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This is an excellent judgment!
http://www.bailii.org/ew/cases/EWHC/QB/2011/2495.html
The recent case of Bibby Financial Services Ltd and others v Magson and others [2011] EWHC 2495 (QB)1 serves as a reminder of the requirements of a deed.
‘SIMPLE’ CONTRACT OR DEED?
Each day most of us will enter into numerous contracts, such as when we buy goods from the supermarket. In more formal relationships, the terms are often expressly noted in a written form.
Parties, or their legal advisors, should always give some thought to the form the agreement should take to determine whether it should be signed as a ‘simple’ contract or a deed. Quite often, the parties will not get a choice as the law demands that certain documents, such as legal mortgages, charges and most leases, are executed as deeds.
However, where there is a choice, there are two fundamental reasons for choosing deeds over ‘simple’ contracts. First, deeds do not require any consideration. Consideration, in a legal sense, means that some form of payment is required in respect of the performance of the contract. Payment is not limited to monetary sums; it can take many forms. A basic rule of contract law is that consideration must move from the promisee to the promisor, meaning the party who is benefiting from the contract should provide something in return to the party performing the contract. Often the recipient under the agreement will not be providing something, and in this case a deed should be used.
Second, the limitation period (which is the amount of time within which a claim can be made against the other party) for a ‘simple’ contract is generally 6 years from the date the cause of action arose, and for deeds the period is generally 12 years (subject to limited exceptions).
REQUIREMENTS OF A DEED
If a deed is required, or the parties have decided that a deed would be beneficial over a ‘simple’ contract, additional formalities are required. Until recently, as the Stevie Wonder song goes, a deed had to be signed, sealed and delivered. Signature and delivery are still needed, but in the case of individuals no seal is required. Companies can choose whether to affix a seal to a deed, but in our experience, most companies do not.
This article will look at delivery in more depth following a recent case which highlighted the perils of not satisfying the criteria.
WHEN IS A DEED DELIVERED?
Historically, delivery occurred when the document was received by the other side. As the law evolved, the concept of delivery became the point at which it could be shown that it was intended that the document would become binding. This is still the test used today.
For companies, a deed is deemed to have been delivered in accordance with the provisions of the Companies Act 2006. However, no deemed delivery provisions apply to individuals.
BIBBY V MAGSON
Bibby Financial Services Ltd (Bibby) is a company which offers invoice finance, such as invoice discounting and factoring, to companies. In this case, Bibby had entered into an invoice discounting facility with a company. As security for the monies due to Bibby, two directors of the company were required to enter into personal guarantees and warranties in respect of sums due.
The company began to struggle and could not pay Bibby what was owed. Consequently, Bibby sought to enforce the terms of the personal guarantees and warranties.
The argument put forward by the directors was that neither the personal guarantees nor the warranties were binding. The documents were executed as deeds, all signatures had been witnessed and the documents had been handed to the other party. However, the directors asserted the documents had not been delivered.
As stated above, delivery occurs when there is an intention for the document to become binding as a deed. In Bibby v Magson, the directors’ personal guarantees and warranties, even though signed and witnessed, were not in a final form. Manuscript amendments had been made to the documents with the intention that clean versions of the documents would be prepared incorporating the amendments, which would then be circulated and signed again.
At trial the directors’ argument won and Bibby could not enforce the documents as they had not been delivered as deeds.
ADVICE TO TAKE AWAY FROM THIS CASE
Whilst the case adds nothing new to the law surrounding the execution of deeds, it is a timely reminder that delivery of a deed should not be overlooked.
It is possible to include clauses in deeds setting out when delivery occurs, usually when the document is dated. An alternative would be for a side letter to be prepared stating that delivery has occurred.
Receiving legal advice from an early stage in a transaction, whether it be a company purchase or the negotiation of a supply agreement, is often essential to ensure the agreement is properly documented. Without such advice, the basic principles of law can easily be overlooked. This can have disastrous consequences, and can result in an agreement being declared void ab initio (invalid from the outset).
http://www.bailii.org/ew/cases/EWHC/QB/2011/2495.html
The recent case of Bibby Financial Services Ltd and others v Magson and others [2011] EWHC 2495 (QB)1 serves as a reminder of the requirements of a deed.
