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Drafting a new day

Who needs that recital of consideration?

By Kenneth A. Adams

I ts 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
one 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an inaccurate or outdated view of con- number of issues of legal usage.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. Whats 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fails to serve its intended purpose and consideration are outdated: With the was in consideration of future services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 Does promise is Acmes 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
Susan Todd

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
mail is case law, I point you to E. Allan respect to guaranties, and this is mir-

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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.

The recital
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 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.

is generally
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 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 Acmes lending the money
In my experience, however, corpo-
rate agreements are drafted and negoti-
ated without the clients or their
lawyers devoting a seconds thought to
formulaic. that Doe provide Acme with the guar-
anty. I would also explain that Doe, as
the principal shareholder of Widgetco,
has an interest in Acmes 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 reporters 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. of transactions the existence of consid-
by consideration. Under Section 2-205 That does not mean, however, that eration would be evident from the

TodaLawy 2 March/April 2003
rights and obligations of the parties; relating to consideration, retaining the and redundancies, you are left with
only in exceptional circumstances traditional recital of consideration my preferred form of lead-in: The par-
would a court be forced to look to the would, in a substantive sense, be not ties therefore agree as follows.
recitals. so much pernicious as pointless. That If you remain unconvinced that the
In some of those cases, there may in does not mean, however, that nothing drawbacks of the traditional recital of
fact be a lack of consideration, such as is lost by retaining it. For one thing, consideration merit changing an
when a landowner grants to a potential as long as the traditional recital of ingrained habit, consider that good
purchaser, without receiving any pay- consideration continues to be widely drafting, like any form of writing,
ment in return, an option to purchase used, corporate lawyers will continue requires of the drafter myriad decisions
the property. (A lack of consideration to be under the misapprehension that on points of usage; opting for one infe-
would of course be irrelevant in a state it is effective to remedy a lack of rior usage might not cause a problem,
that has enacted a statute eliminating consideration. but if you take enough wrong turns it
the requirement of consideration for In addition, the impenetrable will quickly take a toll on the readabili-
option contracts.) In such circum- legalese of the traditional recital of ty, efficiency and even enforceability of
stances, reverting to a traditional recital consideration causes readers your drafting. The traditional recital of
of consideration in the hopes of satisfy- whether lawyers, business people or consideration is such an obvious can-
ing any court called on to find consid- judges to needlessly stub their didate for the scrap heap that if you
eration would, given the limited and toes on the threshold of the body of insist on retaining it, it is highly likely
mixed case law, seem reckless. If possi- the contract. It can also suggest to the that other archaisms, inefficiencies and
ble, you should instead remedy the discerning reader that the drafter is in redundancies lurk in your drafting.
lack of consideration, for instance by thrall to the voodoo trappings of legal Of course, leaving the traditional
having the holder of an option pay a practice. recital of consideration out of a con-
fee for it. Stripping from the lead-in the tra- tract will occasionally cause other
Assuming that a given set of recitals ditional recital of consideration makes lawyers to suggest that you should
also contains, to the extent necessary, the lead-in much more readable. Once restore it. Such are the perils of
meaningful background information you eliminate the remaining archaisms progress.

March/April 2003 3 Business