in the left column) from its definition (placed in the right column opposite that defined term).

11) A term defined in the definitions article should not be preceded by an article or a preposition and should be followed, consistently, by the word means.

If the defined term is a verb and may be confused with a noun, exceptionally, the defined verb can be preceded by “to“, which should not be printed bold and should be placed outside the quotation marks (if used at all).

If the defined term and definitions are presented in the format of a table (with the defined term in the left column and the definition in the right column), you may prefer to place a colon ( : ) immediately after the defined term, instead of means. The defined term can also be followed by the combination shall mean, provided that it is used consistently. Some drafters believe that shall exclusively refers to an obligation. In that vision, shall mean would be incorrect.

12) To exclude something that would ordinarily be within the scope of a definition, the defined term, or a part of it, should be followed by excludes.

Instead of excludes you may prefer to use does not include. Similarly, some drafters believe that if a definition is not intended as an exhaustive description, the defined term should be followed by includes (and not means).

Following the same line of reasoning, means and includes should not be used. Means makes clear that the defined term and the definition are entirely equivalent. Includes indicates that the defined term also refers to matters outside the definition.

Although means and includes cannot be used together to refer to the same definition, a definition may well start with means and specify certain elements of the definition by including X, Y and Z. Obviously, similar combinations of means, includes and excludes can also be made.

13) In the definitions article, you should not repeat the text of a term that is already defined in the body text and never summarise or rephrase such a definition.

For example, do not use “Management Board means the management board of the Company” together with “4.1 – The Company shall be managed and represented by the management board (the Management Board).” It would be even worse to use the following definition in combination with the above section 4.1: “Management Board means the Company’s formal body, collectively responsible for the day-to-day affairs of the Company.” A term should be defined completely, either in the definitions article (preferred option) or in the body text.

Sometimes, it is unavoidable or more convenient to work with a definition defined in the body text. In several jurisdictions, it is common practice to define terms as much as possible in the body text rather than in the definitions article.

Do not re-define or refer to the “Parties” or “Agreement” in the definitions article, provided that the terms are defined (or, for example in the case of a separate schedule identifying each party, referred to) in the initial contract line and parties block. Sometimes, but wrongly, a clause is added to the definition of Agreement, modifying its ordinary meaning or limiting its scope to the body text (or expanding its meaning to schedules and annexes). Such modifications should be addressed in a separate interpretation section (e.g. section 1.2) or in the miscellaneous provisions.

14) A term defined in the body text should, when defined: (a) be placed between brackets together with an article; (b) be distinguished clearly from the other text; and (c) be marked consistent with the terms defined in the definitions article.

It is common practice to mark the defined term in bold where it is defined. Sometimes, defined terms are underlined (as well). Consistency with the principle applied in the definitions article implies that if defined terms are placed between quotation marks, this should be done both in the definitions article and in the body text. More elegantly however, and as it seems increasingly, defined terms are not placed between quotation marks but printed in bold only:

(the Products).

The article is not part of the defined term. Hence, if the defined term is marked bold or placed between quotation marks, the article should not be bold and should be left outside the quotes. For example, do not define products as (“the Products“) but instead write (the “Products“).

It is unnecessary (and old-fashioned) to indicate that a term is defined elsewhere in the body text, whether in the parties block, the preamble or the definitions section, by also inserting between the brackets words or phrases such as hereinafter, or hereinafter referred to as.

In letters (and letter agreements) it is common to use quotation marks only and not to print the defined term in bold or all-caps.

15) A term defined in the body text must be placed immediately after the definition (taken in its entirety).

The defined term should not be placed halfway through the description it intends to cover. This creates ambiguity.

Sometimes, the defined term refers back to several objects. In such case, it may be desirable (especially if the last object mentioned was a plural) to add collectively. For example: (collectively, the Excluded Assets).

It is not always clear how far the text intended to be captured by the definition reaches back. Normally, this is no further back than the beginning of the sentence. Anyhow, in case of doubt, it may be helpful to further identify the object of the defined term. For example: (such report, the Report).

Similarly, the drafter should be careful in noting whether the preceding text may also be read so as to include qualifications that are not intended to be a part of the definition:

…Purchasers, shall give Seller a notice in writing:

(a) referring to this Agreement and this Article;

(b) specifying the precise nature, background and details of the Triggering Event; and

(c) the date on which the Triggering Event occurred, as well as the date on which Purchaser anticipates that the effect of the Triggering Event may reasonably result in…,

(such notice being an Option Notice).

Note that the indentation of the definition captures everything from a “notice”. Hence a notice would qualify as an “Option Notice” only if the written notification complies (or must reasonably be understood to comply) with each of (a), (b) and (c).

Occasionally, the defined term precedes the object it defines. This is especially the case for listings of items: termination events such as bankruptcy, suspension of payment proceedings, change of control and material breach or assets to be sold (or excluded from sale). For example:

For the purpose of this Article 7, a Triggering Event means the occurrence of any of the following facts or events: