In the second of our series "Back to Basics", we consider the position you may be in if there has been an error in the execution of a contract. In many cases, where something has gone "wrong", this may not be fatal to the document as a contract - it is worth having a checklist to hand as a point of reference in the first instance.
See our article 'Back to basics - signing your documents correctly' for a summary of what is generally required for a document to be validly executed as a 'simple' contract or a deed.
If only life were that simple! (No pun intended.) However, as we all know, things can and often do go 'wrong' in the execution of documents; see below for a handy guide for some (but not all) of the common mishaps that you may encounter.
1. "Oh no, it has not been signed as a deed"
If a document has not been correctly executed as a deed, it may still take effect as a 'simple' contract provided that:
- the requirements for execution as a 'simple' contract have been met;
- there is no legal requirement for the contract to be made as a deed; and
- the signatories to the document had the necessary authority to sign a 'simple' contract.
Remember that a 'simple' contract requires consideration to move between the parties. This may be missing where a document was drafted with the intention that it would be executed as a deed, because consideration is not necessary for a deed.
2. "Oh no, someone has added manuscript amendments"
If manuscript amendments are made to a document and the parties intend to be legally bound by them, then all parties (or their lawyers) should initial the amendments as evidence of that intention. Those initialling the manuscript amendments must have the requisite authority to do so and ideally a copy of the authority to make the amendments should be kept with the document for evidential purposes.
If the manuscript amendments are substantial and/or material then best practice would be to have a clean copy drawn up and re-executed.
3. "Oh no, there are still square brackets in the document"
Lawyers use square brackets to indicate that drafting is incomplete, uncertain or not yet agreed but otherwise they do not have any special meaning or status attached to them.
If square brackets are accidentally left in a completed document then it will be a matter of interpreting the document by applying the general principles of contractual interpretation.
If the parties are in agreement as to what the contract should have said then, for clarity, you may wish to amend the contract by mutual consent.
4. "Oh no, it has been executed in counterparts but there is no counterparts clause"
A contract does not need to include a counterparts clause in order for it to be signed in counterpart. However, including a counterparts clause is best practice and reduces the risk of a party later arguing that the contract is not binding.
5. "Oh no, somebody has dated the document prematurely"
A contract should not be dated until all parties who need to execute the contract have done so. If a party has dated a contract prematurely then the date should be amended to a date no earlier than the date on which the last signatory actually signed.
Remember that a party who is taking only a benefit (and no burden) under the contract need not sign at all.
6. "Oh no, it has not been dated"
It is not always necessary for a contract to be dated in order for it to be legally binding.
A 'simple' contract is formed when you have all the ingredients for a 'simple' contract, namely: offer, acceptance, consideration, intention to create legal relations and certainty of terms. If all of these requirements have been met then the absence of a date on the contract will not prevent the formation of a legally binding contract.
A deed must be in writing, state that it is intended to take effect as a deed and be validly executed and delivered. A deed may be delivered either unconditionally (meaning it takes effect immediately) or in escrow (meaning it only takes effect upon certain conditions being fulfilled). It is a question of fact whether a deed has been delivered unconditionally or in escrow but factors to consider may include:
- Is there anything in the terms of the deed which indicates that delivery is intended by the executing parties to be conditional on a date being inserted? An example would be wording along the lines of "This document has been executed as a deed and is delivered on the date stated at the beginning of it".
- A deed is more likely to be construed as having been delivered in escrow if it places obligations on both parties.
Unless the dating of a deed is explicitly stated to be an escrow condition, the absence of a date will not invalidate the deed. If it is the parties' intention that the deed will not come into effect until it has been dated, the parties should ensure that this is stated explicitly, both in the document itself and when it is sent out for signature.
7. "Oh no, I forgot to date my contract and now I want to backdate it"
The date of a contract is evidence as to when it was executed and there is a (rebuttable) presumption that the date on a deed is the date it took effect. If a contract is backdated, this may create a false impression as to when the contract was signed - potentially a criminal offence under the Theft Act 1968, the Fraud Act 2006, the Forgery Act 1913 or the Forgery and Counterfeiting Act 1981 and a conspiracy to defraud.
