Drafting License Agreements – Best Practices for Definitions

Effective definitions are the foundation of a clear, well-drafted license agreement. Ambiguities or inconsistencies in the terms of a license agreement can lead to unintended disputes or other legal consequences, particularly when the agreement is complex or includes technical or industry-specific terms. By implementing best practices for definitions – such as drafting definitions clearly, using defined terms consistently, choosing terms strategically, and organizing definitions thoughtfully – drafters of license agreements set the stage for consistent interpretation of key terms and mutual understanding between parties.

Draft Clearly and Consistently

The first and foremost consideration when drafting definitions is clarity. A license agreement is a contract, so each term should be defined precisely so as to aid understanding, make interpretation of contract provisions easier, and avoid potential contract disputes. Generally, two types of definitions are of particular importance to contract drafters – “precising” and “stipulative” definitions. A precising definition makes a generally known term more precise in hopes of preventing peripheral misunderstandings. A stipulative definition is one that offers a shorthand phrase to improve contract readability and avoid inadvertent inconsistency. Careful drafting of both types of definitions is crucial for proper contract interpretation – definitions should be non-circular and unambiguous, including as much detail as needed to cover the full scope of the term as used in the agreement, but without creating unintended loopholes or alternative interpretations.

Make Agreements User-Friendly

After clarity, user-friendliness is the next most important consideration for definitions. The following guidelines can help a drafter enhance comprehension and readability.

First, consistently capitalizing defined terms brings readers’ attention to the fact that the words have specific meanings as used in the agreement.

Second, choosing defined terms that suggest their meaning without reference to the full definition aids the reader in developing an intuitive understanding of the terms.

Third, particularly for longer license agreements, consider placing defined terms in a dedicated “Definitions” section. Alphabetized definition sections allow readers to refer back to a specific definition quickly. If providing a definition in a definition section is impractical, for example because a particular term is more easily understood in context, the drafter can improve clarity by offering a cross-reference to the section in which the term is defined and bolding or underlining the term in that section.

These organizational practice tips, among others, improve ease of reference and interpretation of the license agreement. By crafting precise and well-organized definitions, license agreement drafters establish a strong framework for not only the entire agreement itself, but also for the parties’ understanding and cooperation going forward.