Using Defined Terms

Using Defined Terms
Your goal in drafting a transactional document is to

make is speak unambiguously and accurately. Future
readers should know exactly what your document
means— regardless of whether those future readers
are your client, you client’s successors, some other
party, or a judge. A good technique for achieving this
goal is the use of defined terms.
When should you use defined terms?
A. As soon as you know you will refer to the same concept more than
once in a document; and
B. When it takes more than a few words to explain the concept
How do defined terms work?
A. “External” defined terms are unique to the external circumstances of
this particular transaction (names of parties, location of real property,
etc.). They tie the document to the outside world and the larger
transaction. External defined terms are especially useful when facts are
subject to future development and the exact details of the transaction
are not yet known. They should all be defined early in the document.
B. “Internal” definitions, by contrast, refer solely to concepts internal to
the particular document. They might refer to external defined terms.
How can defined terms simplify transactional
documents?
A. They can assure that any particular laundry list will appear only once
in a document. This preserves simplicity, certainty, and consistency.
B. If properly structured, defined terms can allow you to make a
necessary change only once—by fine-tuning or modifying a defined
term—as the terms of the transaction are negotiated and modified
over time.
C. Defined terms can help you prevent a maze of cross-references.
How should you create defined terms?
A. Take a “structured” approach, setting up definitions as “building blocks” that
work together.
B. As much as you try to broaden or clarify a defined term, it should still mean
what it intuitively seems to mean without close scrutiny of the definition.
C. Beware of setting up a “broad” defined term and then using it in a context
where you need a “narrow” defined term.
D. Avoid using words like “applicable” or “actual” or “selected” or “operative”.
They don’t help the user remember what the term is about.
E. When defining related concepts, the defined terms should interact in a way that
reflects the interaction of the underlying concepts
F. Collect your definitions in one place.
Don’t Use Plural Words in Defined Terms
• A defined term should not include “(s)”: where defined, a defined term
is either singular or plural. In the body of the contract, both the singular
and plural can be used interchangeably regardless of whether the
definition refers to the singular or plural term.
E.g. 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.
The first letter of the defined term should be
capitalised
• 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 its conjunctions and prepositions (e.g. and, but, or, on, in, under,
beside, of, by, for, with, as, about).
• This best practice rule is well-established and prevents that more
clarification of how defined terms and definitions work. For example:
Seller hereby sells the Goods and undertakes to provide the Services…
Within ten Business Days after each calendar quarter, the Management
Board shall…
Each party may terminate this agreement upon a Change of
Control over the other party.
• 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.
• The drafter may prefer to use a synonym where the defined term is
meant to be avoided. Here is an example of correctly using a defined
term in combination with an undefined (similar) word:
Distributor shall not sell any products that are equal to or fulfil a
similar function as the Products.
Do not create a defined term if its plain-
language meaning is clear and unambiguous
• Especially in transactions in which no sharp line is intended to be
drawn between concepts that could either fall within or outside the
definition, it is often better to leave the term undefined. Consistent
with the overriding drafting principle that contracts must use plain
language (and not business jargon or legalese), the same applies to
defining terms.
• For example, in most contracts it will be superfluous to define what a
‘third party’ is or what is captured by clauses referring to a ‘person’.
Create only one defined term for each definition, and never use a
synonym where the defined concept, word or expression is meant
to apply.
• It is confusing if a word or concept is defined (e.g. the Goods sold
under the agreement are “all products listed in the annex”) and the
agreement would ‘refer’ to it by using similar words or concepts. For
example, it is confusing if the agreement would interchangeably refer
to “Goods”, “the products listed in the annex” and “the goods
contemplated by this agreement”.
For example, do not define a contracting party as (the “Company” or
“Weagree”)
For another example, do not refer both to ‘Product’ and to ‘TV Sets’,
if they are both defined as “tv sets as specified in Annex 1”.
Avoid creating a defined term if it will be used
only once.
• In case a word or concept would be used only once in the contract, it
is sufficient clarifying that word or concept in a subsequent sentence
or paragraph.
If a term is defined, do not repeat a part of its definition
in connection with the use of the defined term.
• For example, do not refer to the “Management Board of the
Company” in the contract provisions if the “Management Board” is
already defined as “the management board of the Company”.
When substituting such incorrectly used defined term, the result would
read “the management board of the Company of the Company”. In
other words, the principle of substituting a definition into the defined
term must be applied strictly.
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.
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’.
• Don’t use «shall» in your drafts but if you used it be aware of:
• F.e. 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.

Never include obligations, conditions or
warranties in a definition.
• The inclusion of obligations, conditions or warranties creates
ambiguity when interpreting the body text in which the defined term
is used. A common flaw of such ‘error’ is, for example:
Specifications means the technical design and related specifications,

which shall be developed and owned by Licensor and which are to be
provided to the Manufacturers that wish to manufacture the Product
meeting those specifications.
Final advice
Don’t get carried away. Some concepts are simple enough, basic
enough, and sufficiently well understood (or vagueness may work in
your favor) that you don’t need a definition.

Using Defined Terms

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Using Defined Terms

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Using Defined Terms

Your goal in drafting a transactional document is to

E.g. Licence Agreements mean collectively, the Trademark Licence and

All disputes in connection with this Agreement, or further agreements

Unless explicitly stated otherwise in this Agreement, the Parties

• If the definitions are defined in a dedicated definitions article, they

“Products” means the products listed in Annex 1.

Specifications means the technical design and related specifications,

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