While English-language contracts generally are not required to adopt a specific format, they often include certain provisions that do not necessarily appear (or may be less detailed than) in Japanese contracts. Such provisions are standard and may even be considered relatively basic, but their contents can occasionally lead to unexpected consequences if a dispute arises. Thus, these provisions warrant attention during the contract drafting and negotiating stage by Japanese and non-Japanese businesspeople alike. An example are the provisions at the beginning of a typical English-language contract: the preamble and, in particular, the recitals.
1. What are the Preamble and Recitals?
The preamble in an English-language contract is a brief introduction to the contractual arrangement that sets out information such as the type of contract (e.g., non-disclosure agreement, licensing agreement, sales agreement, etc.), date of the contract, and parties to the contract. Parties are identified first by their full names, which are often then defined by capitalizing a shortened version of their names and sometimes also by their respective roles in the transaction (e.g., “Buyer” and “Seller” in a sale and purchase agreement). In addition, the parties also may be defined individually as a “Party” and collectively as “Parties” (although in English-language contract parties are not called “Party A,” “Party B,” etc. as in Japanese contracts). It also is common to include the place of incorporation and addresses of the parties.
This Confidentiality Agreement (“Agreement”) dated as of [date] (the “Effective Date”) is made between ABC Inc. (“ABC”), a corporation duly organized and existing under the laws of [place of incorporation], having its principal place of business at [address], and XYZ Co. Ltd.
(“XYZ”), a corporation duly organized and existing under the laws of [place of incorporation], having its principal place of business at [address], collectively referred to as the “Parties” and individually referred to as a “Party.”
The preamble serves to introduce the reader to the contract and the parties, rather than set out contractually enforceable obligations or duties. Of course, if certain words or phrases are defined in the preamble (e.g., the Agreement and Effective Date above), the defined terms will refer to and mean those words and phrases throughout the contract in a legally binding manner (this also is true of terms that are defined elsewhere in the contract).
In English-language contracts, recitals often follow the preamble and directly precede the main body of the contract. Recitals traditionally appear as sentences beginning with the word “Whereas” that briefly set out the background and purpose of the contract.
WHEREAS, ABC is engaged in the manufacture of products described in Section 3 below, and XYZ is engaged in the business of selling and distributing such products in Japan.
WHEREAS, ABC desires that XYZ sell and distribute the products described in Section 3 in Japan, and XYZ desires to sell and distribute the products described in Section 3 in Japan.
THEREFORE, in consideration of the premises and the mutual covenants set forth herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, ABC and XYZ hereby agree and covenant as follows: ...
2. Do Recitals Matter?
Like the preamble, recitals generally do not, and are not meant to, set out contractually enforceable obligations or duties. As an English court explained in one decision, recitals usually are not “regarded as containing specific operative terms”; their “function is simply to act as an introduction to the detailed terms which come later.”¹ American courts share this perspective: “Recitals are not part of the contract and are not legally binding . . . . [C]ontract recitals are statements of intent[.]”²
English and American courts, however, do recognize that if the detailed, operative provisions of a contract are ambiguous, including where there is an important omission in the operative provisions, recitals may be used to help determine what the parties intended to say or do in the contract.³ Sometimes, courts may also identify ambiguities in the recitals themselves to assist in the interpretation of a contract over which the parties are in dispute.
An American case, TA Operating LLC v. Comdata, Inc. and Fleetcor Technologies, Inc. (TA Operating v. Comdata), is illustrative.⁴ The plaintiff in this case, TA Operating, is one of America’s leading travel center operators that provides fuel and other amenities to truck drivers. The defendant Comdata is one of the largest fuel card providers to the trucking industry (fuel cards are like charge cards and allow truck drivers to purchase fuel, food, and other products and services at travel centers). The parties had a longstanding agreement under which TA Operating’s travel centers accepted Comdata fuel cards, and Comdata processed transactions made at TA Operating’s centers in exchange for a transaction fee. After working together for over 20 years, Comdata approached TA Operating about introducing a cardless fuel purchasing alternative using radio frequency identification (RFID) technology at the travel centers. The parties executed an RFID contract and at the same time amended their existing agreement to reduce the transaction fees TA Operating paid to Comdata. The recitals of the amended agreement contained a “Whereas” clause that referenced the RFID contract and asserted that the parties were executing the amended agreement “in consideration of” agreements mentioned in the recitals, including the RFID contract. Nowhere else in the amended agreement, however, was there any mention of the RFID contract.
