Corporate & Securities Law

Defined Terms for the Components of a Transaction

By Ken Adams

I’ve been urging my Penn Law students to curb their tendency to create more defined terms than a given contract requires. That led to one of my students sending me the following message regarding our final assignment, the Penn Law redrafting project:

Dear Professor Adams,

I just took a look at your version of assignment 5. It seems to me that I still don’t have the defined-term Fingerspitzengefühl …

Since in my previous assignments I tended to include way too many defined terms, I tried to limit them this time as much as possible. Therefore, I didn’t include a defined term for words like “services,” “contractor,” “statement of work,” because I thought that their meaning was clear and that no defined term was needed. Now I see in your version that you did include a defined term for these words. How do you know it when one is appropriate and when it isn’t?

Thank you very much.

Kate

Here’s how I responded:

Kate: Thank you for your question; it has caused me to think further about how I use defined terms.

Other than defined terms for party names, the defined terms I use in my redraft?SoW, Services, Contractor, Deliverable?all represent basic components of the transaction in question. In each case, the definition serves to indicate that the defined term pertains to that agreement.

For example, references to contractor, with a small “c,” could in theory be taken to refer to any contractor, not just a contractor providing services under the agreement. Is that likely? No. But contract language is like software code: it’s best to be explicit about relationships rather than requiring the reader to fill a gap in logic. And I’d rather not refer constantly to any contractor providing Services?such wordiness would be tiresome. (I wouldn’t create such a defined term if the thing in question were referred to only a few times.)

That’s why in other contracts I use Closing as a defined term referring to the closing of the transaction contemplated by the agreement. Would a reader likely assume that Closing refers to closing of some other transaction? No, but I don’t want to use shorthand in a contract unless by using a defined term I flag to the reader that I’m using shorthand.

But even I have my limits. I don’t say party hereto, or use the defined term Party (see MSCD 1.76): the parties to a contract are entirely a construct of the contract rather than some potentially external reality, such contractors. But I happily confess that it’s a matter of degree rather than bright lines.

And one can distinguish from defined terms for components of the transaction those defined terms that do more than label something as pertaining to the agreement?for example, the defined term Excluded Liabilities. Such defined terms are the real workhorses of the defined-term world.

I hope this helps!

KAA

Incidentally, I liked Kate’s use of Fingerspitzengefühl?if the audience is receptive and you indulge sparingly, subtle German words can enliven prose and conversation. I recall that my father was fond of Torschlusspanik.

Full post as published by AdamsDrafting on November 23, 2008 (boomark / email).