Loss Prevention Alerts

ALERT 38:  The dangers of executing contracts as deeds

Introduction

A deed is a formal written contract. Most contracts can be executed in writing, orally and can even be evidenced from the conduct of the parties. Deeds require certain formalities.

It is generally inadvisable to execute contracts to provide services as deeds. This applies whether the services are consulting or contracting services. In the vast majority of cases there will be no compelling legal reason why such agreements need to be executed as deeds which simply increase the risks inherent in providing the services.

In this alert reference is also made to simple contracts, which are contracts not executed as deeds.

Executing and recognising deeds

Face value requirement

There are a few formalities for the execution of deeds.  One of the main requirements is that the document should “make it clear on its face that it is intended to be a deed…” (section 1(2)(a) Law of Property (Miscellaneous Provisions) Act 1989) (the “Act”).  This is often referred to as the “face value requirement” and simple wording on the document such as “Signed as a deed by…” or “This deed of indemnity…” will be sufficient.  There has been some confusion about whether a deed can be created by a company by simply putting its seal on the document but the introduction of section 1(2A) of the Act states that executing a document under seal is no longer sufficient to satisfy the face value requirement.  Put simply, good practice dictates that the word “deed” should always be on the document.

Delivery of deeds

Simple contracts become effective as soon as they are executed but deeds need to be delivered before they take effect.  Delivery is the formal act of handing over the deed to the other party.

Dating

A deed will still be valid even if it is not dated - it will normally take effect from the date of its delivery - however it is good practice to ensure that the deed is dated.  Normally deeds are dated at the completion of transactions. It is though possible to provide that a deed is deemed to have effect from a date in the past.

Escrow

Sometimes a deed will not take effect until certain conditions are fulfilled - the deed is then referred to as a “deed in escrow.”  The escrow conditions should be made clear to the contracting parties and once delivered, such deeds cannot be withdrawn.

Examples of company deed wording

Execution using common seal

The common seal of [name of Company] was affixed to this deed in the presence of:

[Common seal of Company]

Director: .............................

Secretary:............................

Execution without a common seal

Signed as a deed by ...........................

[Company] acting by Director

[name of Director] and [name of Director/Secretary]

Consideration

Generally speaking, the law does not enforce gratuitous promises but instead requires a certain reciprocity for the creation of a simple contract. This is known as consideration. In simple terms consideration can be thought of as the price each party will pay for entering into the contract.

If a specialist agrees to provide services to his client for a fee, the fee represents the consideration for the specialist’s agreement to provide the services. Such a contract can be executed as a simple contract. Importantly, the courts are not concerned with the adequacy of the consideration and do not enquire as to whether the fee, on any objective assessment, seems reasonable in the circumstances.

If the consultant agreed to provide the service for no fee, and for no other benefit, then such a contract would not be enforceable under English law as a simple contract. In such a circumstance, to have legal effect a contract without consideration would need to be executed as a deed because no reciprocity of promise is required to render a deed enforceable: provided the formalities necessary to create a deed have been properly implemented, deeds can be enforced even though there is no consideration.

There may still be certain bodies - such as some public authorities, ancient societies and learned associations - whose constitution or articles of association require that they can only execute contracts (or certain types of contracts) as deeds. However, these will be very rare cases. There may be cases where a consultant or contractor is working for no fee - for example for a charity - in which case it might be assumed by some that a deed would be appropriate. However, this is rarely the case. In such circumstances, the fiction of consideration can be generated by a simple nominal consideration clause that states:

“X party has agreed to pay the sum of £10 to Y party, receipt of which Y party hereby acknowledges.”

Because the courts do not consider the adequacy of consideration, the promise to pay £10 will constitute good consideration and no execution as a deed is required. The £10 need not actually be paid.

Collateral warranties are sometimes executed as deeds because the warrantor is assuming a risk of liability to the beneficiary in circumstances where the beneficiary often makes no payment, payment generally being made by the warrantor’s client. However, provided a nominal consideration clause is used as suggested above, no deed is necessary.

Limitation

Limitation is the principle of law that protects parties to a contract from having to defend old, stale claims. Generally speaking, a claim for breach of contract under a simple contract can be brought within six years of the date of breach of a contract. By Section 8 of the Limitation Act 1980 no action upon a specialty (which includes a deed) can be brought after the expiration of 12 years from the date when the cause of action accrued. In almost all cases accepting a 12 year limitation period will be unacceptable to a contractor or consultant. A client might issue a claim just before the expiry of the limitation period. In such a situation, many of the consultant’s or contractor’s staff will have left and it may have destroyed or lost relevant documents. Defending such claims is hugely burdensome.

A collateral warranty is a distinct contract. If it is executed as a deed while the contract of appointment is a simple contract then a 12 year period of liability will be owed to the beneficiary of the warranty while there will be only a 6 year period of liability to the client.

If the client or beneficiary insists that a deed is created, or in the unlikely event that the client can only contract via a deed, then the twelve year limitation period can be converted to six years by agreement of both parties by the following:

“No claim under this deed, or in tort, debt, breach of statutory duty or otherwise, can be brought after the expiry of six years from the date of this deed.”

Conclusion

Be wary of clients or their advisers who urge that contracts be executed as deeds on the basis that, for want of consideration, the contract will otherwise be unenforceable. Bear in mind that consideration can always be generated by an appropriate clause and that, often, the real reason for clients wanting to execute contracts as deeds is to take advantage of a 12 year limitation period.

For further details about the law of limitation AGS Members should consult the paper in the AGS Tool Kit on “The Law of Limitation”. 

This loss prevention alert has been produced by the Loss Prevention Working Group (LPWG) of the AGS.  It highlights issues that the LPWG considers may be of relevance to members.  It is not intended to provide a definitive response to any issues and before taking action members should consider carefully whether they need to seek independent legal advice.

Prepared for the Members of the AGS by Steven Francis, Eversheds

Date of Issue:  19th March 2007

Applicability in Scotland

This advice is not applicable in Scotland.