Paul Taylor, Partner At Fox Williams LLP
You are a director of a growing SME. Your company needs finance and you have reluctantly agreed to issue to your company’s bank a personal guarantee ("PG").
When will you be bound by the terms of such a PG?
Is it when you:
(a) agree over the phone/by email to sign it;
(b) sign the company’s loan agreement (which includes the supply of your PG as an express condition);
(c) sign and send the PG back to the bank; or
(d) receive confirmation that the bank has subsequently counter signed and dated the PG?
Following the recent case of Bibby Financial Services Limited vs Magson and others, the surprising answer to the above question, is that none of the above may result in a binding PG.
The Bibby case (discussed further below) once again reminded us of how important the concept of "delivery" of a document is when trying to prove that is legally enforceable. At the end of an often long and complicated negotiation process, it is a common mistake to view the execution and delivery of deal documents as mere formalities. However, get it wrong and a mere formality, can result in documents being unenforceable.
Given the increasing use of virtual completion meetings (where the parties and their lawyers do not meet face to face), the question of proper execution/delivery of documents is more important than ever. English law has recently grappled with the concept of executed documents being scanned and exchanged by email. The Mercury Guidelines make it clear that the parties should not just attach the execution pages but also the final complete versions of the documents which they apply to. The trail of emails should also make it clear that both parties are happy to complete and the documents are therefore delivered.
It should be noted that this article looks at individuals' execution/delivery of deeds (as per the facts of the Bibby case). In respect of corporate entities, there is a further body of law such as the Regulatory Reform (Execution of Deeds and Documents) Order 2005.
Why a deed?
It is necessary to understand why certain documents are executed as deeds in order to appreciate the consequences of failure to properly execute.
English law has long since attributed certain benefits to documents executed as deeds:
(a) there is no need to show that consideration (an essential component of a binding contract) has been provided in exchange for the commitments contained in the agreement;
(b) there is a longer period to begin enforcement proceedings compared to non-deeds; and
Certain documents such as powers of attorney and mortgages over land can only be entered into as deeds.
When is a document a deed?
Section 1 of the Law of Property (Miscellaneous Provisions) Act 1989 provides:
"(2) An instrument shall not be a deed unless -
(a) it makes it clear on its face that it is intended to be a deed by the person making it or, as the case may be, by the parties to it (whether by describing itself as a deed or expressing itself to be executed or signed as a deed or otherwise); and
(b) it is validly executed as a deed -
(i) by that person or a person authorised to execute it in the name or on behalf of that person, or
(ii)by one or more of those parties or a person authorised to execute it in the name or on behalf of one or more of those parties.
(3) An instrument is validly executed as a deed by an individual if, and only if –
(a) it is signed -
(i) by him in the presence of a witness who attests the signature; or
(ii) at his direction and in his presence and the presence of two witnesses who each attest the signature; and
(b) it is delivered as a deed."
The key components of a deed are therefore:
(i) the wording of the document making it clear that it is a deed (typically the execution clause will contain the phrase "duly executed and delivered as a deed");
(ii) a signature by the person or their duly appointed attorney;
(iii) a witness; and
4. What happens if a component is missing?
It is important to note that the consequences vary depending on what component is missing.
For example, if a deed is not witnessed but everything else is in place, courts have held that the document would still have legal effect but not as a deed. As such it will lose, for example, the presumption of consideration. The Bibby case looked at whether a PG had been delivered and the consequences if it hadn't.
The Bibby case is interesting as it showed how the requirements of the law inter-relate with everyday business life.
The proposed guarantors met with a representative of Bibby (their lender) in the guarantors’ pub to discuss finance terms. What was clear was that the guarantors signed the PGs, which were witnessed and handed over to the Bibby representative. However written manuscript amendments were made to the PGs at the meeting. The guarantors maintained that they had only signed and handed over the PGs as "a sign of good faith".
The intention was always that the PGs were going to be updated and re-executed. Therefore there was no intent to be bound by the originally signed documents.
The court held, on the facts, that the PGs had not been delivered, in the technical sense, by merely being handed over to Bibby after signature. For a document to be enforceable, it was necessary to produce further evidence that all parties intended to be legally bound.
6. Due execution
For those wanting to ensure a binding contract is in place:
a. make sure the execution clause clearly states that the "document is executed and delivered as a deed";
b. follow the Mercury guidelines if the parties are not physically meeting to complete the transaction;
c. if manuscript changes are made to a document and the parties intend to be legally bound (without further correction/execution), all parties/their lawyers should initial such changes. If the parties agree that the document should be cleaned up and re-executed, they need to make it clear whether the interim manuscript document is still legally binding;
d. make sure there is clear additional evidence that the document has been delivered and as such each party intends to be bound by it. For example, banks are increasingly asking guarantors’ legal advisers to sign and send back a standard confirmation letter. The guarantors' lawyer must not only confirm that the guarantor sat down and executed the document, but that the guarantor "wishes to proceed and has asked me to return and deliver the guarantee to you".
With the increasing use of virtual completion meetings, cases like Bibby serve as a timely reminder of the importance of due execution and delivery of documents and the potentially severe consequences if care is not taken.
Paul Taylor is a Partner in the Corporate department at Fox Williams LLP. He can be contacted on firstname.lastname@example.org or 020 7614 2512.
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