COVID-19 opened the eyes of many to full-time working from home. Yet absent the integrated hubs that occupational premises provide, the prospect of assembling, distributing and executing legal agreements in hard copy has become taxing. Unsurprisingly, businesses have sought electronic alternatives.
E-signature platforms have boomed, as have virtual signings. The first category can be poorly optimised for the construction industry. That’s because major projects necessitate a large number of agreements, while works contracts can run to thousands of pages. These contexts are not particularly catered for by software providers, which can make the task cumbersome. The penchant for contracts to be made as deeds with a limitation period of 12 years, as opposed to six (together with the formalities this entails), adds to the difficulty.
Where a vital deed must be concluded in short order, proceeding through a virtual signing can be appealing. In an era of social distancing, however, it can lead to situations in which “split execution” occurs.
What is split execution?
Virtual signing processes vary but a common scenario involves each party receiving an electronic or physical copy of the agreement and returning to the other parties by email a signature page executed in “wet ink” and a scanned copy of the full agreement. This is a form of counterpart execution, whereby each party signs and exchanges a separate copy (counterpart) of the contract and, together, those copies comprise the contract.
But, whereas it is well-established that agreements signed in counterpart are binding, the legal position is uncertain where one party to a deed seeks to execute the contract by having two of its authorised signatories sign separate copies. The conservative view is that it is the two representatives’ signatures together that constitutes the party’s execution. The risk is that if a virtual counterpart is sent to multiple signatories for a party, even via the same email, each person printing off and signing it may be executing a fresh counterpart rather than the same one.
If so, there would be a split execution.
Why does it matter?
The difficulty with split execution is that it’s a grey area as to whether it leads to effective deeds. Section 44(2) of the Companies Act 2006 states:
“A document is validly executed by a company [as a deed] if it is signed on behalf of the company—
(a) by two authorised signatories, or
(b) by a director of the company in the presence of a witness who attests the signature.”
While other means to execute deeds exist, these represent by far the most popular options.
“Document” is not defined within the statute. Nonetheless, the language of section 44 may indicate that it is meant to be construed as a company signing a discrete document rather than one comprised of counterparts.
Given the strict formalities, the cautious view would be to avoid split execution to remove any doubt that the agreements will benefit from the substantially longer limitation period enjoyed by deeds. If signatories for a party are not co-located, there are clearer alternatives that can be pursued.
Allow more time within signing protocols
The first of these is to deal only with hard copy counterparts and arrange for one to be signed by a signatory and then couriered or posted to the next signatory to execute until that process has been completed.
However, this is not always realistic since it ignores the fact that agreements may need to be signed quickly, for example, to works to be completed in time or for third parties to release funds for the project. Furthermore, the process can be laborious and costly when there may be dozens, or indeed hundreds, of deeds to be completed.
Adding further steps to a signing process increases the likelihood of a mishap occurring, such as documents becoming misplaced.
Execute pursuant to section 44(2)(b), Companies Act 2006
This has the clear advantage of enabling a single director to bind a company to a deed by executing a physical copy in the presence of a witness, which can then be scanned and distributed under a virtual signing. That said, as an internal control on commercial risk, larger companies often require two directors to execute any significant agreements and may be reluctant to depart from this check and balance for high value contracts.
Use digital signatures
The legal position with deeds made by digital signatures, as with split execution, is not definitive, but a practice note produced by a joint working party of the Law Society Company Law Committee and the City of London Law Society’s Company Law and Financial Law Committees suggests that – unlike a Microsoft Word or PDF file attached to an email as in a virtual signing – an electronic deed sent through an e-signature service, such as DocuSign or Adobe Sign to, and opened by, multiple signatories, is the same file.
On this basis, it would not give rise to a split execution.
Use alternative signatories or powers of attorney
To comply with section 44(2)(a), a company could (perhaps through its articles of association or a power of attorney), authorise alternate or additional signatories who are not officers but who may find it easier to sign the requisite deeds. Since the matter is often disregarded in a company’s articles, a power of attorney could be used.
A degree of forward planning would be necessary and, similar to section 44(2)(b), companies may be apprehensive about appointing irregular signatories for important contracts.
Modify a simple agreement
Limitation periods are prescribed by the Limitation Act 1980, as amended. Although the policy for statutory time bars is to prevent stale claims, English courts appear to be of the view that they can be extended by including a provision within the agreement, for example, to effectively increase the expiry of the contractual limitation period under a simple agreement from six years from accrual of the cause of action to 12 years. In light of the latitude afforded to how simple contracts can be made (provided that good consideration is given), this substantially increases the parties’ signing options and can surmount concerns over split execution.
According to Oxford Architects Partnership v Cheltenham Ladies College, “clear terms” are required to exclude a party’s right to rely on a statutory limitation defence.
The case for reform
The English courts may yet opine on split execution. Until then, for those not wishing to leave this to chance, one of the above-mentioned choices may beckon instead. The trade-off for businesses in taking such a path is greater inconvenience.
However, another jurisdiction shows a way forward.
In May 2020, the Australian Government amended section 127(1) of the country’s Corporations Act 2001 through a Ministerial Determination to make it easier for businesses to sign documents electronically, including through split execution. These interim changes permitted greater flexibility during COVID-19 and have been renewed on a short-term basis as the pandemic has continued.
The UK Government is aware of companies’ concerns. In 2019, the Law Commission published a report on the electronic execution of documents. While this did not expressly discuss split execution, its proposals included the legislative reform of the electronic execution of deeds to give greater confidence to the modern marketplace. The Lord Chancellor accepted the Law Commission’s recommendation to convene an Industry Working Group to examine the practical issues, as well as endorsing a future review of the law on deeds.
Even so, the promise of modernisation – rather like the end of this awful pandemic – seems an age away. In the meantime, we can expect e-signature platforms to build on last year’s momentum.