Getting it right- executing contracts

The execution of contracts is a task often overlooked. Even after maximum effort has been exerted to negotiate a deal, and draft a contract, a slip at the final hurdle could cost millions.

Mistakes in executing a contract particularly a deed, can result in:

  • an unenforceable contract;
  • a non-binding contract owing to consideration not being properly given. Consideration is something of value brought to the deal (e.g. payment or supply of services) and is one of the fundamental principles that needs to be satisfied forming any legal contract. Deeds are often used as an alternative to a simple contract if one party is not providing consideration, however, 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 therefore defeats the point of having a contract to provide legal certainty; and
  • a shorter limitation period: deeds can be enforced for 12 years from when the relevant cause of action accrues; simple contracts for 6 years. The deed must be executed correctly for the full 12 years of protection to kick in.

HOW TO GET THINGS RIGHT

The following are some practical tips to bear in mind when executing documents:

Determine what the document is and if any formalities apply:

Is it 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:

  1. be in writing;
  2. state on its face that it is a deed;
  3. 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, if deed provides for the document to be delivered at a later date, for example, using the following wording, “executed but not delivered until dated by…”; and
  4. be executed in line with the rules below.

If the above criteria’s are not met, a deed will not have been formed but constitute a simple contract instead. If a simple contract has been formed then the document must be amended and re-executed.

Deeds can be executed by a company in any of the following ways:

  1. by affixing the company seal;
  2. signature by two authorised signatories. A company’s authorised signatories comprise each of its directors and the company secretary; or
  3. signature by one registered director, in the presence of a witness who also signs the deed. 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 the director, or a minor. (Different rules apply for partnerships and LLPs.)

A simple contract can be signed on behalf of a company by any of the methods listed at a) to d) 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, power of attorney, authorised signatories list, etc.), there is a presumption that execution is compliant if it falls within the general nature of the rules. Nevertheless, always obtain a copy of the document authorising a signatory to check where another entity is signing the document on behalf of another party, that the other entity has the requisite authority to sign.

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.

Foreign companies

A foreign company can execute a contract or deed in one of these ways:

  1. by affixing its common seal;
  2. in any manner permitted by the law of the country in which the company is incorporated; or
  3. 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.

It may 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.

Agree on how the document 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 broad and 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. These are valid and increasingly used methods. The challenge is proving they were applied by the right person and not tampered with or misappropriated.

The Law Society has issued guidance on how best to complete “virtual signing”. 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 signatory 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 finalises the document. The PDF then becomes the original and copies are circulated to all parties. However, the Law Society’s guidance is not conclusive. For the avoidance of doubt, ensure that everyone involved agrees on the version of the document to be signed and how the process will work.

NEXT STEPS

There is a lot more to execution than it may seem. To summarise, it is important to work out in advance if you need a deed or a simple contract, who must sign it and how. In case anything goes wrong, the document may need to be re-executed, in order to be effectively relied on.

For more information on or any guidance or advice in drafting and executing your commercial contracts, Cleveland & Co external in-house counsel, your specialist outsourced legal team are here to help.

 

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