Three mistakes to avoid when drafting defined terms

Drafting

I remember the difficulties I had in drafting defined terms for contracts in drafting class.

I tried to be as precise as possible.

I fretted over where to place (“[defined term]”) in a contract. The meaning might change depending on where I put (“[defined term]”) within a sentence.

In actual practice, we rarely draft contracts from scratch. There are usually precedents to refer to. However, oversights or mistakes may also arise due to reliance on precedents.
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Three mistakes to avoid when drafting defined terms in contracts:

1. Definitions that are overly generic.

E.g. “Products” means products which are supplied by Party A to Party B under this agreement.

The problem with the above overly generic defined term is that a reader would not have any clue what products are being supplied under the agreement.

An alternative (which I think is a better way) would be to define the products with detailed description set out in a schedule to the agreement.

2. Same subject matter being defined more than once in an agreement.

E.g. In the recital of the agreement, it is stated that Party A would supply …. (“Products”) to Party B.

“Products” is defined again in the definition section of the agreement but with some variations to the definition of “Products” in the recital.

Are you confused yet as to what “Products” are being supplied by Party A which is the subject matter of the agreement?

3. Not defining the term used.

E.g. The agreement may be terminated if there is a change in Control of either party.

You search through the entire agreement, but “Control” is not defined.

Does “Control” in the agreement mean 33% or more of voting shares in a party (as referred in the Capital Markets and Services Act 2007), or more than 50% of voting shares, which allow for the passing of an ordinary resolution?

If “Control” is not defined, how would the parties determine whether the termination clause is triggered whenever there is a change in the shareholding in either party?

What other mistakes relating to defined terms do you usually encounter?

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First posted on Linkedin on 26 November 2021.

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