What’s a Contract Preamble?
What is a contract preamble? Let’s go through it so that we can clearly understand what it is and how we can employ it directly into our own contracts.
By definition, the preamble is the beginning of an agreement and it states the purpose of the agreement. It contains information about the parties to the agreement, as well as a little bit of background about the issue, transaction, or relationship at hand. The contract preamble is not usually longer than one or two sentences. The purpose of the contract preamble is really to set the stage for the rest of the contract – it naturally follows that the first paragraph of any piece of writing should set the whole article up .
A contract can technically be enforceable without a contract preamble, but the purpose of the contract preamble is to avoid variations of the contract terms later on. As such, the contract preamble is useful for contract law (legal interpretation of contracts) when judging whether or not the terms of the contract have been upheld. The contract preamble also serves to inform the reader about the general subject of the contract.
The general warning that can be found on most contracts should be enough to show you that a preamble is not required, but a lot of parties include one regardless of that fact. This holds even more true when international law and business is concerned, since different countries and jurisdictions have different rules and regulations about contract formation, interpretation, and terms.
Essential Elements of a Preamble
When you begin a drafting a contract, your first step is to start with a preamble that sets the stage for the rest of the document. A preamble serves as the introduction to your contract and is the section that precedes the definitions and substantive terms. The purpose of the preamble is to present the fundamental basis for the agreement. This includes the following key elements:
Purpose of the Contract
The preamble should set forth both the purpose of the contract and the underlying intention of the parties in entering into it. The clearer and more succinctly you explain the purpose of the agreement, the easier will it be to understand. If you fail to do this, the implications of the agreement may not be clear, which can result in unexpected consequences.
Name of the Document
The preamble should include the name of the document. Frankly, there are many potential names you could use for the document you are drafting. However, the document should be named in a way that identifies its content, and that fits with the general naming conventions you may want to use in your drafting practice.
Examples of potential document names include:
Parties
The preamble should fundamentally identify the parties to the agreement. This includes the legal name of the parties (including the use of defined terms), which is critical. It is a good idea to define the parties in the preamble so that you do not need to constantly re-define them in rest of the contract. This is because supplying defined terms at multiple places in the agreement can result in a more of onerous and longer document than may be necessary. Therefore, the preamble should simply identify the parties and describe their initial roles under the contract, leaving the definition section to be the place for full explanation of the parties.
Examples of information you may want to provide:
Other Items
There are other items you could include in the preamble, such as a brief description of the overall clauses in the contract or of the nature of the agreement. If you can do so in a concise manner, this may help set out for the reader the overall theme of the contract. You could also include a requirements clause that sets the minimum threshold for satisfaction of a contractual provision. Finally, the preamble could include terminologies that are relevant to narrow interpretation of the contract.
Contract Preamble Sample
The following is a generic template to demonstrate the key elements of a preamble. Since a preamble typically follows the recital section, you may wish to make this part follow the recital section and heading. However, for visual clarity, I am not going to restructure the example below (and I am going to leave out those pesky hyphens that make it look like I made a mistake in spelling the word "recital"):
THIS CONTRACT PREAMBLE (sometimes referred to as a preamble clause) is made, entered into and effective as of the [date] (the "Preamble Effective Date"), by and between [the name of the first party], a [corporation, limited liability company, etc.] organized and existing under the laws of the State of [State], with offices at [street address] [city, county and zip code] ("Party A"), and hereinafter sometimes referred to individually as "Party." Party A and [name of opposite party], a [corporation, limited liability company, etc.] organized and existing under the laws of the State of [State], with offices at [street address] [city, county and zip code] ("Party B"), hereinafter sometimes referred to individually as "Party."
RECITALS:
- A Preamble (sometimes referred to as a preamble clause) to a contract typically defines the parties to the contract and describes the background facts of the agreement between the parties and the intention of the parties.
- Party A is a [corporation, limited liability company, etc.] originally formed for the purpose of providing widgets, widget services and related widgets, which Party A sells to its clients and customers.
- Party B is a [corporation, limited liability company, etc.] whose primary business is [state what Party B does].
- Party B desires to have its clients and customers purchase widgets from Party A for the purpose of [explain the reason why Party B wants to purchase widgets from Party A].
- Party A desires to sell its widgets to Party B’s clients and customers.
- Party A and Party B have discussed their mutual desires and intentions and have come to an agreement to work together to accomplish their desires and intentions.
- Party A and Party B desire to memorialize their mutual desires and intentions in this contract, and to set forth each party’s rights, obligations and limitations to each other regarding the transaction.
Common Pitfalls when Drafting the Preamble
A preamble is effective only when it is accurate. A preamble that describes the parties incorrectly, uses inaccurate language, or makes representations about the future is rarely helpful and can even create liabilities. Some common mistakes in a preamble include:
• Identifying incorrectly the entity that is being represented in the preamble (for example, the parent company rather than its legal subsidiary);
• Using an out-of-date address for the company;
• Using the incorrect corporate names for the parties to the transaction (such as a dba name rather than the corporate name);
• Identifying the place of incorporation incorrectly; and
• Using terms of art (such as "merger") in a colloquial manner, inaccurately or without appropriate disclaimers.
