Top tips on executing contracts

For a contract to be enforceable it must be executed correctly. Getting it wrong can prove to be a costly exercise leaving a party without sufficient protection. Tips on getting it right are provided below.

Contracts under hand and deeds

A new statutory instrument on the execution of deeds and documents by companies came into force on 15 September 2005 (“the 2005 Order”), largely to standardise practice on the execution of contracts by companies and to address inconsistencies in the legislation.

Documents can be executed either as simple contracts (often called “contracts under hand”) or as deeds. There are additional formalities for a document to be executed as a deed, and these vary according to whether the executing party is an individual or a company. Beware that backdating (of contracts or deeds) is an offence!

In some circumstances there is no choice but to execute the document as a deed, for example on the transfer of land or any interest in land (such as a lease), the creation of a legal mortgage or the grant of a power of attorney.

However, parties may elect to use a deed, commonly because:

• Deeds do not require ‘consideration’ (the price for which a promise is bought). Thus a parent company guarantee, where the parent offers the guarantee in return for what (at least in the past) might have been construed as no benefit, is generally executed as a deed.
• You can sue under a deed for up to twelve years from the date it was breached; if you execute under hand, the period is only six years.

Every deed must:

• state that it is intended to take effect as a deed (this is known as the “face value” requirement);
• be correctly executed as a deed; and
• be delivered.

To satisfy the “face value” requirement you only need to state the document is a deed – no particular form of words is needed.

The remainder of this article reviews the requirements for due execution (for contracts under hand and for deeds) and delivery (this applies to deeds only).

Execution by companies

Most companies’ articles provide that a contract under hand may be executed on behalf of a company by any person acting under its authority, not only a director. This is normally a matter of authorising an individual, usually by means of board minutes, to sign on behalf of the company. No attestation of the signature is needed.

If the contract is to be executed by a company as a deed it must be:

• executed by the company and expressed as such; and
• delivered as a deed.

A company may execute a deed by:

• using its company seal; or
• the signature of two directors; or
• the signature of the company secretary and a director; or
• appointing an individual, typically a director or another company, as its attorney. The appointing power itself has to be executed as a deed.

If two directors, or a director and the secretary, sign the deed, or attest its sealing, there is a statutory presumption in favour of a purchaser that the deed has been duly executed.

The articles of association of the company will normally specify how the company may use its seal, and may for commercial reasons, permit the directors to authorise sealing attested by someone who is neither a director nor a secretary. This does not, however, confer the same presumption of due execution on a purchaser as if sealing were witnessed by two directors or one director and a company secretary.

Under the 2005 Order, where several companies are executing the deed and the same persons act as their directors or secretaries, the directors and secretaries must sign separately for each company they represent.

Execution by partnerships

Any partner may execute a contract under hand on behalf of the partnership if authorised to do so. The signature block should show the name of the partner and of the partnership and state that he is a partner.

Deeds should be signed, witnessed and delivered by all the partners unless all the partners have entered into a power of attorney (which must itself be executed as a deed by all of them) authorising someone to execute deeds on their behalf. For administrative ease the partnership deed (where used) will often allow deeds to be validly executed where a limited number of them (say, two) sign.

Execution by Limited Liability Partnerships

An LLP can execute a contract under hand by fixing its common seal (if it has one) or by a member of the LLP signing with the document being expressed as executed by the LLP.

Prior to the Order if the document was to be executed as a deed, it had to be signed by two members or under the common seal. However, the 2005 Order does not expressly deal with LLPs, which is unfortunate since the relevant legislation for LLPs works by adapting the legislation for companies and has been thrown out of kilter by the changes. Although the 2005 Order has helped clarify the law in some areas, for example the presumption of delivery as discussed below, it has muddied the area in relation to LLPs as the presumption of delivery is not similarly applicable. This position is currently under review by the Department for Constitutional Affairs.

The presumption of due execution discussed in the context of companies above will apply. It is for the members to determine in the members agreement what the formalities for the execution of contracts and deeds are between the members, and which of them should sign. This does not affect the ability of a purchaser to rely on the presumption of due execution.

Delivery

Finally, as noted earlier, unlike a contract executed under hand a contract executed as a deed must be “delivered”. Delivery does not necessarily mean physically passing the document to the other party, but merely that the person who has executed it must in addition show that he intends to be bound.

There is a rebuttable presumption in favour of purchasers (for example a lessee or mortgagee providing some benefit) that all deeds executed in a certain way are delivered when executed, subject to a contrary intention being proved. One result of the 2005 Order is that the presumption is rebuttable even where the deed is executed by a company without using its seal.

Crystal clear?

The 2005 Order has brought greater uniformity to the area of execution of documents, however what was and still is needed is legislation to tie together this disparate area of law. A useful summary of consolidated legislation can be found at the annex to the guidance issued by the Department of Constitutional Affairs at http://www.dca.gov.uk/pubs/deed-doc-guidance.pdf.

This article first appeared in our Construction and development legal update Spring 2006. To view this publication, please click here to open it as a pdf in a new window