Why are some words in a contract capitalized, and what the heck are “defined terms”?
If you've ever had the pleasure of reading a contract or other legal document, you may have noticed sprinklings throughout of certain common words written with a capitalized initial letter, as if the word was a proper noun. “Why is this done?” you might wonder. “Why are so many common words capitalized at seemingly random places throughout the document, and what is the significance of this capitalization?”
Well, those are great questions. If you've made this reflection, I commend you. You obviously have discerning observation skills, and perhaps even a mild curiosity about the nuance of legal writing.
Because the practice of using defined terms is so widely used (and sometimes misused), I've decided to dedicate this blog post to the topic of defined terms.
A defined term is a word (or set of words) written with an initial capital letter and assigned a particular definition in the document. Throughout the document, each time the specific capitalized term is used, the assigned definition automatically applies. Defining terms is a broadly accepted legal writing convention and is an extremely useful approach for drafting documents. In fact, almost invariably, legal documents use defined terms.
Also, its not uncommon for a defined term to include one or more other defined terms within its very definition. This requires the reader to jump from one definition in the document to other definitions, in order to accurately understand the applicable definition and its context.
Why Define Terms?
Defining terms is done for words or concepts that are intended to have a particular and consistent meaning throughout a document. Typically, the first time a defined term is used in a document, the term has an initial capital letter, is used in quotation marks, and is assigned its particular definition. Then, whenever the capitalized term is used later in the document, the reader knows (without having to be informed in so many words) that the previously-assigned definition applies to that term.
By using this writing convention, there is no need to continually repeat a definition each time the particular word is used. This leads to shorter documents, fosters consistency and reduces the risk of ambiguity or error within the contract.
Why Bother Capitalizing The Words?
Typically when using defined terms, the first letter of a defined term is capitalized any time the term is used throughout the document. Capitalization serves as a signal to the reader that the word is a defined term and therefore is to be ascribed its specific defined meaning. If the term is not capitalized, confusion or argument could arise as to whether the word was intended to be covered by the specific definition.
Where Are The Definitions Located?
In longer contracts which involve numerous defined terms, definitions are often grouped together into one section of the document. This is often the case, for instance, in commercial loan documents, M&A deal documents, or other long contracts. Sometimes all definitions are grouped together at the beginning or end of the document or in a schedule or exhibit attached to the document. When grouped together in this manner, defined terms are listed in alphabetical order for ease of use. In certain complex contracts, it's not unusual for the list of defined terms to be as long, or longer than, the remaining body of the contract itself!
Alternatively, in shorter or less complex contracts, or where relatively few defined terms are used, definitions can be found scattered throughout the document as opposed to being grouped together in one location. Either approach is acceptable and accomplishes the same result.
Pro Tip: Definitions are just as important as any other term or provision of a contract, can be lengthy and highly technical, and can have enormous financial and legal ramifications. Never gloss over definitions when negotiating and drafting contracts! Read them very carefully and ensure that they are negotiated and drafted to accurately reflect the intentions of the parties.
It's always wise to use qualified legal counsel to assist in negotiating, drafting and interpreting contracts.
Capitalization of common words in a contract, if done correctly, is an excellent way to help ensure that contracts are drafted unambiguously and succinctly. The practice of defining terms facilitates the drafting of contracts and helps to ensure that the contract will be interpreted consistently and in accordance with the intentions of the parties.
A qualified business attorney can help make sure your contract definitions are written and used correctly. Contact the Law Office of Jennifer M. Settles today at (602) 617-3938, or through the Contact Form on the website, for help with your contract needs. The initial consultation is always FREE.
Jennifer M. Settles, Esq. is a corporate lawyer at the Law Office of Jennifer M. Settles. She advises clients on M&A transactions, commercial contracts, real estate matters, financing transactions and corporate law. To schedule a free consultation with Jennifer, please call 602-617-3938, or connect through the Contact Form on the website.
Copyright © 2023 Prime Legal Freelance, LLC