Definitions from hell: 5 things NOT to do with contract definitions

Defining terms is a widely used technique in contract drafting. Arguably, definitions make contracts shorter and clearer, because there is no need to re-define a term at multiple places and because it ensures consistency of interpretation across the contract.

Defined terms are usually capitalized to alert the reader. Their definitions are either included in a central glossary (in the first article of the contract or an annex) or in the body of the clause using the defined term.

All of this is based on good intentions, but the road to hell is paved with good intentions and contract definitions went happily down this road.

Why is it so? Well, contract clauses are notoriously hard to read and understand, and having to stop at every other word to verify their meaning really doesn’t help. Consider the following example (defined terms in bold):

If, following the procedure described above, the number of RFR Offered Securities for which the Right of First Refusal has been exercised is lower than the number of RFR Offered Securities, the Board of Directors shall so inform the RFR Transferor and all RFR Other Shareholders in writing (the “Free-up Notice”) and the RFR Transferor shall be entitled to complete, within a period of ninety (90) calendar days after the date of the Free-Up Notice, the Transfer of all the RFR Offered Securities for the RFR Offered Consideration per Security and at the RFR Offered Conditions as set forth in the RFR Transfer Notice to the Prospective Transferee.

Definitions seek to clarify the meaning of a term. They often produce the opposite effect for the reader and reviewer: every capital letter raises a mental flag that says « I cannot trust my understanding of this term until I check how they defined it in there ». Isn’t it ironic that startups like Donna and Define are now creating software products to deal with the complexity of definitions – yes, the feature supposed to make contracts simpler?

So is it worth interrupting the mental flow of the reader to stop by a glossary? Not with these 5 types of definitions from hell, all with real-life examples.

1) Useless definitions

They are essentially bloat. They clarify the meaning of a term that was never ambiguous in the first place., and help avoiding litigation that has .0005% chances to happen. Is it OK because they don’t hurt? You’ll think differently after wasting 5 minutes of your life seeking for the definition of « Day » in a 5-pages long glossary.

Euro means the legal currency of the European Union

By the way, it’s not even correct.

Customer Personnel means the Personnel of the Customer

Approvals means all consents, visas, licences, authorisations, approvals, permits and permissions;

I guess they ran out of synonyms

Information shall mean any inventions (whether patentable or not), data, instructions, ideas, software, algorithms, discoveries, procedures, methods, techniques, formulae, biological sequences, advice and any other knowledge each in whatever form.

Why? Just…why?

Milestone means a milestone for delivery or provision of the Deliverables by Supplier as specified in the Implementation Plan;

Basically, a milestone is a milestone

Ordinary Course of Business means the usual, regular and ordinary course of the business conducted by the Company’s group, consistent with past practices and custom and operated in a diligent and prudent manner;

Note there is room for an interesting debate if past management practices were all but diligent and prudent.

Acceptance Criteria means the criteria agreed in respect of each of the Deliverables to be delivered by Supplier as specified in the relevant Acceptance Testing Procedure and such criteria will be used to assess whether the Deliverable in question complies with the Specifications in all material respects;

In other words, the criteria used for acceptance.

Trade Secret shall mean any Information, Materials and other Services deliverables which (i) are secret and (ii) have commercial value derived from the fact that they are secret and (iii) are the subject of reasonable efforts to be kept secret.  

Surprisingly, a trade secret is something that (i) is a trade secret and (ii) meets the material conditions for being a trade secret.

2) Definitions by reference

These definitions are merely pointing at another clause or document where the term is (supposedly) defined. Because contracts are more fun with a treasure hunt vibe? Bonus points if the outsourced definition itself contains defined terms, forcing the reader to go back to the glossary.

Drag-along Right has the meaning set forth in Article 7.3 of this Agreement;

Probation Period has the meaning given to it in clause 7;

Release Event shall have the meaning given to it in the Escrow Agreement;

This one gets a bonus point

Escrow Agreement means the escrow agreement to be entered into between Customer, Supplier and the Escrow Agent in accordance with the provisions of clause 7.9, substantially in the form of the Escrow Agreement attached hereto as Annex I;

Just for fun, to complete the previous example – they come from the same agreement

3) Counterintuitive redefinition of legal concepts

A sophisticated equivalent of « no means yes ». Playing with the scope of existing legal categories is a dangerous game and rarely a good idea. Sure, there might be occasional merits in clarifying the inclusion or exclusion of borderline categories or lifting a controversy. But abusing this practice forces the reader to distrust her knowledge of usual legal concepts and categories, and refer to a definition instead, a very annoying exercise.

