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.

8 thoughts on “Policing Your Defined Terms”

  1. Another case where inconsistent capitalization caused problems: Clinton Ass’n for a Renewed Environment, Inc., v. Monadnock Construction, Inc., 2013 NY Slip Op 30224(U): Because the contract defined the term “Substantial Completion” but used “substantial completion” in a crucial place, the court denied the defendant’s motion to dismiss on the pleadings. https://scholar.google.com/scholar_case?case=14653201682737170524 (Ken, I don’t remember whether this was one you cited back in the day.)

    • Thanks; I didn’t know this one. In fact, the secondary reference was “substantially completed,” so the drafting screw-up went one step beyond just dropping the initial capitals.

  2. Thank you for an entertaining blog! I’ve lost a bit of my work-day just reading through the last months posts.

    If you don’t mind a little self-promotion: we’re actually building software for this issue (among other things), at donna.legal. It’s inspiring to see cases where we could have made the difference.

  3. I detest initial caps (nitcaps) on defined terms but use them anyway. I long for a better, less Teutonic way to indicate that a term is defined. If one follows your advice and never uses a defined term except as a defined term, almost all of the reason for nitcaps goes away.

    If one can’t bear not marking defined terms somehow, perhaps there’s a less obtrusive way, such as an initial symbol (^obligations or *obligations) or a trailing symbol (obligations°). Bolding every occurrence of a defined terms is as distracting as nitcaps. I haven’t formed a strong opinion yet. Nitcaps may be the least bad way to go.

    Another occasional problem is a defined phrase (‘scheduled obligations’) containing separately defined parts (‘scheduled’ and ‘obligations’). (Not a good example, but I can’t summon a better.) When the problem arises, one casts about for a way to show whether one intends each word as separately defined or the whole as phrasally defined. This problem arises with and without nitcapping. I know of no elegant way to handle it except never to make a defined phrase from defined words. Surely not with hyphens (‘scheduled-obligations’ or ‘Scheduled-Obligations’?) Does MSCD3 address this?

    • Company Confidential Information is a common enough pattern in NDAs.

      The test should be whether the whole phrase is defined as a phrase, e.g., [“Contractor Confidential Information” means …..] But then a drafter should never juxtapose the words without intending to mean the defined term. Of course that happens. It happens that we sometimes use generic-ish defined terms at the beginning of a sentence, too, like “Payments” or “Taxes” without fighting hard against the possible ambiguity.

      When those defined terms are all nicely hyperlinked to a definition, and there are zero errors in the process, then maybe we’ll all be able to tell the difference all the time. Until then, YMMV.

  4. In general, I try to pick defined terms so that sentences using them read naturally in all lower case. That’s a natural check to make sure I’m defining terms to add clarity, rather than lay traps.

  5. And I think there was a case last year in which the court said there was a difference in meaning in the contract between ”Practical Completion” and ”practical completion”, but I can’t find the case reference…


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