Common Elements of Business Contracts, Part 2: Recitals

This is the second is a series of articles [1] presenting an overview of various provisions commonly found in business contracts, primarily from the point of view of the drafting attorney. [2]

Recitals

The recitals or background section follow the preamble and provide background information about the agreement and the parties that may be useful to a person who reads the contract – particularly a court.

Are recitals enforceable?

Strictly speaking, the answer to the above question is no, but that does not mean recitals are unimportant. As the Indiana Court of Appeals explained in 1983,

Preliminary recitals in a contract have some value in determining the intention of the parties, but they are not contractual, and are never permitted to control the express provisions of the contract. . . .

Preliminary recitals or “whereas” clauses, however, serve a legitimate function. Although they do not ordinarily form any part of the real agreement, they do indicate the background of the contract, and may be referred to in determining the intent of the parties where its operative parts are ambiguous. [3]

DRAFTING TIP: Because recitals are not enforceable, they should never contain representations, warranties, or covenants. Leave those for the main body of the contract.

Two formats: traditional and modern

The traditional way to write recitals is to craft them as one long sentence composed of several clauses, each beginning with “whereas.” The modern trend is toward plain English drafting, typically with the recitals or background section consisting of a list of declarative statements, generally but not always numbered. [4]

At the end of the recitals are words of agreement or a lead in. Traditional drafting often includes a recitation of consideration, but most commentators now agree that is unnecessary [5] and that it is sufficient to include a simple sentence such as, “Therefore, the parties agree as follows:”

Here is a set of recitals in the traditional form take from an “Agreement to Assign Patent Applications and Royalty Sharing Agreement between Microsoft Corporation and Expedia, Inc.,”: [6]

WHEREAS, the Parties have entered into a License Agreement dated as of October 1, 1999 (the "License Agreement");

WHEREAS, the Parties have entered into an Agreement and Plan of Recapitalization and Merger dated as of July 15, 2001 (the "APRM"); and

WHEREAS, as part of the consideration of the APRM, Microsoft desires to assign, and Expedia desires to acquire, all right, title, and interest in and to a number of patent applications that are owned by Microsoft.

NOW, THEREFORE, [for and in consideration of the mutual covenants contained herein, and for other good and valuable consideration receipt of which each party hereby acknowledges,] [7] the parties hereby agree as follows:

Here are those same recitals rewritten in modern form (and with some of the legalese removed):

BACKGROUND [8]
  1. The Parties have entered into a License Agreement dated October 1, 1999 (the "License Agreement"). [9]
  2. The Parties have also entered into an Agreement and Plan of Recapitalization and Merger dated July 15, 2001 (the "APRM").
  3. As part of the consideration for the APRM, Microsoft desires to assign, and Expedia desires to acquire, a number of Microsoft’s patent applications.

Therefore, the parties agree as follows:



[1] These articles are adapted from materials prepared by the author for a continuing legal education seminar, “Business Contracts from A to Z,” sponsored by National Business Institute, and presented by Michael Ray Smith of Smith Rayl Law Office, LLC; and by Trevor J. Belden and Robert K. Stanley of Faegre Baker Daniels, LLP. Used by permission of National Business Institute.

[2] There is no universally accepted structure, format, or style for writing business contracts. In contract drafting, as in computers, “The nice thing about standards is that you have so many to choose from.” Andrew S. Tannenbaum, Computer Networks, 4th ed., quoted at http://en.wikiquote.org/wiki/Andrew_S._Tanenbaum. Two references sometimes used by the author are Kenneth Adams, A Manual of Style for Contract Drafting (2008). Another reference for specific provisions is Tina L. Stark (ed.), Negotiating and Drafting Contract Boilerplate (2003). These two sources are subsequently referred to as “Adams” and “Stark.”

[3] Ohio Valley Gas, Inc. v. Blackburn, 445 N.E.2d 1378, 1383 (Ind. Ct. App. 1983).

[4] Some argue that numbers are unnecessary. Adams, p. 20.

[5] Adams, pp. 23-26.

[6] Available online at http://contracts.corporate.findlaw.com/operations/ip/1154.html.

[7] The language in brackets is a recitation of consideration. Even in the traditional format, it is unnecessary. See text accompanying n. 5, supra.

[8] A heading is optional, but the author of this section thinks one is helpful and prefers “Background” as being more descriptive than “Recitals.”

[9] These recitals could be improved by explaining the relationship of the License Agreement to the APRM and to this Agreement.