10 Jun Clear Definitions in Contracts
I have another contract rant to get out of my system.
I was reading through the blog of one of my favorite writers, Ken Adams, who is the author and editor of Manual of Style for Contract Drafting, which I use heavily when writing contracts. Ken was talking about a lawsuit that came out of the southern district of New York (Manhattan). The case was between Nuance Communications v. International Business Machines (IBM).
Most of contract litigation revolves around what the contract actually means. Contract litigations involving one party that didn’t do something aren’t usually very interesting, largely because it’s a pretty simple breach of contract. These cases don’t lend themselves to very good blog posts, to be honest. But in this particular case, we have what Ken Adams refers to as being a failure to tell the story.
I take it from a similar point of view. A contract is a written description of a business relationship. In order to be effective, that business relationship needs to have clear communications. When you’re dealing with a contract, really the only communication that matters is the actual contract itself.
In the dispute between Nuance and IBM, the conflict was related to the support and updates for a program called DeepQA, which IBM was providing. The core of this dispute was a definition. Nuance believed that it was entitled to receive updates developed outside of a particular IBM business unit, as well as that particular business unit. IBM said that they only get the updates that come out of that business unit.
Those of you who read this blog regularly may be able to spot the problem. In any contract, the parties must make clear their expectations. Neither party did so. Both parties are at fault.
They have a definition of licensed IBM background software. I’m a big fan of a clear definition section. This case doesn’t have it. The definition is poorly written. It has a couple hundred words and has all kinds of punctuation matters. In fact, IBM admitted to the court that their definition was “a bit gargled.”
But, here’s the thing. The definition section is a chance to make clear what a particular term means. You need to take some dedicated time to ensure that all elements of the definition are included, and that the average person can understand what the term means.
The larger point that I want to make is that when it comes to writing a contract, it is not enough to know what the law is. Most lawyers can look that up. It’s not enough to know what is at stake in the contract, or even what the relationship is. It is just as important, and even more so, to make sure that the words that you choose support the overall objectives of the contract.
So, when you have a definition section, you need to make sure that you are supporting the overall understanding between the parties. Every section of a contract is potential for a dispute, and my guess is that the parties spent over a quarter of a million dollars litigating this particular matter. Why? Because they did not clearly state what their expectations were, and they did not make sure between the high price legal talent that was involved in this transaction, that everyone understood.
If you’re a lawyer and you’re reading this post, I want you to think long and hard about the definition section of any contract. It is of vital importance. When I write a definition section, I try to be very clear, even though I might not always succeed on a first go.
For our clients, to have a clear understanding of this transaction, we need to have clear definitions. The moral of the story for both lawyers and clients is that make sure the language you see in a contract is something that you can understand, and just as importantly, that it meets your expectations.