‘SIMPLE’ CONTRACT OR DEED?
Each day most of us will enter into numerous contracts, such as when we buy goods from the supermarket. In more formal relationships, the terms are often expressly noted in a written form.
Parties, or their legal advisors, should always give some thought to the form the agreement should take to determine whether it should be signed as a ‘simple’ contract or a deed. Quite often, the parties will not get a choice as the law demands that certain documents, such as legal mortgages, charges and most leases, are executed as deeds.
However, where there is a choice, there are two fundamental reasons for choosing deeds over ‘simple’ contracts. First, deeds do not require any consideration. Consideration, in a legal sense, means that some form of payment is required in respect of the performance of the contract. Payment is not limited to monetary sums; it can take many forms. A basic rule of contract law is that consideration must move from the promisee to the promisor, meaning the party who is benefiting from the contract should provide something in return to the party performing the contract. Often the recipient under the agreement will not be providing something, and in this case a deed should be used.
Second, the limitation period (which is the amount of time within which a claim can be made against the other party) for a ‘simple’ contract is generally 6 years from the date the cause of action arose, and for deeds the period is generally 12 years (subject to limited exceptions).
REQUIREMENTS OF A DEED
If a deed is required, or the parties have decided that a deed would be beneficial over a ‘simple’ contract, additional formalities are required. Until recently, as the Stevie Wonder song goes, a deed had to be signed, sealed and delivered. Signature and delivery are still needed, but in the case of individuals no seal is required. Companies can choose whether to affix a seal to a deed, but in our experience, most companies do not.
This article will look at delivery in more depth following a recent case which highlighted the perils of not satisfying the criteria.
WHEN IS A DEED DELIVERED?
Historically, delivery occurred when the document was received by the other side. As the law evolved, the concept of delivery became the point at which it could be shown that it was intended that the document would become binding. This is still the test used today.
For companies, a deed is deemed to have been delivered in accordance with the provisions of the Companies Act 2006. However, no deemed delivery provisions apply to individuals.
BIBBY V MAGSON
Bibby Financial Services Ltd (Bibby) is a company which offers invoice finance, such as invoice discounting and factoring, to companies. In this case, Bibby had entered into an invoice discounting facility with a company. As security for the monies due to Bibby, two directors of the company were required to enter into personal guarantees and warranties in respect of sums due.
The company began to struggle and could not pay Bibby what was owed. Consequently, Bibby sought to enforce the terms of the personal guarantees and warranties.
The argument put forward by the directors was that neither the personal guarantees nor the warranties were binding. The documents were executed as deeds, all signatures had been witnessed and the documents had been handed to the other party. However, the directors asserted the documents had not been delivered.
As stated above, delivery occurs when there is an intention for the document to become binding as a deed. In Bibby v Magson, the directors’ personal guarantees and warranties, even though signed and witnessed, were not in a final form. Manuscript amendments had been made to the documents with the intention that clean versions of the documents would be prepared incorporating the amendments, which would then be circulated and signed again.
At trial the directors’ argument won and Bibby could not enforce the documents as they had not been delivered as deeds.
ADVICE TO TAKE AWAY FROM THIS CASE
Whilst the case adds nothing new to the law surrounding the execution of deeds, it is a timely reminder that delivery of a deed should not be overlooked.
It is possible to include clauses in deeds setting out when delivery occurs, usually when the document is dated. An alternative would be for a side letter to be prepared stating that delivery has occurred.
Receiving legal advice from an early stage in a transaction, whether it be a company purchase or the negotiation of a supply agreement, is often essential to ensure the agreement is properly documented. Without such advice, the basic principles of law can easily be overlooked. This can have disastrous consequences, and can result in an agreement being declared void ab initio (invalid from the outset).
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