A brief summary of the principles, recent developments and practical tips relating to the use of recitals in interpreting commercial contracts.
Principles
- The recitals of an agreement can provide important context when it comes to construing the contract’s operative terms, even when the agreement expressly provides that the recitals are non-binding.
- An unexpected event, which was not contemplated by the parties at the time of contract, cannot be invoked retrospectively to indicate the meaning of the agreement.
Recent developments
- Blackpool Football Club (Properties) Limited v JSC Baltic International Bank & Anor provides a good example of a recital showing the commercial context of an agreement. It also illustrates how an unexpected event can have consequences that fall outside the terms agreed in a contract.
- An agreement between Blackpool FC’s owner (BFCP) and an external investor provided that income arising from the development of part of the club’s stadium would be shared by the parties, after deducting any capital expenditure above the sums invested by the parties under the agreement.
- When the contract was agreed, the parties expected that the final phase of the development would need to be financed by a third party. But to everyone’s surprise, Blackpool FC was promoted to the Premier League in May 2010 and, as a result, BFCP had sufficient funds to complete the development itself. BFCP claimed that the sums it had put into the development should be deducted from the income that was to be split between the parties.
- The Court of Appeal disagreed. A recital in the agreement made clear that deductions from income for capital expenditure relating to the financing of the final development phase were intended to be applied only where the finance was provided by a third party. In addition, all the evidence showed that the parties had not contemplated that one of them would be able to fund the final phase and the contract had to be construed on that basis.
What this means
- Treat recitals with care, even when the contract makes clear that they are not operative provisions, as they are still evidence of the context in which the contract was agreed.
- When drafting and negotiating a contract, consider circumstances which are unlikely, but still possible, and how the agreement functions in those circumstances. If unforeseen events nonetheless arise, consider whether the contract should be amended before taking further action in reliance on the terms initially agreed.
