The facts
A lender attempted to enforce a guarantee by an individual and legal charge over real estate by a company. The guarantee and legal charge were contained in a document which was described as a deed.
Unfortunately, the individual had not signed the document in his personal capacity in the relevant signature block, although he had initialled some pages and signed on behalf of a company other than the one granting the legal charge.
An earlier draft of the document had been signed on behalf of the company giving the charge and the signature page attached to a final version which was materially different from the draft.
The issues
These circumstances presented the lender with a number of problems:
- Under the Statute of Frauds 1677 (SOF) a contract of guarantee must be in writing or evidenced by a memorandum in each case signed by or on behalf of the guarantor. Failure to comply makes the guarantee unenforceable through the courts.
- S 1 of the Law of Property (Miscellaneous Provisions) Act 1989 provides that for an instrument to be validly executed as a deed by an individual, the individual must sign it in the presence of a witness who attests the signature.
- Ss 44 and 46 Companies Act 2006 (CA 2006) provide that a document is validly executed as a deed by a company if, amongst other possibilities, it is signed on behalf of the company by two authorised signatories or by a director of the company in the presence of a witness who attests the signature, and the other statutory requirements for a valid deed are satisfied.
- The case of R (on the application of Mercury Tax Group and another) v HMRC [2008] EWHC 2721) (Mercury) where the judge commented that the taking of a signature page from one document and 'recycling' it for use with another materially different version was not capable of creating a deed. The judge's comments in Mercury were obiter (ie not part of the main decision which concerned an application by HMRC for a search warrant).
- Under s 85 of the Law of Property Act 1925 a legal charge over land in England and Wales can only be created by deed.
The judgment
The Court held that the guarantor was not liable under the personal guarantee because there was no evidence that the guarantor's signature on behalf of one of the companies and initialling of some of the pages of the document was intended to operate as a signature in a personal capacity. Furthermore, the requirement that the signature must be witnessed was not satisfied.
The Court found that the purported legal charge was not effectively executed by the attachment of pre-signed signature pages, despite finding that it was the intention of the relevant company and everyone else that the final deed would be executed in this way.
This was on the basis that the execution of deeds by both individuals and companies required signature and attestation to form part of the same physical document (as stated in Mercury).
The Joint Working Party note
These issues were considered by the Joint Working Party of The Law Society, City of London Law Society and Financial Law Committee note on virtual signing or closing in 2009 (updated in 2010) which is referred to in the judgment. The Joint Working Party concluded that the comments in Mercury should be confined to its facts and that the earlier Court of Appeal decision in Koenigsblatt v Sweet remained the leading authority on the principles of authority and ratification to the creation of contracts.
In summary, Koenigsblatt v Sweet is authority for the proposition that amendments made to a document with the authority of the parties before it becomes legally binding, but after they have signed are binding on them. In Koenigsblatt, the contract was not one which required execution as a deed.
The judge explicitly stated her disagreement with the opinion of the Joint Working Party pointing out that Koenigsblatt dealt with a contract which was not a deed.
This judgment appears to be decided on the basis that signature on the same physical document is essential for the validity of a deed. Unlike Mercury, it is not an obiter decision and therefore strengthens this line of argument.
What effect does this decision have on virtual completions?
The Joint Working Party put forward three options for virtual completions where the signing parties are not in the same room and communicate through email usually via their lawyers.
Of these, only Option 1 is suggested for documents executed as deeds. This option requires final versions of the relevant documents to be emailed in electronic format, with or without an additional copy of the signature page in the same format. Each party then prints and signs the signature page only and emails back the final version of the document together with a scanned copy of the signed signature page.
In the opinion of the Joint Working Party (supported by leading counsel), the final version of the document and signature page attached to the email equate to the "same physical document" referred to in Mercury. This view was endorsed by the Law Commission in its Consultation Paper on the electronic execution of documents. This makes sense, as the days when deeds were embodied in a single piece of vellum are long gone.
The judgment does not undermine this opinion, as the case is one where the signature page was 'recycled' from an earlier version of the deed. The Joint Working Party makes it clear that the use of pre-signed signature pages to purport to execute deeds is not recommended.
Option 1 is widely used in loan transactions, sometimes with the addition of a requirement for the addressee of the email to print the whole document before signing. A hard copy may be required in some cases for registration or filing purpose, as we've discussed previously.
Bioconstruct GmbH v Winspear [2020] EWHC 7 (QB)
