No Good Deed: Common Mistakes Made When Executing a Deed

This is because a deed does not require that consideration pass between the parties – it can in fact place an obligation on only one party with no reciprocal obligation on the other – and, rather than the standard six-year limitation period that applies to a breach of contract claim under both English and New York law, a claim for breaching a deed is subject to a 12-year limitation period.

Deeds are relatively common in English practice, though less so under New York law, where they are typically used for real estate transactions or to grant security interests, but are otherwise not often employed. That said, in both systems, a contract can be executed as a deed if certain formalities are followed (these are mostly governed in England by the Law of Property (Miscellaneous Provisions) Act 1989 and the Companies Act 2006, and in New York by the General Obligations Law).

Problems can arise when parties do not pay enough attention to those formalities and thus believe they are executing a deed, while a court will only enforce the instrument as a simple contract.

Under both English and New York law, for an agreement to be executed as a deed it must satisfy specific legal requirements:

• It must be in writing.
• It must state on its face that it is being executed as a deed.
• It must be validly executed by the person making it.
• It must be delivered.

The first element is easy to satisfy by simply committing the agreement to writing, rather than relying on any oral agreement. The second element can be satisfied by including language to this effect, often on the signature page, such as “the parties have executed this agreement as a deed.” The fourth element is similarly simple to satisfy, as this does not necessarily require physical delivery but again can be satisfied by stating in the document that it is delivered as a deed; language to the effect that “this agreement is delivered as a deed” is usually sufficient.

It is the third element where parties sometimes fall short of executing their agreement as a deed. Often they will have only one person sign it, as they would a simple contract. If that is the case, then despite any language labelling the agreement as a deed, a court is likely to enforce it as a simple contract only.

For the agreement to be validly executed as a deed, it must either:

• be signed by a director of the company and witnessed by someone who co-signs as such; or
• be signed by two directors of the company; or
• be signed by a director and the company secretary; or
• have the company’s common seal affixed.

The benefits – or, depending on a party’s perspective, the detriments – of executing an agreement as a deed are primarily related to the consideration necessary or the limitation period applied to any claims for breach of the agreement.

As to consideration, a simple contract requires consideration to pass between the parties under both English and New York law. This might be as little as the proverbial peppercorn (or, as in the case of Chappell & Co Ltd v Nestle Co Ltd [1960] AC 87, a handful of chocolate bar wrappers), but contracts still have been held to be unenforceable due to a lack of consideration. Therefore, where the parties’ agreement might raise issues of consideration, especially where the agreement is designed to require performance by only one of the parties, execution as a deed can provide greater certainty and security as to the effectiveness and enforceability of the agreement.

As to the limitation period, this could easily become a benefit to one party – the one bringing a claim at some later date – and a detriment to the other – the one resisting that claim.

Under both English and New York law, a claim for breach of contract is subject to a six-year limitation period, meaning the claim must be brought within six years of the breach’s having occurred or it will be time-barred. Under a deed, however, a breach claim is subject to a 12-year limitation period, doubling the length of time that claims for breach remain live. This longer period might be desirable, for instance, in long-term projects or where parties wish to build in more time for amicable resolution before claims must be commenced to avoid their being time-barred.

In most cases, there is likely little need for parties to attempt to convert what would normally be executed as a simple contract into a deed. Doing so should be avoided unless there is a specific reason that the parties can articulate as to why a deed would be preferable in the circumstances.

However, where it is their intent to execute an agreement as a deed, it is important for parties to understand the formalities required for executing a deed and to ensure those are satisfied. Otherwise, a party may find that it cannot enforce an agreement because it lacked consideration, or that its claims are time-barred because it mistakenly thought it had 12 years to commence and action when in reality its claim was time-barred after six years.

So if a good deed is what you are after, be sure to follow the rules.

This article was co-authored by Marshall Hagemeyer, Associate.