Coronavirus - No good deed: recent cases on issues with the signature of deeds - UK

• United Kingdom

• Banking and finance
• Coronavirus
• Financial services

20-07-2020

This update will examine two recent cases heard before the High Court which contain useful lessons for lenders, borrowers and lawyers on how the courts are likely to treat documents when the effectiveness execution is disputed. Whilst proper “due” execution has always been fundamental, at a time when all parties (and their advisors) are being required to adapt to, and adopt, different processes for the purposes of completing documents remotely, including where no hard copy document is printed, there is as strong a focus on the signing process itself as there is the negotiation of the contract.

Contents

Signature Living Hotel Ltd v Sulyok - Useful guidance on how the courts will look at agreements which purport to have been executed as deeds but where the formalities for execution as a deed have not been met.

Bioconstruct GmbH v Winspear and another - Confirms that it is not safe for lenders to rely on signed signature pages that have been appended to deeds in circumstances where the deed has been amended after the date on which the signature pages were signed.

Conclusions and useful guidance- Useful lessons for lenders, borrowers and lawyers

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Case 1 - Signature Living Hotel Ltd v Sulyok

Signature Living Hotel Ltd v Sulyok [2020] EWHC 257 (Ch) (the “Signature Living case”) provides useful guidance on how the courts will look at agreements which purport to have been executed as deeds but where the formalities for execution as a deed have not been met.

Background

A property development company borrowed money from two lenders for the purpose of developing a hotel, and, as part of the funding arrangements, a company from within the borrower’s group of companies (the “Guarantor”), granted two guarantees, one to each lender (the “Guarantees”). Neither loan was repaid when repayment was due,  and each lender made formal demand for repayment by the borrower under the relevant loan. The lenders also requested payment from the Guarantor under the relevant Guarantee by serving a statutory demand on the Guarantor. In turn, the Guarantor made an application to the court to prevent the lenders from presenting a petition to wind up the Guarantor.

The Guarantor argued that the Guarantees were not enforceable because they purported to have been made as deeds, and though they had each been signed by one director of the Guarantor, they had not been witnessed. Under section 44 of the Companies Act 2006, in order for a company to enter into a deed, the relevant document must be signed by either (i) two directors, (ii) a director and the company secretary or (iii) a director in the presence of a witness who attests the signature.

The Guarantor sought to rely upon a paragraph in the judgment of R (On the application of Mercury Tax Group) & Another v HMRC [2008] EWHC 2721 (Admin), [2009] STC 743 (“Mercury”), which stated that documents which purported to be deeds but which did not fulfil the requisite formalities would not survive as simple contracts.

The lenders acknowledged that the Guarantees had not been executed correctly as deeds but argued that, despite this, the Guarantees were still enforceable. The lenders asserted that the Guarantees fulfilled the requirements necessary for them to take effect as ordinary contracts, on the basis that (i) they were signed by a director of the Guarantor, (ii) there was valid consideration, and (iii) they were made in writing (under the Statute of Frauds 1677, a guarantee must be in writing for it to effective). Consideration is not needed for a deed, but it is necessary for a simple contract to be effective.

Judgment

The Court found that while the Guarantees had not been executed correctly as deeds, they were effective as ordinary contracts, as all of the elements needed for a valid contract were present. The Court held that the paragraph from Mercury had not changed the legal position and that the law is as stated in Andrews and Mitchell: The Law of Guarantees, being that, if a guarantee is made by way of a deed but the formalities for a deed have not been fully complied with then, where all of the elements of a simple contract have been made out, a guarantee can still be enforceable as a simple contract.

The Court found that the Guarantees were made for valid consideration. At clause 2.1 of each Guarantee, it stated that that Guarantee was granted by the Guarantor in consideration of the relevant lender entering into its loan agreement. The Court noted that consideration need not directly benefit a guarantor, but can consist of some benefit conferred on the borrower at the request of the guarantor, such as making a loan to that borrower.

The Court noted that, even if a guarantee is dated after the date of the relevant loan agreement, courts will look at the commercial reality of the situation with regard to consideration. In the Signature Living case, each Guarantee was envisaged in the relevant loan agreement. The Court stated that if it could be shown that a guarantee had always been envisaged, it would not help a party to argue that the consideration in relation to a guarantee was invalid on the basis of being past consideration.

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Case 2 - Bioconstruct GmbH v Winspear and another

Bioconstruct GmbH v Winspear and another [2020] EWHC 7 (QB) (the “Bioconstruct case”) confirms that it is not safe for lenders to rely on signed signature pages that have been appended to deeds in circumstances where the deed has been amended after the date on which the signature pages were signed.

Background

A lender made a loan to a company in relation to the construction of an energy plant. As part of the financing arrangements, an individual (“SW”) and a company (the “Company”) were to, respectively, guarantee repayment of the loan and grant a legal mortgage – this arrangement was to be documented under a single deed.

SW claimed that he had not validly signed the deed. He had not signed the final version of the deed (the “Final Version”) but an earlier version which had been circulated for signature (the “Earlier Version”), and he had not signed in his personal capacity but in the signature block relating to a company. SW had initialled a number of pages of the Final Version, but SW argued that this had been in order to approve changes that had been made to these pages, rather than to approve the Final Version as a whole. There was a signed signature block for the Company, but it had been signed by SW, who was not a director of the Company, and, again, the version that had been signed was the Earlier Version.

