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Do Not Overlook Definitions!

The “Definitions” section of an agreement and the definitions contained therein are one of the most important but overlooked parts of an agreement. Creating a definition specific to a contemplated transaction allows the parties to avoid subjecting themselves to the “ordinary” meaning of the term in question as determined by a third party. A carefully drafted definition may limit or even shift liability.

Most definitions are drafted to benefit the drafting party. A skilled lawyer should read each definition carefully to ensure that it does not place the lawyer’s client at a disadvantage. Further, each definition must be read in light of the contemplated transaction as the meaning of each definition may vary with each transaction. Defined terms evolve to recognize the changes in the technology industry. For example, the definition of “source code” used 25 years ago would not necessarily protect a licensee’s interests today, as it would likely fail to encompass new technologies such as html, Web browsers, and so on.

Savvy lawyers should seek to draft definitions to benefit their clients. Lawyers should not rely on previously used definitions as a review of these definitions may raise issues not initially contemplated by a party or that may have been overlooked. While previous agreements may serve as a starting point in creating or reviewing a definition, a smart lawyer should carefully review each definition, especially those drawn from a previous agreement, with the intent of ensuring the definition reflects the unique nature of the transaction they are negotiating.

Contracting parties are free to alter the ordinary meaning of a term to better fit the intended meaning employed by the parties and in the event of a dispute, a court will be bound by this interpretation assuming the definition is properly written. Feldman & Nimmer, Drafting Effective Contracts: A Practitioner’s Guide 2d. ed. (2005 Supp.) §2.02[L].

The parties should use caution in “defining” the parties and other entities in the agreement. A party may later claim that a short hand definition modified the parties’ intent or could otherwise have unintended consequences. See, e.g., Roanoke Engineering Sales Company, Inc. v. Rosenbaum, 290 S.E.2d 882, 884 (Va. 1982) (defendant, who was an officer and director of plaintiff corporation, claimed use of the term “Employee” to identify defendant in his employment agreement limited the applicability of his non-compete obligations.)

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