The time constraints associated with posting, signing and returning documents, together with the practicalities of all signatories to a document being physically present at a closing meeting, have led to what has become known as the virtual signing of documents and the virtual closing of transactions.  This involves either:

·                     the execution of the signature pages of a document in advance of closing which are then transferred to the final version of the document; or

·                     an exchange of executed signature pages by email or fax.

The obiter comments of Underhill J. in the recent case of R (on the Application of Mercury Tax Group Limited and another) v HMRC [2008] EWHC 2721 (Admin) cast doubt on the effectiveness of virtual closing of commercial contracts.  Unsurprisingly, the Administrative Court held that the parties to a tax avoidance scheme had not executed documents as deeds by transferring signed signature pages from earlier drafts of the documents to the final versions.

The Administrative Court rejected the argument that it was common commercial practice to transfer signed execution pages to the final form of a document owing to the practical difficulties associated with the execution of multi-party contracts.  In the Court’s opinion, such difficulties can be overcome by the documents being signed by the parties at different times or by using counterparts.

In relation to the execution of deeds, Underhill J. stated that the formalities set out in section 1(3) of the Law of Property (Miscellaneous Provisions) Act 1989 required that “the signature and attestation must form part of the same physical document”.  These comments have left many parties feeling compelled to organise physical signing meetings to conclude transactions that they would previously have concluded through an email exchange of executed signature pages.

The City of London Law Society has just published guidance (the “Guidance”), prepared by a joint working party of The Law Society Company Law Committee and The City of London Law Society Company Law and Financial Law Committees, on the virtual execution of documents.

The Guidance sets out a number of (non-exhaustive) options for dealing with virtual signings and closing of documents governed by English law.  The Guidance, endorsed by Leading Counsel Mark Hapgood QC, sets out Option 1 as the preferred method of execution of deeds and real estate contracts when closing a transaction by email:

Option 1: Counterparts – Deeds

·               The final execution copy of the document is emailed (in PDF or Word format) to all parties.  For convenience, a separate PDF or Word document containing the relevant signature page can be attached to the same email.

·               Each signatory prints and signs the signature page (there is no need to print off the full document).

·               Each party then returns a PDF copy of its signed signature page and the final execution copy of the document by email.

The final execution copy of the document, together with copies of all executed signature pages, is circulated by the lawyers coordinating the virtual closing

When closing transactions by email involving simple contracts the Guidance offers two alternative procedures:

Option 2: Simple Contracts

·               The final execution copy of the document is emailed (in PDF or Word format) to all parties. For convenience, a separate PDF or Word document containing the relevant signature page may be attached to the same email.

·               Each signatory prints and signs the signature page (there is no need to print off the full document).

·               Each party then returns a PDF copy of its signed signature page with written authority to attach it to the final execution copy of the document.

·               The final execution copy of the document, together with copies of all executed signature pages, is circulated by the lawyers coordinating the virtual closing by email.

Option 3: Pre-signing execution pages

·               Prior to closing, the signature page of the document still being negotiated is emailed to all parties.

·               Each signatory prints and signs the signature page and returns a PDF copy of its signed signature page to be held to the order of the signatory (or its lawyers) until authority is given for it to be attached to the execution copy of the document.

·               Once the document has been finalised, the final version of the document is emailed to all parties and confirmation is obtained that the final version of the document is agreed together with authorisation to attach the pre-signed signature page to the final version and to date and release the document.

·               The final execution copy of the document, together with copies of all executed signature pages, is circulated by the lawyers coordinating the virtual closing by email.

In the current economic climate, with parties increasingly determined to renege on contractual obligations by attempting to avoid concluded contracts, it is important that the formalities required to virtually close transactions are observed and it is recommended that the procedures outlined above are followed.

For further information please contact James Walton or the Partner with whom you usually deal