The Meaning of Recitals in a Contract
A recital is a formal statement. It is typically the first section of an agreement that contextualizes the operative terms contained in the contract. Recitals may also be referred to as "preamble," "background" or "whereas." While they form an important part of a contract , recitals are not legally binding.
Recitals in an agreement are the building blocks that give meaning to the operative provisions of the agreement. Recitals may include the background of an agreement, outline the agreement’s scope of work, refer to past practices, explain the parties’ intent (in conjunction with or in lieu of defining relevant terms) or detail substitutional obligations under the agreement.
The Importance of Recitals
Recitals explain the context for the agreement. They explain what has gone on before in the discussions or negotiations between the parties before they entered into the agreement, and/or the purpose or intention of the parties in entering into the agreement.
Recitals can be very important in disputes between the parties to an agreement. This is because recitals can be used to provide context and background to the agreement. Recitals are often expressed to reflect that a statement is made "in reliance upon", or "that" something is, a particular fact. For example, a recital may say "the company holds licences in respect of Radio Stations;" "the company is prepared to sell its Radio businesses in order to fund a new business venture;" "the company wishes to dispose of its interest in the investment in which the investment in the joint venture is held;" "the company wishes to take advantage of a special opportunity to reduce its costs and create synergies:"; "the company wishes to make use of a financial investment opportunity". All of these statements are statements of fact about the parties position at the time they entered the agreement. They are there to give context to the agreement, to enable the court to understand why the parties entered into the agreement and how they understood the consequences of the agreement at the time it was entered into.
Key Elements of Well-Crafted Recitals
Clarity: The recital should be clearly, unambiguously and concisely worded.
Convention: The recital should conform to one of the common conventions (frequency counter, subject sequence order, position of completeness, etc.) that should always be used for recitals in a specific type of agreement.
Precision: A recital may be (i) precise with numerous specific points and, therefore, limited breadth, or (ii) imprecise with fewer specific points and, therefore, broad.
Rationale: The recital should give the reader an explanation as to the reciting party’s interest in the subject of the agreement. The recital should not provide editorializing.
Common Pitfalls in Drafting Recitals
Drafting recitals is sometimes treated as a poor cousin of the other provisions of an agreement. "Who reads them anyway?" is often asked. The answer is that they fulfil an important role, and should be drafted to serve useful purposes rather than being no more than ‘window dressing’. Here are some common mistakes to look out for in drafting recitals: Recitals should not be used as the place to provide the definitions of key concepts in an agreement. They can be drafted in a much more user-friendly way when they are set out in their own part of the agreement, and creating a separate definitions section in an agreement is not out of the ordinary. The ‘Whereas’ clauses in recitals should not be the place for the core definitions either – this is because recitals are intended to provide the context for the legal part of the agreement. They should not contain detail that would be better placed elsewhere in the agreement so as to have more prominence (and can be seen more easily when reading the agreement). Separating out definitions into a different section from the recitals and clauses in an agreement allows for ‘blanket’ definitions (i.e. those which apply to various parts of an agreement) and those which are only referred to in one place. This gives clarity to definitions, and prevents confusion as to when a definition is only relevant to a specific provision. The concept of distinct legal entities can also be lost in recitals if care is not taken when drafting recitals for different entities signing an agreement. A separate clause adopting a joint registration may prevent any confusion as to whether there could be inconsistency between recitals and clauses (although care must be taken on signing as to what is adopted) . A better approach is to set out clearly at the outset which entity is binding under which provision, and in particular, the provisions applicable to the binding entity. For example, ensuring that the entity that receives profit is clearly set out is essential, and would be done by using the word ‘agree’ instead of ‘acknowledge’. This may unduly overload the recitals with unnecessary detail, but it may be needed in some cases to ensure that the recitals and clauses are clear. Having a recital of certain facts that are adverse to the parties’ commercial interests can also be a trap. These may become more of a problem if they are referred to repeatedly, or if they were true at the time of drafting but have not been satisfied subsequently. A practical solution is to specify in the recitals that certain facts have been satisfied (where this is the case), rather than creation an ambiguous recital that could be disputed. There are also occasions when the parties’ expectations of an agreement may be extremely high as to what an agreement will achieve. It is sensible to ensure that the recitals do not give rise to expectations that may not be met. For example, an undertaking to make certain changes to a document as soon as reasonably possible may be unnecessary where the schedule to the agreement contains a list of those changes. It may be more appropriate to use the word ‘shall’ rather than ‘may’ in this circumstance, but this is a matter of negotiation with the other party. These common mistakes when drafting recitals show how important it is to get it right: the recitals in an agreement may be of real importance later on in any disputes. As with most legal drafting, they should not be relied on as a substitute for the substantive clauses – they should be used as a guide and context for the agreement, but not as a substitute for other provisions.
