After a hiatus, I am back with an article on contract drafting, this time on the topic of the definitions and interpretations clause.
Definitions are a ubiquitous part of a contract. Sometimes they appear right at the beginning of the contract just after the introductory clauses. Sometimes they are spread across the contract.
If you are a law student and have done internships at corporate law firms, you might have received a thick contract and asked to review it for consistency and cross referencing. One of your jobs would have been to see that all the definitions are capitalized and bold and have been used constantly in the entire contract.
This assignment seems straightforward; but have you ever stopped to wonder the why and how behind the Definitions clause?
Definitions play a big role in making the contract easier to read and comprehend.
Your contract may contain references to people, articles or terms which are used throughout the draft. Writing out the whole meaning every time will make your contract difficult to navigate and cumbersome to read. Definitions reduce a phrase or a whole sentence into one word, which can be used repeatedly with ease.
ABC Trading Private Limited can be defined as ‘ABC’ or ‘Seller’.
Hotel situated on JKL Road, having 80 keys, banquet, restaurants, spas and allied facilities can be defined as ‘Hotel’.
Land parcel admeasuring 2.5 acres bearing survey no 3,4 &5 located at PQR Road can be defined as ‘Land’.
Defined terms give clarity and a sense of definitiveness to a contract. It also removes ambiguity and makes a contract easier to understand.
Definitions are a very important tool in the interpretation of a contract. When there is a dispute between the parties, you as a lawyer will pour over the clause in dispute and use the definition of the key terms to understand the meaning.
To use definitions effectively and properly in a contract, one must keep a few important things in mind.
Let’s find out what are the key rules of using definitions.
1. Know the difference between ‘means and ‘includes’
While drafting a definition, you will either use ‘means’ or ‘includes’. Therefore, it is important to know when to use which term.
If you want to give a restrictive meaning to a term, then use means.
If you want to give a wider meaning to a term, then use includes. Includes automatically means that the definition is not exhaustive and it can include other things apart from what is mentioned.
Let’s see an example:
Force Majeure Event shall mean fire, flood, earthquake, tsunami, volcanic activity, hurricane, civil war, riot, insurgency, acts of terrorism, foreign invasion, plague or epidemic.
Here is the same definition with a change –
Force Majeure Event shall include fire, flood, earthquake, tsunami, volcanic activity, hurricane, civil war, riot, insurgency, acts of terrorism, foreign invasion, plague, epidemic or any other event outside the reasonable control of the parties.
Did you see the difference it made with switching of a word?
A definition can contain both mean and include but not together. Check the example of ‘Confidential Information’ below to know more.
If you want to specifically exclude something from the definition, you must do so with a clear exclusion clause. Don’t leave it to the ‘means’ clause thinking that what you have not mentioned are automatically excluded. It will save valuable time later.
2. Define all terms in one clause (and at times within the clauses)
It is a usual practice to group all definitions in the first clause of the agreement right after the Introductory clauses. It serves two purpose –
- It keeps all the definitions in one place. You can refer to just one clause and find out all the defined terms.
- It gives a sense of the agreement and its terms through the definitions right at the beginning.
At other times, especially for a smaller contract, the defined terms are spread across the contract, appearing whenever the need for definition of a term arises. This has the benefit of –
- Giving the definition as you read along the contract, thereby adding a context.
- Define only the phrases which need definition.
You can choose either of the approach.
My personal favourite is the “Define as you go” method, since I find a separate definition clause cumbersome to refer to every time I come across a defined term. Usually, during a negotiation, parties tend to get stuck on this clause right at the start which stalls progress. I believe if one has the context of why that term is defined the way it is, he understands it better.
I use the “All in one clause” approach when the contract is a long and complex one and has a lot of definitions to deal with. Then its always a good idea to group all definitions in one clause to avoid confusion. Moreover, when a defined term is used repeatedly, it’s easier to locate the definition if all definitions are present in one clause, rather than flipping through pages to locate the clause it was first defined.
In some of the contracts I have negotiated, I have found the definitions clause at the end, which is also a good idea. By the time you reach it, you would have read the whole contract and gotten a sense behind the whole of it, which makes it easier to appreciate and understand the definitions.
So, pick and choose your method depending on the type of contract and what, according to you, will make the reading process simpler.
3. Draft your Definitions
Let’s talk about drafting of definitions.
Most of the lawyers have never drafted a definition from scratch. We pick from templates, or from the other side’s draft, or simply google it.
I realized how tough it is to draft a definition clause when I was preparing the standard draft of a certain type of agreement at my job. I had the older template to go by, but most of the definitions had become obsolete and needed upgradation.
