Summary
- An agreement becomes legally binding when it contains an offer, acceptance, consideration, and an intention to create legal relations, whereas a deed requires no consideration but must be signed, witnessed, and delivered.
- Deeds are often used for transactions involving significant obligations, such as property transfers or guarantees, where consideration may be absent.
- Choosing the wrong document type can affect enforceability, so understanding the distinction is essential for protecting your business interests.
- This article explains the legal differences between agreements and deeds under Australian law, written for business owners and commercial parties.
- It is produced by LegalVision, a commercial law firm that specialises in advising clients on contract law and business transactions.
Tips for Businesses
Use a deed when no consideration is exchanged or when a longer limitation period is needed. Ensure deeds are properly signed, witnessed, and delivered to be enforceable. Review existing contracts to confirm the correct document type was used, as errors may affect your legal rights and obligations.
When signing business contracts, understanding the difference between a deed and an agreement is essential. The key distinction lies in consideration: agreements require an exchange of value between parties, while deeds represent a binding, one-sided promise. For instance, under an agreement, one party might provide a particular product in exchange for the other party providing money. In comparison, deeds are a unique form of a legal document that indicates a party’s promise to do something. This article will further explain the differences between deeds and agreements.
What is a Deed?
A deed is a special type of binding promise or commitment to do something.
The essence of a deed stems from the need in every community to have a special type of ritual or procedure that publicly indicates the solemnity of a binding promise that a person intends to make.
In today’s commercial world, this idea of a serious commitment continues in the form of a deed. Therefore people use a deed when substantial interests are at stake, such as when a person passes an interest, right or property.
You will often need to use a deed if you are:
- assigning intellectual property between related companies;
- entering into a non-disclosure deed where you want to ensure that another party does not share your confidential information;
- documenting an agreement that you have reached with another party after a dispute;
- providing a bank guarantee or letter of credit; and
- transferring property, such as the sale of a house.
What is an Agreement?
An agreement, also known as a contract, is formed when:
- there is an offer and an acceptance (for example, I offer to wash your car, and you agree to pay me $50 for it);
- the parties demonstrate a clear intention to create legal relations; and
- the parties do something in exchange for an offer. This is known as consideration.
The major difference between a deed and an agreement lies in whether there is any consideration for the promise.
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The Difference Between an Agreement and a Deed
The fundamentals of modern contract law are that there must be:
- offer and acceptance;
- an intention to be legally bound; and
- consideration.
Consideration stems from the idea that when two parties agree, they have reached a bargain. The parties need consideration to show that they have ‘bought’ the promise by doing some act or providing something in return for the promise.
In contrast with a contract or agreement, there is no requirement for consideration for a deed to be legally binding. A deed does not need consideration because of the idea that a deed is the most solemn indication that the parties intend to be bound.
Know which key terms to negotiate when buying a business to protect your interests and gain a favourable outcome.
Common Types of Deeds
Some common types of deeds include:
- deed of termination;
- escrow deed;
- financial guarantee or letter of credit;
- deed poll;
- indemnity deed; and
- confidentiality deed.
How Do I Execute My Deed?
Deeds and agreements have different requirements for execution. Execution is the process of formally finalising contractual documents.
If you are executing a deed, you will need to follow specific rules. If the deed is regarding something personal for you, like a house deed, someone must witness your signature. In comparison, however, if the deed is for a company, it will need to be signed by:
- two directors; or
- one director and the company secretary.
You will not need a witness if you are signing a deed for a company. Further, there is no need for the other party to sign the document. A deed is binding immediately once one party executes it.
It is important to refer to the legislation specific to your state as the failure to duly execute a deed means that the deed is unenforceable. The requirements for executing deeds are much more stringent than that for contracts. Therefore, you should seek specific advice if you are unsure about how to execute a deed or whether you need a deed for a particular situation.
How Do I Execute My Agreement?
Agreements do not need to be ‘signed, sealed and delivered’ in the way that deeds must be. An agreement can technically be binding if the parties have agreed to it:
- in a contract;
- orally; or
- by writing in an email.
However, it is best practice for agreements to be in writing and have both parties sign it. This makes it very clear what terms the parties are agreeing to. Individuals may sign an agreement without having someone witness their signature. Similarly to a deed, a company may sign an agreement by:
- two directors; or
- one director and the company secretary.
One huge practical advantage in using an agreement, rather than a deed, is that you can execute the document in counterparts. This means that you and the other party can both sign a copy of your own agreement, and then send it to the other side. Taken together, the two documents constitute the same agreement. This is particularly practical if you are not geographically near the other party.
Limitation Periods
A limitation period is the period of time that you can bring a claim to court after an event occurs. These periods exist to protect defendants. They operate under the principle that the administration of justice becomes more difficult the longer it takes for an action to come to court. Many do not know that contracts and deeds have different limitation periods.
It is important to note that the court will interpret an action as first accruing as the point when circumstances gave rise to the claim the first time. For example, this could be when the breach occurred. However, where the loss is purely economic, the cause of action accrues when the loss first became known to you, or when it should have reasonably been discovered through diligence.
Therefore, if you are dealing with a contractual dispute with another business, make sure that you understand whether the document at hand is an agreement or deed. Then, ensure that the limitation period does not lapse before bringing a claim to court.
Key Takeaways
A deed is a special form of document which indicates an individual’s most sincere promise to do something that she or he has contracted to do. At common law, the requirements for executing a deed are that it must be in writing, sealed and delivered to the other party. The key difference between an agreement and a deed is that a deed does not need consideration. Furthermore, each Australian state and territory has legislation that sets out specific requirements for executing a deed. You should check legislation to ensure that you properly execute your deed.
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Frequently Asked Questions
A deed is a special type of binding promise or commitment to do something. In today’s commercial world, this idea of a serious commitment continues in the form of a deed. Therefore people use a deed when substantial interests are at stake, such as when a person passes an interest, right or property.
The deed must be in writing, have a personal seal is placed on the document and be delivered to the other party. However, there are also specific legislative requirements, so you should always check to see if any other legislation applies to your deed.
In New South Wales (NSW) and Queensland (QLD), the limitation period to bring a claim to court for breach of a deed is a 12 years.
Electronic execution of deeds varies by state. Some jurisdictions permit it under specific conditions, whilst others still require wet ink signatures. Always check your state’s legislation before executing a deed electronically.
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