Deeds are used in a commercial context for various reasons. One such use is to record settlement agreements between parties in dispute. Considering the importance of these instruments, it is crucial that companies entering into deeds are certain as to the point in time when a deed becomes binding on, and therefore irrevocable by, one or more parties.
High Court considers the law on the execution and enforceability of deeds
Helpfully, the High Court’s ruling in Silver Queen Maritime Ltd v Persia Petroleum Services plc [2010] provides useful clarification as to when a deed will be deemed irrevocable. It also illustrates the significant disadvantage a party can face when it fails to adequately express the time at which the deed is to become binding.
Facts of Silver Queen
Persia Petroleum Services (PPS) was contracted by Iranian Offshore Oil Company (IOOC) to carry out exploration and drilling services in the Persian Gulf. Silver Queen Maritime Ltd (SQM) was sub-contracted by PPS to carry out an oil exploration survey in 2008/09. Under the sub-contract, PPS was to pay SQM’s invoices regardless of whether it had received money from IOOC. In October 2008 IOOC stopped making payments to PPS in respect of SQM’s invoices and consequently PPS stopped payments to SQM. SQM, therefore, brought a claim against PPS for non-payment of invoices.
In July 2009 PPS agreed to settle SQM’s claim for approximately €8.1m and this was recorded in a settlement deed (the deed). The deed was signed by PPS and sent to SQM for countersignature on 21 July 2009.
On 22 July 2009 PPS purported to withdraw from the settlement on the basis that SQM had not disclosed the fact that, in previous negotiations with IOOC, it had agreed to accept lower offers. In fact, PPS had previously requested that SQM attempt to resolve the dispute directly with IOOC. Notwithstanding this objection by PPS, SQM countersigned the deed and returned it on 22 July undated.
In August 2009, after further negotiation, SQM indicated it would be willing to accept €5.2m, provided it was paid by 30 September. This was recorded in the minutes of the meeting that were signed by each party. However, the sum was not paid and SQM sought a declaration from the court that the deed concluded in July was binding. PPS’s position was that its consent to the settlement had been successfully withdrawn before the deed was executed, or alternatively, the deed was to be rescinded on grounds of non-disclosure by SQM. In addition, PPS sought to enforce the August settlement agreement, the effect of which would render the deed concluded in July invalid.
Judgment
The court found that SQM was entitled to enforce the deed. In reaching its conclusion, the court considered the following issues:
- the circumstances in which a deed will become irrevocable, thereby preventing a party from ‘withdrawing’ from its agreed effect;
- whether a deed must be dated to be valid;
- whether the non-disclosure of settlement negotiations would allow the court to set aside an otherwise binding deed;
- whether there are other circumstances that would give rise to the court setting aside an otherwise binding deed; and
- whether the settlement negotiations in August 2009 resulted in a new settlement that replaced the agreement set out in the deed.
When will a deed become irrevocable?
A binding deed must comply with the formalities set out in the Law of Property (Miscellaneous Provisions) Act 1989 (the 1989 Act). According to s1(2) of the 1989 Act, the document must:
‘(a)… make it clear on its face that it is intended to be a deed by the person making it or… by the parties to it (whether by describing itself as a deed or expressing itself to be executed or signed as a deed or otherwise); and (b)… [must] be validly executed as a deed by that person or… one or more of those parties.’
Furthermore, a deed is validly executed only ‘if (a) it is signed… and (b) it is delivered as a deed’. (Section 1(3) of the 1989 Act).
First, Mr Justice Lindblom considered whether the deed had been ‘delivered’ as a deed. Relying on the Court of Appeal judgment in Longman v Viscount Chelsea [1989], he noted that a deed can be delivered in three ways once it has been signed:
- unconditionally, so that it becomes irrevocable and takes immediate effect on delivery;
- in escrow, so that it is irrevocable but does not take effect until certain conditions are fulfilled; and
- to an agent with instructions to deal with the deed in a certain way in a certain event, whereby it will be revocable and of no effect until it is so dealt with.
