What are Recitals and Their Function?
Recitals are functional provisions that are found at the beginning of an agreement before the operative section (undoubtedly the largest section) of that agreement. From a drafting perspective, a recital is a distinct paragraph in the drafting environment – it has its own child nodes and its own space in the document.
The recital will typically begin with the word "whereas". The assumption is that there is a point to the paragraph, which is to be explained after the word "whereas". In many circumstances though , the recital appears without the word "whereas".
The recital usually contains background information only to provide context to the main agreement. For example: The parties wish to enter into an agreement … The purpose of this agreement is … What is critical for the reader to note is that the recital provides context or background information only. It is not contractual and so may not be used to interpret the agreement. The reason is that it would be inequitable if a party were to have relied on the recital (as it provides context) only to find that the context was not intended to have contractual effect. For example: The parties have executed this agreement as their legally binding agreement … The recital is therefore not a binding statement of fact. In circumstances in which the recital contains a binding statement of fact or a binding statement, that statement may take precedence over the main agreement. In these circumstances, the statement would have appended "hereby" or have been placed in the operative section of the agreement. The point is that it is the drafter who determines the level of binding obligation by placing the statement in the operative section.
Recitals, Purpose and Utility
Recitals are intended to endow a contract with contextual relevance, which is supposed to be embodied in the operative contractual terms. In other words, recitals set the scene for the operative provisions of a contract by giving context to them and explaining the parties’ intentions.
For example, in a sale and purchase transaction, recitals will typically provide information on which particular assets will be conveyed including valuation of such assets. Information may include detail of the parties’ negotiations, references to underlying processes and co-legacy obligations that are necessary to understand how the parties have reached agreement.
Recitals should not seek to address issues that are not gathered under the obligations of the operative terms. For example, recitals should not seek to set out the events leading up to a settlement, the rationale for it or any other party involved in such settlement, as none of that exists in the main operative body of the agreement. Doing so can invite an interpretation of the operative terms of the contract contra preferentem.
Key Elements of Typical Recitals
A typical recital may contain the following components:
(a) Purpose: A recital should explain the purpose of the agreement. This will serve as a springboard for the context of the transaction.
(b) Background statement: A statement as to the background details of each party then follows. This will include the identity of the parties and details of the parties’ respective businesses. The idea is to give the reader/principal context as to what each party brings to the transaction.
(c) Reasoning behind the agreement: This statement will describe the intention of the agreement. It will give the subjective reason why the parties are entering into the agreement and the practicality of the transaction.
The wording of each component is generally in the following form:
(a) Purpose "This agreement sets out the terms on which the Seller will sell and the Purchaser will buy the [insert description of the goods]"
(b) Background statement "The Seller is a company duly incorporated …"
"1. INTERPRETATION
In this agreement the following terms shall have the meanings assigned to them hereunder unless the context indicates a contrary intention:
1.1. "Agreement" means this Agreement."
(b) Reasoning behind the agreement –
"1. INTERPRETATION
In this agreement the following terms shall have the meanings assigned to them hereunder unless the context indicates a contrary intention:
1.2. "The parties"
To the following: ABC (the seller) and XYZ (the purchaser) – to refer to ABC and XYZ alternatively."
Enforceable Nature of Recitals
In most common law jurisdictions, including British Columbia, recitals are not considered an essential part of a contract. For example, the Court of Appeal for British Columbia held in Nankivell that "recitals to an agreement are no part of it, and except in so far as they are expressly incorporated into the agreement, they have nothing to do with it."
That said, courts will treat recitals as binding if they are specifically incorporated into the contract. Recitals may also be found to be binding if a contract incorporates the recitals of the previous agreement or if a contract states that recitals form part of it. For instance, in Municipal District of Ranchland No. 66 v. Cypress County, the Alberta Court of Queen’s Bench held in relation to a merger clause: The merger clause in the … Agreement is a standard form clause which expressly states that the Agreement and its schedule "constitute the entire agreement between the parties with respect to the subject matter hereof and supersede all prior notice, discussion or negotiations respecting this transaction." Reading the Agreement as a whole and giving the merging clause its proper weight, the Judging assumes that the parties intended all terms of the Agreement to be set out in the contractual text. As such, the recitals of the … Agreement have not been expressly incorporated in, and form no part of, the Agreement between the parties.
