Why It’s Important to Police Your Defined Terms

I know only too well that if you draft a contract of any length and complexity, keeping track of the defined terms can be a challenge. It’s easy to find yourself using terms you don’t define, defining terms you don’t use, and using different defined terms to convey the same meaning.

Thanks to Cousin Joshua, I learned about Wells Fargo Bank, N.A. v. Palm Beach Mall, LLC, 2013 WL 6511651 (Fla.Cir.Ct.). (PDF here.) It serves as a reminder that that sort of mess can result in serious unhappiness and embarrassment.

The gist of it is that a loan agreement used the defined term “Special Purpose Entity,” whereas a related guaranty used the defined term “Single Purpose Entity.” Under the guaranty, the guarantor was liable for the entire amount of the debt if “Borrower fails to maintain its status as a Single Purpose Entity.” That led the plaintiff to argue that the guarantor was liable for the borrower’s failure to maintain its status as a Special Purpose Entity.

In making that argument, the plaintiff attributed to “a typographic error” use of the defined term “Special Purpose Entity” in the guaranty. The court was having none of that (citations omitted):

The Court finds that the term “special purpose entity” is much broader than “single purpose entity.” The Court finds Plaintiff’s arguments unpersuasive in light of the language of the documents memorializing the loan, the evidence of parties intent, and the sophistication of the parties to the agreement.

Moreover, Plaintiff requests the Court proceed as if this was a scrivener’s error, ignore the plain language of the contract, and yet simultaneously assert it is not seeking a reformation of the contract. These positions are inconsistent and unavailing in light of the clear language of the contract and the evidence submitted by Defendants.

Indeed, according to the parties involved in negotiating the Loan Agreement and Guaranty, an event in which Plaintiff was not involved, the parties understood these terms to have distinct meanings. In addition to the evidence of intent. of the parties to the Loan Agreement and Guaranty, the usage and custom in the commercial lending industry of the term “special purpose entity” and “single purpose entity” shows that Plaintiff’s argument is untenable. In light of the sophistication of the parties who entered into the Loan Agreement and the Guaranty, the Court finds that the parties knew these terms to have distinct meanings and negotiated their risk accordingly.

That might sound plausible, but Cousin Joshua says the terms are used interchangeably in commercial real estate. It’s very easy for courts to rationalize, after the fact, stuff that creeps into a contract inadvertently.

Cousin Joshua, piling on, also told me about Euclid Housing Partners, Ltd. v. Wells Fargo Bank, N.A., 2014-Ohio-3033. (PDF here.) (What, Wells Fargo again!) In that case, a single-purpose-entity provision in a guaranty mistakenly referred to “Borrower” instead of “Guarantor,” so the court held that the guarantor wasn’t liable under that provision.

So how do you guard against this sort of thing? Saying “Be careful out there” doesn’t do much good, because when you’re on the umpteenth version of a document and you’re under pressure, policing the defined terms can fall through the cracks. So you might want to try out software that checks how defined terms are defined and used in a document.

One option is Thomson Reuters’ Drafting Assistant, which includes as part of a broader offering what used to be the software product Deal Proof. There’s also Lexicon, which I wrote about in this 2007 post. I checked in with Steve Gullion, the guy behind Lexicon, to see where things stand now with Lexicon. In particular, I wanted to know whether Lexicon could be used to check for the problem that caused the dispute at issue in Palm Beach Mall, namely inconsistent use of defined terms across documents. This is what he had to say:

Lexicon allows you to define a project, which is essentially a set of related documents, and all defined terms are analyzed across the project. So yes, Lexicon can check for consistent use of defined terms between documents, identify redundant definitions between documents, and so forth. We’ve been working for a while on a new version that will include outline checking and very granular cross-reference checking. No release date yet. The current version has proven very robust, however, for analyzing defined terms.

There’s also a relative newcomer, LexDye, but I don’t know anything about it beyond what’s on their website. I asked them for additional information but after a brief exchange of emails I didn’t heard back.

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.