Details about an Agreement

What do you mean by preamble of an agreement

Most contracts include a set of paragraphs that cover a few significant aspects of the
agreement, the linked transaction, or the parties' businesses, and that assist the reader
comprehend the context before diving into the definitions section. The prelude is another
name for this section. A contract's preamble is the first paragraph in which the parties to
the agreement are identified. Recitals are usually placed after it (also called the
background section). "Whereas" is a common label for these recital paragraphs. The
preamble and recitals, when combined, reveal who, what, when, and why the transaction
is taking place. To put it another way, they should tell the reader who the parties to the
agreement are, when it was signed, and what the parties hoped to achieve by doing so.
Only goals, desires, or declarations of fact should be included in the preamble. It is
common to confine these declarations to topic matters that could directly impact the
contract's legality or enforceability. Other details that illustrate the wider picture of the
proposed transaction, such as the contract's interdependency with other agreements (if
any) or the requirement that certain critical conditions be met or regulatory clearances be
granted, can also be addressed here. The things mentioned in a preamble should be of
such importance that if any of them are false, the contract should be voidable under the
legal doctrine of ‘mistake' ('error').
Example: PREAMBLE
The general purpose of this Agreement is to establish and maintain collective bargaining
relations between the Hospital and the employees covered by this Agreement; to provide
for ongoing communication between the Union and the Hospital, as well as the prompt
resolution of grievances and the final settlement of disputes; and to establish and
maintain mutually satisfactory wages, hours of work, and other employment conditions in
accordance with the provisions of this Agreement. It is understood that staff want to
collaborate effectively with the hospital in order to provide the greatest possible treatment
and health protection for patients.

Clause is used to explain backdrop of an agreement

The recitals, or 'Background' clauses, of a contract are usually clearly specified to be non-
binding. They are intended to highlight the agreement's commercial context and so aid in
the accurate reading of the parties' rights and responsibilities under the agreement's main
section (or 'Operative Provisions'). Intentions, desires, or declarations of fact should be
the only information presented in the background clauses. It is common to confine these
remarks to topics that could have a direct impact on the contract's legality or
enforceability. Obligations, conditions, warranties, policy norms, or duties should never
be included in background-clauses.
The recitals provide background information on the parties and the agreement's context,
as well as introducing the agreement itself. While clauses come in a variety of forms:
Recitals relating to the parties: one or more while clauses can reflect each party's relevant
business operations.
Background recitals or context: these explain the events or conditions that led to the
transaction. They might be viewed as a continuation or expansion of the contract title.
Compliance-related recitals: the parties may wish to state in one or more whereas
provisions that those involved have met particular conditions or prerequisites for entering
into the agreement.
Recitals on transaction structure: in non-standard, complex transactions, it is occasionally
necessary to clarify the numerous processes conducted in accordance with the contracts.
Recitals about related transactions: a prologue may include one or more recitals about
agreements that are being entered into at the same time.
A step-up recital: many drafters state an overarching aim that the parties want to
represent the preceding thoughts in writing. In truth, such a lead-in is superfluous and
unnecessary.
Example: BACKGROUND
The OIDF makes it easier to create technical specifications and other papers around
digital identity. Under the terms of this Agreement, Contributor wishes to participate in
the development of certain technical specifications and publications.

Is it a good practice to draft binding obligation in recitals

So basically, binding obligation means , with respect to a Party: (a) any oral or written
agreement or arrangement that binds or affects such Party's operations or property,
including any assignment, licence agreement, loan agreement, guaranty, or financing
agreement; (b) the provisions of such Party's charter, bylaws, or other organisational
documents; or (c) any order, writ, injunction, decree, or judgement of any court or
Governmental Authority entered against such Party or by which any of such Party or A
legally obligatory obligation in connection to premises, whether deriving from an
agreement or otherwise, is referred to as a binding obligation (not contained in a lease).
Now let’s know what recitals are: Recitals are the opening statements in a written
agreement or deed, usually included at the start and comparable to the prologue. They lay
forth the parties' intents in detail, including what the contract is for, who the parties are,
and so on. Recitals are frequently found after the words 'whereas' and before the words
'now it is hereby agreed as follows,' the latter phrase establishing the agreement's
operative or primary conditions. It's also worth noting that the parties' intentions, as
expressed in the recitals, may be significant to the court's decision on whether or not to
insinuate a term into the contract. We already know about binding obligations and recitals
so which are explained above in brief. So now let’s talk about how important is to draft
the binding obligation in recitals? So, if we talk about binding obligations are a legally
obligatory obligation in connection to premises, in recitals we should draft the binding
obligation in brief as recitals are opening statement in a contract. So, it would be easier
for the reader to under the obligation which are binding while reading the opening
statement which is recitals. So, it is a good practice to draft binding obligation in recitals.

