Over time the commercial practice of "virtual signings and closings" has emerged in England and Wales. Often difficulties are encountered in arranging for signatures to documents. Either it may not be possible for all parties to be present for signing at completion, or it may be impractical to send the documents around all the parties for execution. In such cases, signing pages are circulated for execution in advance of completion of the final document and then attached. This practice was brought into focus recently with the case of R (on the application of Mercury Tax Group Limited and Another) v HMRC [2008] EWHC 2721 (Admin).
Attempt at fraud?
Mercury involved tax related issues. However, the matter of the process for virtual signing was considered in judicial review proceedings. In Mercury, the parties had signed incomplete drafts and the signature pages were then attached to the final version.
At the time of the judicial review, the court considered whether this practice was proper and also looked at the nature of the differences between the document signed and the final version. Not only did the draft have blanks to be filled in, but also the subject matter of the document had been altered. The combined effect made HMRC suspicious that there may have been an attempt at fraud. They also challenged the validity of the document, due to this practice of transferring signatures. It became apparent that the parties to the document were aware of the changes and therefore the process was not regarded as a dishonest implementation of the tax scheme, albeit some of the steps in the process were flawed. However, the issue of significance is the court's view in relation to the process of substituting signature pages.
"Re-cycling" signature pages
One of the arguments was that it is "ordinary office practice" to obtain signatures to a draft and transfer it to a final document. The authority relied on was Koenigsblatt v Sweet [1923] 2 Ch 314 on the basis that a contract could be altered after signature provided the changes were authorised. The judge's comment on the Koenigsblatt case was that the document that was altered was the same as the one that had been signed.
He did not accept that this, nor any other argument led, was authority permitting "the taking of a signature page from one document and its recycling for use in another." He also disagreed with the argument that with modern technology facilitating the reconstitution of a document there was no difference between altering a document after it has been signed, and attaching signature pages to what is effectively a new agreement. The judge's presumption was that the parties to the document must have regarded the signatures as an essential part of the document. From that he implied a common understanding that the document would exist as a "discrete physical entity" at the time of signing.
The statutory position
There are various Acts of Parliament governing the execution of deeds in England and Wales. The Law of Property (Miscellaneous Provisions) Act 1989 sets out the requirements for execution of documents and deeds by an individual. Execution of a document as a deed requires stricter rules for signing. This approach is usually used where the parties wish to be able to enforce the terms of the deed, even if no price has been paid for the obligations in the deed, if the deed is important for evidential purposes or in the case of contracts for a transfer of an interest in land.
The Companies Act 2006 applies the rules to the execution of deeds by companies. One of the principle methods of execution of a deed is for it to be signed by the individual/director/authorised signatory in the presence of a witness who must also sign. Thereafter the deed requires to be delivered.
The method of signing was not in dispute in Mercury. The main point raised by the judge was that his interpretation of the legislation was that the language envisaged the signature and the witness as being part of the actual deed itself at the time of signature.
Guidance note on virtual signings
Many of those involved in any type of commercial practice have raised concerns over the outcome of the judicial review proceedings, and have considered the impact the judges comments could have on the commercial practice of virtual signings and closings.
A joint working party was set up between the Law Society's Company Law Committee and the City of London Law Society Company Law and Financial Law Committees, to look into this interpretation, and they have taken advice from leading Counsel. Their conclusion is that "it is possible to demonstrate an alternative understanding and intention of the parties and/or to comply with this requirement for a "discrete physical entity/authoritative version" in cases where contracts are circulated for signature by email."
They have issued a Guidance Note setting out three options that they believe work where the procedure of virtual signings/closings is adopted.
Options for virtual signing
Where a virtual signing or closing is the required method of signing, the Guidance Note provides the following methodology (Option 1 of the Guidance):
- The lawyers should have their clients' instructions agreeing to this approach, and the agreement of all parties' lawyers should be secured prior to any virtual signing.
- The final version of the document should be emailed (as a pdf or Word document) to all absent parties and/or their lawyers. It may also be the case that it is more convenient also to include as a separate attachment, the relevant signing page.
- It is only the signatory page that requires to be signed by the absent party, but the presumption is that advice has been given to that party to read the final version of the document and that this has taken place.
- Each of the absent parties is then required to return one single email to its lawyer or the lawyer co-ordinating the virtual signing/closing. This email should have two attachments namely the final version of the document and a pdf copy of the signed signature page. If the document is a deed it is also necessary to stipulate when delivery is to take place, or to make the statement that the deed has not been delivered simply because it has been signed, if alternative arrangements for delivery have been made in terms of that transaction.
- It may be the case (and it is advisable) that the final document is also circulated for the "wet ink" signatures to be written on the deed. This will be particularly relevant if a copy is to be sent to Companies House or the Land Registry.
Options 2 and 3 suggested by the Guidance Note relate to guarantees (not executed as deeds) and simple contracts. In those cases there is less formality about returning the principal document when the signed signature page is returned, but otherwise the processes set out are similar.
Caveats to the virtual signing approach
The authors of the Guidance Note make it particularly clear that the Guidance Note is not an exhaustive list of options, nor is it a note that should be relied upon if put to the test. It is based on the presumption that the decision in Mercury is to be interpreted in light of its own facts.
In addition, there are several caveats in the Guidance Note, which advises interpreting each transaction on its own facts. There may be background reasons not to follow any of the options. If the countries where a company is incorporated have different rules, if a company has granted Board Resolutions with stricter rules for signing, or if there are particular reasons peculiar to an individual transaction that indicate an alternative approach, those circumstances ought to apply.
The rules in relation to deeds which are real estate contracts dealing with the transfer of land are stricter than other forms of contracts: contracts dealing with an interest in land can only be made in writing, the terms must be agreed in one document, and the document must be signed by or on behalf of each party to the contract.
It is still best practice therefore to adhere to the traditional method of execution of deeds and insist on the principle deed, executed by all the parties being available for a completion. This is particularly so with the use of any of the Law Society formulae where confirmation of being in possession of the final deed signed by the relevant parties is a requirement.
If there are commercial circumstances that result in use of a virtual signing, Option 1 above is the only suggested relaxation of the rules of execution. The "wet ink" signature version of any deed and any counterpart deed should follow on for certainty, and for the purposes of any registration.
To access the Law Society and CLLS Guidance on virtual signings, click here.