A recent case before the High Court highlighted the importance of correctly executing a document especially when a power of attorney is involved.
In Katara Hospitality v Guez the court decided that a deed of guarantee relating to the seller’s obligations under a share purchase (which had been executed on the defendant’s behalf under a power of attorney) was invalid. This was because the power of attorney did not meet the requirements for a valid deed and additionally the execution of the guarantee was not within the scope of the power of attorney.
In the case, the defendants put forward the following arguments:
- the power of attorney was not a valid deed (which is a requirement for any power of attorney to be binding) as it did not satisfy the face value requirement (explained below);
- the powers granted under the power of attorney were only to sign agreed documents in connection with the share sale, which the guarantee was not; and
- the guarantee was not binding as only one of the defendants’ signatures was witnessed.
The defendants succeeded on each of these points and the buyer of the failed in their claim for approximately €65 million which would have been due to them had the guarantee have been binding.
This case highlights the importance of ensuring documents are executed correctly. So what are the key issues?
Deed or Simple Contract?
There are two forms of written contract under English law:
- contracts written under hand (commonly known as simple contracts); and
- deeds.
Most contracts made in writing will be simple contracts. Deeds are used because either the law requires their use (including transfers of land and granting a power of attorney) or because a deed has certain advantages, including that:
- For a simple contract to be valid each party has to provide ‘consideration’ (i.e. some form of counterpayment or other obligation, even if it is not of equivalent value) where deeds do not. For example a gift which is intended to be legally binding is usually drafted in the form of a deed otherwise it is likely to be unenforceable due to lack of consideration from the recipient.
- Most claims for breach of a simple contract must be brought within six years of such breach, whereas deeds have a limitation period of twelve years.
The key points to create a deed are:
- A deed must be in writing.
- A deed must make it clear that it is intended to be a deed (face value requirement).
- A deed requires additional formalities in relation to its signature/execution in order for it to be enforceable. For instance, the signature of individuals and companies (signing with one director) will require witnessing.
Execution by an Attorney
An attorney is a person who has an express power, created by deed in the form of a power of Attorney (PoA), to act on a person’s behalf or act in a company’s name and on its behalf. The PoA will set out exactly what the attorney is able to do and this may be very general or it may be limited to defined purposes (for example, execution of a specified document). If a properly appointed attorney signs a document on behalf of a person or a company, they will be bound by the terms of that document this document.
It is possible to authorise an agent to act on behalf of a person or company and to sign documents on its behalf, but can lead to some uncertainty and this is not commonly used in transactions and without a PoA cannot authorise the agent to sign a deed.
Therefore getting the scope of a PoA correct is incredibly important. If an attorney purports to enter into an agreement for which they have not been granted the power to do, the company or individual will not be bound by that agreement. In the scenario above, even if the PoA and the guarantee had each fulfilled all the requirements to be validly executed as deeds, executing the guarantee (as it had not been previously agreed by the defendants) it was found that executing the guarantee fell outside the scope of the powers under the PoA and the claim under the guarantee would still have failed.
When executing any document via a power of attorney, and especially deeds, the follow key points should always be considered and documents checked before and at the time of signing:
- The scope of the PoA must be broad enough so that the attorney may enter into the desired agreement (although the person granting the power will want to balance this with not being bound to unexpected obligations).
- The PoA must be executed as a valid deed.
- Any final document signed under the PoA must also be properly signed, and if this document is itself a deed, the formalities relating to execution of deed followed carefully.
To discuss any of the issues raised in the above article, please contact a member of our Corporate and Commercial Team on 01737 854 500.