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Published On: 6 August 2015
Welcome to the third of our series of simple briefings aiming to highlight some of the more common issues relating to contracting. We will be releasing a new alert every month, each focussing on a different topic.
In the previous two instalments of this series, we discussed the risks of inadvertently creating legally binding contracts, even where no written contract exists between the parties (Working Without a Written Contract and Contract formation – inadvertently creating binding obligations). In this note we explore the most common means of executing a contract as well as exploring some circumstances in which a contract may not have the full intended legal effect, unless it is set out in writing and executed appropriately.
As discussed in previous instalments of this series, it is always sensible to ensure that (i) contractual arrangements are documented in writing, and (ii) agreement to those terms is evidenced by signature so that, wherever possible, there is an unambiguous record of what the parties intended. There are also certain types of contracts which the law or applicable registration rules require must be made in writing. Some examples are:
In each case, the written contract is said to have been executed as a "simple contract". So, what does "in writing" actually mean? Well, one thing that is clear is that it does not mean that these types of contract must always take the form of a traditional legal contract with completed signature blocks at the end. Bear in mind that it typically includes typing, printing and email so, for example, the courts have clarified that an exchange of emails or a sequence of documents is capable of constituting a simple contract that would meet the applicable legal requirements in respect of a guarantee.
Certain types of arrangement must be documented in a special form of contract, known as a "deed" and executed in particular way. These include:
Deeds are also commonly used to document arrangements which the parties intend to be legally binding but where one of the elements necessary for a contract to be formed – consideration i.e. the bargained for benefit of a contract or the assumption of a detriment – is missing or is unclear. It is for this reason that guarantees of someone else's obligations usually take the form of deeds.
One advantage of executing a contract as a deed instead of a simple contract is that deeds have a longer statutory limitation period than contracts (12 years as opposed to 6 years) but this has to be weighed against the fact that deeds are also subject to more formalities than a simple contract.
A deed will need to comply with four basic requirements, if it is to be valid:
The precise execution requirements that apply will depend upon the 'legal personality' of the person executing it.
Deeds entered into by English companies can be executed by affixing the company's seal to the document, in the presence of (a) the company secretary and one director, or (b) two directors, or (c) other persons who are duly authorised by the company’s articles, who attest the sealing by countersigning the deed. Alternatively, if the company has no seal (or chooses not to use its seal), the deed may be signed on behalf of the company by (a) the company secretary and one director, or (b) two directors, or (c) by one director in the presence of a witness who 'attests' the signature (i.e. confirming that the individual in question signed the document in their presence). Deeds entered into by an individual must be signed by the individual and that signature attested by one witness, or if the deed is being signed by someone else at the direction of the individual, that person's signature should be attested by two witnesses.
The other party to the deed cannot act as a witness, but ordinarily there is no requirement for the witness to be an 'independent person', so for example, an individual may act as a witness on behalf of their spouse (although it is probably best practice to secure an independent witness, if possible).
What does "delivered" mean? Delivery takes place on the date on which each party makes it clear to the other that it intends to be bound by the terms of the deed, regardless of whether the document itself has physically been delivered to the other party. There is a statutory presumption that the deed is delivered on execution, unless there is clear evidence to the contrary.
Don’t panic just yet. The general rule is that a deed that does not adhere to the above formalities cannot take effect as a deed. However all may not be lost - the document may still be classed as a legally binding simple contract, provided that the conditions of a contract are present (and the document is not subject to any of the legal or registration requirements that require it to be in the form of a deed). It is also worth bearing in mind that there have been circumstances where a court has held that even where a deed has not been executed properly, a party to it can still be held liable under it e.g. where the party contending that it is not valid has actually sought to rely on it in the past.
If you are in any doubt as to the steps you may need to take to properly execute a contract or have other contract-related issues you would like to discuss, please do not hesitate to get in touch.
Helen Simpson, Partner
T: +44 (0)117 918 2338
Carole Poletti, Solicitor
T: +44 (0)117 918 2324