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Mortgage Contracts, Deeds & Agreements [2005]

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COMMENT:

Some Mortgage Contracts were executed as agreements not contracts prior to the UCCC and NCCP.

Does this have any bearing on current Loan Fraud Cases?

 

 

 

31 August 2005

Did You Know - What's the difference between Deeds and Agreements?

By Bernard Wall.

Key Points:
A deed is a special type of binding promise or commitment to do something.

You may have noticed that some formal commercial arrangements are expressed to be an "agreement" while others are expressed to be a "deed". Ever wondered what the difference is? In this Did You Know section, we'll briefly discuss what a deed is, how deeds are executed and some of the implications of using deeds.

What is a deed?

In short, a deed is a special type of binding promise or commitment to do something. It seems to be a feature of every legal system that there is some particular ritual, act or instrument by which a person can notify the community that she or he most solemnly means and intended to be binding.

It seems that the substantial requirement of a deed was that it be intended by the executing party to be the most serious indication to the community that she or he really means to do what he is doing. In modern times, this idea of serious commitment continues and today a deed is a special type of contract or binding commitment or obligation and is regarded as the most solemn act that a person may perform which:

  • passes an interest, right or property;
  • creates an obligation binding on some person;
  • or amounts to an affirmation or confirmation of something which passes an interest, right or property.

 

Are there differences between deeds and agreements?

It is a basic principle of modern contract law that in order to have a binding contract there must be:

  • offer and acceptance;
  • an intention to be legally bound; and
  • consideration (this stems from the idea that the promises or obligations must be part of a "bargain" between the parties and the parties must show they "bought" the promise by doing some act in return or providing a counter-promise).

The major difference between a deed and an agreement is that there is no requirement for consideration in order for the deed to be binding. In short, the lack of the requirement of consideration is overcome by the idea that a deed is intended by the executing party to be a solemn indication to the community that she or he really means to do what he or she is doing.

What types of documents are commonly executed as deeds?

The following types of documents are often executed in the form of a deed:

  • Deed Poll;
  • Escrow Deed;
  • Financial Guarantee or Letter of Credit;
  • Confidentiality Deed;
  • Deed of Termination; and
  • Indemnity Deed.

The reason for executing these types of documents in the form of a deed is often to overcome any difficulty that may arise if there is no consideration provided for the undertakings in the document.

For example, during a project A may be under an obligation to provide B with a financial guarantee to secure its obligations. In this context, a bank guarantee or letter of credit may be provided by a financial institution (on behalf of A) to B. However, there may be no consideration between the financial institution and B for this guarantee. To ensure that the guarantee is binding even though there is no consideration, the guarantee is often in the form of a deed.

There are also specific documents which are required by legislation to be executed in the form of a deed. For example, in all Australian States except Queensland, contracts creating or disposing of an interest in land are void unless they are in the form of a deed (there are some specific exceptions to this general rule which vary from State to State such as vesting orders by a court).

How are deeds executed?

Traditionally, in order to be a deed at common law, an instrument needs to comply with a number of formalities:

  • it must be written on parchment, vellum or paper;
  • a personal seal was placed on the document; and
  • it must be delivered to the counterparty.

This is the origin of the expression "signed, sealed and delivered".

The execution of deeds is now dealt with under legislation in each Australian State. Part 6 of the Property Law Act 1974 (Qld) deals with the execution of deeds under Queensland Law. Section 45 states that an individual may execute a document as a deed if:

  • the individual signs the document;
  • the document is expressed to be an "indenture", "deed" or be "sealed"; and
  • the document is signed and attested to by at least one witness not being a party to the document.

Section 46 deals with the execution of deeds by corporations under seal, by agent and by a person authorised under a power of attorney, while section 47 deals with the requirement of delivery (defined as the intention to be legally bound under section 47(3)). The execution of a document in the form of a deed does not itself imply delivery unless it appears that execution was intended to constitute delivery (delivery can be inferred from any fact or circumstance, including words or conduct).

The Corporations Act 2001 (Cth) also deals with the execution of deeds by bodies corporate. Section 127(3) provides that a corporate may execute a document as a deed provided the document is:

  • expressed to be "executed as a deed" ; and
  • the document is signed in accordance with sections 127(1) or (2) of the Corporations Act (signed by two directors or a director and a company secretary, with or without a common seal).

Limitation periods

An important point to note about deeds relates to the period of time in which a claim can be brought for the breach of an obligation set out in a deed.

Each State has specific legislation dealing with the period of time in which a claims or actions can be commenced (in Queensland this is the Limitation of Actions Act 1974). In general, under this legislation, a claim following a breach of contract must be commenced within six years from the breach occurring. However, because of their special nature there is a longer period of time to commence action following the breach of a deed (often referred to as "specialty").

The particular time period depends on the law of which State the deed is governed by (the deed should state which State law it is governed by), the extended time periods being:

  • Queensland, New South Wales, the Australian Capital Territory, the Northern Territory or Tasmania - 12 years
  • South Australia or Victoria - 15 years
  • Western Australia - 20 years.

These extended limitation periods should be considered when deciding to execute a document as an agreement or a deed. Other considerations when deciding to execute a document as an agreement or a deed include:

  • whether there are any specific corporate restrictions on the execution of deeds (for example, some delegated authorities do not allow company representatives to sign deeds of behalf of the company);
  • tax implications;
  • whether a deed can be executed in counterparts (this is a technical argument based on the common laws requirement for a deed to be "delivered" in order to be effective); and
  • the availability of particular remedies for the breach of a deed.

So there you have it, now you know a bit about deeds, how to execute a document as a deed and the effect of a deed on statutory limitation periods. Whether to execute a document as a deed or an agreement depends on the particular circumstance. If in any doubt, seek specific advice.

 
Source and further reading: http://www.claytonutz.com/publications/newsletters/queensland_energy_and_resources_insights/20050831/did_you_know-whats_the_difference_between_deeds_and_agreements.page
 
 
Disclaimer
Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states or territories.
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