Touchpoint Legal Deeds and Contracts

3 Key Differences – Contracts and Deeds

Key differences –  contracts and deeds

Many people don’t understand the difference between a contract (or agreement) and a deed. After all, does it really matter? I think that it does matter. There are several key differences between contracts and deeds that could make a difference to how you structure your business transactions. I have set out three of these differences below. (Please note that these are not the only differences).

Limitation Periods

A limitation period is a prescribed period of time within which a claim must be initiated in Court. Failure to initiate the claim within that time period may mean that no action can be taken (that is,  the cause of action is statute barred). In New South Wales, the Limitation Act (NSW) 1969 (the Act) sets out the relevant limitation periods applying to actions for breach of contracts and deeds.

Many people don’t realise that substantially different limitation periods apply to contracts and deeds. The limitation period to initiate proceedings in Court for breach of contract is 6 years from the date of breach (or the date that the cause of action accrues) whereas, under a deed, there is a 12-year limitation period.

For businesses offering goods and/or services, transacting business by way of deed can mean that there is a far greater period of exposure to liability than there would be if the same transaction were conducted by way of contract.

These businesses can obtain a distinct advantage in mitigating the period of risk exposure by offering their goods and services by way of contract rather than deed.

On the other hand, if your business buys goods and services, the opposite position may apply. Transacting a purchase of goods and/or services by way of deed would allow a greater period of time to discover any latent defects in the goods or services and maximise the period of time to initiate proceedings against the seller. The risk of being ‘statute-barred’ from initiating a claim in Court is minimised.

In addition, depending upon the terms of the transaction, the major risk a buyer may run in transacting business by way of deed is the risk of being sued for non-payment! Breach involving non-payment for goods and services would be discovered very quickly by a seller no doubt – so probably no need for a long limitation period!

Something for nothing! 

One of the fundamental differences between a contract and a deed is that under a contract, each party must give something of value to the other party in order for the contract to be binding and enforceable.Touchpoint Legal Contracts and Deeds

For example, if I promise to give you a car and you promise me nothing in return, this will not constitute a contract, as I have received nothing of value arising out of the transaction. A Court, in these circumstances will not force me to hand over the car to you because the requirements to form a contract have not been met.

On the other hand, if I promise to give you a car and you promise me nothing in return, by way of deed, the promise would be enforceable against me. In these circumstances I could be
compelled by a Court to give you the car that I had promised to give to you.

This is because under a deed, there is no requirement that something of value pass between the parties. The underlying theory is that a deed is intended to create a ‘solemn promise’ by one party to another, whereas a contract is more in the nature of a bargain between two parties. (Having said that, a deed is often used by businesses to exchange something of value in the same way as a contract).

So, to ensure that any contract you enter into is valid and enforceable as against the other party, one of the requirements that must be met relates to the giving of value by both parties to each other. If nothing of value is promised to be given to the other party, then you may be better to structure the transaction by way of a deed.

Signed, sealed and delivered!

Another important difference between a deed and a contract is that a deed may be binding on the parties, notwithstanding that all parties to the deed have not yet signed it (Vincent v Premo Enterprises (Voucher Sales) Ltd [1969] 2 QB 609), whereas a contract will not be binding until one party has accepted the offer of the other party. After execution of a deed by a party (provided all other legal requirements are met), delivery of the deed to the other party may be sufficient for the first party to be bound to the transaction.

Touchpoint Legal ContractThis could be an important factor if goods or services subject to a transaction are vulnerable to market fluctuation. For example, if a seller signs and delivers a deed to a buyer’s solicitor and, subsequent to delivery, the value of the goods or services sky rockets, the seller may not be in a position to withdraw from the transaction and find a buyer that offers a higher price.

Whereas, if the transaction were structured by way of contract, the seller may be in a better position to withdraw from the transaction if the buyer has not yet accepted the contract. (Please note that some laws may prescribe that a transaction must be undertaken by way of deed and a choice may not be available to you).

Knowing the differences between a deed and a contract can help businesses to structure deals to better manage liability risks, enforceability and enable a transaction to be bound faster.

You may wish to learn more about the differences between deeds and contracts so that you can structure your business transactions in a manner that creates the best advantage to your business.

If you liked this article, you may like our article about the key differences between liability and indemnity clauses.

 

About The Author

Angela Stackelbeck

Angela Stackelbeck is a Legal Director at Touchpoint Legal. She has practised law in Sydney in large corporates and private practice, for over 20 years. Angela's broad experience allows her to uniquely offer the dual benefit of practical legal expertise gained in private practice and commercial pragmatism learned from the in-house environment. You can contact Angela at angela@touchpointlegal.com.au or on 02 8005 0692 or 0404 872 644.