The recent High Court case of R (on the application of Mercury Tax Group Ltd and anor.) v. HMRC & Ors [2008] EWHC 2721 has focused a spotlight on certain practices conventionally used in closings of PPP/PFI and other similar transactions. Most of the commentary on Mercury has considered the implications for "virtual" closings, where the parties create and sign documents electronically. But those involved in more traditional closings also need to be aware of potential pitfalls highlighted by the case.

The Mercury case

In Mercury, the arrangers of a tax avoidance scheme detached signed signature pages from an earlier version of documents and attached them to the final version. The court held that the documents were not properly executed. The judge stressed the common understanding that documents must exist as a discrete physical entity (whether in a single version or in counterparts) at the moment of signing.

Although there were other differences between the earlier and final versions, the draft documents in Mercury contained blanks or words in square brackets which the parties intended to be filled in or confirmed. Counsel for the arrangers argued that the signatory had implicitly authorised them to fill in the blanks. He argued that a party signing a document containing such blanks must envisage that they will be completed and that the document will bind him so long as the words inserted fall within the scope of what could reasonably be expected. Although not central to his decision, the judge did not accept that argument.

The case serves as a reminder of the need for proper authorisation of any changes to documents after their execution but before they become effective. Some aspects of current practice can usefully be reconsidered in light of Mercury.

Current practice

In closings of certain transactions, it may be necessary to insert details or make changes to the closing documentation after its execution but before it is dated and intended to take effect.

A common scenario arises from interest rate or inflation rate hedging, which is a feature of the closing for many PPP/PFI projects. The parties can only determine the final price for the main project agreement (and often other documentation) after the hedging has been completed. The hedge transactions (or swaps) will typically be carried out on the day of the closing. However, the parties are often reluctant to enter into the swaps until all other matters are finalised in preparation for the closing, including physical signature of the project documentation by all parties. The prior execution of the documents provides a degree of comfort to the parties that the project will reach financial close, even though at that stage the signed documents are not, and are not intended to be, legally binding.

The usual practice for this type of closing is for all the parties to sign (but not date) the documents, with blanks left for completion with the final pricing and related details when they are determined. The project company and hedging banks then enter into the swaps. The parties' financial advisers can then generate figures such as the final price and loan repayment profiles by running a financial model incorporating the outcome of the swaps trade. The financial model produces the required information to fill in the blanks in the documentation. Once these blanks are filled in, the documents are dated and delivered.

In these cases, "filling in the blanks" should be treated as an amendment to the document. The principles that apply to amendments made after a document is physically signed or sealed but before it is intended to take effect in law will apply.

Koeningsblatt

The Court of Appeal case of Koenigsblatt v. Sweet [1923] 2 Ch 314 states the law applicable to these amendments. In that case a party to a contract had physically signed a paper contract and handed it back to his solicitor. Before exchange of contracts, the solicitor agreed an amendment to the contract with the other party's solicitor, and he then amended the text. The solicitor then phoned his client to advise of the amendment, and the solicitor gave evidence that the client had signified approval of it.

Subsequently, the client asserted the invalidity of the contract and the other party took proceedings against him to enforce it. The client's defence was, broadly, "the contract you are suing me on is not the contract I signed, because it was amended after I had signed it".

The Court of Appeal dismissed this defence, holding that the client's approval of the amendment, confirmed to his solicitor, amounted to his "ratification" of his signature of the contract, including the amended text.

Koeningsblatt is authority that an amendment to a "pre-signed" document can be binding on the signatory if one of the following applies: the signatory prospectively authorises another person to make the amendment or the signatory "ratifies" an amendment made without his prior authority. "Filling in the blanks" in the closing of a transaction will therefore not invalidate the documentation, provided all parties have in fact authorised the completion of the blanks either prospectively or through ratification.

Evidence of authority

Often someone other than the signatory will complete the blanks in documentation at the closing. Indeed, the principals may be cracking open the champagne while the solicitors are completing the documents and dating and delivering them. In many cases the parties may not have expressly considered the question of authority. At best, the lawyers may be relying on oral authorisation to fill in the blanks once the information to do so has become available. Mercury has highlighted the risks where it is not possible to prove express authority for the amendments.

Where documents are amended after execution (including by filling in the blanks), best practice is to obtain reliable contemporaneous proof of authority from the signatory. Written evidence of authority is clearly best. Prospective authorisation is also preferable to reliance on ratification.

One way to show this authority is through an express authorisation letter signed by all parties to a document before or as part of the closing. Each party authorises its solicitors or another person either to complete the blanks on its behalf or to approve the completion by someone else. (There can, of course, only be one person "holding the pen".) The letter can address other matters, as relevant, including:

  • authorising other amendments to the documents between signature and delivery (in addition to filling in the blanks);
  • initialling documents for identification;
  • delivery of the documents; and
  • a promise by the signatory to ratify any action taken pursuant to the authorisation letter.

Following Mercury, letters expressly authorising someone to fill in the blanks on behalf of the parties are likely increasingly to become a feature of PPP/PFI and similar closings.

Deeds

It seems that the authority to "fill in the blanks", and to take any of the other steps mentioned above, can be conferred by a letter or other form of written authority simply signed by the signatory. However, some practitioners consider that, where the principal document is a deed, the authority is best conferred by an authorisation that is itself expressed to be and is executed as a deed. In practice, this will not usually be a great inconvenience, since the principal document must itself be executed as a deed, and the form of authority can be presented for execution in the same form and at the same time. A statutory body, for example, might execute both the principal document and the authorisation by sealing, while a company governed by the Companies Acts might do so by the signature(s) of the specified officers (and witnessing of those signatures where required).