The Legal Consequences of Recitals
The legal impact of recitals will be determined by the contract in which they are contained. In general terms, the legal effect of recitals may be either descriptive or contractual. Recitals which are descriptive may serve to amplify the provisions of the contract and have no contractual effect. They may, in some cases, extend the ambit of the contract and necessarily be contractual in effect. Repeated emphasis is necessary in this context that the legal interpretation of recitals is necessarily a factual issue and would always depend on the facts and circumstances of each case before the court or arbitrator concerned.
In one case one of the questions referred to the court concerned the impact of a recital that "so long as this agreement is in force the vendor shall not, by himself, his agents or otherwise, deal in or dispose of any items similar to those sold to the purchaser…"
The court held that the recital only prevented the vendor from dealing with articles similar to those it had already supplied to the purchaser. The recital did not empower the purchaser to treat the vendor as its agent for the purpose of purchasing articles the vendor had supplied to similar customers – irrespective of whether or not a contract to that effect was in writing. The purchaser was not entitled to take over the vendor’s customer lists and seek business from those customers in order to "assist" the vendor to comply with its obligation under the recital. The recital did not give the purchaser any rights whatsoever and it could not seek to indirectly enforce them by prohibiting the supplier from its contractual rights.
The case underscores the essential point that where the parties intend a recital to have a certain legal effect the language used should, even in the absence of some statutory requirement in this regard, be such that the legal effect thereof is clear. In an appropriate case the failure to include the essential prerequisites for binding obligations in respect of a recital may well render it, in the eyes of the court, merely a preamble, i.e. an introductory section providing background information. As a result the recital will have no legal effect whatsoever.
The fact that a recital contains a statement of intention on the part of one of the parties does not render it legally effective or otherwise affect the legal impact of the recital in question.
In a recent decision by the Western Cape High Court, the court was presented with a dispute concerning four agreements. In each of the agreements there was a recital in the following terms: "The buyer has represented to the seller, by providing the information on the ‘Purchase Order’ attached hereto, that the product purchased and/or the services to be rendered will be for resale of commercially available aircraft and/or Commercial Airline purpose".
The court was required to determine whether these recitals amounted to express and enforceable warranties of the type alleged in the pleadings. In this respect the court held that a recital such as the one set out above does not have the status of a warranty. It merely refers to what has been represented and is not a representation in itself. Given that the phrasing of the recitals was to confirm that the purchaser had represented something, the recital itself cannot, in language, do more than indicate that the purchaser was making a representation. A recital may certainly be included in a document for the purpose of recording something such as a representation but whether or not the recital also contains warranties is a factual issue which must be determined before deciding whether or not the statement in question constitutes an express warranty of the type pleaded.
Recitals may, depending on the circumstances, constitute an essential ingredient or contribution to a particular provision in a contract in so far as it may fall within the class of recitals which expand the contract or influence the legal consequences flowing from specific circumstances when the inter-play between the various provisions of the contract is taken into account.
It is important to note at all times that given the differing circumstances of each case, there are instances where the recitals may, indeed, have a contractual, thus obligatory, bearing, rather than merely a descriptive one which has no bearing on the legal rights and obligations which flow from the operative clauses of the contract concerned. Such scenarios are best dealt with by using language that expressly provides that the recitals are intended as representations in order to avoid any ambiguity.
The parties to a contract remain free to determine the legal effect of any recital they may wish to include in their contract and that a recital may be the vehicle for precisely achieving the solution to the parties’ difficulties. The potential legal effect of a recital may well depend on the manner in which the parties have fashioned the wording of the recital. It must, as always, be remembered that it is a question of fact whether a recital amounts to a representation, warranty or preamble and this remains so regardless of the use of the terms "shall mean" or "shall constitute"; the manner in which the parties have fashioned the wording and/or the internal and external context of the language is ultimately relevant.
Recital Drafting Best Practices
The drafting of recitals in an agreement is not an exact science. The key drafting considerations remain termed below.
• Keep them short and use plain English. Recitals need not be seen as providing useful insight into what the parties meant some six months later. Keep them succinct using plain English, but describing what needs to be described.
• Consider the history behind the agreement. You may find yourself in court seeking to rely on the recitals some time later. The court will have regard to the recitals and their interpretation in accordance with the applicable rules. Remember that the full factual scenario behind the agreement itself will often not be recorded in the recitals and that the agreement may also have been the fruit of lengthy and complex negotiations. Your approach to drafting the recitals needs to take cognisance of these factors.
• Avoid legal jargon. Recitals need to be drafted in plain English explaining in general and simple terms the purpose of the agreement rather than using legal words and phrases . It is important that the agreement complies with the legal requirements (for instance in the context of surety agreements), but legal jargon and technical phrases should be avoided if possible.
• Ensure that the recitals correspond with the main provisions of the agreement. This may seem like an obvious point but there have been a fair number of cases where parties have attempted to argue first that the recitals constitute the parties’ agreement and latterly that the main provisions of the agreement carry little weight.
• Use the same terminology throughout the agreement. Consistency is key in drafting an agreement at all levels. It not only smooths the reader’s path through the agreement but it will also avoid potentially expensive disputes before and during the relevant proceedings. It would be a good idea to include a definitions clause setting out the full wording of the defined terms used throughout the agreement.