How many times have you read through an agreement only to find that certain defined terms appear to be undefined? Perhaps instead you have read a definition of a defined term only to discover that the term’s definition is itself a defined term?
Let’s be honest here. A contract can be a great many things, some good, some bad, but all attorneys would likely agree that the one thing a contract should not be is confusing. However, also keep in mind that there is a distinction to be made between confusing and ambiguous. One party or the other often creates ambiguity in an agreement deliberately because ambiguity can sometimes benefit a particular party, but confusion is beneficial to no party.
When using defined terms, you need to ensure that the definitions of those terms accomplish two important tasks:
1) Provide the reader/interpreter of the agreement a clear understanding of what a specific term means in the context of the agreement.
2) The definition of one defined term does not conflict with the definition of another defined term.
In addition, keep in mind that every term in agreement need not be specifically defined. A good rule of thumb to follow is that if you use the same term more than once in an agreement, then that term likely should be defined in a clearly delineated definitions section early in the agreement.
In terms of the two suggestions I stated above, let me address each in turn.
First, a definition does no one any good if no one except for the drafter can understand it! Therefore, it is best to write a definition as clearly and definitively as possible. Ken Adams, a leading authority on contract drafting, advocates for the use of plain, simple language as much as possible in agreements and I agree wholeheartedly.
Second, sometimes you may come across an agreement where the definition of one or more defined terms uses yet another defined term as part of its definition or relies on, in part, another defined term.
Not only will doing either of these things likely unnecessarily frustrate the other side as well as perhaps some on your side as well, it also will make the agreement as a whole more complicated and confusing. In other words, AVOID DOING EITHER OF THESE THINGS.
At the end of the day, while the lawyers may be the ones negotiating the agreement and will most likely be the ones drafting the agreement, it is the business people who will be relying on the agreement as the basis for their business relationship.
Therefore, the agreement needs to be clear not just to the attorneys, but also to the business people. While there will be certain provisions the business folks will likely not fully understand such as indemnification, all parties will be better off if as much as the agreement as possible can be understood upon execution by as many of the various parties involved as possible.