And more to the point, one student asked the first blogworthy question of the semester. We had been discussing integrated versus autonomous definitions, and one of the examples I used featured a definition of the defined term SEC. The student mentioned to me that during his summer at a law firm, a partner had told him that he needn’t define SEC in the contract the student was drafting, as anyone who had any business reading the contract would know that SEC was a reference to the U.S. Securities and Exchange Commission.

I thought a bit of empirical research was in order, so I of course turned to the SEC’s EDGAR system. I looked at twenty merger agreements that used the initialism SEC. Of those twenty, seventeen defined SEC, two didn’t define it, and one was inconclusive, as the definition section was in an unfiled attachment. That suggests that overwhelmingly, the practice is to define SEC.

But which approach prevails is only of anecdotal interest to me, because I think it’s simplest and clearest to define all terms, no matter how obvious their meaning. For one thing, contract drafting is most efficient when you apply rules across the board—it complicates matters if the drafter starts making judgment calls regarding whether the meaning of a given defined term is obvious. And if drafters start dropping definitions, at some point you can expect reader confusion, either because contracts can have a broader readership than you might expect, or because a given drafter had an agressive notion of what terms have an obvious meaning.

So I’ll continue to recommend that you provide a definition for every initialism or other bit of contract shorthand.

This dispute holds little interest for me, but I did sniff out a contract-drafting side to the story.

An important issue in the litigation was whether Carter Bryant, the man behind Bratz dolls and a former Mattel employee, had assigned two Bratz doll names to Mattel. In a 1999 employment agreement, Bryant assigned to Mattel all “inventions” conceived or reduced to practice by him during his employment by Mattel.

The employment agreement defined “inventions” as follows:

[T]he term “inventions” includes, but is not limited to, all discoveries, improvements, processes, developments, designs, know-how, data computer programs and formulae, whether patentable or unpatentable.

But did the employment agreement serve to assign to Mattell Bryant’s ideas? The district court held that yes, it did, but the Ninth Circuit disagreed, holding that the employment agreement “could be interpreted to cover ideas, but the text doesn’t compel that reading.”

In particular, here’s what the Ninth Circuit had to say about the definition of “inventions”:

Mattel points out that the list of examples of what constitutes an invention is illustrative rather than exclusive. Ideas, however, are markedly different from most of the listed examples. Cf. People ex rel. Lungren v. Superior Ct., 926 P.2d1042, 1057 (Cal. 1996) (courts avoid constructions that would make “a particular item in a series … markedly dissimilar to other items on the same list”). Designs, processes, computer programs and formulae are concrete, unlike ideas, which are ephemeral and often reflect bursts of inspiration that exist only in the mind. On the other hand, the agreement also lists less tangible inventions such as “know-how” and “discoveries.” And Bryant may have conveyed rights in innovations that were not embodied in a tangible form by assigning inventions he “conceived” as well as those he reduced to practice.

The autonomous definition of “inventions” contained in the employment agreement doesn’t give the entire meaning of the defined term: it isn’t a “full” definition, using means. Instead, it’s an “enlarging” definition, using includes. (See MSCD 5.19.) The risk with enlarging definitions is that you end up asking yourself what else falls within the scope of the defined term, and in that uncertainty there’s plenty of room for dispute.

So the Bratz saga serves as a reminder that it’s generally best not to use enlarging definitions on their own. Use instead full definitions. And you can always tack an enlarging definition on to a full definition—X means Y and includes Z—without creating the uncertainty associated with enlarging definitions.

A recent Texas Supreme Court decision highlights the importance of thoughtful drafting. In Intercontinental Group Partnership v. KP Home Lonestar L.P., 295 SW3rd 650 (Tex. 2009), the Texas Supreme Court addressed the simple question: What does “prevailing party” mean?

In the Intercontinental case, the contract contained the following attorney’s fees provision: “If either party named herein brings an action to enforce the terms of this Contract or to declare rights hereunder, the prevailing party in any such action, on trial or appeal, shall be entitled to his reasonable attorney’s fees to be paid by losing party as fixed by the Court.”

