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So far in our Contracts 101 series, we’ve covered how to understand contract preambles and parties (see here, and here).

Today we’re going to take on a new concept that seems to flummox most people the first time they look at a contract: those every so scary definitions (cue spooky music)!

Always remember, the entire goal of a contract is to remove ambiguity, to make everything crystal clear, to set down in written words the story of the deal in an indisputable manner.  Why?  So that when you and the other side might have any confusion, discussion, or disagreement over a key deal point, you can both take out the contract, read it, and instantly agree as to what must be done.  When you draft a contract, you are really writing it for that moment, so that people in the future working at the companies who signed the deal will remain in agreement as long as the deal lasts, and prevent the tremendous frustration that comes with an unresolved dispute.  You are drafting the contract for a wide audience: for the person you are negotiating with, for their successor, for their supervisors and subordinates, for their lawyers, and (hopefully not), for a mediator, arbitrator, judge or jury that needs to rule on what the contract says in a lawsuit.

If you’ve done your job right, then litigation should be prevented.  And doing your job right means being completely accurate in describing the deal.  You’ll never totally get there, after all, the very act of documenting anything always involves you injecting your own world view and agenda into whatever you write, but the more you understand basic contract concepts and use best in class contract language, the more effective you can be at shaping future behavior.

When pilots can see everything in front of them for miles and miles, they describe their visibility as “severe clear“.  Use this term as a metaphor when you draft your contracts; do it extremely, superbly, and severely clear.

Okay, so now you’re thinking, “Fine, enough already, tell me how!”  Let’s do it.  Think for a second about the goal of drafting crystal clear contracts.  To do this, you might surmise that you need a lot of words to provide a really solid description of what’s going on.  And you’d be right.  For instance, if you’re selling a used car, a good sales contract is going to have a terrific description of the car, something like:

“A 1998 Toyota Corolla, model LE, manual transmission, maroon outside color, beige inside color, 4 doors, 113,000 miles, never been in an accident, new timing belt used for only 11,000 miles, and new tires used for only 500 miles.”

On top of that, when you’re describing a deal, you might need to refer to the same thing a few times.  The contract might talk about the fee for the car, and the warranty for the car, and the performance of the car.

Okay, I know, I know, now you’re wondering, “But . . . wait . . . what are you doing to me?  If I refer to the car several times in the contract, I’ve got to use all of these words every time?  Do you know how long that will take?  How many pages could that be?  Should I just go chop down a whole forest now or buy a controlling interest in Dunder-Mifflin?

Luckily, no.  There is a solution, and that solution is the all important contract definition.  The way it works is you only have to use the lengthy description once, assign a word or two as being defined by that description, and . . . voila!  You’ve done it.  Now, whenever you use that word(s), everyone knows that you don’t just mean that lonely little world, but the whole kibosh instead.

What does a definition look like?  All you have to do is make the very first section of your contract after the preamble the definitions section, and spell out each of the defined terms.  Let’s go back to our car example to get a sense of this:

1. DEFINITIONS.

(a) “Car” means a 1998 Toyota Corolla, model LE, manual transmission, maroon outside color, beige inside color, 4 doors, 113,000 miles, never been in an accident, new timing belt used for only 11,000 miles, and new tires used for only 500 miles.

That’s how you create defined terms.  In this case, we now know that every time we see the defined term “Car” throughout the contract, whether in the fee, warranty, or performance sections, “Car” always has the same definition noted above.  This gives your contract internal consistency and makes it completely clear as to what you mean every time you say “Car” throughout the agreement.

Alright, you’ve now got the top of the contract under your belt, getting a grip on preambles, parties, and definitions.  Next time we’ll dive into actual contract clauses that require the parties to do things.  Can’t wait, right?  Tune in tomorrow.

Happy drafting.

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