Ceremonial language in contracts: recitals of consideration

denningLast time IP Draughts looked, it was conventional in the English High Court for a barrister to begin speaking with the phrase “may it please your Lordship”. This phrase is little more than a signal to indicate the start of a presentation of a case. The actual words are fairly irrelevant.

Signalling phrases, where the words used are symbolic rather than to be taken literally, are encountered in other areas of the law, and in life generally. In a social setting, the phrase “see you later” (or “later!”) has become popular, to the immense irritation of people who take it literally. The insulting response “not if I see you first” has become equally formulaic, and is not usually meant to be taken seriously.

We seem to take comfort from the familiar. It has been suggested that the repetition of familiar phrases may stimulate a different part of the brain from the use of spontaneous language – see this discussion of the use of familiar phrases by stroke patients.

know allOften, the words used in formulaic phrases have a quaint, archaic quality about them, which reinforces the sense that they part of a ceremony. In a legal setting, “know all men by these presents” is a particularly silly one, sometimes found in deeds poll and other unilateral legal statements. Ken Adams comments on it here. IP Draughts commented on this and similar phrases here.

IP Draughts is unsure whether the use of familiar, but sometimes absurd, phrases in legal documents owes something to this tradition of using symbolic language. Perhaps we gloss over wording, particularly if it forms part of the “packaging” of the document (eg in introductory or closing wording in a contract) rather than its main substance. Perhaps we treat it as a signal of the type of document we are dealing with, rather than as a set of words that is to be read literally.

This is all highly speculative. It may explain the presence of obscure, irrational wording in contracts, but it doesn’t justify the wording. The drafter should aim for simplicity and clarity, and avoid rhetorical flourishes.

Recitals of consideration

An example of the type of wording that, in IP Draughts’ view, should be avoided, is the US-style recital of consideration which sometimes appears at the beginning of contracts. A typical example follows, which has been lifted from a recent article by Ken Adams (follow PDF link on this page):

NOW, 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, the parties hereto covenant and agree as follows:

This wording seeks to ensure that the contract meets one of the requirements for a legally-binding contract. Under the laws of most US States, England and Wales and some other jurisdictions, there needs to be “consideration” for the promises made in the contract, if it is to be legally-binding.

If this wording has any value at all, it is only where there are doubts about whether consideration is being given. In the vast majority of contracts that IP Draughts is involved in, there is no doubt about the point. For example, in a two-party research funding agreement, typically one party will provide consideration in the form of payment, or a promise to pay, and the other party will provide consideration in the form of a promise to perform research work.

Occasionally, the issue surfaces. For example, consider the situation where a contract provides that research is to be performed within a 3 year term. After the contract is signed, the research provider negotiates an extension of time to 4 years, and records that extension in an amending agreement. If no consideration is given for the concession of an extra year, there may be doubts over whether the amending agreement is binding. This might be addressed, under English law, by including nominal consideration, eg £1, or by executing the agreement as a deed.

Does a recital of consideration, as in the example quoted above, avoid the need for such steps? Or is this wording, in Ken’s memorable phrase, merely “three lines of unspeakable crap”? Ken’s conclusion is that this type of wording should be avoided, despite a very few cases in US State courts that seem to suggest that the wording has some value where the consideration is unclear.

The above wording has come from US template agreements, and is designed (at least in part) to address US case law. Is there any need or benefit under English law to use wording of this kind? In IP Draughts’ view, there is no benefit, and therefore no excuse for using these unspeakable lines of legalese. In fact they illustrate the dangers of using wording designed for one jurisdiction when the agreement is made under the laws of another jurisdiction.

Several factors lead IP Draughts to this conclusion.

Premises and mutual covenants

premisesFirst, we need to strip away all the fusty wording and get to the core of what is being said. The “premises” here are any relevant statements in the recitals. As in the plural of premiss. Best practice is to keep the recitals brief and avoid including contractual statements. The wording also refers to mutual covenants. In this context, covenant is just an old-fashioned term for a contractual obligation. It is unclear why pointing to the recitals and to the main part of the agreement, as this wording does, helps to make anything in those parts of the agreement more likely to be consideration.

