The difference between contracts and deeds in small business
Agreeing commercial terms with clients can be tough, and business owners need to know the documents they’re signing. Here, Karen Holden, founder of A City Law Firm, explains the crucial difference between contracts and deeds.
In legal terms, it is assumed that a director conducting a business-to-business transaction is competent enough (or would at least take legal advice) before entering any agreement where it’s important to know the difference between contracts and deeds.
Business-to-business transactions come with more limited protection, and cannot be terminated as easily as transactions with consumers. A company owner cannot argue about a cooling off period, for example, nor that the terms of an agreement are unfair.
Therefore, caution should be exercised by company owners signing agreements without first carefully considering their options or receiving advice. So, what actually is the difference between contracts and deeds?
Contracts require consideration
When there is an exchange of physical products between parties, whether it’s money, property, goods or services, consideration is given by all involved in the transaction to each other, and a contract is required. A deed, on the other hand, does not require any consideration.
A key difference between contracts and deeds is that, if there is doubt about whether there is consideration for a contract to be created, the terms can be recorded in a deed.
A simple example is for the provision of a gift, which is a one-way pledge between parties. The giving of a gift cannot be enforceable as a contract, as no consideration is given in return. As a deed however, the pledge can be legally enforced.
Offer and acceptance
Another important difference between contracts and deeds is that a contract needs offer and acceptance, so each party must execute its counterpart and either exchange signed copies or confirm agreement to the terms of the contract.
The difference with a deed is that a deed is binding on a party when it has been signed, sealed and delivered to the other parties, even if the other parties have not yet executed the deed.
Deeds must be written
Contracts do not have to be in writing, and verbal or digital agreements can be upheld. As a consumer, you’re not likely to commit your agreement with a local grocer to writing when doing your weekly shop, but your mobile phone contract, for example, will come with extensive terms and conditions.
Both are just as legally enforceable, but because of the enforceability and nature of deeds, unlike contracts, these must be in writing. Deeds must be signed by independent witnesses, they must be dated, and it must state clearly that it is to be executed as a deed.
If signed on behalf of a company, a deed document should be signed in accordance with?section 46 (and section 44) of the Companies Act 2006, which states it must be signed by two directors, or a director and a company secretary, with or without a common seal.
A crucial difference between contracts and deeds when choosing whether to sign one or the otheris that of the limitation period the period in which one party can bring a claim against the other.
For breaching the terms of a simple contract, the innocent party has six years in which to commence a claim before being time-barred. The difference between contracts and deeds is that with a deed, you have 12 years.
Why would I need a deed?
Certain transactions cannot be effected unless done by deed. For example, creating a power of attorney, or transferring legal interest in real estate. As a simple contract, these legal actions would not be enforceable, but a deed is a transparent statement by one party that they mean to do what has been agreed between them and all other parties, so it’s more likely enforceable by law.
A deed may therefore be desirable to remove any doubt over consideration between parties. It will make it harder for a party to dispute its creation, or the timing of a certain aspect of the deed whether or not an individual’s signature was witnessed, for example. You also have twice as long to start a claim on a deed.
When written properly, deeds give you additional comfort and protection, but in most cases, a simple contract will be sufficient.
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