What are Recitals in Law?
A contract, deed or other legal document such as a constitution, trust deed or will may contain a statement known as a "recital." Such a statement records factual matters which are the background to the document. For example, at the commencement of a deed securing a loan there may be a recital outlining the reasons for the loan.
Typically, a recital will refer to ‘the lender’, ‘the purchaser’, ‘the borrower’, ‘the vendor’, ‘the company’ or some similar identifier. The recital makes no attempt to identify the persons or companies concerned.
The legal significance of a recital was outlined by the High Court in Australian Broadcasting Corporation v Xavier (1985) 156 CLR 574 at [16]:
‘Recitals’ in a deed may have more than one function. Depending upon the matter intended to be recited , they may be relevant to construction of the operative provisions of the deed or they may be independent statements or both. Their probative value will depend upon the circumstances in which they appear.
Generally, recitals are not binding on the parties to the agreement but they may form an integral part of the contract and assist in interpreting the document. For example, if there is an inconsistency between recitals and operative clauses of a document, a court will often prefer the operative clause as it is presumed that the parties did not intend to create a conflict.
The Purpose of Recitals in a Contract
The recitals play an important role in setting the scene for how the operational clauses work. They can be useful in helping the reader to understand the business background and the purpose of the contract, or where it fits into the bigger picture. It can be useful in a schedule to a statute, for example, to provide that the parties to the schedule have certain things in common, or have found themselves in certain situations, or to help provide context as to their respective capabilities and assets.
The recitals can also help to set the scene in terms of high-level obligations of the parties and function as a broad introduction to some targeted contractual points, for example by providing that the party has agreed to supply certain goods or services as part of the contract.
The recitals can also be useful for limiting or qualifying elements of the operational clauses (especially in the event of a dispute) and in that way can be used to limit the ambit of an express obligation. For example, the recital might provide: the supplier agrees to provide the goods in accordance with industry standards for similar goods in the industry.
The recitals can also be referred back to in terms of the assumptions on which the rest of the contract is based.
Legal Significance of Recitals
The first legal implication of the use of recitals in a contract is that, while the courts will rarely place reliance on recitals in statutory contracts, they actively encourage the use of recitals in unregulated private contracts. The courts have identified at least two situations where recitals are not considered evidence of the parties’ intention: (i) where the contract document is not the entire agreement or definitive proof of the parties’ bargain and (ii) where one party is unable to influence the content of the recitals in a contract of adhesion. As alluded to above, recitals are more likely in practice not to be relied upon as evidence of the parties’ intention when the contract is regulated by statute and the recital clause is not subject to negotiation. Instead, the objective test of probable construction may in these cases be relied upon by the court, rather than the subjective approach of referring to recitals as evidence of intention. The propensity to ignore recitals in regulated contracts has been characterised by some as "judicial scepticism" towards evidence from recitals, with the courts preferring to err on the side of caution by not relying on recitals unless necessary.
Secondly, recitals assist the court in construing a contract where the meaning of a clause is uncertain – recitals may be used to shed light on the parties’ intentions and construction of the contract as a whole. In Clyde & Co LLP v Nestation [2016] EWCA 1380, the Court of Appeal assessed the meaning of the terms "act of insolvency" and "material adverse effect" in a provision for automatic termination in the event that the other party ceases to be able to pay its creditors or suffers a material adverse event. The Court looked at the recitals as part of the interpretation process, along with surrounding clauses, and considered them practically alongside the identified ambiguity to reveal the context and intention behind the contract language.
In the case of A & C Black Ltd v Andermann [2007] UKHL 22 it was held that recitals can also be used as part of a contract’s factual matrix. For instance, the introductory section of a contract, which may have included a recital about the state of affairs before the contract was signed, was deemed to be useful information in clarifying who holds the burden of proof in proceedings under the French Penal Acts (the core dispute in the case). The inclusion of the recital in this case assisted the Court in determining the factual matrix by providing evidence of the wider circumstances in which the contract terms were agreed upon.
In situations where recitals have not served their purpose as a contextual aid to construction, it has been suggested that the court may: (i) view the recital in question as an "extrinsic attempt to preclude a court’s proper consideration of the language of the contractual document" (in the case of Cayne v Global Natural Resources plc [1984] 1 WLR 634) or (ii) view the recital as insufficiently specific to aid the court in interpreting the contract (as suggested in Andermann). In these cases, courts may be reluctant to refer to recitals if they appear partly retrospective and therefore of no assistance in construing a contract.
Recitals are Not Operative Provisions
Recitals differ from operative clauses in a contract in a number of ways. Operative clauses embody the legal commitments and obligations of the parties which they intend to be enforceable (although the matter is not free from doubt). Recitals are not made with enforceability in mind. They are context and background. In relation to a legal action, a recital is at best a guide as to the commercial intent of the parties in a broad sense, and can only rarely be used to vary or even have an impact on the parties’ legal obligations as contained in the definition sections and operative clauses of the contract. In particular, recitals may be useful when there is an ambiguity in the operative clauses. The recitals may then assist in finding a construction which was intended by the parties in line with the context and factual background to the contract .
The parties do not generally intend recitals to create legal obligations and cannot renounce or remove a contractual obligation by including something in the recitals. This is shown in the case of Amalfi Coast Investments Ltd v Pairaudeau [2008] EWHC 3085 (Ch) where the court held that the clear meaning of the wording of an operative clause in a clause overrode the recitals especially as the recitals had been expressly stated not to be interpreted as having binding effect. The presumption that recitals will not give rights or impose any obligations upon the parties may be rebutted as a result of the subsequent actions of a party which has given effect to its content, for example, taking or refraining from taking steps in reliance upon them. The recitals in the contract may then become relevant as to a party’s acquiescence or change of position.
How to Draft Effective Recitals
When drafting effective recitals, the first consideration is to ensure that they are in accordance with the body of the legal instrument, including the parties’ stated intentions. This will involve ensuring the recitals contain sufficient information about the matters with respect to which the parties wish to elaborate. The information should not, however, be too detailed.
Sufficient detail is usually necessary to explain the context of the agreement or instrument, but it will not be necessary to include detail which is not relevant. An example of this is where a party is supplying a particular service which is not incidental to a larger transaction, and the parties do not intend the transaction as a whole to be covered by the agreement. In this case, it is arguable that it is appropriate to set out the proper background to fully inform the reader of the purposes of and the rationale behind the instrument, and the basis for the obligations of the parties therein .
The purpose for which recitals (or background provisions) are included in a deed or agreement is to set out a background to the use of the instrument. Although there is no fixed list for what should be included, it is often desirable to include the following types of information (although it will depend highly on the circumstances of the agreement):
• the identity of the parties
• the nature of their business
• something about the background to the agreement
• the reasons for entering into the agreement
• some information regarding their relationship and past dealings
• the meaning of terms, defined terms and/or technical terms used in the agreement
• why the specific structure has been chosen (such as for taxation or other commercial reasons).