This post uses a recent case to consider whether a draft collateral warranty, signed as a deed, can be used by an employer in place of a formal engrossment. Can an employer complete the missing details and use the collateral warranty to give rights to a beneficiary? Might a contractor be able to stop the employer using and relying on that executed draft?
Possible scenarios
The legal formalities of a construction and engineering project often require the parties to execute several contract documents. Sometimes, a party executes draft documents before it should. For example, it might:
- Execute a draft contract without realising it had not yet been agreed.
- Execute an agreed form of collateral warranty (or bond or guarantee) before it has been engrossed (prepared) as a separate document and while it is still missing the corresponding party’s name and other key details.
Contractor’s arguments
While every situation will depend on its facts, here are two arguments a contractor could use to avoid being bound by a deed of collateral warranty, if the employer “filled in the blanks” of an executed draft document:
- In Bibby Financial Services Ltd and others v Magson, the High Court had to consider whether two individuals who had executed deeds were bound by those documents. The individuals maintained that they had executed draft documents as a gesture of good faith, with the parties agreeing at the time that fresh engrossments of the documents would be produced for later formal execution, incorporating comments made in manuscript on the drafts. The court found for the individuals, holding that (in the technical sense) the deeds had not been “delivered”, even though the individuals had handed over executed drafts at the meeting.
- The Companies Act 2006 contains a rebuttable presumption relating to the timing of delivery of deeds executed by companies. It provides that a document that a company executes as a deed is presumed to be delivered as a deed on execution, unless a contrary intention is proved (section 46(2), Companies Act 2006). Although we are not aware of any specific case law on the issue in the construction arena, a form of collateral warranty marked as a draft, which is missing the beneficiary’s name and other key details, is arguably not “delivered” on execution.
Best practice
It is best practice not to execute a draft document (indeed, any document) unless you intend to be formally bound by it. If the parties to a construction contract need to show that a form of collateral warranty (or bond or guarantee) is agreed:
- The terms of their contract will usually state that forms of ancillary document attached to the main contract are in agreed form. By executing and delivering the main contract, the parties will have formally confirmed their agreement to the draft forms referred to.
- They could initial the draft, rather then execute it. (Some people prefer to initial and date agreed drafts.)
Risk for a beneficiary
Certainly, as a beneficiary, it is risky to accept a form of collateral warranty or other document where your name has been added in after execution, without making further enquiries about whether the contractor (or other warrantor) has agreed to be bound by that document.