Good, valuable, received and sufficient

The wording goes on to refer vaguely to “other good and valuable consideration”, presumably items of consideration that are not stated in any part of the written agreement. There is then an acknowledgement that consideration has been received and is sufficient. Why are these four qualities of the consideration – good, valuable, received and sufficient – relevant to the question of whether the agreement is a binding contract? And why is it relevant to acknowledge these qualities?

Good or bad?

chitty chittyIt is true that there are restrictions on what counts as consideration. For example, IP Draughts was taught that “past consideration is no consideration”. In other words, promising to do something you have already done or promised to do doesn’t count as valid consideration. This is a brief summary of one small aspect of consideration. The leading English tome on contract law, Chitty on Contracts (IP Draughts has the 30th edition, published in 2008; a new edition is now available) devotes an entire chapter (124 pages) to the subject of consideration. Centuries of case law are discussed in this chapter. Compliance with all of the requirements set out in this chapter might be said to make the consideration “good”, although this word is not commonly used nowadays in the English law analysis.

Valuable, adequate and nominal

The chapter does, however, include a section that discusses the need for consideration to be  “valuable”. However, under English law the consideration does not need to be “adequate” and purely “nominal” consideration is generally acceptable. This may be different to the position under some US States’ laws.

Sufficient

Judging from the index to Chitty, the “sufficiency” of consideration does not seem to be a general requirement under English law. This term is, however, used by Chitty in relation to one particular reqsufficientuirement. A traditional maxim of English contract law is that “consideration must move from the promisor” (Chitty 3-036). Later sections of Chitty discuss whether a benefit to the promisee is “sufficient” even if the promisor has suffered no detriment. This seems too narrow a point to justify being highlighted in the recital of consideration.

Receipt

It is not clear to IP Draughts why an acknowledgement of “receipt” of consideration is relevant. He speculates that one of the following points may be what the original drafter had in mind.

First, this may be referring to receipt of money, ie financial consideration. It seems that, sometimes, consideration can consist of the actual payment of money, as distinct from a promise to pay money or perform other obligations. If payment is to occur simultaneously with the signature of the contract, this could be a receipt for money, making it more difficult for the other party to argue that consideration has not passed.

receivedBut surely this cannot be the reason for including the reference to “receipt” in the recital? Payment of money on signature is only one of a large number of types of consideration, and surely the recital of consideration is not intended to be limited to this one type?

If we dismiss that line of thinking, then is the word “receipt” referring to receipt of a promise to perform an obligation? That doesn’t sound right either. The promise is given by one party, but in what sense is it “received” by the other party? As discussed earlier, Chitty discusses the situation where a party receives a benefit even though the promisor suffers no detriment. Could this be the type of “receipt” being referred to? It seems unlikely that the recital is dealing with this fairly rare situation. But perhaps the analysis of consideration is different under US laws.

Or perhaps the acknowledgement of receipt is trying to forestall an argument that there has been a “total failure of consideration”, which might bring the contract to an end. Separate chapters of Chitty discuss when a failure of performance (as distinct from the promise to perform) entitles the other party to treat the contract as discharged or recover money already paid. At the time of signing the agreement, performance may be due to happen in the future, and an acknowledgement of that performance in the agreement itself may be premature. Looking at these areas of law again reminds IP Draughts how mind-boggling he found them as a university student; the subtle and piecemeal distinctions found in the case law and legislation are difficult to reduce to a simple set of guiding principles. It is certainly difficult to relate those subtleties to a brief acknowledgement of receipt.

Discussion

Thus, while some of the four qualities mentioned above – good, valuable, receipt and sufficiency – may have some significance in English contract law, it is not clear to IP Draughts why these qualities, over other necessary qualities for an English law contract, are being highlighted in the recital of consideration.

Standing back from the typical wording of the recital, a party who wishes to include such a recital presumably wants to prevent the other party from arguing that there was no valid consideration and therefore there was no binding contract. If such an acknowledgement is felt to be useful, wouldn’t words such as the following be clearer?

Each party acknowledges that valid consideration has been given under this Agreement for all of the promises made under this Agreement and that any payments due on signature of this Agreement have been paid and received.

