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Who Needs That Recital of Consideration?

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Who Needs That Recital of Consideration? DraftingDrafting aa newnew dayday Who needs that ‘recital of consideration’? By Kenneth A. Adams t’s hardly a shocking notion that are hereby acknowledged, the parties Farnsworth, Farnsworth on Contracts any given contract could contain hereto covenant and agree as follows. 150 (2d. ed. 1998).) It follows that Ione or more provisions that reflect Recitals of consideration raise a using instead the vague language of a an inaccurate or outdated view of con- number of issues of legal usage. For traditional recital of consideration tract law. What’s more noteworthy is example, NOW, THEREFORE is archa- would be equally ineffective. the fact one such provision — the tra- ic, while in consideration of the premises Similarly, a false recital of consider- ditional recital of consideration — is simply an obscure way of saying ation cannot create consideration appears in most corporate agreements. “therefore” and is superfluous given where there was none. If, in the con- In this article, I explain why that the preceding “therefore.” And refer- tract between Acme and Roe, Acme traditional recital of consideration ences to the value or sufficiency of recites falsely that the payment to Roe fails to serve its intended purpose and consideration are outdated: With the was in consideration of future services why omitting it could only improve a rise of the “bargain test of considera- and Acme subsequently refuses to pay contract. tion” reflected in the Restatement (Sec- the bonus, Acme should prevail in any The ostensible function of a recital ond) of Contracts, the focus of judges action brought by Roe if it succeeds in of consideration is to render enforce- has shifted from the substance of the proving that the recital was false. able a contract that would otherwise exchange to the bargaining process. Of (Again, see Farnsworth.) The outcome be held unenforceable due to lack of greater interest, however, is whether would be the same if the contract con- consideration. In corporate agree- traditional recitals of consideration in tained a traditional recital of considera- ments, the recital of consideration is fact serve any purpose, or rather tion. Allowing a false recital — placed in the “lead-in,” which comes at enough of a purpose to justify their whether specific or vague — to the end of the recitals and serves to presence. trump a lack of consideration would introduce the body of the contract. For a traditional recital of consider- effectively do away with the require- A recital of consideration can be ation to fully serve its ostensible func- ment of consideration. specific as to consideration — for tion, any inquiry as to whether a con- Although these principles together instance, by stating that the considera- tract is supported by consideration indicate that recitals of consideration tion for Doe’s promise is Acme’s having would begin and end with the recital cannot remedy a lack of consideration, paid Doe a given amount — but most of consideration. In this respect, how- there is authority for the proposition often it is entirely vague. A representa- ever, the utility of recitals of considera- that for purposes of option contracts tive, if relatively full-blown, example of tion is very circumscribed. For one and guaranties, a false recital of consid- a lead-in containing a recital of consid- thing, a recital cannot transform into eration will support a promise. (An eration is as follows: NOW, THERE- valid consideration something that option contract is a contract represent- FORE, in consideration of the premises cannot be consideration. ing an irrevocable offer.) and the mutual covenants set forth herein If in a contract Acme makes an Section 87 of the Restatement (Sec- and for other good and valuable consider- unenforceable promise to pay a con- ond) of Contracts provides that an ation, the receipt and sufficiency of which sultant, Roe, a cash bonus for past option contract that is lacking in con- services, that promise is not rendered sideration is enforceable if it is in writ- Adams is an associate with Kramer Levin enforceable by having Acme recite that ing, is signed by the offeror, and Naftalis & Frankel LLP, in New York the payment is “in consideration for “recites a purported consideration for City, and the author of Legal Usage in past services.” (Since this is not the the making of the offer.” In Section 88, Drafting Corporate Agreements. His e- place for an overview of the relevant the Restatement provides the same with Susan Todd mail is [email protected]. case law, I point you to E. Allan respect to guaranties, and this is mir- March/April 2003 Business Law 1 To d a y rored by Section 9(b)(2) of the Restate- of the Uniform Commercial Code, recitals have no bearing on considera- ment (Third) of Suretyship, which pro- signed firm offers by merchants are tion: Since recitals can shed light on vides that no showing of real