In short: yes (with some caveats below)

The High Court has confirmed that where a deed was held to be invalid (e.g. because it was not signed/sealed in the presence of a witness), the document could still be enforced as a contract so long as:

  • the document met the required formalities of a contract (i.e. offer, acceptance, consideration and intention to create legal relations) and
  • the transaction was not one for which a deed was required by law (e.g. a land transfer or a power of attorney)

(Signature Living Hotel Limited v Andrei Sulyok Roxana Monica Cocarla [2020] EWHC (257) Ch)

Although this is a sensible decision, parties should take care to comply with the formalities, to enjoy the benefits of a deed (e.g. longer limitation periods in which to bring a claim based on the deed), and avoid a potentially drawn-out and costly dispute with a defaulting party over a seemingly routine step.

Failing properly to execute a deed will still be fatal to a transaction (and prevent enforcement of a defaulting party's obligations) if the particular type of transaction requires the use of a deed by law (e.g. land transfers), with no contractual recourse to fall back on.

Case summary

Signature Living Hotel Limited (Signature Living) is part of a corporate group involved in the development of hotels and residential units. In 2018, it received loans from Adreei Sulyok and Roxana Monica Cocarla (Respondents) to develop a Belfast Hotel (the Loan Agreements). 

As security for the Loan Agreements, Signature Living provided guarantees by way of deed (the Guarantees). Signature Living subsequently failed to make payment under the Loan Agreements by the required due dates, and received statutory demands for payment from each of the Respondents. Signature Living applied to the court for injunctions to restrain the Respondents from presenting a petition. The application was made on the basis that the Guarantees were unenforceable deeds, because they were signed only by the sole director of Signature Living in the absence of a witness. Accordingly, they failed to comply with the following provisions:

  • Section 1(2) of the Law of Property (Miscellaneous Provisions) Act 1989: an instrument shall not be a deed unless it is “validly executed” as a deed.  
  • Section 46(1) of the Companies Act 2006: “a document is validly executed by a company as a deed…if, and only if, it is duly executed by the company…” 
  • Section 44 of the Companies Act 2006: for a document to be duly executed by a company it requires that either two authorised signatories sign on behalf of the company, or a director signs in the presence of a witness who attests their signature.
  • Section 44 of the Companies Act 2006: for a document to be duly executed by a company it requires that either two authorised signatories sign on behalf of the company, or a director signs in the presence of a witness who attests their signature.
Issues 

The Respondents accepted that the Guarantees were invalid as deeds. However, they argued that the Guarantees were nevertheless enforceable as contracts. Under section 43(1)(b) of the Companies Act 2006, the formalities for execution of a simple contract by a company are that the contract is made “by a person acting under its authority, express or implied”. 

Signature Living disputed this, and sought to rely on the decision in R (On the application of Mercury Tax Group) & Another v HMRC [2008] (Mercury) where Underhill J stated that "the fact remains that the parties intended them to be deeds and their validity must be judged on that basis"

Decision

Giving judgment for the Respondents, and dismissing Signature Living's application for an injunction, the Judge stated:

I have no hesitation in preferring the submissions of [The Respondents]. I am entirely satisfied that the law is (and still is)……that if an otherwise complete contract of guarantee is intended to be embodied in a deed but the formalities have not been complied with, the creditor can still enforce the agreement.

In particular, the Judge dismissed Signature Living's reliance on the decision in Mercury, citing that the case was unimpressive and lacked authority. The Judge placed emphasis on the facts that:

a) the sole director of Signature Living clearly intended to authenticate the Guarantees; and 

b) the Guarantees had all the elements of a valid contract (in particular, being supported by consideration) and could thereby stand as simple contracts.

Practical considerations

This decision provides a welcome safety net to parties who fail to satisfy the formalities of entering a deed; they are able to rely on the document being a simple contract. 

Nevertheless, it remains important that, where a document is intended to be signed as a deed, each party complies with the formal requirements. This will help to prevent protracted and potentially costly disputes over a seemingly routine point. Such disputes often arise where a defaulting party seeks to leverage failures to comply with formality in order to avoid meeting its obligations. 

It should also be remembered that a deed may be preferable to a contract, e.g. due to extended limitation periods (12 years versus 6 years, by default) in which to bring a claim. 

In other cases, it may be that parties are required to enter a deed, not a contract, to record a transaction (such as land transfer) ensuring the correct formalities are observed at the outset, with legal input where necessary, can reap dividends, ensure certainty and keep the parties' obligations intact.

Key contact

Anouj Patel

Anouj Patel

Associate, Commercial Disputes
Leeds, UK

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