Using defined terms and definitions is a powerful tool to improve the readability of a contract. They are used to make the interpretation of a contract easier and reduce any risks of ambiguity.
In common parlance, the terms defined term and definition are somewhat interchangeably referred to as ‘definitions’. However, for a better understanding of the concept of definitions in contracts, it is helpful using a strict terminology:
- Definition refers to the description, or object, of what is being defined;
- Defined term refers to the (capitalised) word or words chosen to refer to that definition.
How does it work? In short, to indicate that a term is defined, its first character is written in upper case (note that sometimes contract drafters put the entire defined term in capitals). Throughout the contract, the draftsperson will consistently use the defined term, wherever the definition is intended to be used (and wherever the same word is not with a first-capital, the word should be interpreted not to have the meaning as defined). In interpreting a contract, the reader must substitute the defined terms by their respective definition. If drafted properly, the definition so substituted will give the contract provision its precise meaning.
Defined terms can be defined in a separate article and in the body text of the contract (or on both places). Where defined, it is best practice to indicate the defined term clearly, by placing the defined term (with initial capitals) between quotation marks or print it bold (or underlined).
In drafting and using defined terms and definitions almost invariably mistakes or drafting flaws are found.