Recitals and Headings: More Important Than You Think!
The recitals of an agreement are often viewed as a perfunctory necessity of little value. While recitals are not mandatory, they can be very important. The recitals give the parties the opportunity to set forth their respective intents for entering into the agreement. A properly drafted recital may provide a subtle advantage to a party in the event of a dispute. In general, the recitals are not considered to be a substantive part of the contract, but rather they describe the parties’ purposes or objectives and are used in the interpretation and construction of the contract. Jones v. City of Paducah, 142 S.W.2d 365, 367 (Ky. 1940).
While each party should be free to set forth their individual intent, licensors should reject any attempt by the licensees to insert overbroad, self-serving statements designed to place the licensor at a significant disadvantage in the event of litigation. Licensors should not agree to statements of fact that essentially serve as additional representations and warranties, such as the following:
Whereas Licensor is the world leader in the implementation of Enterprise Resource Planning Systems (ERP).
Whereas Licensor has the expertise and experienced employees to install and support a worldwide, world-class ERP system.
Whereas Licensee has relied on Licensor’s skill in selecting Licensor to implement the system.
The Licensor should be especially concerned in those states where recitals involving a statement of fact are considered to be conclusive evidence of the facts stated. See, e.g., Detroit Grand Park Corp. v. Turner, 25 N.W.2d 184 (Mich. 1946). See also Cal. Evid. Code § 622 (2015).
A prudent licensor will ensure that the agreement states that the recitals do not expand the licensor’s obligations under the agreement beyond those set forth in the body of the agreement. If the licensee insists on including self-serving recitals, the licensor should insert a recital stating it is the parties’ intent that the licensor make a reasonable profit and that the recitals only be looked to in the event of an ambiguity within the agreement.
The parties should avoid defining terms in the recitals and avoid operative language. Definitive terms should be contained in the body of the agreement to avoid ambiguity and unintentional interpretation of the agreement by a third party such as a judge or jury.
Practitioners disagree as to the importance of section headings and whether they should be used for assistance in interpretation or used only as finding aids.
Headings are usually a single word. As such, it is impossible to summarize the intent of a paragraph in one word or even a few words. Thus, prudent practitioners will expressly provide that section headings should be used for ease of reference only and not for interpretation of the section.
At least one court has held that a contractual provision containing a warranty disclaimer set forth under a misleading section heading was void. See Blankenship v. Northtown Ford, Inc., 420 N.E.2d 167 (Ill. App. 1981). As such, the parties should ensure that each section heading clearly reflects the provision it contains and include language that clearly indicates the section headings are for convenience of reference only and are not intended to have any substantive significance.