I’d like to revisit an aspect of the traditional recital of consideration.
I mentioned in a footnote in my first book, Legal Usage in Drafting Corporate Agreements, that in some jurisdictions a recital of consideration will establish a rebuttable presumption that the contract in question is supported by consideration. An inquiry from a reader served to remind me that MSCD doesn’t mention this principle. That’s something I’ll remedy in the third edition, but it’s of no practical significance for purposes of determining how to address the issue of consideration in a contract.
That’s because any rebuttable presumption established by the traditional recital of consideration should be of no practical significance. Whether a business contract was supported by consideration is a question of fact. If there’s zero evidence for consideration, the rebuttable presumption isn’t going to be of any use, because it’s a long-established principle that, to quote § 71 comment b of the Restatement (Second) of Contracts, there is no consideration where there is “a mere pretense of bargain … as where there is a false recital of consideration or where the purported consideration is merely nominal.” In any dispute, any evidence as to consideration, or the lack of any evidence, will be more important than the rebuttable presumption.
Furthermore, having the presence of a traditional recital of consideration in a contract establish a rebuttable presumption makes no sense. Almost all contracts contain a traditional recital consideration; drafters include it without giving it any thought. It follows that courts shouldn’t accord it any significance—if something is in essentially every contract, it might as well be in no contract.
But here’s what really matters for drafters: Usually the consideration—payment of money, performance of services, whatever—is evident on the face of the contract, meaning that consideration doesn’t have to be otherwise addressed. But if consideration is an issue in a contract, it would be the height of drafting recklessness not to address it explicitly and instead rely on a traditional recital of consideration.
So if the consideration for a contract is, one way or the other, clearly stated, a traditional recital of consideration and the associated mumbo-jumbo (in consideration of the premises; good and valuable consideration; receipt and sufficiency; and so on) would just gum up the works.
7 thoughts on “Revisiting the Traditional Recital of Consideration”
While I agree with your analysis, it should be mentioned that the case of a post hoc guarantee is a bit unusual. In the normal executory contract, there is no actual consideration that passes when the contract is signed. Many years ago, I was taught that the “modern” and becoming majority rule in the US was that the mutual promises of the parties within the contract–which is what you really are talking about when you say that the consideration is stated in the contract–are sufficient consideration to support their respective performance. There still may be jurisdictions where some actual consideration above and beyond mutual promises are necessary, for which a recital that consideration has *already* passed provides the fig leaf of evidence. Once the actual performance of the contract has taken place, the contract is, as it were, consummated and consideration is no longer an issue; but a purely executory agreement is still enforced and does not fail for lack of consideration, based on the mutual-promise or the nominal consideration concepts.
A guarantee entered into concurrently with a principal obligation also usually presents no problem, because it is obvious that the obligee of the guarantee is getting it in order to enter into the agreement with the principal debtor. Recitals to that effect in the guarantee are, as you say, superfluous. But when the principal debt has been incurred without a guarantee, and the obligee manages to wangle a guarantee after the fact, then the question of consideration is legitimately raised–what more is the obligee giving to get the extra measure of protection? In the Gerber case you analyze, it was the forgoing of a conversion option; but in another transaction there would have to be something else. Sometimes there is nothing else besides a general feeling on the guarantor’s or debtor’s part that without the guarantee the obligee could under unspecified conditions make trouble, enforce the underlying obligation too strictly, or some such intangible, and in such a case, bootstrapping consideration through a recital, especially if it creates a presumption, makes sense for the obligee, at least insofar as it makes it harder for the guarantor to get off the hook.
Not every transaction document that contains a promise contains a corresponding mutual promise or consideration. For example, personal guarantees are often unilateral — or at least, they look that way if you start reading after the Front of the Contract material. In those kinds of documents, I try to use the recitals to explain the relationship of the parties and the context in which the promises are being made. And since I practice in a state where a recital of consideration gives rise to a presumption and I usually want there to be a presumption of consideration, I usually include a recital of consideration. (If I don’t add it, counsel for the other party probably will.)
Ken, do you have any different recommendations for ways to reflect consideration in “unilateral” documents that are part of a larger transaction? In your view, should courts give recitals of fact any more weight than recitals of consideration? Or are efforts to preempt litigation about these kinds of documents more or less futile?
Tim: Your concerns should be addressed by the fact that a contract of guaranty is supported by sufficient consideration if it’s based on some benefit that passes to the principal obligor or guarantor or some detriment or injury to the guarantee. Another way of putting it is that consideration supporting the principal obligation also supports the secondary obligation. So if I guarantee that you’ll pay back your bank loan, the fact that the bank is lending you the money constitutes consideration for my acting as guarantor. It would probably make sense to allude to that by stating in the guarantee recitals that I’m providing the guarantee in consideration for the bank’s making the loan.
Of course, it’s a different issue if the guarantee is entered into some time after the underlying obligation is incurred.
I believe the reasoning behind recitals is a very old common law rule that consideration had to be recited, or at least appear on the face of the contract. Lawyers anxious to ensure that their contracts were valid would stick a recital of sufficiency of consideration to cover this potential problem. I think the rule has softened into obsolescence in all modern common law jurisdictions, but the drafting practice is probably a holdover from the time when it was necessary to not only prove consideration, but also recite it in the agreement.
I’ll look into this. It’s an important contribution to the discussion. Thanks.