Corporate update: the latest corporate law developments January 2024

Was a deed still valid when signed in the wrong place and by non-statutory directors?

In Lendlease Construction (Europe) Ltd v Aecom Ltd [2023] EWHC 2620 (TCC) the High Court considered a consultancy agreement that had purportedly been executed as a deed on behalf of a company. But it had been signed in the wrong place and by two signatories who were not in fact statutory directors of the company at the time of signing. So was the agreement still effective as a deed?

What is a deed?

A deed is a particular type of written agreement which must be signed (or ‘executed’) in accordance with certain prescribed formalities.

Although many agreements can be drafted as a deed, they are actually only required in a limited number of cases. These include a transfer or lease over land, a legal mortgage or charge over land, a power of attorney and the appointment of a trustee.

Deeds can also be used to ‘cure’ a lack of consideration from a party to a contract. So, for example, a guarantee will typically be executed as a deed as there is generally no consideration given to the guarantor in return for them giving the guarantee.

A key difference between a simple contract and a deed is that the limitation period for claims under a contract is six years whilst the period for claims under a deed is 12 years. Parties may sometimes choose to execute an agreement as a deed, even where that is not technically required, in order to take advantage of this longer limitation period.

How must a deed be executed?

An individual party must sign a deed in the presence of a witness who attests their signature.

A corporate party to a deed must execute it either by:

• the signature of a single director, signing in the presence of an attesting witness;
• the (unwitnessed) signatures of two ‘authorised signatories’ and, for this purpose, only the company’s directors and secretary qualify as authorised signatories; or
• affixing the company’s common seal (although this is rarely used in practice).

In addition to being properly executed, a deed must make clear on its face that it is intended to be a deed and it must be ‘delivered’ by the parties, i.e. they must have shown an intention to be bound by the deed. These requirements are often met by the language used in the deed, for example by the signature clauses stating that the document has been “Executed and delivered as a deed”.

The facts

The dispute in the Lendlease case arose out of the construction of a new oncology centre at St James’s Hospital in Leeds. The contractor brought a claim against the consultant under a consultancy agreement and a key question for the court was whether or not that agreement took effect as a deed. If it were a deed, the relevant limitation period for claims would be 12 years, but if it were a contract, the limitation period would only be six years and the claim would effectively be time-barred.

As noted above, there were problems with the way in which the corporate consultant had executed the consultancy agreement. In particular, the two purported signatories were employees of the relevant company but they were not statutory directors. In addition, they had signed in the wrong place, signing in the execution block for witnessing the affixing of the company seal, rather than the one for signature by two directors.

The decision

The court held that, notwithstanding the failure to comply with the strict legal requirements, the consultancy agreement took effect as a deed. Among other things, the court found that:

• The agreement had been signed in the wrong place in error. There was never any intention that it should be executed by the affixing of the company’s common seal which would have been inconsistent with the approach taken to the other documents executed at the same time. The signatories’ intention had clearly been to sign in the section below the one in which they had actually signed, i.e. the section providing for execution by the signature of two directors.
• The consultant company had held the two signatories out as being in the position of directors and having authority as such on behalf of the company. As a result, the company could not now deny that the signatories had the authority normally associated with that position. Crucially, the company had accepted that the signatories had authority to act as they did and the parties had proceeded with the arrangements between them on the basis of the signed agreement. The signatories were not acting improperly in relation to the company but actually were doing what they were expected to do.

Comment

Although the agreement was effective as a deed, the court highlighted that statutory requirements specifying the formalities necessary for a document to operate against a company as a deed are not to be readily circumvented. Whilst the court ‘saved’ the agreement in this case, it would not be wise to rely on it to justify execution by non-directors in other circumstances. The question of whether a non-director has been appropriately held out by the company and acted within the scope of their authority will be fact specific and could be difficult to prove.

It is also of note that, by reaching the conclusion he did, the judge prevented the consultant company relying on its own invalid execution to avoid a claim under the agreement. In other circumstances, the court may be more reluctant to validate execution of a deed by non-directors.

Legal assignment: Execution by attorney for an individual held to be invalid

In Frischmann v Vaxeal Holdings SA [2023] EWHC 2698 (Ch), the High Court held that an assignment of contracts was not a valid legal assignment as it had not been signed by the assignor himself, but by his duly appointed attorney. The court went on to find that the assignment took effect as an equitable assignment.

The case is a useful reminder of the strict requirements for a valid legal assignment by an individual assignor.

Legal and equitable assignments

An assignment is the transfer of an existing right or interest – such as the benefit of a contract – from one person to another. After assignment, the assignee is entitled to enjoy the benefit of the contract and to enforce its rights against the other contracting party.

Assignments can be legal (also known as statutory) or equitable. Parties will usually try to create a legal assignment, rather than an equitable one, because legal assignments always allow the assignee to enforce the assigned rights in their own name. In contrast, an equitable assignee is normally required to join the assignor in any action against the other party to the agreement.

Section 136 Law of Property Act 1925 (LPA 1925) sets out the requirements for a legal assignment. These include that the assignment must be in writing and signed “under the hand of the assignor”. Equitable assignments tend to come into being when an assignment is made that does not meet the requirements of a legal assignment.

The issue

The court was asked to determine whether the rights under two loan agreements and a guarantee had been validly assigned.

The defendants in the case argued that the assignment was ineffective because it had been signed on behalf of the assignor (Dr Frischmann) by an attorney acting under a power of attorney. This meant that the assignment had not been signed “under the hand of the assignor” as required by section 136 LPA 1925.

