Many agreements contain a long definitions section or numerous defined terms scattered throughout the agreement. This is especially true of contracts in the construction industry.
Definitions are used to help make an agreement more readable. Who wants to read, “all applicable federal, state, and local laws, statutes, regulations, and codes that govern the project, including, but not limited to blah, blah, blah……” over and over again when it can just be defined as “Applicable Laws.”
But definitions can also expand liability or, in some cases, limit liability unintentionally.
Look at indemnity provisions for instance.
There is usually a laundry list of parties defined as “Indemnitees.” All of the “Indemnities” are entitled to be indemnified and defended for claims covered by the indemnity, and they usually are named as additional insureds on certain insurance policies.
One situation where this can create a problem is when the architect is included in the definition of “Indemnitees.”
A broadly drafted indemnity provision can potentially result in the contractor being required to indemnify the architect for certain claims that are prohibited by Chapter 130 of the Texas Civil Practice and Remedies Code.
Even though the statute would make that type of indemnity void and unenforceable, time and resources would have to be spent having the provision declared void and unenforceable.
Another type of agreement where definitions are often used and are very important is a settlement agreement.
Let me share a real life example with you of a case my firm got involved in after definitions in a settlement agreement caused a problem.
“Parent Company” was sued over a debt, and as the case progressed the plaintiff also sued some officers and affiliates of the Parent Company.
The case settled and the settlement terms required the Parent Company to pay a certain amount over a period of time with the plaintiff agreeing to dismiss the lawsuit against all of the defendants.
The original version of the settlement agreement included a definitions section that had a separate definition for each of the defendants along the lines of “Parent Company,” “Affiliate 1,” “Affiliate 2,” “Officer 1,” “Officer 2,” and “Officer 3,”
The payment provision, however, only required the Parent Company to make settlement payments.
Throughout the settlement agreement each time the defendants were referenced, all of the defined names were listed, which made the agreement longer and a bit cumbersome at times.
When the settlement agreement was almost finalized, the plaintiff’s attorney redefined the Parent Company to include all of the defined terms for the officers and affiliates to shorten and simplify the agreement. The other provisions of the settlement agreement remained unchanged.
The defendants and their attorney agreed to the revision and the settlement agreement was signed. After approximately half of the settlement payments were made, the Parent Company experienced financial problems and stopped making the settlement payments.
The plaintiff filed suit against the individual officers and the affiliates to recover the remaining settlement payments.
Even though the officers and affiliates had never intended to be responsible for the settlement payments, they ended up being responsible because the “Parent Company” was responsible for the payments under the agreement and each of the officers and affiliates had been incorporated into the definition of the Parent Company.
Don’t just skim over the definitions in any of your agreements. Read them carefully and ask yourself if each of the people or entities listed really need to be included in light of the obligations or liabilities that are associated with the defined terms.
The same is true of definitions related to applicable laws, indemnified claims, and many other issues that are sometimes grouped together and defined.
Using definitions can be convenient, but unless they are carefully reviewed, they can also lead to future unintended consequences.