Subsequently, a dispute arose and Comdata notified TA Operating that it had breached the RFID contract. Comdata also terminated the parties’ amended agreement on the basis that the RFID contract had been, in a formal legal sense, consideration for the amended agreement, meaning that the RFID contract was made in exchange for the amended agreement.⁵ TA Operating sued Comdata in Delaware state court.
In the litigation, Comdata faced a challenge because, as noted above, the only place in the amended agreement that referenced the RFID contract and indicated it was consideration for the amended agreement was in the amended agreement’s recitals. TA Operating argued that the language in the recitals functioned only to provide background for the amended agreement (i.e., the recitals were not operative, binding contractual terms). TA also contended that the word “consideration” in the recitals did not mean a bargained-for exchange in a formal legal sense, but rather was used in a non-legal, colloquial way to mean “in light of.”
Addressing TA Operating’s argument, the court acknowledged that recitals “‘do not ordinarily form any part of the real agreement’” and “‘do not have the force of contractual stipulations.’”⁶ The court also noted, however, that recitals “‘may have a material influence in construing the contract and determining the intent of the parties, and in such respect they should, so far as possible, be reconciled with the operative clauses and given effect.’”⁷
Here, because the main body of the amended agreement did not include any reference to the RFID contract, and because the meaning of the word “consideration” in the recitals had been called into question, the court found the amended agreement to be ambiguous. The usual principle guiding American and other common law courts in contractual interpretation is that where a contract is clear and unambiguous on its face, the courts will interpret the contract as it is written and will not typically examine the recitals or extrinsic evidence (e.g., the parties’ contractual negotiations or the parties’ subsequent conduct when performing the contract) to help understand the parties’ intentions and the contract’s meaning. If, however, a court finds a contract to be ambiguous, then the court may look to such extrinsic evidence and the recitals to understand the parties’ intentions and interpret the contract in order to resolve the dispute.
In TA Operating v. Comdata, therefore, the court looked to extrinsic evidence, in particular the parties’ negotiations regarding the amended agreement which took place at the same time the parties entered into the RFID contract. The court determined that the weight of this extrinsic evidence strongly supported Comdata’s position that it had agreed to amend the parties’ existing agreement (which, as noted, reduced the transaction fees Comdata received from TA Operating) in exchange for TA Operating’s willingness to sign the RFID contract. Accordingly, the court concluded that the RFID contract was, in a formal legal sense, consideration for the amended agreement as set out in the amended agreement’s recitals.
3. Closing Thoughts
In English-language contracts the preamble and recitals introduce the contract and the parties, as well as the background and purpose of the contractual arrangement. Typically, the preamble and recitals do not, and are not interpreted to, include operative provisions with contractually binding effect.
For reasons explained above, however, it is especially important to write the recitals clearly and carefully because they may be used to help interpret the parties’ contractual intentions if there is an ambiguity, including a significant omission, in the main body of the contract. Further, as the decision in TA Operating v. Comdata shows, courts sometimes may view an ambiguity in the recitals themselves as a reason to examine evidence outside the contract’s language when deciding the parties’ intentions. Thus, if parties do not wish to be surprised in this respect if they have a dispute, it is equally important that they be sure to include in the operative provisions of their contracts all of the material issues that are the subject of their contractual arrangement, including all of the relevant enforceable obligations and duties.
Click here for Japanese translation article.
¹ J. Toomey Motors Ltd. and Toomey (Southend) Ltd. v. Chevrolet Ltd., England and Wales High Court (Commercial Court) (20 February 2017) (Toomey v. Chevrolet), at p. 17.
² Construction Mortgage Investors Co. v. Darrel A. Farr Development Corp., et al. and Darrel A. Farr, Minn. Court of Appeals, 10 August 2010, unpublished decision (Construction Mortgage Investors v. Farr), at p. 7.
³ Toomey v. Chevrolet, at p. pp. 17-18; Construction Mortgage Investors v. Farr, at p. 7.
⁴ TA Operating LLC v. Comdata, Inc. and Fleetcor Technologies, Inc., Del. Court of Chancery, 11 September 2017 (TA Operating v. Comdata).
⁵ In common law systems, consideration is the benefit (e.g., money or something else of value) that each party bargains for when entering into a contract and is viewed as a necessary element in an enforceable contract.
⁶ TA Operating v. Comdata, at p. 61 (citation omitted).
⁷ TA Operating v. Comdata, at p. 61 (citation omitted).
The information provided in this article does not, and is not intended to, constitute legal advice and is for general informational purposes only. Readers of this article should contact an attorney to obtain advice with respect to any particular legal matter.