Here is the approach I took.
- If the term is industry-specific, I researched into the various ways it can be defined.
- I discussed with my business team and took their help. They are the ones who will execute the contract on the ground and are best suited to provide guidance.
- I looked at a minimum of 5 templates online to draft a comprehensive definition.
- Lastly, once I had a first cut ready, I edited the hell out of it. I shortened the length, used punctuation judiciously, swiped out the grand words with simpler, plainer synonyms and made the whole language crisp, sweet and simple.
Here is an example of definition of ‘Confidential Information’.
In most contracts, the definition runs into huge paragraphs. I have tried to define it in as simple language as possible.
Confidential Information shall mean information of the disclosing party that is not in the public domain and includes, without limitation, all information relating to the business, organization, operations and financial aspect of the disclosing party, business or technical data or know-how, domain knowledge, internal process documents, prototype concepts, customer lists, marketing information, manufacturing processes, formulae, designs, photographs, drawings, specifications, and other documents bearing any such information which is disclosed by the disclosing party.
Such information shall be deemed to be Confidential Information irrespective of whether it is marked or stipulated as being “Proprietary”, “Confidential”, “Strictly Private” or not and irrespective of the medium in which it is stored, whether tangible or otherwise. Such disclosure may be made either directly or indirectly, in writing, orally or by drawings, plans or inspection of products, materials parts or equipment.
4. Define only if you use a term more than once (and other tips)
Here are some quick tips to keep in mind for the Definitions clause:
(i) Do not define a term which is not present in the contract. Whenever I receive a draft from the other side, I run a Cntrl + F on the definitions and find several of them absent.
Many times, a draft undergoes several rounds of negotiations and some of the defined terms get deleted. Some times, the draft is the result of a template where the defined terms are not required in the present context. Therefore, before finalizing a contract, always run a Cntr+F on the definitions.
(ii) Don’t define any term unnecessarily. If a term has a common English meaning, no need to define it. If a term is used only once or twice, no need to define it.
(iii) Use a defined term only after defining it in the contract. It’s generally not a good practice to use a defined term and then mention ‘defined hereinafter in clause xx’. Definitions should appear at the first instance.
(iv) If there are several contracts for related transactions, then define the terms in the main contract. In all the other contracts if the defined terms appear again, state that ‘capitalized words will have the same definition as appearing in the main contract’.
(v) If you choose to group all definitions under one clause, then list them alphabetically. It’s easier to locate them when one is looking at a physical copy.
(vi) Do not add obligations, warranties or conditions in a definition. That’s for the body of the contract.
(vii) Be aware of what all you are including in a definition and by correlation, what you are excluding. Make sure it’s aligned to the interest of your client or business team.
(viii) If you are using a defined term (A) within another definition (B), make sure to list out the definition A separately by stating ‘A has the meaning ascribed to it in the definition of B’.
5. Interpretations clause (and a sample)
Definitions and Interpretation clause go hand in hand.
Interpretations clause sets out the general rules of interpretation and construction of various references made in the contract to aid in its interpretation.
It is a straightforward clause. Once you draft one from scratch, you can write or review this clause easily every time with your eyes closed.
Here is a sample for you.
In this Agreement, unless the context otherwise requires:
(a) Clause and article headings are inserted for convenience of reference only and have no legal effect;
(b) Where a word or phrase is defined, its other grammatical forms have a corresponding meaning;
(c) Headings and underlines are for convenience only and do not affect the interpretation of this agreement;
(d) References to this agreement or any other document shall be construed as references to this agreement or that document as in force for the time being and as amended, varied, substituted, supplemented, restated or novated in accordance with the terms thereof;
(e) Words importing the singular include the plural and vice versa;
(f) Reference to this agreement shall include the annexures, exhibits and schedules to this agreement;
(g) Words importing a gender include any gender;
(h) An expression importing a natural person includes any company, partnership, joint venture, association, corporation or other body corporate;
(i) Reference to anything includes a part of that thing;
(j) Reference to statutes or ordinance shall include any statutes or ordinances amending consolidating or replacing the same;
(k) Reference to a party to a document includes that party’s successors-in-interest and permitted assigns; and
As always I would like to remind you that you should read through the clause before copy-pasting anywhere and see that all of it applies to your contract.
Hope you enjoyed reading this article on Definitions & Interpretations clause of a contract.
Next in the series, we will begin exploring the operative clauses of a contract.
In case you haven’t checked out yet, here are all my articles on contract drafting so far.
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