Different kinds of Covenants

A covenant, in legal and financial terms, is a commitment made in an indenture or other
formal debt arrangement that specific acts will be carried out or that certain thresholds
will be met. Covenants in finance are clauses in a financial contract, such as a loan
instrument or a bond issue, that specify the maximum amount a borrower can lend.
Types of covenants:
Affirmative Covenants: A positive covenant, also known as an affirmative covenant, is a
phrase in a loan contract that mandates a borrower to take particular acts. Affirmative
covenants include requirements to maintain acceptable levels of insurance, to provide the
lender with audited financial accounts, to comply with applicable laws, and to keep
accurate accounting books and credit ratings, if applicable.
Normally, a breach of an affirmative covenant results in outright default. Certain loan
contracts may include stipulations that provide the borrower a grace period to correct the
problem. Creditors have the right to declare default and demand immediate repayment of
the principal and any accrued interest if the situation is not addressed.
Negative Covenants: Negative covenants are used to compel debtors to refrain from
taking specific acts that could harm their credit score and capacity to repay existing debt.
Financial ratios that a borrower must maintain as of the date of the financial statements
are the most typical types of negative covenants. Most loan agreements, for example,
stipulate that the ratio of total debt to a specific measure of earnings not exceed a set
threshold, ensuring that a firm does not take on more debt than it can service.
An interest coverage ratio is another typical negative covenant, which states that earnings
before interest and taxes (EBIT) must be greater than interest payments by a particular
number of times.
Bond Violation: A breach of a bond's covenants is referred to as a bond violation. Bond
covenants are designed to safeguard both parties' interests when they are included in the
bond's indenture, which is a legally enforceable agreement, contract, or instrument
between two or more parties. A bond issuer is regarded to be in technical default when it
violates a bond covenant. Downgrading a bond's rating is a common penalty for breaking
a bond covenant, which can make it less appealing to investors and raise the issuer's
borrowing costs. One of the major credit rating agencies in the United States, Moody's,
for example, ranks a bond's covenant quality on a scale of one to five, with five being the
worst.

How is ‘Language of Obligation’ different from ‘Language of discretion’ under

several categories of contract language.
Language of obligation: The contract's obligations are described using the language of
obligation. The use of the words "shall," "must," and "has a duty to" are typical of this
language. The meat of the contract, or the terms that will compel a party to act or refrain
from acting, are the clauses that contain this Language.
Language of Discretion: The term "discretionary language" is used to express the options
accessible to a party. Not all future events are certain, and a party may pick one choice
over another based on the circumstances. Phrases like "has discretion to," "is permitted
to," and "may" are examples of this terminology. Because the passive voice frequently
takes more verbiage and is less obvious, these statements are best employed in the active
voice (John may choose vs. the choice may be made by John).
Difference between Language of obligation and language of discretion is:
So basically, language of discretion is a language which states that a party has a
discretion to take or not take a given action. May, which expresses permission, is the
most common way to convey discretion. Using at its discretion in discretionary language
implies that (1) the discretionary phrase in issue does not offer entire discretion and (2)
that tacking on at its discretion fixes this. The language of commitment is the language of
the victim. Even when we make such statements, some of our spirits rebel against
implicit missions, and the weight of our previous work hinders our progress. Credit Law
and Language is the first work of its kind to examine the basic language used by courts,
legislatures, and academic critics in explaining credit law. I prefer the second option. The
use of discretionary language indicates a possible violation if the customer purchases the
widget in any other way. It doesn't make sense. There is no other way to buy.

What is the consequence of using the word ‘may’ while discussing the obligations of
parties to an agreement?
At its basic level, contractual obligations are the obligations of the contracting parties
through the terms and conditions of the contract. Therefore, the nature of the obligations
of the contracting parties is primarily based on the terms and conditions of the contract.
All contracts include the exchange of almost any valid consideration for goods, services,
money, etc. Each contracting party has various obligations associated with this exchange
of consideration. This usually leads to breach of contract if one of the contracting parties
fails to fulfil its contractual obligations in accordance with the contract.
In Mansukhlal Vithaldas Chauhan Vs. State of Gujarat [(1997) 7 SCC 622]
Court held:
"Mandamus, which is a discretionary remedy under Article 226 of the Constitution, is
requested to be issued, among other things, to compel the fulfilment of administrative,
ministerial, or statutory public responsibilities." A statutory duty can be optional or
mandatory. The usage of the words "shall" or "must" in statutory responsibilities
indicates that they are intended to be mandatory. However, this is not definitive because
"shall" and "must" have been understood as "may" in the past. The scheme of the statute
in which the responsibility has been set out determines the character of the duty, whether
it is obligatory, mandatory, or directory. Even though the "obligation" is not stated
explicitly in the statute, it may apply. Even if the "duty" isn't stated explicitly in the
statute, it can be inferred as a corollary to a "right."
BY- Samriddhi Tiwari