As the complexity of projects increase, so too does the documentation behind them. Medium to large transactions often require multiple agreements, which take the form of both contracts and deeds. As the negotiations and preliminary planning stages of a project progress, many iterations of these contracts and deeds are produced.
Time pressure to conclude negotiations and commence the project, coupled with the practical difficulties in accessing company directors and senior managers due to their busy schedules, often leads to the execution of these documents and the finalisation of these documents being out of sequence. The recent UK decision of R (on the application of Mercury Tax Group and Another) v HMRC  EWHC 2721 (Admin) warns of the dangers of this practice. It is a useful reminder about the potential traps and issues associated with the execution of documents and also highlights how an incorrect procedure can lead to the transaction documents not being effective.
Mercury Tax Group (Mercury) provides tax consultancy services. In 2002/03 Mercury operated a tax avoidance scheme for some of its clients. Her Majesty's Commissions of Revenue and Customs (HRMC) suspected that the scheme had been dishonestly implemented and sought warrants to search for documents at a number of Mercury's client's premises.
As a consequence of warrants sought by HRMC to obtain documents relating to the implementation of the scheme, Mercury commenced judicial review proceedings seeking a declaration that to grant the warrants would be unlawful.
HRMC alleged that an issue in the implementation of the scheme was the way in which the contracts had been executed by Mercury's clients. Therefore, in considering whether or not the warrants were lawful, the Court also considered the validity of the documentation through which the scheme had been implemented. Specifically, the Court focused on the procedure for the execution of the documents.
The Scheme Documentation
To participate in the tax scheme clients were required to execute three documents. These were the:
- Trust Deed.
- Options Agreement.
- Sale and Purchase Agreement.
Mercury's clients were requested to execute these document (all of which ultimately took the form of deeds) while they were still in draft form. The final documents were substantially amended versions of the documents executed by Mercury's clients. However, despite the nature and extent of the amendments, Mercury's clients did not execute the amended documents. Rather, the signature pages from the drafts were detached and stapled to the final versions.
HRMC claimed that the documents had not been validly executed. Mercury stated that it was ordinary practice to transfer execution pages from draft documents to the final version, and that this did not impact the validity of the contracts.
The Court found that there were reasonable grounds to suspect that were serious flaws in the implementation of the scheme, including the way in which the three critical documents which regulated the regime were executed. In particular, the Court found that the documents were not legitimately executed by the parties.
The Court observed that the documents had been executed by the parties prior to the production of the final version and, despite the fact that significant amendments were made to the documents, the earlier execution pages were transferred onto the final version. In this case the Court noted that:
- Mercury's clients regarded signature as an essential element in the effectiveness of the documents.
- In cases where execution of the document is critical, the document to be signed should exist as a discrete physical entity.
Therefore, the Court determined that in this case the documents were not legitimately executed, as they had not been executed in their final form, as one discrete, single, physical entity. Although the case dealt specifically with the execution of deeds, it suggests that the same approach would be taken with simple contracts.
The UK Response To The Mercury Case: Suggestions For The Future
It is interesting to note that the Company Law Committee of the Law Society of England and Wales and the Company Law and Financial Law Subcommittees of the City of London Law Society have issued a recommended protocol for the execution of documents for 'virtual signing' in order to comply with the findings in the Mercury case.
These Options Include:
Option 1A: Deeds And Contracts
- The organising firm sends by email a PDF version of the final contract documents.
- The parties print the whole document and execute the signature pages and return by email a PDF of the original signature pages to the organising firm.
- The returned signature pages should be accompanied by a confirmation that the PDF document was printed in full and the final document executed as one single document.
- The organising firm sends the final document including the executed signature pages received to all parties.
Option 1B: Deeds And Contracts
- The organising firm sends all parties the final PDF version of the contract to be executed and includes a separate PDF containing the signature pages.
- Each party executes the PDF signature pages.
- The parties return to the organising firm in a new email the PDF version of the final contract and the separate PDF signature pages.
- The organising firm sends the final version of the contract together with all signature pages to all parties.
Option 2: Contracts Only
- The organising firm sends all parties the final PDF version of the contract to be executed and includes a separate PDF containing the signature pages, which contains the same footer information, such as document ID and pages numbers as the main document.
- The parties print off the signature page PDF, executes it and returns it to the organising firm, noting approval of the final document in the email.
- The organising firm sends the final document, including the executed signature pages received, to all parties.
Option 3: Contracts Only
- Detached signature pages are emailed to each party in advance of the document being finalised. The signature pages should clearly show the contracts to which they relate.
- Each party is requested to execute the signature page in advance.
- The signature pages are returned to the organising firm until authority is given for attachment to the final contract.
- Once the contract has been finalised, the organising firm obtains instructions from an authorised representative from each of the parties to attach the pre-signed signature pages to the final version and to date and release the document.
It should be noted that the recommendation issued by the Company Law Committee of the Law Society of England and Wales and the Company Law and Financial Law Subcommittees states that Options 2 and 3 should not be used for deeds, real estate contracts or guarantees but only for 'simple contracts'.
Lessons From Mercury
Often not enough attention is given to the procedure for the execution of contractual documentation when finalising a transaction on agreements. This is increasingly an issue as the number of parties involved in transactions increase, parties often do not execute contracts in the same physical location, and frequently parties are required to execute signature pages and return them by email.
While there is no case law from an Australian court dealing specifically with the issues this case raises, there are a number of lessons that can be taken from this case. Further, in the event of a challenge regarding the proper execution of a document, this case is likely to be influential in any Australian court's decision.
These lessons are:
- Avoid obtaining signatures on a draft contract or deed for later appending to an amended final.
- Provide executing parties with a complete copy of the deed or contract for execution rather than just the execution page.
- Do not obtain original signatures on one contract or deed and transfer that signature page to another subsequently amended contract or deed.
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