There are many basic contracting principles that can help streamline and create a readable and clear contract, including the proper use of defined terms. Consistent with the phrase, a defined term is a word or term, often capitalized or otherwise distinguished from other text throughout the agreement, that is to be read to include the particular meaning given to it in the agreement.
Defined terms are often included at the beginning of and/or throughout a contract and are identified by some sort of separation of the term from the definition, in many cases using parentheticals, quotation marks, bolding, or other stylistic changes or a combination of these.
Using defined terms can eliminate the need to rewrite the same, possibly lengthy text repeatedly and instead capture larger concepts in just a word or two.
The following are few primary considerations when reviewing or preparing an agreement with defined terms:
- Proper Use: It is important to have a comprehensive understanding of the defined terms and use them appropriately and consistently. For example, using the sample defined terms below, in a master agreement that includes orders for SaaS products, referring to the “Subscription Term” may not have the same effect in the agreement as referring to the “Term” of the agreement itself. Subscription Term, as defined, is specific to the SaaS Services in the order or statement of work, while the “Term” is how long the master agreement is in effect.
- Undefined Terms: Using capitalized terms that are not defined is a common drafting mistake that may create confusion. Prior to finalizing an agreement, review for capitalized terms and note whether they are defined. If they are not defined, it may be the case that such word can be lowercased; however, if the term is used multiple times throughout the agreement, consider adding a definition in the definitions section or where the word/term is first used to give the capitalized/defined term meaning throughout.
- Defined Terms Only Used Once: In most instances, the purpose of a defined term is to be able to use it in multiple places to refer back to its meaning without retyping the same meaning each time. If a term is only used once in an agreement it may not need to be defined. That said, if the term is likely to be used in a statement of work, order, or other related document under the agreement as a defined term, this may be a reason to define such term in the master agreement even if only used once therein.
Sample Defined Terms
SaaS Services means the online, web-based software programs and platform provided by Vendor as set forth in an applicable statement of work as may be modified, enhanced, or improved by Vendor.
Subscription Term means, collectively, the initial term for the SaaS Services as set forth in an order or statement of work, together with any renewal term for the SaaS Services.
Term means the initial term of this Master Agreement commencing on the Effective Date and continuing for three years, unless terminated sooner in accordance with the terms of this Master Agreement.