Deeds and agreements are both ways in which a deal between parties can be recorded so that it is legally binding. At first glance, deeds and agreements appear similar and the only difference between them appears to be the name of the documents themselves. However, there are key differences between them and how they are executed, and it is important for businesses to understand the distinction when structuring transactions to manage litigation risk and to resolve disputes.
What is an agreement?
An agreement is an understanding or arrangement between two or more parties. For an agreement to be legally binding, there must be:
- offer and acceptance;
- an intention to be legally bound; and
- consideration – that is, the promise or obligation must be part of a bargain between the parties, and something of value is given in return for the promise, often in the form of a counter-promise.
What is a deed?
A deed is a special type of promise or commitment that indicates the most serious and or solemn indication that the executing party intends to do what they have promised. A deed can:
- pass or confer legal or equitable interests in property or some other right;
- create an obligation binding on some person; or
- affirm an agreement that passes a legal or equitable interest in property or some other right.
Certain types of documents are commonly executed in the form of a deed, including:
- Deed Polls;
- Escrow Deeds;
- Confidentiality Deeds;
- Deeds of Termination;
- Settlement Deeds;
- Deeds of Company Arrangement;
- Forbearance Deeds;
- Guarantee Deeds;
- Novation Deeds; and
- Indemnity Deeds.
When resolving disputes, particularly litigation, it is common for parties to enter into a deed of settlement and release.
Legislation also requires that specific documents be executed in the form of a deed. For example, in all states and territories except the Australian Capital Territory, certain assurances of land, including conveyances and dispositions, must be made by deed.
What are the elements for a valid deed?
At common law, a deed must:
- be written on parchment, vellum or paper;
- have a personal seal placed on it; and
- be delivered to the other party.
These common law requirements have since been modified by legislation across all Australian jurisdictions. For example, Australian companies may execute a document as a deed if the document is expressed to be “executed as a deed” and otherwise signed in accordance with the provisions for the execution of documents under the Corporations Act< 2001 (Cth).
In New South Wales, a deed signed by an individual:
- must be signed and witnessed (by a person who is not a party to the deed); and
- is deemed to be “sealed” if it is expressed to be a deed. That is, the document expressly states that it is executed as a deed.
In New South Wales, Victoria and Queensland, a deed can also be created in electronic form, as well as signed and witnessed electronically. However, in South Australia, Western Australia, Northern Territory, Tasmania and the ACT, electronic execution of deeds is not permitted. The Corporations Act 2001 (Cth) was also recently amended to allow electronic execution of deeds, provided certain conditions are met.
Where a deed is executed by a mix of companies and individuals, it is important to carefully consider the relevant provisions as the law governing the execution of deeds is not uniform.
How does a deed differ from an agreement?
In deciding whether to use an agreement or a deed to formalise legal obligations, you should consider the key differences between a deed and an agreement, which include:
- A deed does not require consideration. Given that consideration is a basic requirement of a valid agreement, a deed allows the parties to overcome any difficulties that may arise in enforcing a promise where no actual consideration is provided.
- A deed must be executed in writing. In contrast, agreements can be oral or in writing, unless specified by statute.
- A deed provides a longer limitation period. The limitation period for bringing an action under a deed is much longer than the limitation period for agreements and varies for each Australian jurisdiction.
The limitation period for breach of contract is 6 years in all States and Territories, except the Northern Territory, where it is 3 years. In contrast, the limitation period for an action founded upon a deed can be brought within the following limitation periods, from the date on which the cause of action arose:
- 15 years in Victoria and South Australia; and
- 12 years in New South Wales, the Australian Capital Territory, Queensland, Tasmania, Western Australia and the Northern Territory.
- Equitable remedies will not be available for actions founded upon deeds which do not contain consideration. Deeds are generally not enforceable in equity if there is no consideration, because of the maxim that “equity will not support a volunteer”.
Practical tips when considering whether to use a deed or agreement
- Whether a deed is required by law
- Whether there are any specific corporate restrictions on the execution of deeds. For example, some authorities do not allow company representatives to sign deeds of behalf on the company.
- Whether a deed is desirable. For example, if there are any difficulties in proving consideration or a longer period to commence an action after breach is desired.
- Consider the availability of particular remedies for the breach of a deed
- Consider tax implications. For example, stamp duty may be payable on the execution of a deed.
Ultimately, this question will depend on the parties and the specific circumstances, and it is important that you seek specific legal advice if you are unclear.