For an article I have to write in the next few days, I’ve been leafing through textbooks intended to be used in teaching contract drafting.
I had contemplated doing reviews of one or more textbooks, but I decided I’d rather focus on how I’d approach teaching contract drafting. That’s what the new article will be about.
But I noticed that the three textbooks I’m now looking at all get wrong a basic feature of defined terms. Because this mistake allows me to explore, in slightly greater detail than I have previously, this aspect of defined terms, that’s what I’ll do now. I won’t identify the textbooks.
The Textbooks’ Take
Textbook A says, “Do not create a circular definition; that is, do not define a term by using the same term.” It gives as an example “‘Subsidiary’ means a subsidiary of the Company.”
Textbook B says, in a heading, “Do not use ‘circular’ definitions.” It goes on as follows:
Circular definitions use the defined term in the definition of that term.
- “Liabilities” means Distributor’s liabilities.
Using liabilities to define the term Liabilities does nothing to enlighten the reader as to what is meant by the defined term beyond merely identifying it as the “Distributor’s liabilities.”
And textbook C says, in a heading, “Error Three – Using a Term in Its Definition.” It then says, “A good dictionary never uses a word in its own definition. To do so is to make the definition circular, confusing, and unhelpful.” It the offers the following examples:
Poor
“Purchased Receivables” means the accounts and other receivables arising out of the invoices sold by Seller to Buyer.
Better
“Purchased Receivables” means the accounts and other rights to payment arising out of the invoices sold by Seller to Buyer.
My Take
All three textbooks offer essentially the same take. They’re mistaken.
Here’s what A Manual of Style for Contract Drafting § 6.3 has to say on the subject:
The definition of a defined term is different from a dictionary definition. Dictionaries shouldn’t use in a definition the term being defined—it would be unhelpful for a dictionary definition of, say, chair to include the word chair. By contrast, a defined term simply serves as a convenient substitute for the definition, and only for that contract. So it’s unobjectionable to repeat a contract defined term in the definition, as in “Trademark” means a registered trademark or service mark or any trademark or service mark that is the subject of any application, registration, or renewal.
I’ll now go into more detail.
A defined term allows the drafter to use throughout the contract the shorter defined term instead of the longer definition. How the drafter achieves that economy depends on the context.
One kind of definition might involve enough detail that there’s no opportunity to use in the definition a word used in the defined term. For example, my definition of the defined term Change in Control consists of three first-level tabulated enumerated clauses, one of which contains two second-level tabulated enumerated clauses. Each element of the definition describes a different kind of change of control, each of which is defined with specificity that necessarily goes beyond simply reusing change in control.
Another kind of definition might refer to different items, but the drafter decides it’s expedient to use as the defined term one of those items, instead of trying to come up with a general word or phrase for all the items. The defined term Trademark used in the definition in the MSCD extract above is an example of that.
A third kind of definition is one that refers to an item with specific characteristics. The drafter is able to achieve economy by having the defined term consist of that item, stripped of the specific characteristics. Here’s a simple example: “Board” means the board of directors of the Company. Here’s a more involved example: “Material Adverse Effect” means, with respect to any Loan Party, a material adverse effect on ….
Each of the three textbooks offers as a poor definition an example of this third kind of definition. Those examples could be challenged, but only if the key noun in the definition isn’t clear enough and should be replaced with something more detailed. In that case, the problem doesn’t involve using in the defined term a word or phrase used in the definition. If a word or phrase used in the definition is adequate, it’s unobjectionable to use it in the defined term.
For example, the “poor” definition of Purchased Receivables in the extract from textbook C is unobjectionable, unless anyone wants to argue that receivable isn’t clear enough. If receivable isn’t clear enough and rights to payment is, then change accordingly both the definition and the defined term.
In Closing
Three thoughts in closing. First, if I were going to challenge the textbook B example (“Liabilities” means Distributor’s liabilities), it would be on account of the bare-minimum economy it offers—saving one word!
Second, if you want to see definitions that actually are circular, see this 2016 blog post and this 2017 blog post.
And third, the mistake the textbooks make isn’t a trivial one. It seeks to invalidate a practice that is unobjectionable and standard.
