Contractual Recitals Matter!
October 19th, 2012
It is no secret that many entrepreneurs, small businesses, and start up ventures seek to avoid legal fees by cobbling together "do it yourself" contracts from various sources. This practice can have far reaching and potentially devastating unintended consequences. To take just one example, consider those "recitals" one often sees in contracts. You know, those clauses that start with the word "WHEREAS" and then purport to recite the events that led to the need for the agreement? Well, the law actually presumes those facts to be true as between the parties to the contract. In fact, it is a conclusive presumption and no amount of evidence demonstrating the falsity of a recital will help you. (The exception to this rule is a recital of consideration, or the amount paid. That recital may be dis-proven with actual evidence).
In one case, a loan was enforceable even though it called for usurious interest because one of the recitals said that the loan was "arranged by a broker." (Brokered loans are exempt from usury provisions). The other party argued that the broker was disqualified from serving as a broker in the transaction and therefore the loan could not have been "arranged by a broker." The court concluded this allegation did not matter. The recital said the loan was "arranged by a broker" and that statement was taken as true. Accordingly, the law against usury did not apply and the loan was enforceable.