Hogan Lovells Publications | 05 February 2018

Spot the defect

A County Court decision has examined whether a deed which failed for invalid execution can survive as a simple agreement and whether, when that defect is apparent on the face of the deed, a party seeking to rely on that deed can claim that the other party is estopped from asserting that the deed is void because of that defect.

Background

A company (the "Guarantor") gave a guarantee (the "Guarantee") to an insurer in a property development context. The homes built by a property developer, whose obligations to the insurer were the subject of the Guarantee, turned out to be defective. The insurer had to pay to rectify the building defects as a result of a guarantee which it in turn had issued to house purchasers. The insurer then claimed against the Guarantor for payment under the Guarantee.

The Guarantor argued that:

• the Guarantee was not validly executed by it as a deed because it had only been signed by one director (ie. it did not comply with the requirements of the time, being Section 36A Companies Act 1985, which required a deed to either be signed by a director with the corporate seal applied, or for two directors (or one director plus the company secretary) to sign the document).
• even if the Guarantee took effect as a simple contract, then the insurer's claim would be statute barred because it was made more than 6 years after the claim. (If the guarantee were a deed the relevant limitation period would have been 12 years of course).

The decision

The judge decided that:

• it was not open to the insurer, as beneficiary of the Guarantee, to argue that the Guarantor was estopped from claiming that the Guarantee was void because it had been invalidly executed.
  This is because on the facts it was obvious that the document had not been executed in accordance with the requisite formalities of the Companies Act. The leading case of Shah v Shah ([2001] EWCA Civ 527) was distinguished because, as a matter of fact, in that case the defect in execution was not obvious and so the beneficiary could not have known that the signatory had not signed the document in front of the witness as appeared to be the case on the face of the document. The judge followed Briggs v Gleeds ([2014] EWHC 1178 (Ch)) where the Shah estoppel argument was rejected because the relevant document was obviously defective on its face.
• whilst the Guarantee was invalid as a deed, it did survive as a simple contract because consideration was given for its provision. The existence of that consideration was even recited at the beginning of the Guarantee.
• On the facts, the claim under the Guarantee was not statute barred – whilst the limitation period was reduced to 6 years as the Guarantee was a simple contract, as a question of fact the relevant claim under it was made by the insurer within the applicable limitation period.

Comment

Whilst this is only a County Court judgment, it is helpful on the important question of whether a failed deed can survive as a simple contract provided that the other conditions for the existence of a valid contract are met (being the need for consideration; the authority of the signatory to sign; and valid execution of the contract). Any claim under the relevant agreement would also have to have been made within the 6 year limitation period.

This is an area of the law where there are conflicting cases. It is notable that the Guarantor did not argue the invalidity case strongly and, in particular, did not cite the Mercury case^[1] in which Mr Justice Underhill held that a defective deed did not survive as a simple contract, saying "the parties intended them to be deeds and their validity must be judged on that basis".

On the other hand, Mr Justice Behrens in Bank of Scotland v Waugh^[2] came to a similar conclusion to the County Court in this case. He held that although a legal charge which had been invalidly executed as a deed was void for the purposes of conveying a legal estate under s52 Law of Property Act 1925, that did not make the charge void for all purposes and held that the charge was effective as an equitable charge.

The Law Commission looked at this legal uncertainty in its 1998 report but concluded back then that it would not be appropriate to put a rule in place as each case should be decided on the merits of the facts of that case. Perhaps it is now time for the law makers to think again?

One practical step which could be taken by those seeking to rely on agreements executed as deeds, and which this case demonstrates the worth of, is inserting a recital in the agreement confirming that consideration was given.

This decision is also important in the context of the application of the rule in Shah v Shah regarding estoppel – whilst the principle developed in Shah could apply in theory to the execution of a guarantee by a company in accordance with the Companies Act, it will not be applied where the defect is obvious on its face.

This decision forms another salutary lesson that execution formalities must always be checked with a keen eye for detail.

Zurich Insurance Plc v Nightscene Ltd ([2017] EW Misc 27 (CC))

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[1] [2008] EWHC 2721 (Admin) at para 40
[2] [2014] EWHC 2117 at paras 60-61

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