The signed signature page from the Earlier Version had been affixed to the Final Version following a meeting at which SW had agreed to make various changes to the Earlier Version.

Judgment

The Court held that the deed was not valid.

SW’s signature had not been applied to the Final Version. The court found that:

(i) the fact that SW had not signed the Earlier Version in the signature block for him in his personal capacity had been deliberate;

(ii) while SW’s initials on certain pages of the Final Version were legally capable of constituting a signature, this had not been what was intended - SW had only intended to approve the pages to which he had applied his initials, and that there was no evidence that SW had intended his initials to serve as a signature to the Final Version as a whole; and

(iii) even if the initials had constituted a signature by SW, they had not been attested by a witness, so they would not have complied with the formalities for entering into a deed.

With regard to the Company’s signature, the Court held that, even though it had been the intention of every party (including the Company) that the Company would sign the Final Version by the affixing of pre-signed signature pages taken from the Earlier Version, the Earlier Version was materially different to the Final Version and therefore the Company had not properly entered into the deed. The Court followed comments made by Underhill J in Mercury, which stated that taking signature pages from one document and using them on another document was not valid for the execution of a deed.

The Court noted that a document that is intended to be a deed but which is ineffective as such can, in certain circumstances, be effective as a simple contract (as illustrated in the Signature Living case). The Court noted further, however, that statute required that the agreement in the Bioconstruct case be effected by deed. The judge said that this “is not merely a ‘formal’ or ‘technical’ requirement (though it would not matter if it were): it is a fundamental statutory requirement [emphasis added], underpinned by sound policy objectives, designed to limit the scope for fraud or mistake”. Whether or not the director of the Company was ignorant of the formalities that had to be complied with in order to enter into a deed, “those requirements applied, as a matter of law. The same is true of any ignorance, or carelessness, on the part of Bioconstruct and its lawyers. Those requirements had not been complied with”.

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Conclusions

It should be noted that cases like these will always be judged on a case-by-case basis, so these judgments may not be applicable in every situation, but useful guidance can be taken from both cases.

Check signed documents carefully

Lawyers acting for lenders must take the time to ensure that documents have been signed correctly, by every party, by the correct signatories and witnessed if applicable. Execution of documents can cause logistical problems (particularly during the current pandemic when signatories may be working from home) leading to frustration and delay. However, rushing these checks could leave your client exposed at a later date – take your time to check signed documents carefully. Lawyers acting for borrowers should also take care to give their clients clear signing instructions and to check that the documents have been signed properly before passing them to the lender’s lawyers. Under the facility agreement the borrower will make representations that the finance documents are enforceable – if it later turns out that they are not, this could lead to a default under the facility agreement.

Don’t take shortcuts

The Bioconstruct case illustrates that taking shortcuts (such as affixing signature pages from a previous version) is not advisable. Attempts to save time and prevent inconvenience to signatories may (again) result in a lender finding itself exposed at a later date. Take care to follow the correct process, whether that be a physical completion meeting (extremely unlikely in the current climate), a Mercury remote completion process or using an electronic signing platform. Lawyers should ensure that the parties understand and are comfortable with the process.

Think about consideration

In the Signature Living case, the Guarantees were found to have been effective despite not having been executed correctly as deeds on the basis that there was valid consideration. Consideration would not have been needed had the Guarantees been executed correctly as deeds, but it proved crucial when it was found that they were not effective as deeds. Lawyers acting for lenders should therefore consider setting out in the guarantee document that it is being made for consideration (and what that is), especially if this is not otherwise obvious in relation to the transaction. This could act as a fallback so that the guarantee might take effect as a simple contract in the case that it fails to take effect as a deed (which of course hopefully won’t be the case if points 1 and 2 above have been followed).

Refer to guarantees in the loan agreement

A further lesson for lawyers acting for lenders is that, if a guarantee is envisaged as part of a transaction, it is worth setting this out in the loan agreement. If the guarantee is referred to in the loan agreement then, in the event that the guarantee is entered into after the date of the loan agreement, the loan agreement reference may help to mitigate the risk that, if entry into the loan agreement by the lender was purported to be the consideration for the guarantor entering into the guarantee, such consideration was past consideration and therefore invalid. If the giving of a guarantee is only discussed and agreed after the date of the loan agreement and is not referred to in the loan agreement, then the parties should be clear what the consideration is and refer to this in corporate authorities / the guarantee itself.

Remember that certain documents must be deeds

Lenders should note that certain documents must be made by deed, including (but not limited to) legal charges over real estate in England and Wales and powers of attorney. If one of these types of document had been signed in such a way that it was not a valid deed, as shown in the Bioconstruct case, we would not expect a court to find that it was still effective as a simple contract.

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The above is intended to be a high level summary of some of the issues surrounding the execution of documents arising from the facts of two cases. If you have any further questions on the above please feel free to contact your usual member of the Eversheds Sutherland International team.