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Company counts the cost of mistake when drawing up deeds

Posted: 2nd November 2011   In: Corporate Commercial

When drawing up deeds it is vital to meet all the legal requirements – otherwise the document could prove invalid and cost you thousands of pounds, as one firm found recently.

The case involved a financial services company that entered into an invoice discounting facility with two directors of a client firm.

A deed was drawn up providing guarantees and warranties that the directors would be liable for outstanding debts if their firm ceased trading. The directors signed the documents in front of witnesses and then handed them over.

Later, the directors’ firm did go out of business and the finance company sought to recover some of its money.

The directors refused to pay so the case went before the High Court. It ruled that the deed could not be enforced because it had not been properly “delivered”.

Deeds are a more formal agreement than contracts. It is not enough that they are signed and witnessed. They also have to be “delivered” to the other party, which in practice means the other party has to make it clear that they wish to be bound by the agreement.

That did not happen in this case. The court found that the document the directors signed contained notes saying that changes would be made. From this, the directors were entitled to expect that an updated version of the deed would be drawn up for them to sign.

This did not happen and so the deed could not be said to have been “delivered”. 

The ruling said: "The critical thing is that the person who has signed the deed must have separately indicated that he intends to be bound by the deed. 

"Mere signature is not enough. Nor is it enough that what looks like a deed has been given to the person who appears to be the beneficiary of it – the issue is not whether the document has been physically handed over to the beneficiary, but whether the person whose deed it is supposed to be intended to be bound by it."

Please contact us if you would like more information about the issues raised in this article or any aspect of deeds and contract law.