The claimant argued that section 7(1) Powers of Attorney Act 1971 (PoA 1971) made clear that the execution of the assignment by the attorney was as legally effective as if it had been executed by Dr Frischmann himself. Section 7(1) provides that an individual donee of a power of attorney may execute an instrument with his own signature and that instrument shall “be as effective as if executed by the donee in any manner which would constitute due execution of that instrument by the donor…”.

The decision

The court held that there had not been a valid legal assignment. To be effective under section 136 LPA 1925, the assignment had to be in writing (which it was) and under the hand of the assignor, and an assignment signed by the assignor’s attorney did not satisfy this requirement.

The court rejected the argument that execution of the assignment by Dr Frischmann’s attorney was sufficient for it to count as being made under the hand of Dr Frischmann himself. When making her decision, the judge relied on previous case law that had suggested that an ordinary agent could not sign a legal assignment on behalf of an assignor. In view of those cases, the judge did not accept that the wording of the PoA 1971 should be treated as rewriting the LPA 1925 without express reference to the earlier statute.

Although the court found that there was no valid legal assignment, it held that the assignment took effect as an equitable assignment.

Comment

The decision in this case has proved controversial. The cases relied on by the judge in reaching her decision involved “ordinary” agents (as opposed to duly appointed attorneys) signing on behalf of someone else. It is surprising that the judge included attorneys in the same category as those ordinary agents, particularly as section 7(1) PoA 1971 expressly recognises an attorney’s signature as being legally equivalent to the signature of the donor of the power. There would also appear to be no obvious policy reason to prevent a legal assignment by an individual from being signed by their attorney.

On the face of it, this decision should only affect legal assignments by individuals. The court’s interpretation of section 136 LPA 1925 should not apply to body corporates, where the relevant signatory (whether a director or an attorney) will necessarily be acting on behalf of that corporate entity. However, the provisions of the Companies Act 2006 that expressly authorise a company to appoint an attorney (section 47) are worded in a similar manner to section 7(1) PoA 1971. This has raised concerns that the Frischmann decision could be an issue for companies granting legal assignments as well as for individuals.

It is worth noting that this case involved a decision of a chancery master (a “junior” judge) and, therefore, may not have the same precedential weight of a full high court judge.

However, despite the controversy surrounding this decision, the sensible course of action would be for any legal assignment by an individual to be signed by the assignor themselves, and not by their attorney (or other agent). Until there is further judicial clarification on the issue, it seems likely that companies will continue to execute their legal assignments by signature of a director or by attorney.

Government review of national security regime

The Government has issued a Call for Evidence on the effectiveness of the regime for intervening in transactions under the National Security and Investment Act 2021 (the NSI Act). Whilst the Government believes the NSI Act has functioned well since it came into force, it wants to ensure that it takes a proportionate and targeted approach when balancing the burdens placed on companies and investors with the risks to the UK’s national security.

Background

The NSI Act requires advance notice to be given of certain transactions involving targets operating in 17 specified sectors. A qualifying transaction which completes without clearance from the Government will be void.

Although the overall number of notifications (866 in the year to 31 March 2023) was lower than some had predicted, the number of interventions via final orders (17) has been higher than predicted. But with 93% of notified transactions being cleared without needing a detailed assessment, there are concerns that the regime is catching matters which pose no real risk to national security.

Call for evidence

The Call for Evidence invites stakeholders to share their views of the regime under the NSI Act, focusing on its impact on businesses and investors, whether the scope and requirements of the regime are proportionate and effective, and how well stakeholders understand the system.

Two specific areas of focus are:

1. the scope of the sector definitions; and
2. whether some targeted exemptions from the mandatory notification requirements may be appropriate.

Sector definitions

The Government is interested in whether there are activities within the 17 specified sectors that are very unlikely to create national security risks, or where compliance with the mandatory notification requirements places substantial burdens on businesses and investors.

In particular, the Government is considering:

• clarifying the scope of various sectors, including Advanced Materials, Critical Suppliers to the Government and Synthetic Biology, to simplify these sectors and provide greater clarity;
• refining the scope of other sectors, including Artificial Intelligence and Defence, to reduce the likelihood of capturing acquisitions that do not raise national security concerns;
• expanding certain sectors, including Communications and Data infrastructure, by reducing certain thresholds and adding certain entities;
• clarifying the treatment of academia, where some activities (for example university spin-outs seeking additional funding) can be caught by the NSI Act, although this would be by issuing further guidance rather than creating a standalone academia sector; and
• carving activities relating to Semiconductors and Critical Minerals out of the sectors in which they are currently captured (Computing Hardware and Advanced Materials) in order to improve clarity.

Targeted exemptions

To further reduce the likelihood of capturing transactions with no real risk to national security, the Government is also considering introducing exemptions relating to:

• internal reorganisations, particularly those where the level of control held by a person over the target entity does not change (or changes very little);
• the appointment of a liquidator, official receiver or special administrator, given that these appointments do not generally present national security risks and, in fact, any onward sale of a sensitive entity by them would be a separate trigger event and potentially notifiable acquisition. This would bring these appointments into line with the treatment of the appointment of administrators which is already covered by an exemption; and
• acquisitions by certain public bodies, such as local authorities, non-departmental public bodies and certain executive agencies.

Comment

This review of the NSI Act has been welcomed by investors and their advisers who have seen the practical impact on transactions where is has been clear that the target’s activities has posed no risk to national security. The draconian nature of the regime, with any un-notified in-scope transaction being void, even where there are no national security concerns, has forced parties to take a cautionary approach, adding unnecessary costs and time to transactions.

Notifications under the NSI Act are made to the Investment Security Unit via an online portal. The Call for Evidence also asks for feedback on the process for submitting a notification and whether any additional guidance is required.

First published in Accountancy Daily.