Virginia Contract Interpretation: Defined Terms

Whether lengthy and extremely sophisticated or short and straightforward, contracts are simply the expression of two or more parties.  In many cases, a skilled contract drafter can make even the most complex provisions of a contract understandable.  However, some contracts can seem daunting and complex to parties that are not exposed to them regularly.  In fact, if drafted poorly, even for attorneys some contract language is archaic and difficult to understand; assuming it makes enough sense to even be understood at all.   Generally, however, many people who are unfamiliar with reading or interpreting contracts struggle and find them difficult to understand.  Oftentimes this comes from basic misunderstandings about the way that contracts are intended to be read, which can often lead to poorly drafted agreements by inexperienced parties or attorneys who do not fully understand what the parties are trying to express in writing.

The first thing to understand is that in a contract defined terms reduce length and ambiguity in a contract by replacing lengthy language or an explanation, usually a definition, with a single term or short phrase.  Defined terms should be capitalized and should remain capitalized in a contract when used in that context.  For example, if “Services” are defined to mean and refer to something specifically, such as ‘computer programming and IT support,’ then for the duration of the contract, in place of ‘computer programming and IT support,’ “Services” should be used with a capitalized “S.”  Without such capitalization, ‘services’ could be read ambiguously or with plain meaning and may not capture the expression of the parties. Therefore, it is important to know what the definitions are in a contract, so that you can understand the meaning of the provisions and how that particular definition or similar language is being used.   It is equally important for a contract drafter to use appropriate definitions where applicable and to use the language consistently.  A skilled drafter or contract attorney will use these definitions as a tool to tell the contract’s story and to keep everything clear.  However, contract drafters can quickly make a contract provision complex with many defined terms used in a single expression.  For example, “only Sales made in the Territory by Builder or Sub-Contractor for Services or Goods Delivered will Costs be deducted.”  With so many defined terms used at once the sentence could easily have complex results and restrictions based on the structural combination and use of those particular terms.  Therefore, it is incumbent on the drafter or contract attorney to fully understand the implications of defined terms and how they are being used, especially if combined with other defined terms.

The second important thing to understand is that if the term is not specifically defined, then, pursuant to Virginia contract law, “words that the parties used are normally given their, usual, ordinary, and popular meaning.”  Preferred Sys. Solutions, Inc. v. GP Consulting, LLC, 284 Va. 382, 732 S.E.2d 676 (2012).  Consequently, if the word is not defined within the agreement, you can read the contract to understand it exactly as the word would normally be used.  Many people are worried that the language or the words themselves contain pitfalls or traps outside of their normal understanding in a contract.  This is generally not the case when there are no specifically defined terms in the agreement.   Conversely, this means that the words will not take on specific meaning if you do not define them to mean that.  Great care must be taken by contract drafters to be certain that they are fully capturing the understanding of the parties or their client’s wishes.  If the parties are using the words in an unusual way, then it may be best to specifically define them.  It is also important to understand that under Virginia contract law, typically the contract is bound by the four corners of the document, meaning, no outside language or other documents, including email exchanges, will be used to interpret or explain the parties’ intentions, especially if the document contains a superseding clause.  This is why it is so important that the contract capture the parties’ understandings fully.  However, the ‘four corner’ approach along with the superseding clause is a lengthy topic with some exceptions that we will address in a future blog post when discussing Virginia’s ‘parol evidence rule.’

A third important issue to understand about reading or drafting a contract is that pursuant to Virginia contract law, “[n]o word or clause in a contract will be treated as meaningless if a reasonable meaning can be given to it, and there is a presumption that the parties have not used words needlessly.” Id.  This means that not understanding a clause does not necessarily render it meaningless.  Therefore, it is extremely important to understand the provision, because there is a presumption that those words were not needlessly added to the contract and will be interpreted to have significance and meaning as a result.  Additionally, it highlights the dangers of inexperienced drafters using duplicative language and provisions.  Such inexperienced drafters may attempt to provide a “concrete” expression or be “extra cautious,’ but they may inadvertently provide added significance or meaning to the provision or clause unnecessarily, which could ultimately change the parties’ intentions.