Consideration and deeds

Today English law becomes common for practitioners outside of the United Kingdom due to its flexibility and widespread around the world. In this article we will briefly describe two issues, which, among others, interest those who start working with English law: consideration and deed. 

In English law there are two main types of contracts that are used to conclude deals and establish legal obligations: contracts by deed and simple contracts. Both types of contracts although being alike have their own unique characteristics which can affect the validity and strength of legal obligations. 

To start, it is important to note that all agreements in English law are categorized as either binding or non-binding.  Binding agreements, in its turn, are further classified as either simple contracts or contracts by deed. 

Simple contracts consists of five essential elements: 1) offer – a specific proposal to enter into an agreement; 2) acceptance – the act of agreeing to the terms proposed by another party as presented in an offer; 3) consideration –value exchanged between the parties; 4) intention to create legal relations; 5) certainty of terms.

Elements numbered 1, 2, 4, and 5 do not significantly differ across various legal jurisdictions, and their general principles are familiar to lawyers worldwide.  However, the doctrine of considerationhas own specific features in English law. 

The principle of consideration states that a promise to perform an obligation considered gratuitous and unenforceable unless it involves some form of reciprocal service or benefit provided by the party to whom the promise was made. The party receiving the promise to perform in their favor must assume all risks associated with material or legal detriment, or the offeror must receive some benefit in return for promise. For a contract to be legally binding and valid, each party must provide something valuable (consideration) in exchange for receiving something else. In other words, both parties must contribute or provide something of value within the framework of the contract.

Meaning

Consideration is the valuable thing that is a benefit to one party (the debtor) and a detriment to the other (the creditor). Consideration can also be described as “…some right, interest, profit, or benefit accruing to one party, or some forbearance, detriment, loss, or responsibility given, suffered, or undertaken by the other…” (Court decision in Carrie v. Misa, 1875). This particular definition from the court decision is often used as the basis for all definitions of «consideration» since there is no precise and uniform definition in English legislation.

Consideration can take various forms, including:

1. Promise to perform an action. This involves a promise to do something, such as transferring ownership rights to property or intellectual property, creating an artistic work, or developing software.
2. Promise to refrain from certain actions (known as a restrictive covenant). This involves a promise not to engage in certain activities. For example, it could be a promise not to work with other employers of a specific type for a certain period after the termination of employment, refrain from acquiring shares of another business, or not to file lawsuits against the other party.
3. Payment of monetary funds. Consideration can also be in the form of monetary payment, where one party agrees to provide a certain amount of money in exchange for goods, services, or other benefits.

Also, there are two forms of consideration, depending on the time the consideration is granted: executory consideration and executed consideration. Executory consideration refers to a situation where both parties make promises to each other, and these promises are yet to be fulfilled. Executed consideration occurs when one party has completed their obligations under the contract, while the other party still has outstanding liabilities. 

Criteria for Consideration

The court practice has established several criteria that consideration must meet:

1. Lawful relations not prohibited by the legislation. For example, consideration cannot be recognized if one party of the contract promises monetary funds to a witness for providing false testimony in court.
2. Consideration should not be past but must be provided by the creditor after the debtor has undertaken the obligation. If the contracting parties have already entered into an agreement, a promise to do something that they have already contracted for cannot be considered as new consideration.
3. It must have some value (and does not necessarily have to be of equal value). From a legal perspective, it must represent some economic value for the party accepting the obligation in exchange for such consideration. There is also the concept of “nominal consideration” (small amount disproportional to corresponding obligation), where, for example, an employee transfers all rights relating to inventions made during their employment to its employee in exchange for a consideration of $1. Additionally, unofficial gratuitous promises, charitable gifts, and moral obligations do not qualify as consideration.
4. Consideration must come from the creditor and not be from a third party. The validity of contracts in favor of third parties is also a particular issue in the law of all countries, and in the UK, contracts in favor of third parties are not recognized as valid.
5. Consideration must be real. There shall be some value for the parties and be physically and legally achievable (for example, land on the Moon or other assets the party has no possession cannot be considered as consideration).

It is important to note that consideration does not necessarily have to be monetary. It can be in non-monetary or even intangible forms. For example, an employer can enter into an agreement with an employee whereby the employee receives a certain amount of money in exchange for waiving their right to file future labor disputes against the employer.

Deed

The concept of consideration is indeed crucial in distinguishing between simple contracts and contracts by deed. Unlike simple contracts, contracts by deed often do not require consideration. For example, an interest-free loan agreement between family members must be executed as a deed because it does not involve mutual consideration. Another key difference is that simple contracts can be valid even if they are made orally, whereas contracts by deed must always be in written form.

Under English law, certain types of deals must be executed as a deed, including:

1. Powers of attorney;
2. All deals related to the transfer and conveyance of rights to land and real property, with the exception of leases for a term not exceeding three years;
3. Mortgages on British ships;
4. Releases or discharges of obligations, provided no consideration has been given for such release or discharge;
5. Documents creating trust relationships or appointing trustees;
6. Any document amending an existing deed.

Parties may choose to enter into any deal by deed at their discretion. In practice, even employment contracts are often executed as deeds because they may grant the employee the authority to represent the employer’s interests, thus incorporating elements of a power of attorney, which must be executed as a deed.

Deed Requirements

Requirements for drafting a deed include:

1. Written form. A deed must be in writing, and it should explicitly state on its face that it is a deed. Typically, standardized wording is used at the beginning of such agreements, such as «This deed is made on…».
2. Presence of witnesses or other authorized persons. It is necessary to have a witness present at the time of signing the document. The current legislation does not impose specific requirements for witnesses, stating only that a party to the contract cannot witness the signature of the other party. However, guidance of government of the UK suggests avoiding situations where the witness is a spouse or cohabitant. It is also desirable for the witness to be at least 18 years old, but not mandatory.
3. Additionally, a deed must be «delivered as a deed». In English law, delivery is not understood literally. It is a concept of common law that means the act is delivered when a party clearly indicates its intention to be bound by the obligations of the deal, regardless of physical delivery of a document. The intention to be bound by the contract does not necessarily have to be communicated to the other party but must be demonstrated through actions or words. Parties often specify that the deed will be delivered on the date stated in the document’s heading.

For individuals, the presence of a witness is mandatory. The deed should include information about the witness and a statement that the person is acting as a witness. If an individual is unable to sign the deed himself, it can be signed on his behalf by another person, but in his presence and in the presence of two additional witnesses.

Deed Execution

As for legal entities, several ways of proper execution of a deed are provided for by Section 44 of the UK Companies Act 2006:

1. Affixing the official company seal;
2. Signing by a single director in the presence of a witness;
3. Signing by two authorized persons. Authorized persons include a director or secretary. Situations where one person holds both the position of a director and secretary are not allowed, and in such cases, the presence of a witness is necessary.

Comparing «contracts by deed» to «simple agreements»

The choice between contracts by deed and simple contracts involves many factors. It is important to consider the anticipated consequences of the deal. Contracts by deed are typically used by parties:

• in deals where it is required by legislation
• in deals that do not involve consideration or in cases where the parties are unsure if the consideration is sufficient
• in deals where the parties wish to establish a longer limitation period, for example, in a dispute over property based on a trust agreement
• if a party or parties want to «complicate» the other party’s waiver of performance from their obligations.

Therefore, it is necessary to take into account the differences between simple agreements and contracts by deed. The choice between them depends on specific circumstances and the parties’ requirements. Simple agreements provide greater flexibility and ease of formation, while deeds have a more formal nature and higher legal significance.

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