Separate but legal

If two parties have reduced their agreement to writing and wish to separately execute copies of the agreement, they can validly do so under the law of Scotland. Do you agree?

Scottish practitioners have a unique opportunity to support the Scottish Law Commission to reaffirm this proposition by reviewing the draft Execution in Counterpart (Scotland) Bill and commenting to the Commission by no later than 31 January 2013. If the bill can be presented to the Scottish Government and Parliament as having the backing of commercial practitioners, this will undoubtedly help to secure its speedy implementation.

I commented under the Scottish Law Commission’s eighth programme of law reform (2010) that uncertainty among Scottish practitioners as to the ability to execute documents in counterpart was leading in many cases to the adoption of English law as the governing law of the contract. This often happened at the eleventh hour and sometimes without consideration as to other knock-on consequences which might then arise (for example the absence of consideration).

In the draft bill, the Commission’s aim is not only to ensure that Scots law can actually compete on a level playing field with England, but also to seek to avoid some of the practical concerns which have arisen there, as witnessed by the Mercury Tax Group case [2008] EWHC 2721 (Admin) and the subsequent practice note issued by the Law Society of England & Wales, Execution of documents at virtual signings or closings. The Mercury case involved the invalidity of attaching to a final version of an agreement signatures made on an earlier draft, and the practice note then set out guidelines for how remote signings should be undertaken and documents exchanged.

Enabling approach

A review of Scots law in this area is outwith the bounds of this article. For those interested in commenting on the bill, I recommend to you chapter 6 of Scottish Law Commission Discussion Paper 154 (available at www.scotlawcom.gov.uk). This paper starts from the premise that, with the exception of contracts relating to land, two or more parties can enter into a binding contract in any manner they choose. All that is required is agreement between them as to the terms and the requisite intention to be bound.

There is case law, albeit over 300 years old, in which the validity of counterpart execution as a method of forming a contract is accepted (Smith v Duke of Gordon (1701) Mor 16987). But that single case does not, and cannot, answer all the questions that arise today. Legislation is therefore necessary if we are to go forward. However, the general policy of Scots law is to facilitate commercial transactions and not to create obstacles or unnecessary pitfalls, and this approach has dictated the Commission’s approach to drafting the bill.

The draft bill was recently discussed in a seminar at Old College, chaired by Lord Hodge and presented by Professor Hector L MacQueen with commentaries provided by Dr Gillian Black and myself from academic and practitioner standpoints respectively. The bill was welcomed by those attending, with the constructive criticism firmly on how to make it as user friendly as possible. This article is written to develop that discussion and to encourage further feedback to the Commission to enhance the effectiveness of the bill.

The Commission has already made adjustments to the original draft. Accordingly I do not propose to review the detailed wording here, but rather the main issues arising and the implications for practice. Both those who attended and all other practitioners are encouraged to read the current draft on the Commission’s website.

Practical questions

The draft bill presented at the seminar contained only two main sections and 13 subsections. Section 1(1) proceeded on the simple assertion that an agreement may be executed in two or more counterparts which will then be deemed a single document. Section 1(2) then provided that the agreement so executed will not be binding until each counterpart is delivered to the parties that did not sign the counterpart in question. At the seminar Dr Black and I suggested alternative provisions aimed at ensuring that the section was as permissive and simple to comply with as possible: while we both believed that the first draft was a very good attempt at achieving this, we felt that it could be improved on.

The seminar provided a stimulating and constructive debate which was generally supportive of the simple proposition that under Scots law, parties should be able to execute documents in counterpart in such manner as they see fit. The Commission recognises, however, that the law should create a default as to how this is done, and state what evidence requires to be maintained.

So the key practical issues of how the bill will facilitate execution in counterpart require to be considered. First, what is an agreement? Some commented that the word “document” may be preferable – does it include a floating charge, for example? How many counterparts require to be executed and retained? What evidence would you retain for delivery? What constitutes delivery and when it takes place? In what format would you retain the agreement – separate full copies, one copy with each of the original signed pages, or one copy with a mixture of original and pdf (or other facsimile) pages, or a conformed copy?

Can the bill avoid the situations where English law requires the entire document to be sent, whether in one email or in component parts? Is it sufficient to send only the signature page? The bill will seek to address the issue of the signature page, providing, as with the Requirements of Writing Act, that the signature page must start on the last page of the document but also permitting the document to be sent in component parts. How should we deal with the situation where the signature page extends to more than one page: do you require to send the whole document or can you send it in component parts? If in component parts, can you send only those signature pages signed by the relevant parties or do you send all the signature pages with the “last page”, even if some of these are blank? Should simple contracts between clients be treated differently from more complex situations involving firms of solicitors where there is a higher degree of trust and lower risk of fraud, and the parties are free to agree what will happen in terms of the contract? As drafted the bill would allow this – rightly in my view.

The wider context

A subsidiary issue that could be addressed is whether the bill should simply provide for counterparts which are traditional documents to be delivered by electronic means, or whether it should also provide more generally for traditional documents to be delivered by electronic means, hence getting around the issue which arose in exchange of missives in the context of Park, Petrs 2009 SLT 871 (OH). The latter would be a useful interim step prior to the introduction of a workable electronic document solution.

It should be noted that the bill does not make any provision regarding probativity of documents. In this respect the Requirements of Writing Act applies and it would therefore be open for all parties to execute each of the counterparts in a probative form. The document completed by the counterparts would then be in probative form also.

The Commission’s approach is to restate the law as simply as possible in a way which is facilitative to commercial parties contracting and being bound by an agreement, where it can be shown that they have reached an agreement and have evidenced an intention to be bound. Subject to concerns regarding fraud, which may arise in situations where legal firms are not involved in the process of the exchange of contracts, I would argue that this is the correct approach for the law to take.

Adopting this approach involves a certain degree of boldness: lawyers and business people continually vacillate between having the freedom of broad general principles (the approach favoured by the bill), and the certainty of being prescriptive about what can and cannot be achieved. I am of the opinion that the bill makes an excellent attempt at achieving this permissive confirmatory approach to the execution of documents in counterpart. There are minor issues to be addressed around the language of the two subsections (1) and (2), what requires to be delivered, avoiding potential fraud, and what requires to be retained or exchanged in order to evidence the signed contract. The success of the bill however will lie in it leading to a widespread acceptance by the profession and business as to what happens in practice, and your comments on the draft will be invaluable to achieving this.

It is hoped to bring the bill before the Scottish Parliament in 2013, so practitioners who wish to comment on the draft are encouraged to do so by email to Professor Hector MacQueen at the Scottish Law Commission (hector.macqueen@scotlawcom.gsi.gov.uk) on or prior to 31 January 2013. Professor MacQueen tells me that the Commission has already taken on board many of the points made at the seminar, and that an updated draft will be available on the Commission website when this article is published.