consider- enforceable without consideration. In the parties’ intent, courts give some ation is necessary if the writing addition, Section 5 of the New York weight to recitals of consideration evidencing a guaranty recites that con- General Obligations Law provides that when determining whether a promise is sideration exists, whether or not that an option contract does not need to be supported by consideration, but permit recitation is truthful. supported by consideration. contrary evidence to be introduced. You could conclude from this that And under the Uniform Written But that does not constitute an while in most contexts a traditional Obligations Act, enacted only in Penn- argument for retaining the traditional recital of consideration would not be sylvania, any written release or prom- recital of consideration. Given that the effective to create consideration where ise will not be unenforceable for lack parties to a contract, and their lawyers, none exists, it nevertheless would be of consideration if the signer states that invariably give no thought to the tradi- prudent to retain it so that it could be it intends to be legally bound; such tional recital of consideration, a court relied on in those contexts where a statements are sometimes tacked on to should disregard it when determining false recital of consideration would the lead-in or concluding clause of a whether a promise was supported by support a promise. contract, but they are outside the consideration. There are three problems with this scope of the recital of consideration as Instead of relying on a traditional reasoning. The first is that the traditionally conceived. (Note that recital of consideration, you can craft approach of the Restatements not only recitals so as to ensure that they con- elevates form over substance, but also tain much more meaningful informa- would have the law recognize a sham. tion pertaining to consideration. In his book The Law of Suretyship and Recitals can serve a number of func- Guaranty, Peter Alces says, in defense tions, one of which is to state briefly of Section 9(b)(2) of the Restatement The recital and in broad terms what the parties (Third) of Suretyship, that “this rule wish to accomplish by entering into makes a good deal of commercial the contract. sense,” as “the fact that a considera- If Acme Financing were lending tion, albeit nominal, is recited is money to Widgetco on the strength of enough to confirm that the parties is generally a guaranty from Doe, I would state in came to terms on, or at least raised, the the recitals of the guaranty that it is a consideration issue.” condition to Acme’s lending the money In my experience, however, corpo- that Doe provide Acme with the guar- rate agreements are drafted and negoti- anty. I would also explain that Doe, as ated without the clients or their formulaic. the principal shareholder of Widgetco, lawyers devoting a second’s thought to has an interest in Acme’s providing the recital of consideration, which is financing to Widgetco. generally formulaic. In most contexts, providing this Of more practical significance is the unless it were validated by statute, as sort of information would simply help second problem, which is that the case in Pennsylvania, I would not include orient the reader, but on rare occasions law does not uniformly reflect the in a contract a statement that the par- when it is not otherwise readily appar- Restatements’ approach. In the context ties intend to be legally bound, as it is ent, it could help establish that the of options, some courts have found a not a condition to the enforceability of contract is supported by consideration. false recital to be legally effective, but a contract that the parties have, or Instead of being shoehorned into the others have held the opposite. And in explicitly express, an intent to be legal- lead-in, this sort of information is best the context of guaranties, the reporter’s ly bound.) placed in the preceding recitals. Strict- notes to Section 88 of the Restatement So the traditional recital of consid- ly speaking, recitals containing such (Second) of Contracts cite only one deci- eration will in most contracts be inef- information could be termed “recitals sion of uncertain significance. fective to remedy a lack of considera- of consideration,” but they bear no The third problem is that even if tion, while in the case of options resemblance to the traditional recital of you assume the case law demonstrates contracts and guaranties, a recital of consideration. unequivocally that there are contexts consideration either cannot be counted While there is value to knowing where a false recital of consideration on to do so or would be unnecessary that an informative set of recitals could would be effective to remedy a lack of because the requirement for considera- help a court to find consideration sup- consideration, by statute certain con- tion has been dispensed with by porting a promise, in the vast majority tracts no longer need to be supported statute.
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