Consideration and contracts by deed

26.07.2023

In English law, there are two main types of contract that are used to enter into transactions and establish legal obligations: "deed" and "simple contract". Both of these types of contracts have their own unique characteristics, and the differences between them are important to business owners as they can affect the validity and strength of legal obligations. As more and more lawyers are now involved in the application of English law, the issue may be relevant. In this article, we will look at the main differences between these types of contracts and the requirements they must fulfil. 

To begin with, it should be noted that all agreements in English law are divided into binding agreements and non-binding agreements. Binding agreements in turn are divided into simple contracts and contracts by deed.

Obligatory elements of simple contacts

• offer - a proposal to conclude a deal;
• acceptance - a response of the person to whom the offer is addressed about its acceptance;
• consideration (counter satisfaction);
• intention to create legal relations;
• certainty of conditions.

The doctrine of "consideration" is an important principle in English contract law. According to this principle, a promise to fulfil an obligation is deemed to be gratuitous and void if it does not involve a reciprocal favour (consideration) on the part of the person to whom the promise was made. The person who has received a promise to perform an obligation in his favour must, for his part, assume in return all risks of material or legal damage, or the offeror must receive some benefit for his promise. For a contract to be legally binding and valid, each party must provide something of value (consideration) in return for receiving something else, that is, both parties must contribute or provide something of value as part of the contract.

What constitutes "Consideration"?

Consideration is something of value that is a benefit to one party (the debtor) and a loss to the other (the creditor). Also, consideration is "...any claim, interest, benefit or advantage conferred upon one party, or abstention, damage, loss or liability suffered or incurred by the other party..." (Carrie v. Misa judgement, 1875). It is this definition from the judgement text that is most often taken as the basis for all definitions of "counter-gratification", as there is no clear and uniform definition in English law.

Types of counter satisfaction

Satisfaction may be as follows:

1. A promise to do something, e.g., transfer ownership of property or property rights, create an artistic work; develop software;
2. A promise to refrain from doing something (known as a restrictive covenant), such as not working with other employers of a certain type for a certain period of time after the employment relationship ends, not taking ownership of shares in another business, or not bringing legal action against another party;
3. To disburse the funds.

There are two forms of satisfaction depending on when the satisfaction is given:

1. Fulfilled Satisfaction - when the obligations given in the contract are fulfilled immediately.
2. Satisfaction to be fulfilled in the future - when the promises made in the contract will be fulfilled in the future.

Criteria for Consideration

The judicial practice has developed a number of criteria to be met by the counter-satisfaction:

1. Compliance with the law. For example, it cannot be recognised as satisfaction if one party to a contract promises a witness money for giving false testimony in court.
    
2. The counter satisfaction must not be past (past), that is, prior to the obligation, but must be given by the creditor after the debtor has assumed the obligation. If the contracting parties have already contracted with each other, a promise to do something for which they have already contracted cannot be a "new" satisfaction.
    
3. Have some value. The consideration need not necessarily be equivalent. From a legal point of view, it must have some economic value to the party who has accepted the obligation in exchange for that countervailing consideration.
   
   In this regard, there is a concept of "nominal counter-satisfaction", when, for example, for a counter-satisfaction of $1, an employee of an organisation transfers to the organisation all rights to inventions that he will make during his employment with that organisation. It is important to understand that in this article we only consider the validity of the transaction, tax and other consequences should be analysed free of charge. Also unofficial gratuitous promises, charitable gifts, moral obligations will not be satisfaction. 

4. The counter satisfaction must come from the creditor, i.e. the plaintiff must prove that he himself has provided counter satisfaction for the obligation of the other party. In other words, the counter satisfaction cannot come from a third party. In the law of all countries there is a special question of the validity of contracts in favour of a third party, in the UK contracts in favour of a third party are not recognised as valid.

5. The counter-satisfaction must be real, that is, being non-equivalent, it must be of some value to the parties and be physically and legally enforceable. 

It is important to note that remuneration does not have to be something monetary. It can be in non-monetary or even non-monetary form, for example, the employer may enter into an agreement with the employee whereby the employee will receive a certain amount of money in return for waiving his or her right to bring a labour dispute claim against the employer in the future.

It is the notion of consideration that is central to the distinction between simple contracts and contracts by deed. Unlike simple contracts, contracts by deed most often do not involve consideration. For example, an interest-free loan agreement between family members must be deeded because it does not involve consideration. Another key difference is that simple contracts can be recognised as concluded even if they are concluded orally, whereas contracts by deed must always be in writing.
 

English law specifies that certain types of transactions must necessarily be done in the form of a deed:

• of power of attorney;
• all transactions related to the alienation and transfer of rights to land and immovable property. An exception is a lease agreement for a term not exceeding 3 years;
• mortgages or deeds of mortgage on British ships;
• a waiver (release) or discharge of an obligation (discharge), provided that no countervailing consideration has been paid on the granting of such waiver or release;
• a document creating a trust (trust) relationship or the appointment of trustees;
• any document that amends an existing deed.

The parties may conclude any transaction in the form of deed at their discretion. In practice, even labour contracts are often concluded in deed form, as they may grant the employee the right to represent the employer, i.e. contain elements of a power of attorney, which must be executed in deed form.

Requirements for drafting a deed form document

Written form

• A deed must be in writing, and the front of the deed must explicitly state that it is in the form of a deed. Most often, typical wording is used at the beginning of such contracts, for example, "This deed is made on...".

Presence of a witness or other authorised persons

• It is obligatory to have a witness at the time of signing the document.  Current legislation does not impose any requirements for a witness, stating only that a party to a contract cannot witness the signature of the other party to the contract, but English government guidance indicates that it is better to avoid situations where the witness is a spouse or cohabitant. It is also desirable that the witness be over 18 years of age, but not required.

For natural persons, the presence of a witness is mandatory. The deed must contain the details of the witness and an indication that the person is a witness. If a natural person is unable to sign the deed himself, the deed shall be signed on his behalf by another person, but in his presence and in the presence of two other witnesses. 

In relation to legal entities, section 44 of the Companies Act 2006 provides for several ways in which a deed can be duly signed:

1. affixing the official company seal (company seal);
2. signing by one director in the presence of a witness;
3. signing by two authorised persons. Authorised persons include the director or the secretary. Situations in which both the director and the secretary coincide in one person are not allowed - in such a case a witness is required.

Delivered as a deed

That said, delivery in English law is not understood literally. It is a common law concept which means that a deed is delivered when a party makes clear its intention to be bound by the transaction, irrespective of physical delivery, i.e. whether the party has a document carrier. The intention to be contractually bound need not necessarily be communicated to the other party, but must be demonstrated by some action or words. Thus, parties often indicate that the deed will be delivered on the date specified in the title of the document. 

Выбор между contracts by deed и simple contracts

The choice between contracts by deed and simple contracts involves a number of considerations. It is important to think about what consequences you expect from the transaction. Contracts by deed are commonly used by parties:

• in transactions where required by law;
• in transactions that do not involve countervailing consideration or where the parties are in doubt as to whether countervailing consideration is adequate;
• in transactions where the parties wish to establish a longer limitation period, for example, in a dispute over property under a trust deed;
• if a party or parties wish to "make it more difficult" for the other party to refuse to perform from its obligations.

Thus, the differences between simple agreements and contracts by deed must be taken into account. The choice between the two depends on the specific circumstances and requirements of the parties. Simple agreements offer greater flexibility and ease of conclusion, while deed has a more formal nature and increased legal significance.

 

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