Month: July 2018

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What is an indenture?

We’ve already examined the historical distinction between a deed poll and an deed inter-parties. But here is another!

Whereas a deed poll, made by one party only, had a shaved or “polled” edge, an indenture, which was a deed to which two or more persons are parties and which evidenced some act, bargain, contract, conveyance, covenant or agreement between them other than the mere consent to join in expressing the same active intention (i.e. the joint and several guarantors example above), was a deed with serrated or indented (hence the term “indenture”) edges so that each party had a similar deed with the two parts being supposed to fit together as a sort of a tally.

Oh, one more thing, so as not to confuse. In the United States they call what we call a ‘trust deed’, an indenture.

 

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Deed poll vs deed inter-parties?

 

The difference between a deed poll and a deed inter partes is absolutely crucial because of the difference as to who may enforce the deed in question.

It is clear that any person named or sufficiently indicated in a deed poll may sue to enforce any obligation undertaken in that deed poll in his favour despite the fact that he is, by definition, not a party to the deed poll and has not executed the deed poll.

By contrast however a person cannot sue on a covenant made in his favour which is contained in a deed inter partes unless he is a party (and named as a party) to the relevant deed. Even if a third party executes a deed inter partes he cannot sue on it unless he is named as a party to the deed. The only way in which a person who is not a party to a deed inter partes can enforce a covenant in his favour contained in that deed is to come within one of the exceptions to the Doctrine of Privity e.g. he would be able to enforce the covenant if he was able to show that there was a completely constituted trust of the covenant in his favour.

Consequently it is vital where you are preparing a deed poll which is to be enforceable by third parties that you do not use language which suggests that there is more than one party to the deed and that it is a deed inter partes. For example avoid phrases such as “this deed is made between”. Conversely, if you are preparing a deed inter parties, make sure that any person who you wish to be able to enforce the deed is named as a party (unless one of the named parties is to be a trustee of the benefit of the deed for a third party beneficiary).

The other historical distinction was between a deed poll and an indenture. Whereas a deed poll, made by one party only, had a shaved or “polled” edge, an indenture, which was a deed to which two or more persons are parties and which evidenced some act, bargain, contract, conveyance, covenant or agreement between them other than the mere consent to join in expressing the same active intention (i.e. the joint and several guarantors example above), was a deed with serrated or indented (hence the term “indenture”) edges so that each party had a similar deed with the two parts being supposed to fit together as a sort of a tally.

The practice of indenting originated in early times when deeds were short; often a deed between parties would be written out two or more times (according to the number of parties) on a single sheet of parchment which was then divided by cutting it with an irregular edge so that each part could be fitted into the other to demonstrate its authenticity.

At first this rule was very strict and a deed executed before 1845 was not an indenture unless it was actually indented, even though it was stated to be an indenture. However in 1845 legislation in the UK was passed providing that a deed between parties has the effect of an indenture even though the parchment on which it is written was not actually indented.

Consequently for all practical purposes the term “indenture” is now a thing of the past and the only real important differentiation nowadays is between deed polls and deeds inter partes.

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What is a deed inter-parties or indenture?

A deed inter-parties is a deed which expressly states that it is made between two or more named persons.

The difference between a deed poll and a deed inter partes is absolutely crucial because of the difference as to who may enforce the deed in question. It is clear that any person named or sufficiently indicated in a deed poll may sue to enforce any obligation undertaken in that deed poll in his favour despite the fact that he is, by definition, not a party to the deed poll and has not executed the deed poll.

By contrast however a person cannot sue on a covenant made in his favour which is contained in a deed inter partes unless he is a party (and named as a party) to the relevant deed. Even if a third party executes a deed inter partes he cannot sue on it unless he is named as a party to the deed. The only way in which a person who is not a party to a deed inter partes can enforce a covenant in his favour contained in that deed is to come within one of the exceptions to the Doctrine of Privity e.g. he would be able to enforce the covenant if he was able to show that there was a completely constituted trust of the covenant in his favour.

Consequently it is vital where you are preparing a deed poll which is to be enforceable by third parties that you do not use language which suggests that there is more than one party to the deed and that it is a deed inter partes. For example avoid phrases such as “this deed is made between”. Conversely, if you are preparing a deed inter parties, make sure that any person who you wish to be able to enforce the deed is named as a party (unless one of the named parties is to be a trustee of the benefit of the deed for a third party beneficiary).

