Common Elements of Business Contracts, Part 3: Defined Terms

This is the third in a series of articles [1] presenting an overview of various provisions commonly found in business contracts, primarily from the point of view of the drafting attorney. [2]

Defined Terms

Most contracts contain defined terms – words or phrases that are assigned special meanings, and the most common way to signal a defined term is to capitalize the first letter. If a term is not defined, courts will generally look to the ordinary definition and in doing so may consult dictionaries, including legal dictionaries. [3]

DRAFTING TIP: Avoid the common temptation to define too many terms. If the ordinary dictionary meaning of a word or phrase suffices, rely on it.

Lists of defined terms

If terms are defined in a list, the list is usually in one of two places – in the first section or article after the recitals (if there are any) or in the first attachment to the contract. The definitions are declarative sentences, generally in alphabetical order. For example,

Territory” means the fifty states of the United States of America, the District of Columbia, and Puerto Rico.

DRAFTING TIP : Use “means”as the verb in a definition. “Shall mean” is unnecessary and conflicts with the recommended practice, discussed below, of reserving “shall” to signal a covenant.

Terms defined in context

A word or phrase can also be defined in context the first time it is used. For example,

Company A hereby grants to Company B a nonexclusive, perpetual, royalty free license to use the Licensed Technology anywhere within the fifty states of the United States of America, the District of Columbia, and Puerto Rico (collectively, the “Territory”).

DRAFTING TIP: Using boldface type to define a word or phrase, as in the above example, makes the definition easier to locate, which is particularly important when terms are defined in context.

Sometimes defining a term in context is more convenient that defining it in a list, even if most of the other terms are listed. In that situation, a convenient way of combining the two practices is to define the specific term in context and include a cross-reference in the list, as in:

Territory” has the meaning assigned to it in Section 3.7.



[1] These articles are adapted from materials prepared by the author for a continuing legal education seminar, “Business Contracts from A to Z,” sponsored by National Business Institute, and presented by Michael Ray Smith of Smith Rayl Law Office, LLC; and by Trevor J. Belden and Robert K. Stanley of Faegre Baker Daniels, LLP. Used by permission of National Business Institute.

[2] There is no universally accepted structure, format, or style for writing business contracts. In contract drafting, as in computers, “The nice thing about standards is that you have so many to choose from.” Andrew S. Tannenbaum, Computer Networks, 4th ed., quoted at http://en.wikiquote.org/wiki/Andrew_S._Tanenbaum. Two references sometimes used by the author are Kenneth Adams, A Manual of Style for Contract Drafting (2008). Another reference for specific provisions is Tina L. Stark (ed.), Negotiating and Drafting Contract Boilerplate (2003). These two sources are subsequently referred to as “Adams” and “Stark.”

[3] See, e.g., A.S. v. LaPorte Regional Health System, 921 N.E.2d 853 (Ind. Ct. App. 2010) (consulting Black’s Law Dictionary for the definition of “business”).