The larger question is why one would want to highlight this issue, as distinct from the other requirements for a valid contract. If such a recital is useful, might one want to include in it references to the other requirements for a valid contract, as in the following example:

Each party acknowledges that all of the requirements for a legally-binding contract have been met in this Agreement, including that:

  1. The parties have the legal capacity to enter into this Agreement.
  2. Offer and acceptance has been made.
  3. Valid consideration has been given for all promises.
  4. The terms of this Agreement are complete and certain.
  5. The subject-matter of the Agreement is lawful.

But why would one want to acknowledge these things? Under English law, these are questions for the judge to decide, and parties cannot turn an invalid contract into a valid one by saying it is valid.

IP Draughts has the impression that US judges may take a slightly different approach. Perhaps he has been too influenced by an extraordinary comment of Chancellor Strine about the “contractarian nature” of Delaware law (reported by IP Draughts here), and by discussion on blogs that suggest that the law of estoppel is more advanced in US laws than in English law.

Looking at the last set of acknowledgements above, they look a little like another characteristic feature of US contracts – the standard warranties that the contract is valid and binding on the parties. The slightly absurd nature of some of those warranties is a discussion for another day.

poundlandIn conclusion, IP Draughts thinks that the typical US-style recital of consideration is drivel: misconceived, badly-worded, incomplete, and pointless, at least under English law. Or, to put it more pithily, three lines of unspeakable crap (© Ken Adams, 2015).

The solution under English law, if the drafter has concerns about whether consideration is being given, is to include nominal consideration or execute the contract as a deed.

 

 

 

5 Comments

Filed under Contract drafting

5 responses to “Ceremonial language in contracts: recitals of consideration

  1. vrkoven

    Mark:
    1. You do realize, of course, that if you see me first, then perforce I will see you later. Unless we see each other simultaneously, in which case neither of us will see the other first. Or later.
    2. It has been widely remarked by sociologists and anthropologists that emigrant/expatriated communities develop apart from their original source communities based the norms of their origins at the time of emigration, from which each then develops independently. Consequently, many Americanisms in the English language derive from regional and older usages in British English that are no longer used there. Similarly, American legal concepts sometimes hark back to English ones that have been superseded by more current thinking. It wasn’t an American judge who first observed that a peppercorn could serve as valid consideration for a contract. On the other hand, it was American jurisprudence that first established that mutual promises were sufficient consideration. This is what programmers refer to as the forking of the code (no cheeky ripostes, please).
    3. Both you and Ken are right, of course, that none of this historical explanation justifies stupidity in requiring either magic words or legal fictions to establish whether there has been sufficient consideration given for a contractual obligation. Luckily, only litigators need to concern themselves obsessively with judicial stupidity in any particular jurisdiction in establishing the validity of a contract (and much else); transactional lawyers need only express themselves clearly and take the trouble to be sure that there is real consideration.

    • Indeed. “Not if, [at a later time,] when we are in a line of sight with one another but you have not [yet] seen me, I see you, realise that you have not seen me, and take evasive manoeuvres to ensure that you do not see me.” Not quite as catchy, methinks.

      As for legal forking, I feel there should be a name, like “faux amis” (eg retourner does not mean to return) for legal concepts that appear similar in different common law jurisdictions but in reality bear little resemblance to one another.

  2. Perhaps the English system plays more of a silly game than the US systems. I don’t know. I do know that I see nominal consideration in many US-drafted IP assignments.

    • Ken Adams

      What you see in US contracts isn’t the issue. Practitioners are under all sorts of illusions, but for the most part US courts decline to follow them over the cliff.

  3. Ken Adams

    I suggest that in your blind hatred of US contracts and all who produce them (joke!), you’re too quick to blame judges. I cite in my article two cases in which the court relied on what I call a “backstop” recital of consideration, but those cases are aberrations. The real culprit is the tendency to verbosity in US drafters, plus inertia, with an assist from traditionalist law-school faculty.

    But what caught my eye in your account is that in England, nominal consideration (such as £1) is enough to support a contract. So in this issue, the US and English systems are conforming to the duality we discussed in our recent article: the US system is awash in verbosity, whereas the English system is playing silly games by giving legal effect to what is a form of pretense.

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