Contracts under seal v under hand

[edit] Introduction

Contracts may be executed under seal (signed by the parties, witnessed and most importantly made clear that it is executed as a deed - see below) or under hand (a 'simple contract' that is just signed by the parties).

[edit] Consideration and limitation periods

There are two important differences between simple contracts, and contracts that are under seal (deeds):

Firstly, simple contracts and contracts under seal have different limitation periods. An action founded on a simple contract cannot be brought after six years from the date on which the cause of the action accrued. The limitation period for a contract under seal is 12 years.

Secondly, unlike a simple contract, a contract under seal does not have to be supported by valuable consideration.

For example, where a collateral warranty consists of unilateral undertakings by one party, the contract must be a contract under seal if it is to be enforceable. It is important to note that whilst consideration is not necessary for a contract under seal in the absence of valuable consideration and, arguably, in the absence of something more than mere nominal consideration, the remedy of specific performance will not be available in respect of the contractual undertakings (see Milroy v Lord).

Specific performance is an equitable remedy requiring the contract breaker to fulfil their contractual obligations, rather than awarding damages for breach. Equity does not assist a volunteer, hence the need for consideration. It is suggested that a deed, which relies on merely nominal consideration, could be rescued by the addition of a consideration, which consists of ‘the mutual undertakings’ of the parties to a deed.

[edit] Legislation

Much of the law relating to the execution of deeds was swept away on 31 July 1990 by the Law of Property (Miscellaneous Provisions) Act 1989 dealing with the execution of deeds by individuals, and by the Companies Act 1989 dealing with the execution of deeds by companies.

Section 1(3) of the Act provides that a deed must be signed by the person who is to be bound and the signature must be attested by a witness. If this procedure is not followed then the document will not be valid as a deed.

Section 1(2)(a) provides that a document shall not be a deed unless it is made clear on its face that it is intended to be a deed by the person making it. It follows that the document must be described as a deed and the attestation clause must include a statement that it is being executed as a deed. If such descriptive words are not included then the document will not be valid as a deed.

The Act does not abolish the old common law rule that to be effective a deed must be delivered by the person who is to be bound. Delivery does not mean the physical handing over of the document but the evincing of an intention, whether by words or conduct, that the party is to be bound. Such intention was satisfied prior to the Act by signature and it is submitted that signature will continue to satisfy the requirement of delivery.

Companies may still use their seals to execute a deed provided that this is in accordance with their Articles of Association. Section 130 of the Companies Act 1989 introducing a new section 36(a) to the Companies Act 1985 provides by sub-section 4 that if a document is signed by a director and the secretary of the company or by two directors of the company and is expressed (in whatever form of words) to be executed by the company it will have the same effect as if it had been executed under the common seal of the company, i.e. a deed.

Further, sub-section 5 provides that a document which makes it clear on its wording that it is intended to be a deed has the effect of a deed even though the specific requirements for execution dealt with in sub-section 4 above are not complied with. For example, a document that is described as a deed and is executed by one director of the company will operate as a deed. Extreme care must be taken to ensure, if it is intended only to create a simple contract, that a company giving a collateral warranty does not accidentally execute the document in such a manner as to give rise to a deed.