Executing contracts: how to get it right
Steve Jobs said “[e]xecution is worth millions”. He was talking about implementing ideas, but his words neatly apply to contracts. Even after maximum effort has been exerted to negotiate a deal and draft a contract, a slip at the final hurdle could cost millions. Failing to execute a contract correctly, particularly a deed, can result in:
- An unenforceable contract. Deeds are often used if one party is not providing consideration. Consideration is something of value brought to the deal (e.g. payment or supply of services) and is an essential ingredient for any contract. If there is no consideration and the deed has not been executed correctly, it is not binding.
- Confusion about whether an agreement has been reached, resulting in expensive, time-consuming arguments about whether there is a contract and, if so, what terms apply. This rather defeats the point of having a contract to provide certainty.
- A shorter limitation period. Deeds can be enforced for 12 years from when the relevant cause of action accrues; simple contracts for 6 years. Deeds are commonly used in construction because it may take several years for a defect to manifest and be investigated. If you want 12 years of protection, the deed must be executed correctly.
Here is how to get execution right when the law of England and Wales applies.
Step 1 – determine what the document is and if any formalities apply
Are you dealing with a contract or a deed? Simple contracts do not have to comply with any formalities. Provided that the essential components of a contract are present (offer, acceptance, consideration and intent), a contract will be formed (even orally). In contrast, a deed must:
- be in writing;1
- state on its face that it is a deed;
- be delivered, meaning the parties must demonstrate an intention to be bound. It is presumed that companies have this intention when they sign, but this can be rebutted, e.g. if the words say “executed but not delivered until dated by…”; and
- be executed in line with the rules at Step 2 below.2
If these criteria are not met, then you may still have a simple contract. If not, or that is not enough, then the document must be amended and re-executed.
Step 2 – identify who must sign
Again, the rules differ depending on whether the document is a simple contract or deed.
Deeds can be executed by a company in any of these ways:
- affixing the company seal;
- two directors, registered as such at Companies House, sign;
- one registered director plus the company secretary sign; or
- one registered director signs, in the presence of a witness who also signs the document. It is good practice for the witness’ name, address and position to be printed in case execution needs to be verified. The witness should not be one of the other signatories, related to them, or a child.3
(Different rules apply for partnerships and LLPs.)
If you need a deed, then it is essential to check that the right people sign for each party by checking the records at Companies House. It can help to remind the parties who must sign when you issue the deed for execution. If the rules are not complied with the document will not take effect as a deed but may constitute a simple contract.
A simple contract can be signed on behalf of a company by any of the methods listed at 1 to 4 above or by a person (or persons) with express or implied authority to sign. Whilst it is best practice to follow these rules and ensure that the signatories have authority (e.g. by checking the company’s articles), there is a presumption that execution is compliant if it falls within the general nature of the rules. A failure to follow internal rules about signing and delegated levels of authority is usually an internal matter. Rarely will it result in an unenforceable contract.
A foreign company can execute a contract or deed in one of these ways:
- by affixing its common seal;
- in any manner permitted by the law of the country in which the company is incorporated; or
- expressing the document to be signed on behalf of the company and having it signed by a person with authority to sign under the laws of the country in which it is incorporated.4
It can be worth obtaining a legal opinion from a lawyer qualified in the jurisdiction of the foreign company on the validity of the proposed method of execution under its local law, related formalities and whether the proposed signatories have authority. In one case, for example, an English law contract was held not binding because only one authorised representative of a Swiss company had signed and Swiss law required two signatories.5
Step 3 – agree how it will be signed
Traditionally wet-ink signatures have been applied to original, hard copy documents either by circulating them for all to sign or in counterpart. The use of wet-ink signatures has been preferred because (forgery aside) the signatory was clearly present and intended his or her signature to be on the contract. The same cannot be said for electronic signatures just yet (except in rare cases where sophisticated electronic signature packages are deployed).
The term “electronic signature” is a broad one and it can cover a signature saved as a pdf or image file, as well as a signature block (or even just an initial) at the end of an email.6 These are valid and increasingly used methods. The challenge is proving they were applied by the right person and not tampered with or misappropriated.
Following the Mercury tax case involving a dispute about a “virtual” signing, the Law Society issued guidance on how best to do this.7 One method it deems appropriate for both deeds and contracts involves circulating the execution version of the contract as a pdf to all signatories. Each one then signs and circulates their signature page, confirming that they authorise its use in the final version. The party coordinating signing then collates all signature pages, adds them to the execution version and completes the document. That becomes the original and copies are circulated to all parties. The Law Society’s guidance is not exclusive. The key seems to be to ensure that everyone involved agrees the version of the document to be signed and how the process will work.
In summary, there is more to execution than it may seem. To keep it simple, work out in advance if you need a deed or a simple contract, who must sign it and how. If it goes wrong, you may need to have the document re-executed to be sure you can rely on it – something to check and put right sooner rather than later.
- 1. Goddards case.
- 2. Points 2, 3 and 4 come from the Law of Property (Miscellaneous Provisions) Act 1989.
- 3. Law of Property (Miscellaneous Provisions) Act 1989 and s.44 of the Companies Act 2006.
- 4. Sections 43, 44 and 46 of the Companies Act 2006 as amended by the Overseas Companies (Execution of Documents and Registration of Charges) Regulations 2009.
- 5. Integral Petroleum SA v SCU-Finanz AG  EWCA Civ 144.
- 6. Golden Ocean Group Ltd v Salgaocar Mining Industries PVT Ltd & Anor  EWCA Civ 265.
- 7. R (on the application of Mercury Tax Group and another) v HMRC  EWHC 2721.