It is generally accepted that a recital is not a decisive factor for the construction of an agreement, and cannot displace an express and unambiguous obligation. In particular, a recital cannot create obligations on a party that are inconsistent with its express obligations set out in the agreement , unless such obligations are expressly included as part of the agreement. Some courts will however consider a recital as a key element of contextual facts needed to determine the intention of a party in making a statement contained in the agreement, which ultimately informs the correct interpretation to be given to the agreement. For example, the Court of Appeal for British Columbia discussed in Southern Railway how recitals can be used together with other contextual information to interpret an ambiguous provision in an agreement: …[T]he recitals in a commercial document "are generally useful in interpreting contractual provisions" … In the context of an agreement such as this one, a recital is likely to inform the construction process by providing context for the interpretive exercise. A recital, however, may be modified by a subsequent provision in the agreement that purports to supersede it. The question for the berthage period to be read in light of the recitals or any other extrinistic facts is a question of fact [emphasis added].
Whether a recital in your agreement will be given legal weight will depend on the facts of your case, the applicable governing law and how the recitals are viewed by the relevant court. When drafting an agreement, your first step should be to determine whether any of the facts to be put in a recital would have legal significance if contained in the agreement. You should then look at the purpose and intended use of the recitals, and how the recitals would be treated under the governing law, before deciding whether to include them as part of the agreement.
How to Write Effective Recitals
When used correctly, recitals can be a key drafting element that adds strength and clarity to the enforceability of the resulting agreement. It is therefore important to have a solid understanding about contractual recitals so drafters can construct them effectively. While it is best to have experienced legal counsel in drafting agreements, the following is a guide to best practices and common pitfalls to avoid in inserting recitals to an agreement. When preparing recitals, consider the following: Recitals are not meant to address every item that needs to be included in the agreement: clauses that expressly allocate risk and detail obligations will need to be considered in some other section. It is best to think of recitals as additional information or background that will enable the reader to better understand the express terms that follow in the agreement.
Examples of Recitals in a Contract
A well-drafted recital should identify the parties, the date or relevant time period of the agreement, and the purpose of the agreement. For example, the following are some examples of clearly written recitals, which identify the parties and give a general overview of what the agreement covers:
Sale of Goods Agreement
"This Agreement, made and entered into this 28th day of February, 2007, by and between, Keynote Systems, Inc., a Delaware corporation ("Seller") and Boring Company, a Georgia limited liability company ("Buyer"), provides for the sale of certain goods on an as-is basis with all sales subject to Buyer’s acceptance of Seller’s standard terms and conditions of sale upon checkout at www.keynotesystems.com."
Service Agreement
"This Service Agreement ("Agreement") is entered into as of this 26th day of February, 2007 (the "Effective Date"), by and between Awesome Company, a Delaware corporation having its principal place of business at 1230 W. Sunny Street, Suite 101, Burlington, Vermont 06066 ("Customer"), and Cloud Computing, LLC, a Delaware limited liability company having its principal place of business at 1860 S . Filmore Street, Suite 210, Denver, Colorado 80210 ("Supplier"). Customer is entering into this Agreement in order to retain Supplier to provide certain consulting services to Customer in connection with the design, implementation and expansion of a cloud computing solution and architecture for Customer (the "Services").
Partnership Agreement
"This Partnership Agreement dated as of the 28th day of February, 2007 (the "Agreement") by and among Kevin Smith, Sally Sue, and Tex Williams (collectively, the "Partners"), agree as follows: The Partners desire to enter into this Partnership Agreement for the purpose of organizing a partnership (the "Partnership") pursuant to the terms set forth herein and in accordance with the Partnership Act."
A poorly drafted recital may state, for example:
"This Agreement is terminated effective April 8, 2008 (the "Termination Date") and includes termination of all obligations under the March 15, 2006 agreement between Company One and Company Two and any other contracts in effect as of the Termination Date." In this example, it’s not clear which specific agreements are being terminated or when the potential for termination actually existed.
