What is the difference between a contract and a deed? When should you use one or the other and what potential risks are there?

From time to time you probably see commercial agreements or other legal contracts executed as deeds. In other cases, they are signed as contracts – but why the difference? When should one or the other be used, and what are the implications?

A matter for your consideration.

As a general rule, whether to use a contract or a deed hinges on reciprocity of consideration – i.e., something of value that passes from one party to the other.

In a contract, consideration is reciprocal – whereas a deed is a unilateral promise by one of the party, where the other party or parties do not undertake to give any consideration in exchange.

Consideration could be anything of value, whether money, the delivery of goods or services, or a promise to do or not to do something. Insofar as a party receives something that it considers to be valuable in exchange for the consideration it provides to the other party, then consideration is deemed to be reciprocal. For the avoidance of doubt, in contracts where the consideration might be rather intangible or unclear, formulae such as “for good and valuable consideration” may be inserted.

Why is this important? Enforceability. A unilateral contract not executed as a deed will most likely not be enforceable against the promisor.

Matters such as powers of attorney, trustee appointments, voluntary covenants evidencing an undertaking to make a donation or deeds of release must be executed as deeds.

Other reasons to execute a bilateral agreement as a deed.

But what about bilateral contracts executed as a deed? It is very common in Australia to see bilateral contracts executed as deeds instead of signed as contracts. This practice is mandated by law in some cases, or sometimes warranted by the expectation of longer limitation periods, but may also carry risks of which most people are unaware.

• Transfer of land: land transfers, whether by sale or donation, must be instrumented as deeds.
• Long leases: in most Australian states, land leases over three years in duration must be instrumented as deeds to create a legal lease enforceable against the world. In these cases, the case for executing as a deed is compelling, as failure to do so will result in a mere equitable lease (i.e., a contract only enforceable between the parties, but which may be challenged by third parties such as creditors).
• Extended limitation period: perhaps the most common reason why many bilateral commercial agreements are executed as deeds is the extended limitation periods attached to a deed. Taking NSW as an example, the limitation period (i.e., the period the parties have to sue each other under an agreement) for a simple contract is six years, whereas it is 12 years if the agreement is executed as a deed.

Potential pitfalls of executing as a deed.

Whilst choosing to execute a bilateral agreement as a deed might seem a good idea in some cases, there are potential pitfalls that must be borne in mind and, if possible, mitigated:

Formal errors: the requirements to execute a document as a deed are solemn and must follow a formula. Failure to do so might invalidate the agreement, where signing as a simple contract would have been more forgiving.

Insurance mismatch risk: if your obligations under the agreement are covered by insurance, you should ensure that the insurance policy will cover your liability for the full limitation period. As an example, most professional liability insurance policies cover the standard six-year statutory period, but would require an extension for an agreement executed as a deed, which has a 12-year limitation period.

You may bound as soon as you sign and deliver: due to the nature of deeds as binding solemn, unilateral promises, one of the greatest potential pitfalls of executing a bilateral agreement as a deed is that a party becomes bound by it as soon as it has signed and delivered it to the other party. In a simple contract, you are not bound to comply with your obligations unless your counterparty does the same – but if you execute a deed, you would be expected to fulfill your obligations under it, even if your counterparty has not even countersigned the agreement. This point was made in Vincent v Premo Enterprises (Voucher Sales) Ltd [1969] 2 QB 609 (CA).

The risk of being inadvertently bound by a bilateral agreement executed as a deed is a very significant blind spot for the vast majority of contracting parties entering into bilateral agreements as deeds, and one that requires consideration and, at least, adequate mitigation.

If signing the agreement as a simple contract is out of the question and it must be executed as a deed, one way to mitigate your risk when forwarding the partially executed deed to the other side is to include wording stating that the deed is delivered in escrow to the other party and will not be deemed “delivered” until duly executed and delivered by the other party.

This would mitigate the risk of being sued at a later stage by your counterparty for a breach of promise under an agreement that your counterparty never signed.

Get in touch with Praetorium Law if your business is negotiating a deed or another kind of agreement where the above matters are relevant, or if your business has been impacted by any of the above.

Email: info@praetoriumlaw.com

Tel : 0410 752 667