13 January, 2020
Construction projects involve the completion of a myriad of deeds, contracts and other documents. Project staff at sophisticated corporate clients are usually very experienced in the business not only of negotiating such contracts but arranging for their signature too. So, what is the value in retaining a solicitor for these purposes?
The risk for the unwary is that a contract or other instrument which needs to be executed as a deed might not be properly signed off. You might have done your bit properly, but can you be sure that the other party to the deal has been as careful as you have? We will look at a couple of examples below.
It is a common standard term in a JCT construction contract that both parties must execute the agreement as a deed. But what if one party arranges for this to be done properly and the other fails to follow its internal authorisation procedures correctly? For example, a company with very old or unusual articles of association might still require the application of the company seal in the presence of two directors or officers. In contrast, section 44 of the Companies Act 2006 provides that a document is executed by a company either by the affixing of its common seal, or signature by (a) two authorised signatories, or (b) a director of the company in the presence of a witness who attests the signature.
Further, a document is presumed to be delivered as a deed upon its being executed, unless a contrary intention is proved, and section 40 of the Companies Act 2006 provides certain protections for a person dealing with a company in good faith. Even if a signatory did not address his mind to the niceties of execution by deed, that is no basis for proof of a contrary intention. To find that failure to witness the signature of a sealed document prevents the creation of a valid deed, where there is no contrary intention proved, would be inconsistent with the wider policy of the Companies Act 1985, the predecessor of the 2006 Act, which made it more difficult for a company to rely on its own internal irregularities to defeat expectations of another party acting in good faith.
Failure to properly execute documents intended by the parties to be executed by deed will inevitably create uncertainty which could be detrimental to, for example, future claims for breach of contract. If a contract has been signed not as a deed, the limitation period for breach of contract claims will be six years as opposed to twelve years for documents executed as a deed. This can be a crucial difference in a construction context where the full extent of a breach by one party may not become obvious until many years later. Even a dispute over the preliminary issue of limitation could cost both sides tens of thousands of pounds in legal fees.
By way of our second example, from 20 September 2019, HM Land Registry no longer accepts "signed as a deed" as a suitable form of wording in prescribed form deeds executed by companies and limited liability partnerships and which are submitted in relation to a land transaction. Where a disposal is in a prescribed form that must be executed as a deed (such as Form TR1 or CH1). It will require that the forms of execution set out in Schedule 9 to the Land Registration Rules 2003 are used. For example:
Executed as a deed by (name of company) acting by [a director and its secretary] [two directors].
This change better reflects section 44 of the Companies Act 2006.
HMLR state that they raise more than 3,000 requests for information daily. Requisitions are commonly raised regarding execution of documents by companies. For example, a company's seal could have been affixed to a document along with two signatures, but with no indication as to who those signatures belong to or their position in the company.
If HMLR spot an error, they will usually provide opportunity for rectification by raising a requisition. However, HMLR are running extensive backlogs for transactions and so a query as to the correct execution of a document could jeopardise the completion of a land deal, especially if the officer(s) signing has ceased their involvement with the company in the meantime.
The moral of the story is to ensure that authorised signatories appreciate the legal significance of executing a deed, and that the other party's execution of their counterpart is examined carefully to ensure that it satisfies section 44 of the Companies Act 2006 at the very least. In contract deals of significant value, consideration should be given to instructing a commercial solicitor to oversee completion of the deed so that nothing is missed.
For more information contact Lachlan McLean in our Construction & Infrastructure department via email or phone on 01772 220219. Alternatively send any question through to Forbes Solicitors via our online Contact Form.