By:
Alex Ottaway and Rachel Cheung HWL Ebsworth Lawyers
In this article from the LexisNexis® Construction Law Bulletin July 2022 edition, Alex Ottaway and Rachel Cheung from HWL Ebsworth Lawyers discuss how a gap in the law may mean some electronically submitted deeds may have failed, and how to protect them if they have.
Newsletter subscribers can read the full article here.
Public health concerns, travel restrictions and everchanging legislative frameworks governing execution and witnesses have made it more challenging for commercial parties and their legal advisors to ensure that an intended agreement is binding and enforceable.
From May 2020, key legal requirements for an enforceable agreement have, at various times, been deleted, amended and reinstated, making satisfying these requirements akin to hitting a moving target. The practicalities of executing documents whilst signatories are self-isolating, in quarantine or unable to enter Australia have presented difficulties.
These concerns have been most prevalent where the agreement takes the form of a deed that has (until recently) carried with it a number of antiquated legal requirements.
Permanent legislation enacted by the Federal Parliament, taking effect from 23 February 2022, has largely modernised the execution of documents (including deeds), such as by permitting electronic execution. Whilst to ensure that deeds are validly executed commercial parties and their legal advisors will need to be familiar with the requirements introduced by the legislation, it is now easier for deeds to be validly executed than was previously the case.
In respect of deeds executed prior to 23 February 2022, there is a greater risk that, unbeknownst to the parties, the deed was not validly executed. This article discusses some steps that parties can take to improve the chances of a deed being legally enforceable and considers the consequences of a deed “failing”, including whether the intended agreement might be binding, nonetheless.
Legislative Reforms Enshrining Electronic Execution in Australia
In March 2020, Australia’s external borders were closed to non-citizens and non-residents, and the entry of returning Australian citizens was also impeded. Starting from mid-2021, local outbreaks resulted in public health orders in most states and territories, involving lockdowns, working from home, self-isolation and restrictions on gathering. Certain interstate borders were also closed.
These factors meant that it was significantly more difficult for parties to satisfy common law requirements relating to deeds (such as the requirement that deeds be executed on paper, parchment or vellum) which, if not complied with, could invalidate the deed.
Temporary Measures
Prior to 5 May 2020, a deed written on animal skin would be valid, but one executed electronically would not. This is one instance of the legal requirements pertaining to deeds being somewhat antiquated and out of step with modern commerce.
From 5 May 2020, measures were introduced at a federal level in response to the COVID-19 pandemic to permit documents (including deeds) to be executed electronically. However, these measures were only brought into effect for a fixed period.
There was an interregnum between 22 March and 13 August 2021 (inclusive) during which no measures at the federal level permitting the electronic execution of deeds were in force. However, the prevailing pandemic circumstances meant that many found that they had no choice but to execute deeds electronically, nonetheless.
The legal status of deeds executed electronically during this period is unclear.
A “failed” deed can be enforced as a simple contract — but only if consideration was present
From 5 May 2020 to 23 February 2022, it was somewhat difficult to identify the applicable legal requirements in force at any given time and to ensure that those requirements were satisfied.
Even where a deed is used, ensuring that consideration has been provided can provide a second line of defence in the event the deed is not executed properly (or at all) or contains a formal defect. In such a case, the “failed” deed may constitute a binding simple contract, but only if consideration is present.
In some cases, it will be obvious from the terms of the instrument that consideration has been provided. In other cases, to avoid future disputes over whether the instrument is legally binding, it may be prudent for the party receiving the benefit to pay (or promise to pay) nominal consideration (e.g., $1).
On the current state of the Australian case law, including decisions of the High Court of Australia where the document contains an acknowledgement of receipt, the consideration must actually have been paid in order for there to be a binding simple contract.
Deeds of variation — can a deed only be varied by a deed?
A common misconception is that a deed can only be varied by a deed. It is settled law that (subject to certain exceptions) a deed can be varied by either a deed or a simple contract.
This means that, if a deed of variation fails due to not being executed properly or some other formal defect, the intended variation can still be legally enforceable as a simple contract (provided that consideration was given for the variation).
At common law, a deed could only be varied by a deed. However, the Courts of Equity allowed a deed to be rescinded or varied by a simple contract. Since at least 1889, the courts have held that a deed can be varied by a simple contract.
The Australian Position on No Oral Modification Clauses
The current position in Australia is that NOM clauses are largely ineffective to invalidate oral variations. It is often suggested that this conclusion is necessitated by notions of party autonomy or freedom of contract.
The Australian courts have sought to justify the position outlined above by appealing to party autonomy — the notion that parties should be free to contract as they see fit.
This principle has been interpreted as meaning that, where parties are found to have intended to vary their agreement, this variation should be enforced.
However, the Australian position means that, no matter how clearly parties express their intention that their agreement cannot be varied otherwise than in writing, they cannot validly bind themselves in this way. One wonders how this is consistent with the notion of party autonomy.
Conclusion:
For commercial parties and their legal advisors, the key takeaways from the principles set out above are that:
- The Act now allows the electronic execution of deeds on a permanent basis and casts aside a number of antiquated common law requirements, which will mean that the execution of deeds is simpler and better adapted to modern commerce.
- Deeds electronically executed between 22 March and 13 August 2021 (inclusive) may not have been validly executed because there was no legislation in place during this period that provided for electronic execution.
- Deeds electronically executed under power of attorney between 5 May 2020 to 22 February 2022 may not have been validly executed because the legislation that was in place did not expressly permit this form of electronic execution.
- Despite (2) and (3) above, depending on the circumstances, estoppel could potentially prevent the parties from asserting that a deed was not validly executed (noting this is an untested point)
- Even where a deed is used for an original agreement or a variation, it is worthwhile to ensure that consideration is present to ensure that, if the deed “fails”, the intended agreement can be enforced as a simple contract.
- Where nominal consideration is envisaged, it is prudent to ensure it is actually provided.
- A deed can be varied by a deed or by a simple contract (the latter requiring consideration to have been provided).
- On the current state of the Australian law, NOM clauses are largely ineffective to invalidate oral variations but may have evidentiary value on the question of whether a variation was in fact agreed upon.
Despite the reforms brought about by the Permanent Legislation, the law of deeds remains complex, and there will certainly be further judicial and legislative developments in this area.
 |
Alex Ottaway |
 |
Rachel Cheung |