Practical Law

This post considers two independent, albeit related, issues:

• What if a deed has been signed and executed by only one party?
• In what circumstances will there be a valid contract where the parties envisage execution of a further document in respect of the terms of an agreement, which document is not in fact subsequently executed?

Issue 1: unsigned deeds

Formal requirements of a deed

There are four formal requirements for a valid deed, prescribed by section 1 of the Law of Property (Miscellaneous Provisions) Act 1989. The “deed” must be:

• In writing.
• Clear on its face that it is intended to be a deed.
• Validly executed as a deed.
• Delivered.

In practice, the first two requirements give rise to little difficulty and the third requirement necessitates lawful execution, which depends on the legal status of the party seeking to execute the deed. It is the fourth requirement that can give rise to greater uncertainty in practice.

Delivery of a deed

There are three ways in which a deed can by “delivered” upon execution. In Silver Queen Maritime Ltd v Persia Petroleum Services plc, Lindblom J held at [108] it may be:

• Delivered as an unconditional deed, being irrevocable and taking immediate effect.
• Delivered as an escrow, being irrevocable but not taking effect unless and until the condition or conditions of the escrow are fulfilled.
• Handed to an agent of the maker with instructions to deal with it in a certain way in a certain event, being revocable and of no effect unless and until it is so dealt with, whereupon it is delivered and takes effect.

Whether a document is delivered as an escrow or as a deed will turn on what the parties objectively intended and will be a question of fact. For example, a deed may be executed and returned to the counterparty, but with a covering letter expressly stating that the parties are not bound unless and until all parties have executed and delivered the deed. Alternatively, there may, of course, be factual permutations less clear than this, on which the law has to draw a value judgment.

Effect of a deed

The general rule is that once a party has executed a deed, it will take effect against that party in favour of the other named parties even though it has not been executed by those other parties, unless it:

• Was delivered subject to a condition that all such parties must execute it.
• Would be inequitable to enforce it.

This follows from the decision in Cooch v Goodman (1842) 2 QB 580 (Lord Denman at [600]), which was summarised in the Law Commission Consultation Paper 143, The Execution of Deeds and Documents by or on behalf of Bodies Corporate (paragraph 3.4).

Two other cases also provide useful guidance of the law’s operation:

• Eagle Star Insurance Company Ltd v Green. Mummery LJ held that a mortgage deed, signed only by the mortgagors, was effective and binding on the parties. It was enforceable by the party who had not executed it (the mortgagee) as against the party that had (the mortgagors).
• McDonald v John Twiname Ltd [1953] 2 QB 304. An apprentice claimed damages for wrongful dismissal. The Court of Appeal had to consider whether there was an enforceable apprenticeship agreement. The apprenticeship agreement was signed by the apprentice and his guardian, but not by the employer. The court held that although the employer did not execute the deed, it took the benefit of the deed and as such must be bound by it. The deed was enforceable by the party who had executed it (the apprentice) as against the party that had not (the company).

As to the circumstances when it will be inequitable for a non-executing party to enforce a deed, these will also depend on the facts:

• A common instance is that of co-sureties, whereby, owing to the non-execution by another person named as a party to the deed, the obligation that is sought to be enforced is a different obligation from the obligation that would have been enforceable if the non-executing person had in fact executed the deed.
• In general, equity will relieve the executing parties if non execution by the others substantially alters the obligations assumed by the executing party (Cheverny Consulting Ltd v Whitehead Mann Ltd at [46]).
• There is usually no inequity, in itself, in a non-executing party simply seeking to enforce benefits conferred upon him by the deed. In seeking to enforce the deed, the non-executing party’s actions affirm and adopt the deed such that that party is bound by it as if he had executed it (Lady Naas v Westminster Bank Ltd [1940] AC 366).

Can a non-executing party simply sign, execute and deliver the deed at a later date?

Great care must be taken in considering whether a non-executing party can simply sign, execute and deliver a deed, if it has not already done so. Two issues may arise:

• If it is a condition of the deed becoming binding that signature and execution of the counterparty is required, then the law provides that unreasonable delay in the performance of a condition of an escrow may prevent the document from being a deed (see Harman LJ in Beesly v Hallwood Estates (at page 117) and Lindblom J in Silver Queen at [116]).
• The rule in Pigot’s Case (1614) 11 Co Rep 266 may apply, such that any material alteration made to a deed after its execution renders it void, if made without the approval of all the parties.

