11 March 2020
In the recent case of Signature Living Hotel Limited v Andrei Sulyok Roxana Monica Cocarla [2020] EWHC 257 (Ch), 2020 WL 00929732 the High Court considered whether two deeds of guarantee which failed as deeds (because the formalities for a deed had not been complied with) remained enforceable as a matter of contract.
In his decision, the judge reinforced the general view that a deed can take effect as a simple contract if there is a defect in complying with the necessary formalities, so long as the contract would be valid as a simple contract at law (which requires consideration to be present) and it is not a transaction for which a deed is required (for example, a power of attorney)…
Did the defective deeds take effect as simple contracts?
Signature Living sought to argue (relying on a statement of the judge in the well-known 2008 Mercury Tax case – [R (On the application of Mercury Tax Group) v HMRC [2008] EWHC 2721 (Admin), [2009] STC 743] that where the parties intended to enter into a deed, their validity must be judged on that basis, and therefore a defective deed cannot survive as a simple contract.
Conversely, the lenders submitted (relying on an earlier 2005 case [Lloyds TSB Bank plc v The Dye House Limited [2005] EWHC 1998 (Comm)] that the guarantees were enforceable as contracts because they were:
The judge agreed with the lenders. He held that, if an otherwise complete contract of guarantee is intended to be embodied in a deed but the formalities have not been complied with, the creditor can still enforce the agreement. He did not consider that the Mercury case constituted a “sea change in the law” on this point, but instead that the particular sentence of Underhill J’s judgment that was relied upon by Signature Living was unimpressive and without authority. The court was also satisfied that on the facts, the guarantees were sufficiently supported by consideration.
Whilst there is no legal principle that a deed will always be saved in these circumstances (each case will turn on its own facts and the law as it stands at the particular time) it is undoubtedly a useful fall-back position for parties who have clearly reached a commercial agreement but have tripped up over the complex formalities of deeds in practice…