The term “prevailing party” was not defined in the contract.

KB Home sued Intercontinental for breach of contract and lost profits. The jury found that Intercontinental breached the contract, but the jury awarded zero dollars in damages. However, the jury did award KB Home $66,000.00 in attorney’s fees. In view of this trial result, both parties claimed to be the “prevailing party.”

The singular issue addressed by the Texas Supreme Court was summarized succinctly by the Court as follows: “When a contract mandates attorney’s fees to a “prevailing party,” the term undefined in the contract, has a party “prevailed” if the jury finds the other side violated the contract but awards no monetary damages?”

After an illuminating discourse on litigants’ entitlement to attorney’s fees and the ordinary meaning of the term “prevailing party,” the Texas Supreme Court ruled that, absent a contractual definition of “prevailing party,” a party must receive affirmative judicial relief to be considered a prevailing party. Inasmuch as KB Home recovered no monetary damages, the Court concluded that KB Home did not qualify as a “prevailing party.” Consequently, the award of $66,000.00 attorney’s fees to KB Home was reversed, and the Court rendered a judgment that KB Home take nothing.

Patrick closed by recommending that “prevailing party” be defined whenever it’s used in a contract. But as Chadwick suggested to me, it must be rare for a party to have the benefit of a favorable verdict but not be awarded even nominal damages. Given that the odds of such an outcome would seem remote, I’m not sure that guarding against it is worth another defined term, or even being more specific as to meaning. Any thoughts?

Another thought—what if a court’s holding is a mixed one?

Consider an email I received today from a reader:

OK, so I thought it was a typo, but it turns out it was intentional.

I was reviewing a clause in a software sale agreement with a major third-party distributor. I got to the assignment clause, and it was very peculiar:

“Assignment. Either Party shall neither assign any right or interest … nor delegate any obligations …”

I revised the clause:

“Assignment. Neither party can assign any right or interest … or delegate any obligations ….”

I get the following comment back:

“‘Either Party’ is a defined term, see first paragraph of cover page.”

It was, I remembered reading it, but I struck it because it read:

“‘Either Party’ means either Licensee or Company.”

In any case, sticking the definition of “Either Party” into the clause doesn’t help the clause, it only makes it worse:

“Assignment. Either Licensee or Company shall neither assign any right or interest … nor delegate any obligations.”

The other lawyer didn’t take to kindly to my mental exercise especially when I said I could make heads or tails of how it ought to apply. “It’s the assignment clause, for Pete’s sake. We’ve already wasted too much money thinking about it!”

Hmm, “Either Party” used as a defined term …. My diagnosis? Acute definedtermitis! The drafter should read chapter 5 of MSCD and call me in the morning.

It’s certainly the case that the same defined terms crop up repeatedly—for example, for purposes of U.S. contracts, Person, Affiliate, Government Body, Environmental Laws, and Business Day, not to mention a slew of defined terms for government agencies (IRS) and legislation (ERISA). Surely it would make life easier for drafters, and make contracts shorter, if instead of including, yet again, in a contract definitions for all or some of those defined terms you could simply refer to some established set of definitions.

Judging from this comment by reader Art, English drafters have the benefit of such a set of definitions, as they piggy-back off definitions contained in the UK Companies Act.

For U.S. purposes, the challenge would seem to be whether any suitable set of definitions currently exists. (Jerry and I agreed that the IRS definitions are too tax-focused to serve that function.) Any suggestions? And do drafters in other countries (besides England) have the benefit of such a set of definitions?

I think that once an authoritative vendor of document-assembly business-contract templates arrives on the scene, they’d be best placed to develop such a set of definitions for purposes of U.S. drafting.

I interrupt my August recess to consult you all on how I should define “Government Body”. Here’s what I’ve come up with :

“Government Body” means (1) the government of any country or of any political subdivision of any country, (2) any instrumentality of any such government, (3) any other person or organization authorized by law to perform any executive, legislative, judicial, regulatory, administrative, military, or police functions of any such government, and (4) any intergovernmental organization.

This concept is articulated countless different ways in contracts, and as usual I aimed to eliminate clutter.

