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.

Normally, definitions would be listed in the article 1 of a contract. It aligns with best practice rule 8, that defined terms must not be used in the body text before they are defined. 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, you may prefer to use the following lead-in: “In this Agreement, the following capitalised terms have the meanings ascribed opposite to them:

Many contract drafters prefer to bring the definitions together at the backend of the contract or in a separate schedule. This prevents the somewhat inconvenient reading a contract (to first go through a list of definitions before reading the core provisions).

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, order the defined terms alphabetically together with its definition, a paragraph for each.

If the definitions are defined in a dedicated definitions article, they are invariably ordered alphabetically. In the definitions article, the defined terms should not be numbered (a), (b), (c), or 1.1, 1.2, 1.3 etc. As they are ordered alphabetically, it does not make sense to enumerate the list as well.

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 must 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).

Note that grammatically, ‘shall’ exclusively refers to an obligation (an action by a person). Accordingly, ‘shall mean’ would be incorrect. A correct example is:

Products” means the products listed in Annex 1.

12) In the definitions article, never repeat a part of a term that is already defined in the body text and never summarize or rephrase such a definition.

For example, do not use “Management Board means the management board of the Company” together with a section “4.1. The Company shall be managed and represented by the management board (the Management Board).” What happens in such combination of ‘definitions’ within one contract is that there are two definitions of the same defined term, and both are ascribed a (fundamentally) different meaning. Although the draftsperson may not intend to differentiate, the defined term is anyhow ambiguous.

It would be even worse to use the following definition in combination with such section 4.1: “Management Board means the Company’s formal body, collectively responsible for the day-to-day affairs of the Company.” Where in the previous example the definition aimed at different elements for identifying the Management Board, in this example, the definitions even collide.

A term should be defined completely. 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.

13) A term defined in the body text should (a) be placed immediately following the concept it defines, (b) be placed between brackets together with an article, (c) be distinguished clearly from the other text, and (d) be marked consistent with the terms defined in the definitions article.

A defined term is clearly distinguishable when printed bold, but traditionally, the term is also put between “citation marks” (it is odd to use ‘single quotes’). It is common practice to mark the defined term in bold where it is defined. For example:

…(the Products).

The article “the” is not part of the defined term. For example, do not define products as (“the Products”) but instead write (the Products), or (the “Products”) if citation marks are used. It is unnecessary to indicate that a term is defined elsewhere in the body text, by also inserting words such as ‘hereinafter’, or ‘hereinafter referred to as.

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.

14) 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. Consider the different scopes of definition of when a notice qualifies as an “Option Notice” in the following examples:

  • …Purchasers, shall give Seller a notice in writing referring to this Agreement and this Article (an “Option Notice”), specifying the precise nature, background and details of the Triggering Event and 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…,
  • …Purchasers, shall give Seller a notice in writing referring to this Agreement and this Article, specifying the precise nature, background and details of the Triggering Event and 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, an “Option Notice”).

By the placement of the defined term, the scope of the captured definition differs: in the first example, a mere written notice by the Purchaser to the Sellers pointing at its option under the referred-to Article will already qualify as an Option Notice, with all the effects stipulated in the agreement (for example, the right to exercise the agreed option right may lapse permanently within a stipulated period of time after the Option Notice, or uncertainty may exist regarding the question whether there was a Triggering Event at all).

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: