No bad deed goes unpunished

Why bother with deeds? It is not always obvious but perhaps the most common reason to use a deed in a loan context is because the relevant document (typically an intercreditor agreement or a security document) includes a power of attorney.

It remains good law under section 1(1) of the Powers of Attorney Act 1971 that an instrument creating a power of attorney must be executed as a deed. It was the failure to observe this requirement (coupled with some other omissions) which caused headaches in the case we discuss below. 

1. Katara Hospitality v Guez & Anor [2018] EWHC 3063 (Comm)

The defendants agreed to sell their 37% shareholding in a hospitality business to the claimant and signed powers of attorney (“PoAs”) drawn up by their US lawyer in favour of the company’s founder, Mr Visan. Each power appointed Mr Visan “to represent me, sign in my place and stead, and take other steps for my benefit, in connection with the completion of the sale of 40% of the issued and outstanding shares of [the company]…”.

Completion was delayed by some months and at the eventual completion meeting the claimant sought a price reduction. As a result, Mr Visan purported to sign a personal guarantee on behalf of the defendants (the “Guarantee”) under the PoAs. This Guarantee was introduced at the eleventh hour (at the completion meeting from which the defendants were absent) and the claimants’ board minutes recorded that during that meeting Mr Visan had agreed to provide a personal guarantee in support of the transaction (but made no mention of the defendants). However, he signed the Guarantee on behalf of himself and the defendants. His signature against the second defendant’s name was witnessed, but his signatures against the other names (including his own) were not.

Under the Guarantee, the defendants agreed to pay to the claimant the difference between the purchase price and the amounts received by the claimant from dividends and distributions during the eight-year period following completion. The claimant submitted that the Guarantee was intended to be and was executed as a deed, whilst the defendants argued that the PoAs were not deeds and therefore the Guarantee was invalid (because the authority to enter into a deed on behalf of someone else, must itself be given by way of deed).

2. Issues for the High Court

Among the issues for consideration by the High Court were the following:

• Were the PoAs valid?

Unfortunately (for the claimant), they were not. The High Court noted section 1(2)(a) of the Law of Property (Miscellaneous Provisions) Act 1989 (the “1989 Act”) which provides that “An instrument shall not be a deed unless it makes clear on its face that it is intended to be a deed by the person making it...”

There was no evidence that the defendants or their US lawyer knew that from an English law perspective the PoAs needed to be in the form of a deed. Such an intention could not be inferred from the wording of the PoAs which did not explicitly use the word “deed” anywhere in them. Mrs Justice Moulder concluded that the PoAs failed to satisfy the requirements of section 1(2)(a) of the 1989 Act and therefore took effect as appointments in writing, but not as deeds.

• Scope of the PoAs

Because the PoAs were not effective deeds, the claimant sought to rely upon the Guarantee as a simple contract signed in accordance with Mr Visan’s ‘appointment in writing’ (there is no requirement under English law for a guarantee to be executed as a deed). The question then before the Court was therefore whether the scope of the appointments granted by the PoAs (whether formal or informal) were sufficiently wide to authorise Mr Visan to execute the Guarantee on behalf of the defendants.

The PoAs provided authority “in connection with the completion” of the sale of shares of the company. When the PoAs were originally granted, the transaction documents and terms were largely agreed. By contrast, the Guarantee involved an entirely new liability which was not contemplated when the PoAs were signed. Mr Visan was not authorised to agree a sale on different commercial terms, and the PoAs did not authorise him to agree on the defendants’ behalf to the undertakings set out in the Guarantee. Board minutes also showed that undertakings from the defendants were not required by the claimant. Accordingly, the Guarantee fell outside the scope of the POAs.

• Was the Guarantee valid without full attestation?

The Court then turned to consider the following issue: if the PoAs had been valid deeds, and had had a wide enough scope to permit Mr Visan to enter into the Guarantee on behalf of the defendants, would the Guarantee be enforceable against the second defendant, who was the only party whose signature in the Guarantee was witnessed (and therefore the only signature that met the requirement for a deed)? Mrs Justice Moulder noted the presumption that a promise made by two or more persons is joint unless express words are included to make it joint and several. In the absence of any such wording, a joint promise needs to be correctly executed on behalf of each promisor.

The High Court concluded that it was not possible to re-write the contract to include several liability. Without the proper attestation, there was no valid execution of the Guarantee by Mr Visan for himself or the first defendant, so that no obligation was created upon the second defendant alone.

3. Practical implications

This case provides a salutary reminder of the care that needs to be taken in respect of both the substance and form of a power of attorney, as well as the execution formalities which are applied to it. Ordinarily issues like those arising in this case should not arise where a power is prepared using a deal lawyer’s standard precedent during the early stage of a transaction. Unfortunately, in this case the powers were prepared at the last moment by a lawyer versed in the laws of a foreign jurisdiction.

Powers of attorney are construed strictly by the courts. Therefore, where it is the intention that the scope of the powers granted to an attorney be wide, the power of attorney should be clear about this. Often this is achieved by way of a carefully crafted ‘general power’ supported by a list of specific transaction documents which are explicitly included within scope (and the actions that may be taken in respect of them). Where the transaction terms subsequently change, it may be appropriate to take new powers rather than relying upon an inadequate previous power.