The other historical distinction was between a deed poll and an indenture. Whereas a deed poll, made by one party only, had a shaved or “polled” edge, an indenture, which was a deed to which two or more persons are parties and which evidenced some act, bargain, contract, conveyance, covenant or agreement between them other than the mere consent to join in expressing the same active intention (i.e. the joint and several guarantors example above), was a deed with serrated or indented (hence the term “indenture”) edges so that each party had a similar deed with the two parts being supposed to fit together as a sort of a tally.

The practice of indenting originated in early times when deeds were short; often a deed between parties would be written out two or more times (according to the number of parties) on a single sheet of parchment which was then divided by cutting it with an irregular edge so that each part could be fitted into the other to demonstrate its authenticity.

At first this rule was very strict and a deed executed before 1845 was not an indenture unless it was actually indented, even though it was stated to be an indenture. However in 1845 legislation in the UK was passed providing that a deed between parties has the effect of an indenture even though the parchment on which it is written was not actually indented.

Consequently for all practical purposes the term “indenture” is now a thing of the past and the only real important differentiation nowadays is between deed polls and deeds inter partes.

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What is a Deed Poll?

It is a basic rule of Australian contract law that, save for limited exceptions, a contract cannot confer rights or impose obligations arising under it on any person except the parties to the contract. This basic rule is known as the “Doctrine of Privity” and there are several different aspects of the doctrine namely:

  1. a person cannot enforce rights under a contract to which he is not a party;
  2. a person who is not party to a contract cannot have contractual liabilities imposed on him by that contract; and
  3. contractual remedies are designed to compensate parties to the contract, not third parties

Deed polls constitute one of the limited exceptions to the basic doctrine of privity under Australian law; they are flexible and, provided they are used carefully, can be of great assistance in capital markets and other finance type transactions.

Lets start with a little bit of history. A deed poll is a deed made by and expressing the active intention of one party only, or two or more persons who join together in expressing a common active intention of them all e.g. a deed poll by two or more guarantors whose liability is joint and several.

The name deed poll comes from the fact that historically the parchment required for such deeds had been shaved even or “polled” at the top. This was historically in contrast to an indenture (see below). The most important fact to note in relation to deed polls is that they are the act of one party only (or two or more persons acting together i.e. the joint and several guarantors example above); in essence they are one sided unilateral instruments to which there is only one party not a two sided (bilateral) instrument like a contract.

A deed poll must be distinguished from a deed inter partes and an indenture.

See next Blog deed inter-parties.

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Doctrine of Privity

The basic Doctrine of Privity is that only parties to a contract may enforce that contact and that a third person who is not a party to the contract may not, unless he can take advantage of one of the limited exceptions to the doctrine, enforce a contact to which he is not a party even if that contract is made for his benefit. For example, if A promises B that A will pay $100 to C if C performs a piece of work, C, having performed the relevant piece of work, cannot sue A for the $100. (Interestingly, in this example, B could also not compel A to pay the $100 to C as B has supplied no consideration for A’s promise unless the facts are such that B agreed to procure performance by C.

It is generally agreed that the modern doctrine of privity was established in 1861 in Tweddle v. Atkinson. In that case the fathers of a groom and bride, in pursuance of an oral contract made between the fathers before their children’s marriage, agreed together in writing to pay the groom, in one case £200 and in the other case £100, adding that the groom should have full power to sue them in any court of law for those sums. The bride’s father failed to pay and the groom, who was not a party to the contract between the fathers, sued the bride’s father for the payment promised by the bride’s father under the contract. The groom’s claim was dismissed on the basis that no stranger to a contract could take advantage of that contract even though made for his benefit.

The Doctrine of Privity was approved by the House of Lords in Dunlop Pneumatic Tyre Co. Ltd. v. Selfridge & Co. Ltd. in 1915 where Lord Haldane said:

“In the law of England certain principles are fundamental. One is that only a person who is a party to a contract can sue on it. Our law knows nothing of a jus quaesitum tertio arising by way of contract. Such a right may be conferred by way of property, as for example, under a trust, but it cannot be conferred on a stranger to a contract as a right to enforce the contract in personam”.

This, however, cut little ice with Lord Denning who made several attempts in the 1950’s to allow rights of suit by third party beneficiaries; despite this, however, the House of Lords reaffirmed the general Doctrine of Privity in Midland Silicones Ltd. v. Scruttons Ltd. (Lord Denning dissenting) in 1962.

WARNING: The Doctrine of Privity is an area of the law where concepts of equity or fairness have little or no standing whatsoever. If A promises B that if B (or C) will do something A will pay a cash sum to C there is no equity in the rule that says that C cannot enforce this promise; but that is currently the law so if you wish to confer an enforceable benefit on a stranger to a contract you must make use of one of the exceptions to the Doctrine of Privity and not simply rely on vague concepts of equity/clean hands and all that.