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Practical Implications of the Mercury Decision (on the Execution of Documents at Virtual Signings/Closings)

Author/s: Jeremy Levy
Much publicity has recently been given to the High Court case of R (on the application of Mercury Tax Group Ltd and another) v HMRC & Others [2008] EWHC 2721 (“Mercury”). The decision in this case led to a period of some uncertainty as to execution formalities and the correct procedure to be followed where transaction documents are to be executed at a virtual signing or closing (i.e. where some or all of the signatories are not physically present at the same meeting). Having obtained advice from Leading Counsel, Mark Hapgood QC, the Law Society published a Guidance document setting out a non-exhaustive range of options available to parties. As the vast majority of structured finance documents are executed at virtual signings or closings, we thought it would be helpful to set out these options and their likely impact on signing procedures in relation to English law documents.

The Mercury decision

The facts of the Mercury case were not directly related to the structured finance sphere. The case revolved around a potentially legitimate tax avoidance scheme and whether Her Majesty’s Revenue & Customs should have been granted a warrant to enter the Mercury Tax Group’s premises to search for documents.

One of the side issues addressed by the courts was whether the Mercury Tax Group’s practice of transferring signature pages from a draft document to the final version was legitimate or not. In finding the document in question invalid, the judge said, in relation to deeds that “the signature and the attestation must form part of the same physical document”. In relation to all documents, the judge said that the document to be signed should exist “as a discrete physical entity (whether in a single version or in a series of counterparts) at the moment of signing”.

The potential implications of these statements on virtual signings and the practice of circulating signature pages separately from the documents to which they relate led to much discussion amongst legal practitioners. It was against this background that Leading Counsel was appointed and the Law Society’s Guidance was published.

Leading Counsel’s Opinion and the Law Society’s Joint Working Party’s view

In general, the note of Leading Counsel’s consultation with the Law Society and participating law firms (including Baker & McKenzie LLP) is confidential to such parties. In practice, however, although not binding on a court, Leading Counsel’s views are likely to greatly shape the development of agreed procedure in this area and provide a useful
reference guide to law firms.

The consultation with Leading Counsel can be disclosed in the terms set out in the Law Society Guidance. This sets out the general view of Leading Counsel and the Law Society’s joint working party (the “JWP”) that the Court of Appeal decision in Koenigsblatt v Sweet [1923] 2 Ch 314 remains the leading authority in this area. The Koenigsblatt case established that an amendment to a pre-signed document can be binding if amendments have been authorised either prospectively or through ratification. The Mercury decision, however, should be limited to its facts and, to the extent that the decisions are inconsistent, the Koenigsblatt decision should prevail.

However, on the cautious assumption that the Mercury decision might have application beyond its specific facts and on a conservative view of the judge’s comments in Mercury, the JWP considers that contracts can nonetheless be circulated for signature using email. The Guidance is designed to provide some examples of appropriate procedures but variations on these procedures or other procedures may work as well. There are specific statutory requirements for the execution of deeds, real estate contracts and guarantees that are not applicable for simple contracts. As such, the JWP has analysed the execution requirements for each of these types of documents separately. Some of the execution options set out below will only work for specific types of documents.

The Law Society Guidance

The Law Society sets out three options for conducting a virtual signing or closing (although, as noted above other options may also work).

Option 1 - suitable for deeds, real estate contracts, guarantees and simple contracts
  1. Before signing, the arrangements for the virtual signing/closing are agreed between the parties’ lawyers.
  2. Once finalised, the final execution copies are emailed to the parties or their lawyers (in either word or “pdf” form). For convenience, a separate pdf or word document containing just the relevant signature page may be attached.
  3. Each signatory prints and signs the signature page. There is no need to print off the full document.
  4. Each party sends an email to the lawyers arranging the signing attaching: (i) the final version of the document (which can be copied straight from the execution email in item 2 above); and (ii) a pdf copy of the signed signature page. If this method is being used for execution of a deed, the arrangements should make clear when the deed will be deemed delivered.
  5. To evidence the execution of the document, a final version of the document, together with copies of the executed signature pages, may be circulated to the parties. One or more additional original versions may also be created by attaching the final execution copy of the document to either pdf or original signature pages.

The view of Leading Counsel and the JWP is that the email containing the final version of the document and the signed signature pages satisfies the Mercury requirement of being the “same physical document”. The JWP also indicates that other methods will also satisfy the requirement as well as Option 1. For example, if each party prints the entire document, signs the signature pages and then returns pdf versions of either the signature pages only or the entire document including signature pages, this will also be sufficient. However, since Option 1 does not require the entire document to be printed out, Option 1 is likely to be more useful in practice.

Option 2 - suitable for guarantees (not executed as deeds) and simple contracts
  1. Before signing, the arrangements for the virtual signing/closing are agreed between the parties’ lawyers.
  2. Once finalised, the final execution copies are emailed to the parties or their lawyers (in either word or pdf form). For convenience, a separate pdf or word document ontaining just the relevant signature page may be attached.
  3. Each signatory prints and signs the signature page. There is no need to print off the full document.
  4. Each party emails its signed signature page as a pdf attachment to the lawyers arranging the signing, together with authority to attach it to the final version of the document. The level of formality required for this authority will be dependent on the circumstances.
  5. To evidence the execution of the document, a final version of the document, together with copies of the executed signature pages, may be circulated to the parties. One or more additional original versions may also be created by attaching the final execution copy of the document to either pdf or original signature pages.

The only difference between Option 1 and Option 2 is at step 4. For Option 2, there is no need to reattach the final version of the document when returning the signature pages. As a result, however, the first original version of the document is created not when the email is sent but when the final version of the document is first printed out and the signature pages are added to it.

Option 3 - suitable for guarantees (not executed as deeds) and simple contracts
  1. Before signing, the arrangements for the virtual signing/closing are agreed between the parties’ lawyers.
  2. Before the final version of the documents are agreed, signature pages are circulated to the parties. As a matter of good practice, each signature page should clearly identify the document it relates to.
  3. Each signatory prints and signs the signature page. The signature page is then returned to the arranging lawyers by pdf or by courier. The signature page is to be held on behalf of the signatory (or his lawyers) until authority is given for it to be attached to the final version.
  4. Once each document is finalised, the law firm arranging the signing/closing emails the final version of each document to the parties (or their lawyers) and receives confirmation from each party that it has (or its lawyers have) agreed the final version. This confirmation should also authorise the law firm to attach the pre-signed signature pages to the final versions and to date and release the documents. The degree of formality required for such authority will be dependent on the circumstances.

As with Option 2, the first original version is created not when the email with the signatures is sent but when the final version of the document is first printed out and the pre-signed signature pages are added to it with authority. One or more additional original versions may also be created by attaching the final execution copy of the document to either pdf or original signature pages.

Option 3 is likely to be used where not all signatories are available to sign documents on the day of signing but are able to provide authorisations as applicable. This ability to sign documents before the document is final only works for guarantees (that are not executed as deeds) or simple contracts.

Summary and conclusions

It is clear that the Mercury decision and the welcome Law Society Guidance will significantly affect execution practices in the future. Parties should expect a stricter degree of formality in comparison to past practices and it should be extremely clear from the email correspondence and documents exactly which version of a document signatures relate to. Where authority is to be provided for signature pages to be attached to simple contracts or guarantees, the authority should be clear and comprehensive.

The Law Society Guidance states that each transaction should be approached according to its own facts, including the countries of incorporation of the parties, internal procedures, the content of board resolutions and whether contracts have to take effect in a particular sequence. In addition, registration requirements might necessitate a hard copy original signed version of a document to be filed. In practice, the availability of signatories will also play a part in deciding which procedure is used and there may well be a desire to simplify signing instructions where possible. For example, if a transaction contains a number of deeds and simple contracts, it might be advisable to execute all documents using Option 1. Although not strictly necessary for the simple contracts, it might be considered preferable to have one set of instructions for all the documents to minimise the risk of parties executing improperly.

We at Baker & McKenzie LLP have advised on a number of post-Mercury transactions and are familiar with the various procedures and requirements. We ensure that virtual signings or closings arranged by us comply with post-Mercury market practice. If you have any queries as to the Mercury case or the Law Society Guidance, please do not hesitate to contact us and we would be happy to advise you further.
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