Indirect Tax means all custom duties, excise taxes, import levies, registration taxes, transfer taxes, stamp duties and other indirect taxes of whatever nature (other than VAT), together with all penalties, charges and interest relating to any of the foregoing;

In tax law, VAT is an indirect tax. In fact, it might be the best example of an indirect tax.

Intellectual Property Rights means copyright, patents, rights in know-how and Confidential Information, database rights, internet domain names, rights in web site addresses, semi-conductor topography rights, utility models, trademarks, service marks, trade names and design rights, in each case, whether registered or unregistered, and applications for registration of any of the foregoing and the right to apply for registration, and all other intellectual property rights and equivalent or similar forms of protection existing anywhere in the world;

Despite receiving some form of legal protection, know-how and confidential informations are usually not considered as IP rights. Extending the IP category to unprotected elements will be problematic in certain contexts, e.g. clauses dealing with transfers of intellectual property rights.

Contract means any agreement, contract, commitment, lease, mortgage, indenture, deed of trust, debt instrument, understanding, arrangement, restriction or other instrument, whether written or oral;

So, an « oral arrangement » is a contract? That was not a given.

4) Catch-all definitions.

An avatar of the frequent (mal)practice of throwing in as many synonyms as possible in contracts because, well, ‘you never know’. Including catch-all language in a definition rarely contributes to create clarity and to avoid potential disputes, quite the contrary. And just for fun, try applying the material provisions using the defined term, to the most remote elements of the catch-all. It usually doesn’t end well.

Intellectual Property Rights means copyright, patents, rights in know-how and Confidential Information, database rights, internet domain names, rights in web site addresses, semi-conductor topography rights, utility models, trademarks, service marks, trade names and design rights, in each case, whether registered or unregistered, and applications for registration of any of the foregoing and the right to apply for registration, and all other intellectual property rights and equivalent or similar forms of protection existing anywhere in the world;

First, the list includes elements that usually don’t receive IP protection, like know-how and confidential information. Then it includes « registered and unregistered » forms of these elements, where some don’t require (or even allow for) registration, and there might be no protection at all for unregistered forms. Last be not least, we are supposed to also include « equivalent or similar » form of protection (or non-protection?) of this already vague list. Good luck figuring out exactly what this means.

Confidential Information shall mean any Information disclosed after execution of this Agreeement by the Disclosing Party to the Receiving Party, whether tangible or intangible, oral, visual, written or electronic, or in any other form

Basically, any information is confidential.

Personnel means the individual partners, directors, officers, employees, representatives, agents, independent contractors, subcontractors, suppliers, advisors, licensors, product providers, and service providers;

Any person who is remotely connected to a party is part of its personnel. Interestingly, the personel of the other party probably falls within this definition as well.

5) Definitions containing material provisions

Definitions are meant to define, or refer to, certain concepts. They should ever include obligations, rules, prohibitions, or other types of contract language. First, because it breaks the logic of the contract. Second, because they will very likely collide with the real material provisions that use the defined terms.

Liquidated Damages means the damages payable by the Supplier to the Buyer for a delay, which for each Local Agreement shall be calculated at the rate of 0,7 % (zero point seven) of the Charges relating to the Product subject to the delay, for each day (or pro-rated portion) between (and including): (a) the date the delay began; and (b) the date on which the delay ended, subject to an aggregate maximum of 25% (twenty-five percent) of the Charges paid and/or payable under the relevant Local Agreement. This is a genuine pre-estimate of the loss agreed by the Parties and is not the sole and exclusive remedy and without prejudice to any other claim under this GFA or any Local Agreement.

Defining the amount of liquidated damages in the definition of the term is already debatable, but if it’s consistent across the contract, why not. But addressing sanctions and remedies in the definition?

Services means all services described in Schedule 3 (Service Schedules) to be provided by the Supplier to the Buyer under a Local Agreement, together with all ancillary, incidental or other services including support or extended warranty necessary to allow the Buyer to enjoy the fully intended benefit of Services, Products and/or Deliverables.

This is a vicious one. It looks like a mere reference to services described somewhere else, except it also includes services that are not described but may be considered useful. Is this definition extending the scope of contracted services? Probably. Is it the right place to do it? Of course not.