One of the big differences between how most
non-lawyers read a contract, and how most experienced transactional
lawyers read a contract, has to do with the definitions.
In my experience, most non-lawyers take the definitions for granted.
They assume that they intuitively know what defined terms mean based on
everyday usage of those terms. So they plunge right into the
agreement's operative sections without spending any real time on the
definitions.
Most experienced transaction attorneys, however, know that the
defined terms are often "where it's at" in understanding an agreement,
and that they need to parse and to fully understand the definition
structure before going to the operative provisions. And the more complicated an agreement is, the more important this exercise becomes.
Here's a few thoughts about definitions and their usage in an agreement:
- The fundamental premise about definitions is that any defined term
can mean whatever the drafter wants it to mean, which may not
necessarily mean what you'd think it means based on the common
understanding of the term. To take this to an extreme, instead of
defining the term as "Confidential Information", I could define it as
"Celery", and there would be no legal or operative difference between
the two terms (it would, of course, be weird to say that "Recipient
shall not disclose any of Discloser's Celery or use its Celery for any
other purpose other than to perform under this Agreement", but that's
beside the point).
- The crucial corollary of the above is that a skillful drafter can
often bury "inconvenient" restrictions and limitations in the
definitions. In other words, if there are provisions to which the other
party would likely object if those provisions are made explicit, they
can be incorporated as part of the definition where they are less likely
to stand out.
- For example, I remember negotiating an agreement where the client
was going to receive government funding to further develop technology
that it had already created. The client was concerned that the funding
agency could obtain rights to anything developed under the agreement as a
"Subject Invention". However, we were able to include a clause in the
definition saying that that "Subject Inventions" would not include any
improvements, changes, modifications or developments relating to the
client's "Background Technology" (as separately defined).
- Another example is a development agreement under which the developer
was concerned to carefully limit the scope of rights to its knowhow and
technology that the other party (the party funding the development
work) would obtain, even if that knowhow and technology were developed
under the Agreement. In that case, we defined "Developed Technology" to
be "the Deliverables that are specified in the Statement of Work to be
developed and delivered to the other party hereunder". So the idea is
that the funding party would not get any rights to any knowhow or
technology, even if developed under the Agreement, unless that knowhow
and technology is specifically called out as a Deliverable in the SOW
document.
- Definitions get particularly tricky if there are "nested"
definitions -- i.e., definitions within definitions. An example would
be something like, "Licensed Product means any Software Product that
infringes a Valid Claim of any Licensed Patent, or which uses or
incorporates any Licensor Technology". There are five defined terms
here: "Software Product", "Valid Claim", "Licensed Patent", "Licensor
Technology" and "Technology" (the definition of "Licensor Technology"
would incorporate the separate definition of "Technology"). It's
crucial that the reviewer fully understand all of the limitations and
restrictions of all five definitions to fully understand what the
"Licensed Product" is.
- For this reason, whenever I get an agreement to review that's fairly
complicated, the very first thing I do is diagram the definition
structure, particularly if there are extensive nested definitions. I'll
start by writing a synopsis of the highest level definition ("Licensed
Product"), and then bullet underneath it a synopsis of the nested
definitions. If there are definitions that are down two levels (like
"Technology"), I'll separately bullet "Technology" under the "Licensed
Technology" synopsis.
- If an agreement is fairly short and simple, it's OK to define terms
"in-line" (i.e., define the term the first time it's used in the
agreement), rather than to include a separate Definitions section or
exhibit. A good example would be a nondisclosure agreement -- it's
sufficiently short, and there are a limited number of defined terms, so
it's easy to find them if the reader needs to refer back to the
definition.
- With most agreements, however, there should be a separate
Definitions section or exhibit. That way the reader knows where to turn
if he or she needs to refer back to the definition. If there are any
in-line definitions in addition to those in the Definitions section, I
like the practice of including an "Index of Definitions", so that all of
the definitions are found or at least referenced in one place.
Starting with the definitions won't mean that you're going like all
of the limitations and restrictions they contain. But at least you're
dealing with the devil you know.