Thursday, March 24, 2011

Defined Terms

When terms used in an Agreement have a specific definition/meaning, they are usually defined either in a Definitions section of the Agreement or, they may be defined in the Agreement by adding language that makes it a defined term.

Example:  The XYZ Machine (hereafter referred to as “Product”).  So every time you used the work Product in the agreement it would mean the XYZ Machine.

The first letter of Defined terms is always capitalized.  In drafting, reviewing and negotiating Agreements you need to check each time a defined word is used throughout the Agreement and any associated documents to ensure it is used properly as a defined term.  If it should not be used as a defined term, the first letter must be lower case (“product”).   This is important because many terms may have multiple meanings such as material, and the use of the defined term will determine which meaning applies. In reviewing your Agreement, also ensure that the defined terms are used consistently throughout.

For example:
“Product” may be a defined term used in the Agreement.   The definition of Product could be  “those products listed in the Statement of Work” or those products listed in Attachment A.  Many of your terms may refer to Product. Many warranties apply to Product. If you purchase something that is not listed in document where the applicable products are listed, you would be purchasing a product, not a Product. That is because the term Product only applies to those items listed on the applicable document. To have coverage of the Agreement, the products you buy need to be added to the applicable document, putting them into the category of Products (the defined term).  You can do that by either amending the applicable document to add it or by mutually agree upon an alternative process by which other items may be added to the list of Products.   

Many times in a negotiation the other party may want to make changes to the definition of a specific defined term. To understand whether to accept the proposed change you need to identify the potential impact.  To determine the impact you need to search for all places within all the documents that make up your Agreement to see where the defined term is used and then see whether the proposed change negatively impacts that commitment.  With Word Processing tools it’s easy to search for each time the defined term has been used. For example using Microsoft word under the Edit pull down menu you would select Find and as defined terms must be capitalized you click on “Match Case” and simply type in the Defined term add it will bring you to every time its used.

For example assume that the Supplier made the following proposed changes to the definition of Personnel.
"Personnel” means  agents, employees or subcontractors  engaged or appointed by Buyer or Supplier.

To understand the impact on the the change in the defined terms that deleted “agents” and “Subcontractors” from the definition, you need to search the agreement for the where the defined term “Personnel” was used. You discover that it is used in two places. It’s used in the General Indemnity, and with this change the Supplier would not be required to indemnify the Buyer against negligent or intentional acts of either the Supplier’s agents or Subcontractors leaving the Buyer exposed.  You find that it was also used in the Section on Supplier Personnel, and the impact of the change would be that the Supplier would not be responsible for managing contract requirements for Supplier personnel with their agents of Subcontractors. Since it would substantially change the commitments in both these areas and increases the Buyer’s potential liability you would reject the proposed change.

There are two ways that a Supplier can change a commitment in a Section. The obvious one is when they modify the section itself. The more subtle way is by changes to Defined terms that are used in the Section. To make sure you get what you need you have to manage both. 

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