Policing Your Defined Terms

A tipster told me about this article in the Economist. It concerns arbitration of a dispute over credit-default-swaps documentation.

I’m not clear on the details, but here’s the gist of it: A contract used the defined term “Obligations” to mean an entity’s bonds. But in one crucial provision, the contract used the word “obligations,” without the initial capital. The arbitration panel concluded that it referred not to the bonds but to any obligations, for example tax liabilities. The panel decided the dispute accordingly. Market consternation ensued.

The lesson for anyone drafting or reviewing contracts is to police your defined terms. First, make sure all instances of a defined term use an initial capital. You could use case-sensitive search to check for that. There’s software than can help, but it’s been years since I looked into it.

And second, it’s best not to use in a contract to convey a different meaning a lower-case version of a word or phrase that’s used as a defined term: the reader might wonder if that was a mistake.

About the author

Ken Adams is the leading authority on how to say clearly whatever you want to say in a contract. He’s author of A Manual of Style for Contract Drafting, and he offers online and in-person training around the world. He’s also chief content officer of LegalSifter, Inc., a company that combines artificial intelligence and expertise to assist with review of contracts.