Introduction

Contracts can be a bit like a different language: full of complicated legal language and words that make you reach for your law dictionary. But one of the most important—and often overlooked—parts of a contract is the defined terms section. Think of it as the glossary of your contract world: it’s where every key term gets explained, so everyone knows exactly what’s being talked about.

But what are defined terms, really? Why do they matter, and how can they help protect your interests?

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What are defined terms?

Defined terms in a business contract are specific words or phrases that have a special meaning for that agreement. These are the terms that get capitalized (like "Services," "Parties," or "Confidential Information") and then explained in detail somewhere in the contract, usually at the beginning or in a separate “Definitions” section.

Think of defined terms as the characters in your contract story. Just like you wouldn’t read a mystery novel without knowing who the detective or the suspect is, you shouldn’t sign a contract without understanding what these capitalized words actually mean.

Why do defined terms matter?

Why bother defining terms in the first place? Can’t we all just agree on what “goods” or “services” mean? Well, not quite. Here’s why defined terms are crucial:

Clarity and consistency

Defined terms ensure everyone’s on the same page (literally). If “Services” is defined as “website design and development,” then every time the contract mentions “Services,” it’s clear what’s being referred to. No room for guessing, assuming, or creative interpretation.

Avoids ambiguity

Contracts are all about avoiding ambiguity. Defined terms help avoid confusion or arguments by clearly explaining what each term means. For example, defining “Confidential Information” makes sure there’s no disagreement over what counts as confidential and what doesn’t.

Saves time and space

Instead of repeating long-winded descriptions throughout the contract, defined terms act as shortcuts. You define “Services” once at the beginning, and then use it throughout without needing to explain it again and again.

Legal protection

A contract without well-defined terms is like a house with no locks—open to all sorts of risks. Defined terms help protect both parties by ensuring the agreement is interpreted exactly as intended. If a dispute arises, the court can refer to these definitions to understand what was agreed upon.

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Where do you find defined terms in a business contract?

Defined terms are usually found at the beginning of the contract, often under a section titled “Definitions.” But they can also be sprinkled throughout the agreement, where they first appear in capital letters.

Pro tip: Always read the definitions section carefully. Don’t skim it just because it looks like a boring glossary. These definitions can make or break how the rest of the contract is interpreted.

Read: How can I amend a contract after signing?

Common examples of defined terms

So, what kind of words typically get defined in a contract? Here are some common examples:

Parties

Contracts often simplify things by defining the parties as “Company” or “Contractor” instead of using long legal names every time. It’s also useful to clarify who “we” or “you” refers to in the agreement to avoid any confusion.

Services

If the contract involves providing services, this term should be defined clearly. What exactly are the “Services” being provided? Is it consulting, marketing, software development? Spell it out.

Confidential Information

Almost every contract has some confidentiality aspect, and this term needs a clear definition. Does it cover all business data? Just trade secrets? Make sure you know what’s included.

Effective Date

The “Effective Date” is usually the date the contract comes into force. Don’t assume it’s the day you sign it—check the definition.

Force majeure

This is a clause in contracts that lists unexpected events (like natural disasters or pandemics) that could excuse one or both parties from their responsibilities. Make sure you understand what events are covered under force majeure.

Deliverables

If you’re creating something specific, like a report, website, or product, define what those “Deliverables” are so everyone knows what’s expected.

Read: How to read business contracts like a lawyer

What to look for when reviewing defined terms

Now that you know what defined terms are, how do you make sure they’re working for you and not against you? Here’s what to look for:

Make sure they’re clear and precise

Vague definitions defeat the whole purpose. If a term like “Services” or “Products” isn’t specific enough, ask for clarification or amendments. Don’t accept “Services” defined as “all tasks necessary to complete the project”—that’s as vague as it gets. Instead, define it with specific tasks, timelines, and deliverables.

Watch out for one-sided definitions

Make sure the definitions aren’t unfairly skewed in favor of the other party. For example, if the contract defines “Confidential Information” as “any and all information disclosed by Party A,” but not the other way around, that’s a red flag. Fair contracts have balanced definitions.

Cross-check throughout the contract

Once you’ve read the definitions section, cross-check every time one of those defined terms appears in the contract. Ensure the term is used consistently and that it aligns with the agreed-upon meaning. If you find any discrepancies, bring them up before signing.

Understand the impact of each definition

Ask yourself: “What does this definition mean for my responsibilities or rights under the contract?” Some definitions might seem harmless but could have far-reaching consequences. For example, a broad definition of “Deliverables” might mean you’re on the hook for way more work than you initially thought.

Think ahead

Picture different situations that might come up and check if the definitions make sense. Could any of these terms be misunderstood or used in a way you didn’t intend? If something seems unclear or could lead to a dispute, clarify it now.

Read: How to review a statement of work like a pro

How to negotiate defined terms

If you spot a defined term that doesn’t sit right with you, don’t be afraid to negotiate it. Here’s how:

Ask for clarification

If a term is vague or seems off, ask the other party to clarify or narrow the definition. “Can we specify what ‘Services’ means by listing out the tasks and deliverables?”

Suggest alternatives

If you don’t like a term, propose an alternative. If the contract defines “Confidential Information” too broadly, suggest narrowing it down to specific categories of data.

Use plain language

Push for plain language wherever possible. Contracts don’t need to sound like they were written in the 18th century. Clear, modern language makes it easier for everyone to understand what they’re agreeing to.

Conclusion

Defined terms might seem like small details in a big contract, but they’re anything but trivial. They’re the foundation upon which the entire agreement is built. Getting these terms right can prevent misunderstandings, disputes, and costly mistakes.

So, next time you’re reviewing a contract, don’t skip over those capitalized words. Take your time to understand what each one means, and make sure they’re clear, fair, and aligned with your interests. After all, the devil is in the definitions.

How Cobrief can help with contract review

Reading your business contracts can feel overwhelming as an owner-manager of a small to medium-sized business. That’s where Cobrief comes in. Cobrief helps business owners and operators review their business-to-business contracts for legal risks.

Upload your contract to Cobrief's AI contract review software, click review and you’ll get a list of all the risks, in plain English. This helps you decide whether to sign, negotiate or reject the terms of your contract, or hire a lawyer. Think of it as a heat map for your contracts.

Get started here.