Court of appeal decides on whether invalid deeds are enforceable in contracts

In Signature Living Hotel Ltd v Sulyok [2020] EWHC 257 (Ch), the question arose as to whether two deeds of guarantee were enforceable despite having been invalidly executed as a deed.

FACTUAL BACKGROUND

The applicant sought finance for its developments by way of investment loans from individuals for which corporate guarantees were given as security. The respondent received guarantees but, as the loans were not repaid, they issued statutory demands for payment.

THE CASE AT THE COURT OF APPEAL

The applicant submitted that the guarantees were not properly executed, as they had not been witnessed as per Section 44(2)(b) of the Companies Act 2006 (CA 2006). They were invalid as deeds and therefore incapable of enforcement by the respondents. The applicant also submitted, and the court accepted, that since the invalidity of the guarantees as deeds appeared on their face, the respondents could not invoke estoppel to assert that they nevertheless bound the applicant.

The respondent accepted that the lack of witness prevented the guarantees from being deeds but argued that under contract law they were still enforceable as Section 43(1)(b) of CA 2006 states all that is required for validity of a contract by a company was for it to be made by a person acting under the company’s authority (explicitly or implied). As the director who had executed the deeds on behalf of the company was authorised, plus there was consideration so the guarantees should stand as simple contracts and be enforceable.

The court ruled in the respondents’ favour, holding that the guarantees were properly enforceable against the applicant as contracts. The court also considered that a view previously expressed by the Law Commission, that there is no reason in principle why a deed that is defective for compliance with the relevant formalities could not survive as a simple contract so long as it was supported by sufficient consideration, remains correct. The court was also satisfied that on the facts, the guarantees were sufficiently supported by consideration.

CONCLUSION

Whilst there is no legal principle that a deed will always be saved in these circumstances (each case will turn on its own facts and the law as it stands at the particular time) it is undoubtedly a useful fall-back position for parties who have clearly reached a commercial agreement but have tripped up over the complex formalities of deeds in practice.

However, if seeking to rely on a defective deed as a contract, parties need to be aware of the other consequences of a negotiated agreement taking effect as a contract and not a deed. For example, contractual limitation periods may be affected and purported attorney appointments will fail (but may still take effect as more restrictive agency arrangements). If the defect is discovered early, whilst the parties’ interests in the commercial deal are still aligned, it will usually be preferable to re-execute the deed correctly.

PRACTICAL TIPS

It is always worth ensuring that document includes all the relevant requirements to be legally valid as a deed, that the relevant execution ‘blocks’ are included as per the CA 2006 and that, prior to completion, the execution provisions/requirements of each party are checked so that any issues are identified and resolved prior to formal execution and reliance on the agreement.

This is of particular relevance given the situation with Covid-19 and the current lockdown difficulties, as execution by electronic means is becoming more common. If such an approach is proposed it may be advisable to seek legal advice to ensure this is a viable option and that the correct steps/formalities are adhered to.

Please see this case here: nature Living Hotel Ltd v Sulyok [2020] EWHC 257 (Ch) (09 January 2020).

For more information, and any guidance or advice on your contracts, deeds and company law, Cleveland & Co External in-house counselTM, your specialist outsourced legal team, are here to help.

 

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