Good deeds and bad deeds - Quick reads - Gateley
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Good deeds and bad deeds

Gateley Legal

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Many agreements can be made informally, either in writing with a just simple signature and no other legal formalities or even just orally. But some agreements have to take a special form – known as a ‘deed’ – and that means certain specific requirements have to be followed.

When is a deed required?

Although any agreement could be made by a deed, there are relatively few agreements which actually have to be done by deed. Probably the most common ones in practice are mortgages or charges over land, transfers of land, leases, appointments of trustees and powers of attorney.

Deeds can also be used in transactions where there is no consideration being given by one party – such as a guarantee where there is generally no consideration given to the guarantor in return for it guaranteeing the obligations of a third party. Using a deed can ‘cure’ that lack of consideration which might otherwise make the transaction (the guarantee) unenforceable.

Requirements for a deed

The key legal requirements for a document to be a formal deed are:

  • The document must be in writing.
  • The document must make clear that it is intended to be a deed – known as the face value requirement. Standard wording in the document will usually achieve this. For example, the document might start with words such as ‘This deed is made on…’ and end with words such as ‘This agreement is executed as a deed’.
  • The document must be properly executed as a deed. This means: 
    • for an individual, they must sign in front of a witness who then attests (or witnesses) their signature; and
    • for a company, the agreement must be signed either by a single director in front of an attesting witness or by two ‘authorised signatories’ (each director or secretary is an ‘authorised signatory’ here).
  • The document must be delivered. Only when a deed is ‘delivered’ will it actually take effect and bind the parties. A deed is delivered when a party indicates an intention to be bound by it. There are various statutory presumptions to help confirm when a deed is delivered but this is also typically addressed in the drafting of the document – so the agreement might state ‘This deed is delivered on the date written at the start of this deed‘.
  • A recent case[1] illustrated how failing to meet these strict legal requirements can have significant consequences for the parties involved.

Losing face

The case involved a company sale by three shareholders. Two of them were unable to attend the completion meeting so their US lawyer arranged for them to sign powers of attorney in favour of the third shareholder. The documents were described as powers of attorney and the shareholders’ signatures on them were appropriately witnessed. But, crucially, the word ‘deed’ was not used anywhere in the documents.

At the completion meeting, the attending shareholder signed a guarantee on behalf of the absent shareholders, relying on the authority given to him by the powers of attorney. When the beneficiary of the guarantee subsequently made a claim under it, the absent shareholders argued that they were not liable as the powers of attorney used to execute the guarantee were not valid.

The High Court agreed with the absent shareholders, stating that the powers of attorney failed to meet the ‘face value requirement’ for a valid deed. There was no evidence that the shareholders, or their US lawyer, knew that English law required a power of attorney to be in the form of a deed. Simply describing the document as a ‘power of attorney’ was not enough to infer an intention that it should take that form. Although there were indications that the document was intended to be a formal one and to have formal legal effect, that was not enough to show that the parties intended the document to have the extra status of being a deed.

All is lost

In some circumstances, a defective power of attorney can take effect in writing but not as a deed to appoint the (purported) attorney as the simple agent of the principal. This happened in this case where the judge said the third shareholder could act as agent of the absent shareholders.

But this still wasn’t enough to save the guarantee as the judge also found that, in signing the guarantee on behalf of the absent shareholders, the agent had exceeded the authority given to him by the (purported) power of attorney.

So, due to the defects in the power of attorney, the buyer was unable to enforce the guarantee against the two absent shareholders.

Lesson learned

Anyone asked to rely on another party signing a document via a power of attorney should check that the power has been properly granted by a valid deed, which meets the requirements explained above, and that the relevant act is within the attorney’s authority. Otherwise, a document signed or executed in reliance on the power of attorney will be unenforceable.

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