If the parties have agreed that the contract should have effect as from a date earlier than the date on which the last signatory actually signed, an express term can be included in the contract, making it clear that the contract is intended to take effect as from that earlier date. The contract should still not be dated before the date on which the last signatory actually signs.
Some consider that there are some (very limited) circumstances in which a 'simple' contract may justifiably be backdated, for example where an agreement is signed but the original is lost and a replacement signed later. However, caution should be exercised.
8. "Oh no, the correct people have not executed"
See 'Back to basics - signing your documents correctly' for a summary of what is generally required for a document to be validly executed as a 'simple' contract or a deed.
If in doubt, check that the signatories possessed the relevant authority to execute the document.
Remember that a party who is taking only a benefit (and no burden) under the contract need not sign at all.
9. "Oh no, there is a mistake in the drafting"
Parties are held to the bargain they have made even if they have misunderstood the contract drafting, its legal effect or their rights, or if they have made a bad bargain. The exceptions are:
- One party has misled the other, in which case the contract may be valid but voidable. While negotiating parties do not owe each other a duty to negotiate in good faith, they do owe each other a duty not to mislead the other into making a contract.
- The contract does not reflect the intentions of the parties, in which case the courts may bring the express terms of contract into line with the parties' intentions, via interpretation or rectification.
- Interpretation - the general principles of contractual interpretation are applied and the application of the "reasonable person" test reveals that there is clearly a mistake in the drafting. The general principles of contractual interpretation include that: language will be interpreted in accordance with conventional usage and common sense; the intention of the parties will be assessed objectively; the commercial purpose of the contract will be considered, the document will be construed as a whole and in its context, etc.
- Rectification - the contract is corrected to reflect the parties' contractual intention. The courts may grant rectification where there has been a common mistake (both parties mistakenly believe the document gives effect to their common intention) or a unilateral mistake (one party mistakenly believes the document accurately records the agreement while the other knows there is a mistake and takes unconscionable advantage of it). In respect of common mistake, the parties must show that they had a common continuing intention in respect of the particular issues and there must have been an outward expression of intention by each party. Where the correction of the mistake is agreed, the parties may enter into a deed of rectification. However, note that this cannot have full retrospective effect as the deed will only regulate the dealings between the parties to it and will not bind any non-parties (such as tax authorities).
- In extreme cases a mistake may prevent formation of a valid contract, e.g. if the mistake negates agreement or renders the contract too uncertain to enforce.
10. "Oh no, there is a mistake in the party details"
As with any error in the drafting, the general principles of contractual interpretation will apply. Relevant factors to consider may include:
- Is it a simple and obvious typo, e.g. "ABC Engineering Limited" instead of "ABC Engineering Limited"?
- Is it clear from the rest of the document (e.g. company number and registered address) who is intended to be party to the document?
- Are there other companies/entities with a similar name which could potentially cause confusion?
- Who signed the contract, how are the signatories identified in the contract and in what capacity does the contract say they have signed?
11. "Oh no, something has changed and we need to vary the document"
A variation can be oral or in writing. However, note that:
- The contract may include an express term requiring any variation to be in writing or meet other formalities. Whether such clause is effective will depend on the particular facts of the case.
- If the contract is required by law to be in writing then it can only be varied in writing.
- There is a rule of equity that a deed can be amended by a 'simple' contract provided that there is consideration.
- Any variation to an existing contract must either be supported by consideration or be executed as a deed.
- Where a third party has a right to enforce the terms of a contract, the parties cannot vary the contract so as to extinguish the third party's right without its consent, if the right has crystallised (Contracts (Rights of Third Parties Act) 1999). However, the contract may include an express term providing that no consent is required from third parties in the event of a variation of the contract.
If you require further information on signing contracts, please contact construction and engineering partner Paul Green.
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