Have you noticed that sometimes your contract document is called a “deed”, and sometimes it is called a “contract” or an “agreement”?
This month, I want to explain what a “deed” is, when it’s ok to use a deed and when it isn’t appropriate.
What is a Deed?
There’s a lot of history and law behind “deeds”, but let’s keep this short and sweet. A deed is basically just a very formal legal document.
If it has been signed properly, a deed is legally binding. That means that any promises you make under a deed can be enforced by a court order. In other words, if you breach the promises you make in the deed, you may be liable for any consequences that another party to the deed suffers.
Deeds have a couple of formal requirements to be valid:
- In many jurisdictions (including WA), if the party to the deed is an individual person, their signature must be witnessed by another person who is not a party to the deed, or a recipient of benefits under the deed.
- If the party to the deed is a corporate entity, the deed must be executed in accordance with section 126 or section 127 of the Corporations Act 2001 (Cth), which means that it must be signed by an appointed attorney or agent or by two company directors or a company director and the company secretary.
Post-COVID, companies can thankfully now do this electronically. However, each state has different requirements for individuals executing a deed so you should check this. In WA, for example, you still need to physically break out a pen and have someone else there to watch and confirm your wet ink signature.
What is the difference between a “deed” and a “contract”?
1. No need for an exchange of value in a deed
A contract requires a number of elements to be present before it is legally binding. The three most important legal elements in commercial agreements are:
- Offer (e.g., the tender or proposal)
- Acceptance (e.g., the letter of award or purchase order)
- Exchange of something of value (e.g., delivery of services in return for a fee, otherwise known as “consideration”).
If these elements are not present, then the contract parties won’t be able to go to court and ask a judge to make a decision about their rights under the contract.
The major difference between a deed and a contract is that a deed does not require these elements before it is legally binding.
2. Deeds can be executed by one party
Another difference is that a deed can be executed by a single party. This is different to a contract, which is a document recording a transaction between two or more parties. An example of this might be a confidentiality undertaking by one person, or a deed of indemnity or release.
3. Deeds are binding for longer
If you’ve watched a lot of “Law and Order”, you might have heard detectives talk about how they can’t prosecute someone for an old crime due to the “statute of limitations”.
There’s a lot about Law and Order that stretches truth, but a statutory limitation period is a legal concept that has an equivalent in Australian states and territories. It’s a piece of legislation that limits the length of time during which a party can commence legal proceedings to recover damages for a wrong that they believe they have suffered.
In most Australian jurisdictions, the statutory limitations period for breach of contract (and most other actions) is 6 years. For deeds, however, it is at least 12 years.
This extended liability has obvious implications for risk, insurance and business costs.
How do you know if it’s a deed?
You’ll know by looking at the words just above the signature panels of your contract. These will say either “Executed as an agreement” or “Executed as a Deed”.
When is it ok for a document to be a deed?
Deeds are most useful when the parties want to record legal obligations, but there is no exchange of value. This means that a contract would not be enforceable. In commercial transactions, two very common examples of this are:
- Agreements covering exchange of commercial information (e.g., NDAs or confidentiality agreements); and
- Significant variations or amendments to an existing commercial contract (e.g., deeds of variation or novation deeds).
Key practical tips:
1. Ask for it to be changed to “agreement”
The vast majority of commercial agreements do not need to be deeds. If you are being asked to execute a straightforward contract and you see the words “Executed as a Deed” above your signature, you should be asking for these to be changed to “Executed as an Agreement”.
If the other party refuses, you should politely ask why they want the document to be executed as a deed. Is there some kind of long term risk that you should know about? This is important because you need to price for that risk, including carrying insurance to cover it for the longer limitations period.
If the document is a confidentiality agreement, the absence of valuable information is a valid reason for it to be a deed, so I’d be less concerned about that.
2. Make sure it is properly executed
If you’re the party that wants your document to be executed as a deed (e.g., you’re exchanging very sensitive commercial information and may want to get a court order preventing disclosure), then you must ensure that it is properly executed. This means a s127 execution for a company. For individuals, you will need to obtain legal advice in the relevant jurisdiction, as the rules are different.