Secondly, Lindblom J considered s46(2) of the Companies Act 2006 (the 2006 Act), which states that, for the purpose of delivery, the deed ‘is presumed to be delivered upon its being executed, unless a contrary intention is proved’. The court heard evidence that PPS had expected to retain its right to withdraw until execution of the deed, which would occur only after the return of the countersigned document. However, Lindblom J stated that it was for the court to look to the objective intention of the parties, and in doing so, found that the deed had been delivered on the one condition that it was to be countersigned by SQM and returned to PPS. The terms had already been agreed and PPS had failed to express its desire to retain a right to withdraw from the settlement. The deed had, therefore, been delivered in escrow. Furthermore, Lindblom J pointed out that the term ‘executed and delivered as a deed’ was on the deed itself in line with s1(2) of the 1989 Act, and there was nothing to indicate that PPS’s intentions were otherwise.
Likewise, Lindblom J held that the absence of a date did not invalidate a deed, save for circumstances in which a requirement that the deed be dated was an express term in the deed. Thus, in the absence of objective ‘contrary intention’ the deed had been presumed delivered as a deed on signing notwithstanding its lack of a date and was irrevocable from that moment onwards.
Could the deed be set aside for non-disclosure?
PPS argued that, should the deed be found to have been properly executed and delivered, it must be rescinded because SQM had failed to disclose to PPS the offers it had made to IOOC. Dismissing this argument, Lindblom J held that the relationship between PPS and SQM did not entail a duty to disclose this information. He explained that even if such duty had existed as a result of the unusual request by PPS that SQM enter discussions with IOOC, it would have ceased on the commencement of legal proceedings: no duty of loyalty exists between parties to hostile litigation and such parties are therefore under no obligation to disclose information relating to the claim, during settlement negotiations.
Any other circumstances that would result in the deed becoming unenforceable?
Lindblom J stated that there may be circumstances in which a deed is properly executed, but for other reasons may be unenforceable. Such circumstances include where a deed relates to an unconscionable transaction, or if there has been a misrepresentation. However, he did not consider there to be such circumstances in Silver Queen.
Was the deed superseded by the agreement entered into in August 2009?
Lindblom J concluded that SQM was not prevented from relying on the deed following its agreement in August 2009 to accept the lower sum of €5.2m. His findings were based on the fact that SQM had made it clear that it would only accept a lower sum instead of the sum set out in the deed if it was paid by 30 September 2009. SQM had clearly stated that should it not receive the money by 30 September, it would retain the right to rely on the deed.
Conclusion
Silver Queen illustrates how important it is for parties to express when they intend to be bound by a deed, and the potential consequences where they fail to do so. If a party intends otherwise, this intention must be communicated so it can be objectively identified. The most effective method is to include a term in the deed itself to reserve the right to revoke up until a certain point in time, or until a condition is met. Furthermore, Silver Queen highlights the durability of deeds as opposed to simple contracts, as it shows the difficulty in setting aside a deed once duly executed.
Silver Queen also provides a stark reminder to parties entering into settlement negotiations that they should attempt to obtain any relevant information before entering into a binding agreement. Had a common-sense approach been taken in Silver Queen, PPS would have ascertained that IOOC was unwilling to cover the amount it had offered to pay SQM. Moreover, it would have learnt that SQM was willing to settle for a significantly reduced sum.
Considerations when executing a deed
Whether executing a deed in a transaction or in litigation, it is important to remember the following:
- Under the 2006 Act, in absence of ‘contrary intention’, a deed is presumed delivered on execution. When in dispute, this requisite intention will be judged ‘objectively’ by the court.
- Parties to deeds should consider reserving their rights to withdraw until the last possible moment.
- If a deed is to become binding only on the fulfilment of a certain condition, make this condition an express term in the deed itself.
- The absence of a date does not automatically invalidate a deed.
- Parties should satisfy themselves that they have considered all information they are able to access that might be relevant to the terms of the deed, prior to execution.
By Chris Pease, associate, and Prina Patel, trainee solicitor, Edwards Angell Palmer & Dodge UK LLP.
E-mail: cpease@eapdlaw.com; prpatel@eapdlaw.com.
