Powers of Attorney: Good Deed or Bad Deed?
It’s not unusual to rely on an attorney to conclude legal documents or transactions when a director or business owner is unable to, but it is vital to ensure your Power of Attorney is valid and effective.
A recent case illustrates the dangers for the unwary donor of a power of attorney when the legal formalities of executing the power are not properly complied with. An expensive legal dispute could have been avoided had identical powers been drafted and executed with more care and the limits of the power considered with care.
What’s the background?
Three shareholders decided to sell their shareholding in a hospitality company to a third party1. As two of the shareholders could not make the final completion meeting, their lawyer arranged for them each to sign powers of attorney (PoA) in favour of the third shareholder giving him power to “… represent me, sign in my place and stead, and take other steps for my benefit, in connection with the completion of the sale…”. Although their signatures were properly witnessed the PoA did not include the word ‘deed’.
At the completion meeting, the shareholder/attorney signed a guarantee on behalf of the other shareholders and himself in relation to certain financial risks.
However, when the beneficiary of the guarantee made a claim, the two shareholders who had granted PoA denied liability on the basis that the powers were not valid and the guarantee was not binding on them.
Firstly, the court agreed that they were not valid as deeds under s 1(2)(a) of the Law of Property (Miscellaneous Provisions) Act 1989 which provides: “An instrument shall not be a deed unless it makes clear on its face that it is intended to be a deed by the person making it...” Instead, the PoA took effect as appointments in writing.
The rules of interpretation were then applied by the court to determine whether the third shareholder had the legal authority to sign the guarantee on the others’ behalf. The Court ruled that the PoA did not give the shareholder the power to enter into the guarantee. This was because when the PoA were executed, the sale was almost complete with no suggestion that a re-negotiation may become necessary. The PoA authorised the third shareholder to take specific steps in connection with the "completion of the sale" - but not to agree a sale on different commercial terms which had not been contemplated or agreed.
What does this mean?
Great care must be taken when drafting and executing powers of attorney to ensure they comply with legal formalities. You should also check the limits of the power so that the attorney does not overstep the mark – and be certain the attorney understands the extent of their legal obligations under the power.
1Katara Hospitality v Gerard Guez and Anr [2018] EWHC 3063
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