The importance of due execution and delivery of documents, and the potentially severe consequences if care is not taken.
The recent case of Bibby Financial Services Limited vs. Magson reviewed when an individual will be deemed to have entered into a legally binding personal guarantee. This is not necessarily when a signed and dated guarantee is handed to the bank. The case looked at the continuing importance of "delivery" of documents and the need for clear evidence that all parties intended to be unconditionally bound.
In the digital world that business now inhabits, the whole question of the delivery of documents is more important than ever. Without a face to face completion meeting, can contracting parties be comfortable they have a binding agreement, for example, if the transaction is concluded by emails. The article explores these issues and also the consequences if the parties get it wrong.
When will a director be bound by the terms of a personal guarantee (“PG”) issued to the company’s bank? Is it when they:
(a) agree by email to sign a PG;
(b) they sign the facility letter with the PG as an express obligation;
(c) sign and date the PG;
(d) send the PG back to the bank
Following the recent case of Bibby Financial Services Limited vs Magson and others, the surprising answer may be that none of these may result in a binding PG.
The Bibby case reminded us of how important the concept of "delivery" of a document is. At the end of a long negotiation process, it is a mistake to view execution as a mere formality. However, get it wrong and the documents may be unenforceable.
This article looks at individuals' execution/delivery of deeds (as per the facts of the Bibby case). In respect of corporate entities, there is a further body of law.
When is a document a deed?
Section 1 of the Law of Property (Miscellaneous Provisions) Act 1989 outlines the requirements for a document to be a deed.
The key components of a deed are as follows:
(i) the document must make it clear that it is a deed (execution clauses often contain the phrase "duly executed and delivered as a deed");
(ii) the document must be ‘validly executed’, meaning that person (or authorised person) must sign it on behalf of that individual;
(iii) signing must take place in the presence of a witness; and
(iv) it must be delivered as a deed.
What happens if a component is missing?
The consequences vary depending on what component is missing.
For example, if a deed is not witnessed but everything else is in place, courts have held that the document would still have legal effect (but not as a deed). The Bibby case looked at whether a PG had been delivered, and the consequences, if it hadn't.
The Bibby case showed how the requirements of the law inter-relate with everyday business life.
The proposed guarantors met with a representative of Bibby (their lender) in their pub to discuss finance terms. The guarantors had signed the PGs, which were witnessed and handed over to the Bibby representative. However, written manuscript amendments were made to the PGs.
The guarantors maintained that they had only signed and handed over the PGs as "a sign of good faith". The intention was always that the PGs were going to be updated and re-executed. Therefore there was no intent to be bound by the originally signed documents.
The court held that the PGs had not been delivered, in the legal sense, by merely being handed over to Bibby after signature. For a document to be enforceable, it was necessary to produce further evidence that all parties intended to be bound.
For those wanting to ensure a binding contract is in place:
a. make sure the execution clause states that the "document is executed and delivered as a deed"
b. if manuscript changes are made to a document and the parties still intend to be legally bound, they should initial such changes. If the parties agree that the document should be cleaned up and re-executed, they should make it clear whether the interim document is still legally binding;
c. make sure there is clear additional evidence that each party intends to be bound by it. For example, banks are increasingly asking guarantors’ legal advisers to sign a confirmation letter. Not only must they confirm that the guarantor executed the document, but that the guarantor "wishes to proceed and has asked me to return and deliver the guarantee to you".
With the increasing use of virtual completion meetings, cases like Bibby serve as a timely reminder of the importance of due execution and delivery of documents, and the potentially severe consequences if care is not taken.
Newer news items:
Older news items: