Mercury Tax Group Limited v HMRC

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In Mercury Tax Group Limited and Darren Neil Masters v HMRC (2008) EWHC 2721 is a leading case on contract execution formalities. Hey, wait! Where are you going? This is worth reading!

It concerned an alleged a tax avoidance scheme. At this point let us cite our common observation that little old ladies, welsh hoteliers and, apparently, tax dodgers make bad law, so en garde.

TL;DR

1. At the time of execution and delivery the agreement must be complete. You can’t just staple an old signature onto a revised document.

2. (Obiter): If you purport to sign something as a deed even if, to be binding, it doesn’t need to be a deed, the formal requirements of deed execution apply. Impliedly, if these fail, even though it might have been a perfectly binding simple contract had you not said it was meant to be a deed, it won’t be.

3. Section 1(3) of the Law of Property (Miscellaneous Provisions) Act 1989 requires that a signature and witness attestation must form part of the same physical document which constitutes the deed. The practice has since evolved, and been validated by the Law Commission and the UK government, of “Mercury signatures”.

One can “Mercury sign” document by attaching to the same email: the whole final version of the document and the PDF of the signed signature page. These can be separate files and will be an original signed document equating to the “same physical document” , as long as they are sent together under cover of the same email or transmission.

Background

The Her Majesty’s Revenue & Customs believed the Mercury Tax Group was, tax-wise, up to no good.

Tax avoidance being the right side of an unbright line, and tax evasion the wrong side of it — and much of the distinction between the states being one of form and not substance — HMRC sought to uncover formal flaws in Mercury’s schemes that might push them across that line.

To this end HMRC executed a series of dawn raids on Mercury. These call to mind an era of brigands, derring-do, swinging on ropes, sword-fights on poop-decks and the general kind of mischief and high-seas japery one doesn’t readily associate with the proper accounting for imputation credits, but good luck to them all the same. Unfortunately, this kind of buccaneering plays no further part in the story, but we mention it to egg you on to keep reading.

Contract execution formalities

The best “fruits” of the dawn raids were formal shortcomings in the way Mercury’s clients executed their contracts.

This led the court to meditate on what one must do, in our digital age, to properly execute and deliver a deed. And as often happens, when the common law tries to engineer a good outcome from a bad set of facts, the law of unintended consequences makes a ghastly appearance.

Those unintended consequences included heightened paranoia amongst deal counsel whenever one is called to pre-sign legal contracts. Especially where this happens remotely, and intermediated by the digital realm.

Execution pages and escrow

It is common enough in the financial markets to pre-sign deal documentation. It is widely — though wrongly, in our view — believed that good governance requires the person signing the contract to be removed from the one who negotiated it.

Legal documents tend to to be lengthy, over-engineered, and are unusually prone to last minute addenda, adjustment and, when being executed on Fridays, signatories buggering off to their place in Verbier.

What with the baroque execution policies, escalation circles and command chains that belabour most modern organisations, even finding an authorised signatory is a job enough: getting her to stay put long enough to sign, not to mention coaxing her through the technological challenge of doing so remotely from her chalet in Verbier, require advanced event management skills. And that’s just one party. There are often ten.

Thus the time-honoured practice of deliberately crafting execution pages to contain no legally relevant text on them at all, such that they can be executed by the right person “in the abstract”, then held by the negotiating team or their counsel “in escrow”, to be released when everything is commercially tied down.

This is somewhat challenging to the idea that a signatory should hold the four corners of the contract before her, and ideally have read it, before applying pen to paper. But that is an old fashioned idea, and does not really reflect the distributed network of a hive mind that best described a functioning multi-national corporation. The thing is that the corporation agrees to this thing. How, internally, it got to the point of formally designating assent is something that counterparties should be less concerned about. Ostensible authority is your friend here.

But the Mercury case has thrown that somewhat into doubt. So the last thing anyone needed is for our learned friends to make the process even harder.

Mercury facts

In the normal commercial case, the affixation of authorised signature to paper — this is execution, but not yet delivery — may happen when the deal is in its final furlong, but yet in advance of pricing, and that final blob-removal sweep: our intrepid signatory may safely disappear to Geneva. But this is just a firm getting its internal governance ducks in a row, and its senior executives getting that first lift in the morning. Should those blobs never be removed — should the deal crater in the final stretch — the execution page can be destroyed without anyone outside the firm ever seeing it.

What happened in Mercury was quite different. Here the clients were individuals, not multinational corporations. There was no separation of deliberative and executory powers. And they signed developed but incomplete drafts, rather than all-but-final execution documents. That is, the missing parts were not mere blobs. Between these executed drafts and the final documents — which clients never executed — there were substantial changes, “unheralded by any blanks or square brackets in the drafts”. Instead of having the client sign the final versions, Mercury detached signature pages from the drafts and stapled them to the final versions “with the intention that that should constitute his signature to that version.”

This is a long way from the market practice outlined above. Mercury argued that it wasn’t. They pointed to correspondence indicating that the client knew about and implicitly, if not expressly, authorised the changes — and failing that, that the changes were, from the customer’s point of view, immaterial.

“He referred me to the decision of the Court of Appeal in Raiffeisen Zentralbank Osterreich AG v Crossseas Shipping Ltd [2001] 1 WLR 1135, which he said was authority for the proposition that in the case of written contracts an alteration to the contract after signature did not invalidate it unless it was material in the sense of being ‘potentially prejudicial to the legal rights or obligations of the affected party’: that, he said, was plainly not the case here.”

The court, alas for the tax dodgers, was having none of it.

“... I believe that the common understanding is that the document to be signed exists as a discrete physical entity (whether in a single version or in a series of counterparts) at the moment of signing. The significance of this is not entirely talismanic (though it would not affect my view even if it were): the requirement that a party sign an actual existing authoritative version of the contractual document gives some, albeit not total, protection against fraud or mistake.”

If that were not enough, the document was intended to be a deed, meaning section 1(3) of the Law of Property (Miscellaneous Provisions) Act 1989 came into play, which provides that to be validly executed a deed must be signed, witnessed and delivered.

Section 1(3) of the Law of Property (Miscellaneous Provisions) Act 1989 provides:

“An instrument is validly executed as a deed by an individual if, and only if –

(a) it is signed -

(i) by him in the presence of a witness who attests the signature; or

(ii) at his direction and in his presence and the presence of two witnesses who each attest the signature; and

(b) it is delivered as a deed by him or a person authorised to do so on his behalf.”

The court found that this language necessarily involves that the signature and attestation must form part of the same physical document constituting the deed. Additionally, the fact that the parties intended them to be deeds, rather than that they were required by law to be deeds (in order to have legal effect) was what mattered: “the fact remains that the parties intended them to be deeds and their validity must be judged on that basis”.

The JC says ... Just quietly, we don’t think this follows: if an instrument doesn’t have to be a deed to be binding, and the way it is executed means in fact it isn’t a valid deed, the mere fact that the parties have in mind that it should be a deed does not undermine their general intention to become bound by what it says, even by way of a simple contract. Assuming the usual ingredients of offer, acceptance and consideration are present. A deed is just a “super contract” — the equity of the situation surely requires it to fall back to a simple contract if one of those would, legally do. To hold otherwise is to prefer form over substance — like when has that ever happened?

Anyway, who cares what the JC thinks? As a last roll of the dice, counsel for the tax dodgers appealed to the well-trodden path of signing execution pages ahead of closing and holding them in escrow:

“... draft documents were signed by the investors ahead of all other parties signing, including the final signatory, the bank. This is perfectly normal business practice. In modern commercial times it is not practical for multi-party contracts, deeds and other instruments to be signed in the same place at the same time.”

Well, this is perfectly normal business practice, but only where those documents were held by the signatory or its representatives (or legal counsel) pending sight of, and official signing of the documents, so that the signature pages are not flying around earlier, appended to entirely different documents, with different terms. Detaching signature pages from another document, after the fact, and appending them to an updated document isn’t really cricket, even if you have the counterparty’s tacit consent.

“I accept that the flaws on which HMRC rely are essentially formal. But I see nothing wrong in applying a strict test of formality to the validity of the agreements with which we are concerned in this case. Their entire raison d’être is to create - and demonstrably to create - a series of formal legal relationships: if they do not do that, they do nothing.”

See also

• Virtual signing
• Deed and simple contract
• Signed, sealed, delivered