Tuesday, January 3, 2012

Defined Terms, Defined term conventions, Managing Defined terms

When terms used in an Agreement have a specific definition/meaning, they are usually defined either in a Definitions section at the beginning of the Agreement or they may be defined within the body of the Agreement where it is first used by adding language that makes it a defined term. In major contracts I’ve seen attachments that listed all the defined terms used in the agreement. Common uses of defined terms are to establish a specific meaning when a word or phrase may have multiple meanings that could be interpreted differently. Another use is to keep the actual contract shorter where the full meaning of it does not have to be repeated each time it its used.

There are multiple potential conventions that may be used to create a defined term. The most common ways to create defined terms is by either capitalizing the first letter only of the defined term or terms that make up the definition or by capitalizing the entire word or words when you create the defined term. Some people prefer to use all capital letters so it’s easy to see when a defined term is being used and so there is no confusion if you used a defined term to start a sentence. If you use the initial letter capitalized approach, when drafting language make sure that you don't a use a defined terms to start the sentence so it’s clear that you are using a defined term.

All that is really required to create a defined term is a convention that is established when you create the defined term that makes it conspicuous that the defined term is being used. There are some languages and alphabets where the capitals don't exist and can’t be used in creating defined terms. If you were to do an agreement in those languages to create a defined term you would need to establish a different convention. There are a number of ways that could be done:

You could say all words that are underlined in this agreement shall have the meaning of the defined term. Then when you create and use the defined term it would need to be underlined.

You could create the convention in the definition such as “ day” or “days” shall mean calendar days. For example when you used that you would say: supplier shall deliver in thirty (30) “days”.

You could bold only defined terms.

You could potentially use a larger or different font.

Just like a disclaimer, you need to make it clear that that it is different and it represents the use of the defined term. To make it clear you would want to clearly define that the specific convention you are using means the use of a defined terms. For example, all words that are “bolded” shall have the meaning of the defined term. Each time you need to use the defined term you would follow the specific convention you established. It’s very important to be consistent in the use of the defined term. At the first point in the contract where you create a defined term you need to decide which convention you will use. Then you use only that that approach to create defined terms in both the definitions section or elsewhere in the agreement where you may be creating defined terms within the context they are first being used..

For example if you say “Supplier” shall mean X Company to create the defined term. Every time you need to use the defined term you need to use Supplier. If you said “SUPPLIER” shall mean X Company, every time you want to use the defined term you need to use SUPPLIER with all letters capitalized. What you can't do is switch back and forth or use an all lower case word when the defined term was created with an upper case convention. Anything else may not be interpreted to have the meaning of the defined term.

In negotiating 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 be a used as defined term, you need to follow the convention you established. If it should not be used as a defined term, don’t follow the convention. In negotiations the other party may want to make changes to the definition of a 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 that defined term is used and then see whether the proposed change negatively impacts that commitment.

For example I one had a supplier that 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 deletion of “agents” and “subcontractors” from the definition, I had to search the agreement for the defined term “Personnel”. I discovered that it is used in two places. It was used in the General Indemnity. With the proposed change to the definition 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. The second place I found it was in a section about responsibility for management of supplier Personnel. The impact of the proposed change would be that the Supplier would not be responsible for managing contract requirements for Supplier personnel with their agents or Subcontractors. Since it would substantially change the commitments in both these areas and increases the potential liability, I rejected the proposed change. I made it clear that I had no contract relationship with those two parties so I could not manage the risk. The supplier did and they needed to be the ones to manage it.

There are two ways 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 must manage both.

In proof reading your contract the easiest way to check for correct use is to use the “find” functionality in your word processing program. Search for each time the word is used. Read that in in context to determine whether it needs to be a defined term or not.

If you learned from this post, think about how much more you could learn from the book.
The book is only US$24.95 plus shipping. The hot-link to amazon.com is above the date.