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Case law: Parties using powers of attorney in commercial transactions must observe the formalities and draft the powers carefully to avoid disputes

Parties to a transaction should ensure that any power of attorney they give to facilitate it is properly drafted and executed by a specialist professional, and that its terms are considered very carefully to ensure the attorney is not authorised to do anything the giver does not intend, a ruling makes clear.

June 2019

This update was published in Legal Alert - June 2019

Legal Alert is a monthly checklist from Atom Content Marketing highlighting new and pending laws, regulations, codes of practice and rulings that could have an impact on your business.

Three shareholders in a company had agreed to sell their shares to a third party. Two of them signed powers of attorney in favour of the third shareholder ‘to represent me, sign in my place and stead, and take other steps for my benefit, in connection with the completion of the sale…’ at a completion meeting. The reason given was to enable him to deal with any last minute changes.

At the meeting, the third shareholder agreed to a lesser price for the shares. He also signed a personal guarantee – a completely new document in the transaction, drawn up at the meeting itself - on his own behalf and as attorney for the other two shareholders. That gave the third party a guarantee against various financial risks if they arose after completion. When the third party tried to enforce the guarantee, the two shareholders argued it was not binding on them.

The law requires that a power of attorney must be executed as a deed which (among other requirements) means that it must state on its face that it is intended to be a deed. The High Court found that the powers of attorney in this case failed this test and were invalid as deeds.

The third party therefore argued that the documents should be treated as informal appointments of the third shareholder, and the guarantee treated as a simple contract signed by the third shareholder as agent for the other two shareholders.

The court applied the usual rules of contractual interpretation to the wording of the documents to determine whether they gave the third shareholder authority to sign the guarantee on behalf of the other two. This meant looking at the natural, ordinary meaning of the words used, in the context of the surrounding factual matrix known to the parties when they entered into the documents.

Fortunately for the two shareholders, the court ruled that the power to ‘take other steps’ in the documents did not extend to entering into the guarantee on their behalf. When the purported powers of attorney were entered into, the deal had mostly been agreed and there was no sign either side might want to re-negotiate any terms or withdraw, and the final completion date had been set. In that context, binding the other two shareholders to a completely new guarantee, creating new liabilities, was not authorised.

Operative date

  • Now

Recommendation

  • Parties to a transaction should ensure that any power of attorney they give to facilitate it is properly drafted and executed by a specialist professional, and that its terms are considered very carefully to ensure the attorney is not authorised to do anything the giver does not intend.

Case ref: Katara Hospitality v Gerard Guez and Anr [2018] EWHC 3063

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