A Definitions clause explains the meaning of certain words or phrases that are used in an agreement. It is usually found at the beginning of an agreement or sometimes at the beginning of a schedule to an agreement.

The words and phrases are set out in alphabetical order. The first letter of each word or phrase in a defined term is capitalised so that you can identify that the word or phrase has a specific meaning in the context of the agreement. This may be different to the meaning in everyday language.

Definitions help to ensure that the agreement means what you and the other party intend and everyone understands that meaning. It is especially important to define a word or phrase if its meaning might not be clear, or where it could have different meanings. For example, the term “Intellectual Property” could mean different things, ranging from assets such as patents and trademarks to design rights and moral rights, which could be registered or unregistered.

A Definitions clause makes the agreement shorter. For example, you could include a defined term of “Subsidiary” or “Closing Date” in the relevant places in the agreement instead of having to write a longer description every time.

An Interpretation clause explains the rules on how to interpret certain words or phrases (which are not defined) or concepts that are referred to in the agreement. Like a Definitions clause, an Interpretation clause can make the agreement shorter and simpler, and it avoids repetition. An Interpretation clause can tell us whether a quite straightforward term like “in writing” includes fax or email and explain the intended legal meaning of a term like “reasonable endeavours”.

Ultimately, documents that are easy to understand are less likely to be disputed.