Issue 2: formalised agreements as conditions precedent

A related issue, also considered in Cheverny v Whitehead and, most recently by Coulson J in Seeney v Gleeson, is whether it is a condition precedent to a valid contract that the parties execute a formalised agreement.

While each case will turn on its facts, the law, in general terms, is as follows:

• If the documents or correspondence relied on as constituting a contract contemplate the parties executing a further contract, it is a question of construction whether the execution of the further contract is:
  • a condition precedent to the bargain: or
  • it is a mere expression of the parties’ desire as to the manner in which the transaction already agreed to will, in fact, go through and be recorded (Von Hatzfeldt-Wildenburg v Alexander [1912] 1 Ch 284).
• If it is a:
  • condition precedent, then there is no enforceable contract either because the condition is unfulfilled or because the law does not recognise a contract to enter into a contract;
  • mere desire or recording, then there is a binding contract and the reference to the more formal document may be ignored.
• Generally, the fact that the reference to the more formal document is in words which, according to their natural construction, import a condition, is conclusive against the reference being treated as the expression of a mere desire or recording (Von Hatzfeldt-Wildenburg).
• Where both parties instruct solicitors and formal written agreements are to be produced and arrangements made for their execution, the normal inference is that the parties are not bound unless and until both sign the agreement (Cheverny v Whitehead at [45]).

As the decision in Seeney v Gleeson shows, this last factor is not determinative. The key question is whether the parties’ conduct is consistent with either:

• The parties only being bound on the conclusion of a formal contract (in which case a formalised agreement will be a condition precedent).
• An agreement that a subsequent written document was simply to record what had been previously agreed (in which case a further formalised agreement will not be necessary to give rise to binding contractual obligations).

Practical guidance on whether a formalised agreement is a condition precedent

First, it may be necessary to look for evidence of prior stipulations for a subsequent or formalised agreement:

• For example, in Newbury v Sun Microsystems, prior to an offer of settlement, there was no expressed stipulation for a formalised agreement. The circumstances did not require a formalised agreement, in the context of a considered, written offer and acceptance by both parties’ solicitors.
• However, the position might be different if lay parties are involved and if there are express (and repeated) stipulations and references to a subsequent formalised agreement to be executed. Such references will not necessarily be determinative though (Seeney v Gleeson).

Second, the identity and characteristics of the negotiating parties may be relevant:

• For example, in Newbury v Sun Microsystems, the parties’ solicitors were communicating, including on offers of settlement. The solicitors were competent to agree such matters.
• However, the position might be different if lay parties undertake negotiations on the understanding that any “agreement” is subject to their solicitors drafting a formalised agreement before there is a binding obligation.

Third, the law does not require the use of the words “subject to contract” in order for a formalised agreement to be a condition precedent to binding obligations (Cheverny v Whitehead at [42]). However, if the parties are represented by lawyers:

• Using “subject to contract” wording will make it “clear that the terms were not yet binding or agreed until a formal contract was agreed” (Newbury v Sun Microsystems at [22]).
• Not using “subject to contract” wording might indicate that a formalised agreement is not a condition precedent to a binding contract (Seeney v Gleeson at [40]).

Fourth, there is a difference between recording a done deal and drafting a possible deal. For example, in Newbury v Sun Microsystems, it was expressly stated that a further agreement should be executed for the purpose of recording an accepted and considered offer of settlement. The requisite legal consequences had already been considered and spelt out expressly in the offer and acceptance letters. Once accepted, it was a matter of recording it. A “suitably worded agreement” was merely one which reflected the terms of the considered and fully stated offer.

However, the position might be different if lay parties have not turned their minds to the legal and practical mechanisms and consequences of implementing an “agreement”.

Conclusion

Once a party has executed a deed, it will generally take effect against that party in favour of the other named parties even though it has not been signed and executed by the other parties, unless either it:

• Was delivered subject to a condition that all such parties must execute it.
• Would be inequitable to enforce it.

Equally, a party that has not executed a deed will, ordinarily, be bound by it if that party has taken the benefit of it.

As to whether a formalised agreement is a necessary condition precedent to enforceable contractual obligations, the key factor is likely to be whether a further, formalised document is merely recording a binding agreement (no condition precedent) or whether the formalisation is, itself, a pre-requisite to a binding agreement.

In each case, the answer will turn on the facts and the evidence, and will require careful analysis.