I used government rather than governmental as the adjective for the same reason that I prefer using contract rather than contractual as an adjective. (See here.) And I opted for body rather than authority because it seemed simpler and clearer. Authority can refer to both the power to do something and an agency—two very different things.

Here are some other considerations:

• As Pete notes in his comment, there’s a distinction between “government unit” and “government body”. My thinking is that it’s sufficient for the definition to encompass the “government body” concept.
• Paul, I opted for “country” rather than “state”.
• I like the economy of having one definition that can work internationally. Paul, with luck my revised version wouldn’t come across as uppity.
• In the second clause I used “instrumentality” rather than “agency” because I didn’t want it to seem that I was referring only to those bodies that have the word “agency” in their name. And I certainly didn’t want to use a string of near-synonyms.
• The third clause is meant to capture quasi-governmental organizations. I used the phrase “authorized by law” rather than simply “authorized,” as the latter option could result in any consultant being deemed a Government Body.
• In the third clause, as in my drafting generally, I used organization rather than entity, because strictly speaking a partnership, for example, isn’t an entity. 
• The fourth clause is meant to capture organizations such as the United Nations and the World Trade Organization. The phrase “intergovernmental organization” is sufficiently standard as to not cause me any real concern.
• Like many analogous definitions one sees, my original version included “arbitral tribunal,” but I deleted it, for two reasons. First, arbitral tribunals aren’t government bodies. And second, I didn’t see any cost to omitting it from the definition.

This definition isn’t precise—it’s nothing like the list Mark links to in his comment. But I don’t think that’s a problem, in that not a lot is riding on this definition. I’m sure you’ll let me know if you think I’m wrong.

Right now I’m reading a long list of definitions in a bankruptcy plan of reorganization, and I just came across this one: “‘SpiritBank’ means SpiritBank.”

As definitions go, that’s pretty lame. I’m sure you, dear reader, have seen other examples of definitions that are self-evident, notably clumsy, or otherwise dubious. I invite you to share them.

I explained that I prefer using the definite article, as it results in prose that’s slightly less stilted (see MSCD 1.73).

The company lawyers then explained that a previous version of their template had used the Vendor, but that they had decided to eliminate it. They said that it’s commonplace for a given vendor to decide, for whatever reason, that it doesn’t want to be referred to by means of a generic defined term, so it will use search-and-replace to change the generic defined term to Acme, or whatever its name might be. When the company’s template used the Vendor, it was commonplace for the vendor to omit the definite article from the search-and-replace, resulting in a contract full of references to the Acme. To avoid having to routinely do the cleanup required by such references, the company elected to switch to Vendor.

Has anyone else had a similar experience?

It’s in order to avoid just such confusion that I recommend in MSCD 1.72 that you not use as defined terms for party names any paired defined terms that differ only in their final syllable, such as Mortgagor and Mortgagee.

Given that one uses Indemnitor and Indemnitee when a contract provides that either party could be subject to claims for indemnification, you can’t replace them with the standard alternatives for party-name defined terms. But what to use instead? Indemnifying Party would be fine, but Indemnified Party would be awkward, in that it’s standard to provide that not only is a given party entitled to indemnification but also its affiliates, and representatives of that party and each affiliate, and so on. Describing each member of that broader group as a “Party” would be to invite confusion.

So how about Indemnifying Party and Indemnified Person?

Out of the material contracts filed over the past six months on the SEC’s EDGAR system, Indemnitor was used in only 378 contracts, Indemnitee was used in 1,669 contracts, Indemnifying Party was used in 1,614 contracts, Indemnified Person was used in 686 contracts, and Indemnifying Party and Indemnified Person were used together in 207 contracts. From that I make the following observations:

• The flight from Indemnitor has begun.
• Indemnitee occurs more frequently than Indemnitor because even when only one party has indemnification obligations, those obligations will often run to a broader group than just the other party.
• Used separately, Indemnifying Party and Indemnified Person are mainstream choices. 
• Indemnifying Party and Indemnified Person are used together often enough to make this a safe pairing.

What say you?

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.