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Definitions Clause Defined

Definitions clauses, also known as contract definitions, are the defined terms in a legal document. Drafting definitions clauses mitigates the chance of misunderstanding interpretations among the parties. The defined terms section should be unambiguous and written in plain language.

Here is an article about the use of the term definition clause.

Definitions Clause Explained

Definitions clauses contain as many or as few contract definitions as necessary. They can affect the outcome of your relationship and any potential disputes.

For example, an employment agreement may define critical terms in the definitions clause, including:

  • Employee
  • Full-time
  • Pay rate
  • Manager
  • Liability

Each term has a corresponding definition in case applicability questions arise in the future. Contract parties may refer to the definitions clause to answer specific questions.

Read this post about definitions clause principles.

Purpose of a Definitions Clause

The most significant purpose of a definitions clause is that they clarify contract-specific terms. It can also aid in future risk mitigation. When both parties understand expectations clearly, it’s easier to meet them.

Definitions Clause Examples

Examples of definitions clause use include:

  • Example 1: Defining employment definitions in a policy handbook
  • Example 2: Hospitals defining terms in a business associate agreement
  • Example 3: Software companies explaining terms in a privacy policy
  • Example 4: Business partnership agreements establishing term definitions
  • Example 5: Severance pay agreements defining key contract terms

Definitions Clause Samples

Sample 1 – Master Sales Agreement:

Definitions.

(a) Change of Control. The term “Change of Control” shall mean (i) any consolidation or merger involving the Company pursuant to which the Company’s stockholders own less than fifty percent of the voting securities of the surviving entity or (ii) the sale of all or substantially all of the assets of the Company.

(b) Exercise Period. This Warrant shall be exercisable, in whole or in part, during the term commencing on the closing date of a Qualified Equity Financing and ending on the expiration of this Warrant pursuant to Section 14 hereof.

(c) Holder. The term “Holder” shall mean any person or entity that shall be the registered holder of this Warrant.

Reference:

Security Exchange Commission - Edgar Database, EX-10.33 5 dex1033.htm MASTER SALES AGREEMENT, Viewed April 5, 2021, < https://www.sec.gov/Archives/edgar/data/1350415/000119312506131362/dex1033.htm >.

Sample 2 – Asset Purchase Agreement:

Certain Definitions. For purposes of this Agreement, the term:

(a) “Buyer Material Adverse Effect” means any event, circumstance, occurrence, fact, condition, change or effect, in each of the foregoing cases at or before Closing, that, in the aggregate, (i) is or could reasonably be expected to become materially adverse to Buyer’s business, operations, results of operations, condition (financial or other), prospects, properties, tangible or intangible assets or liabilities of Buyer and its subsidiaries (taken as a whole), or (ii) materially impairs or could reasonably be expected to materially impair the ability of Buyer to consummate any of the transactions contemplated by this Agreement or any of the Transaction Documents; provided, however, that none of the following in and of itself shall be deemed a Buyer Material Adverse Effect:

(i) any failure on the part of Buyer to meet internal or other estimates, predictions, projections or forecasts of revenue, net income or any other measure of financial performance (provided, however, that the facts leading to such failure shall be taken into account in determining whether there has been, or would be, a Buyer Material Adverse Effect);

(ii) any adverse effect (including any litigation, loss of employees, cancellation of or delay in customer orders, reduction in revenue or net income or disruption of business relationships) arising from:

(1) any change in accounting requirements or principles or any change in applicable laws, rules or regulations or the interpretation thereof;

(2) provided that such event, change or action does not affect Buyer in a substantially disproportionate manner, other conditions affecting:

  1. a) the industry or any industry section in which Buyer operates or participates; or
  2. b) the U.S. economy or financial markets or any foreign economy or financial markets in any location where Buyer has material operations or sales;

(3) the taking of any action by Seller; or

(4) any breach of this Agreement by Seller.

(b) “Closing Balance Sheet” has the meaning assigned to such term in Section 4.5.

(c) “Closing Cash Consideration” means (i) $26,000,000 reduced by (ii) the Working Capital Shortfall, if any.

(d) “Closing Consideration” shall mean the Closing Cash Consideration and the Closing Share Consideration.

(e) “Closing Share Consideration” means a number of shares of Parent Common Stock equal to (x) $8,000,000 divided by (y) the Parent Stock Price (rounded to the nearest whole share, with 0.5 being rounded up).

(f) “Closing Working Capital Amount” means an amount equal to Seller’s (i) cash balance plus (ii) accounts receivable minus (iii) trade payables minus (iv) liabilities (excluding Deferred Revenue Liabilities and Retained Liabilities), in each case, as of the Closing Date and as indicated on the Closing Balance Sheet.

Reference:

Security Exchange Commission - Edgar Database, EX-2.1 2 dex21.htm ASSET PURCHASE AGREEMENT, Viewed April 5, 2021, < https://www.sec.gov/Archives/edgar/data/1428669/000119312510013625/dex21.htm >.

Sample 3 – Share Purchase Agreement:

Definitions.

For purposes of this Agreement, the following terms shall have the following meanings, unless the context clearly requires otherwise:

1.1 “ADS Appreciation Ratio” shall mean a percentage determined by multiplying 0.9 by the difference between (i) the quotient obtained by dividing the average of the regular session closing prices of Parent’s American Depositary Shares for the twenty (20) trading days after the announcement of Parent’s fourth quarter, fiscal year 2007 earnings results by US$24.05 and (ii) one (1). If the foregoing product results in a negative number, then the ADS Appreciation Ratio shall be zero (0).

1.2 “Action” shall mean any civil, criminal, regulatory or administrative claim, action, suit, arbitration, proceeding or investigation by or before any court or other Governmental Authority or any arbitration proceeding.

1.3 “Adjusted Cash Consideration” shall mean the Cash Consideration less the payments made to the Company Special Shareholders pursuant to Section 2.2(a).

1.4 “Adjusted Company Common Share Equivalents” shall mean the Company Common Share Equivalents less (i) the Company Common Shares issuable upon cash exercise of all of the Unvested Company In-the-Money Options and (ii) the Company Common Shares held by the Company Special Shareholders.

1.5 “Adjusted Korean GAAP” shall mean generally accepted accounting principles and practices as in effect from time to time in Korea, provided, however, that any gross revenue from a sale of product or service to a Distributor of the Company shall be recognized at the time of resale thereof to an end-customer.

1.6 “Ancillary Agreements” shall mean the Investment Agreement, Escrow Agreement, and Employment Agreements.

1.7 “Assets” shall have the meaning set forth in Section 7.21(a).

Reference:

Security Exchange Commission - Edgar Database, EX-4.12 3 dex412.htm SHARE PURCHASE AGREEMENT, Viewed April 5, 2021, < https://www.sec.gov/Archives/edgar/data/1329394/000119312507148404/dex412.htm >.

Common Contracts with Definitions Clauses

Every contract should take advantage of definitions clauses. However, the legal effect of definitions clauses impacts the result.

Common contracts with definitions clauses include:

Definitions Clause FAQs

Definitions clauses are a vital component of every contract. Check out the following definitions clause FAQs to learn more about this crucial contract section:

What is the difference between limitation of liability and indemnification?

There is one significant difference between limitation of liability and indemnification. Limitation of liability designates liability levels, whereas indemnification assigns responsibility for paying damages for negligence or breach of contract.

What is a normal liability cap?

A normal liability cap is the monetary “ceiling” placed on one party’s damages liability when under a contract. The anticipated amount depends upon your specific situation.

This article will help you understand the best practice use of definitions in a contract. If you have contract law questions in your state, a contract drafting lawyer can help.

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