Here are some strategies to avoid these and other common mistakes:
• Rely on business records. If you have business formation documents you can refer to , such as articles, bylaws, fictional names registrations and good standing certificates, look to see if they have information that clarifies the entity to which the preamble is referring.
• Use words that have normal business meaning unless the situation calls for it. One example is the word "concerning," which means "involving." Selecting that word or others with highly technical definitions does not help the reader.
• Be careful using aspirational language. "Forward-looking statements" may make sense in a corporate report, but not in an agreement unless used carefully. Since preambles often set the stage for the scope of the contract that follows, be thoughtful about how to include aspirational statements, or agreeing to certain actions, in a preamble.
Legal Significance of the Preamble
The interpretation of a contract is an important consideration in any contract dispute. The role of a preamble in interpreting a contract was addressed in the English case of Spire Healthcare Ltd v Royal & Sun Alliance Insurance plc [2015] EWHC 1003. The court in Spire Healthcare Ltd reviewed English as well as other Commonwealth authorities regarding the construction of preambles and its purpose.
The court in Spire Healthcare Ltd considered whether a preamble should be treated as terms of the contract. The defendant, Royal & Sun, argued that the preamble in the particular agreement was not a binding term of the contract, but only read to assist in interpreting the contract.
Preambles are defined by legal dictionaries as the introductory, preface or leading part of a deed, act, or other document, especially one defining its objects or scopes and in contracts, any express statement of the intention of the parties, especially descriptive headings.
The court provided a non-exhaustive list of established purposes of preambles in contracts: The court in Spire Healthcare Ltd stated that evidence of pre-contractual negotiations is inadmissible in interpreting a contract unless it has been incorporated into the contract. This means that to prove the purpose for which a preamble is drafted, sufficient evidence must be led to show what the parties meant when employing the language contained in the preamble.
The court further stated that a preamble may be extended to include compatible provisions of the contract that are not a part of preamble. A preamble may, therefore, be used to interpret the terms of the agreement. In Spire Healthcare, both parties disputed if the preamble was a part of the contract and its adjudication in conclusively determining the present matter led the court to conclude that a preamble is determinative of contractual interpretation.
The court in Spire Healthcare reiterated the cardinal rules for construing preambles in contracts, which are: The court in Spire Healthcare provided further guidance on the relevant rules for interpreting preambles under common law, which include: The court in Spire Healthcare also stated that if the language in the preamble is capable of bearing either of the suggested meanings, the preamble should be construed against the draftsman. It is clear from this case that a preamble: (a) guides the reader in understanding the agreement; and (b) should be interpreted as a binding term of the contract. In construing a preamble only admissible evidence, of what the parties agreed to as the meaning of a preamble, will be considered. The approach taken by the court in Spire Healthcare is consistent with the English position on the role of a preamble in a contract.
Tips for Lawyers and Businesses when Drafting a Preamble
Here are some tips you can follow when drafting a contract preamble:
State the nature or subject matter of the deal. By reporting this information in the first few lines of a contract, you save your reader the trouble of having to leaf through the document to figure out what it is about. For example, the preamble to a non-disclosure agreement might begin as follows: "This NON-DISCLOSURE AGREEMENT is entered into as of August 15, 2012 between XYZ Corp. ("Disclosing Party") and ABC, Inc. ("Receiving Party") in reference to the disclosure of certain proprietary and confidential information relating to the Disclosing Party’s …" (Here, of course, the parties would insert the nature of the confidential information.)
Provide context. The preamble is also a good place to say, for example, that the contract is being entered into in connection with the purchase of a municipality-owned water treatment plant, or that the parties are entering into an agreement to correct errors on the company’s tax filings from 2009 through 2012.
Avoid legalese and other legal jargon. These terms are often imprecise, as they don’t mean the same thing to all lawyers (and many clients). It’s better (and more reader-friendly) to spell out what you mean in plain English, while at the same time not overdoing it by writing a treatise on each little term. In the non-disclosure agreement example above, substituting "Confidential Information" for "proprietary and confidential information" would make the drafter sound like either someone with a penchant for legal jargon or a lazy writer who can’t be bothered to explain himself .
Avoid unnecessary abbreviations. If you say "ABC, Inc." at the beginning of your preamble, don’t say "ABC" in subsequent paragraphs (unless the contract refers to ABC solely by the acronym). Presumably, you’re using "Inc." because you want the reader to know that the "C" in "ABC" stands for "corporation," which you’ve already told them. In the vast majority of writing, it’s not necessary for you to tell the reader that "Inc." means "corporation" if the reader should already know that. Similarly, the second time you say "the parties" in the contract, substitute "they" for "the parties." If the reader doesn’t catch the drift, he or she might as well be reading gibberish.
Make sure the preamble accurately describes the parties. In some circumstances, state the parties’ full names and indicate the type of business entity for each. Here’s an example:
This NON-DISCLOSURE AGREEMENT is entered into as of August 15, 2012 between XERXES CORP., a California corporation with a principal place of business at 2234 North Main Street, Los Angeles, California 90001 (the "Disclosing Party") and FECAL CORP., a California limited liability company with a principal place of business at 1234 South Main Street, San Francisco, California 94016 (the "Receiving Party").
Be concise. The preamble doesn’t lend itself to a lot of legalese, so it’s usually best to keep it to no more than two or three short paragraphs.