What is a Contract Under Seal?
A contract under seal is a legal document that demonstrates the intent of the parties to be bound by the terms contained within it, but which also provides them with certain privileges and protections as it relates to a limitation period. Unlike a standard contract, a contract under seal does not require consideration to be provided in order for it to legally stand. This may seem like a favourable proposition, however, it is irrelevant as it relates to whether there has been a valid contract between the parties. The absence of consideration is only relevant to whether or not a plaintiff may be able to rely on the presumption that a contract exists under seal.
When the Contract will be Considered a Contract Under Seal:
A contract arises when the parties establish rights and obligations through an agreement. A contract does not need to satisfy any formalities, and the parties need not be represented by lawyers. However, while a contract does not need to have any formalities, the same cannot be said for the contract under seal.
In the 14th Century, the Crown had the right to enter into contracts with private citizens, but in order for these contracts to be enforceable a seal needed to be applied as a formality. This was known as the seal of the Crown. Once this seal was applied , it gave rise to a presumption that the parties were entering into the contract under seal and that they were granting consideration. These public contracts remained in force until a need arose for limitation periods in 1623.
In Ontario, the relevant legislation is the Limitations Act, S.O. 2002, c. 24, which states in s. 13(1) that there is a 15 year limitation period for actions "on a contract under seal." What this means is that the contract, at the time of it’s inception, must state on its face that it is a contract under seal (or otherwise mention that it is being granted under seal).
The case of Darnell v. Watt (1971), 18 D.L.R. (3d) 773 (Ont. C.A.), held that the contract provisions of the Limitations Act relating to sealed contracts applied to both commercial and non-commercial contracts. The court, in this case, stated that there was no reason provided as to why contracts under seal should be limited to only commercial contracts.
Practical Implications of Contract Under Seal
As the law currently stands in Ontario, there is a 15 year limitation period from the date at which a contract under seal is executed. Not only is it important to ensure that if entering into a contract under seal you use the correct seal, but it is also critical to ensure that you are able to meet the 15 year limitation period if you are entering into a contract under seal.
Requirements for a Contract Under Seal
A contract may only come under seal (as opposed to being a "simple" contract under hand) when it satisfies certain legal requirements. These are that: a) it be in writing, b) it be executed by or on behalf of the parties, c) it be delivered, and d) it is intentionally sealed by the party(ies) executing it. Thus, an oral contract cannot be under seal although a contract may be under seal (although it need not be) if its creation and execution is less than formal: see my posts of March 29, 2017 ("Standard Contracting Practice: Res Judicata") and June 12, 2015 ("Burnett Construction Ltd.: Evaluating And Evaluating a Document as a Contract"). In addition to the above, there must also be some words or physical marks (such as a colour of paper) on the contract to show that the contract is intentional so that "the parties conduct clearly evidences an intention to enter into the formal transaction of deed" (M.A.P. Agricultural Enterprises v. Canada (Attorney General), 2001 FCA 445).
The latter point relates primarily to the sealing mechanism. First, a "linear mark" known as a touch or scrawl may form part of the signature of the party who made it and/or follow such party’s name. Second, the seal may be of any nature found on a formal document; e.g. a circular (pressed) seal, a wax seal, a printed seal or even a paper seal. However, the physical definition of a seal has been found to be satisfied in phrases using the word "seal". For example, "sealed with my seal" or even "signed in the presence of X." Also, the use of a stamp on a lease with the words "seal here" was enough in JMR Holdings Ltd. v. Cimco Investments Inc., 2017 ONSC 1514. The key issue is intention (i.e. the marks or words must give a very strong intention that the parties are entering a seal contract).
Finally, in the event the contract is in fetters (a seal put on around 1570), the above requirements are also applicable and "there is no difference" between the seal and the requirements for a simple contract (M.A.P. Agricultural Enterprises, supra).
Benefits and Drawbacks
Though contracts under seal enjoy a longer limitation period, they are also highly technical in nature and are often avoided by parties.
Some advantages of using a contract under seal is the ability to obtain a limitation period of twenty years. Whereas ordinary contracts are governed by a limitation period of two years, a contract under seal may be subject to a limitation period of twenty years.
Another advantage of a contract under seal is that when properly executed, it cannot be set aside or declared to be invalid, other than for fraud. For example, if party A delivers a negotiable instrument as collateral security to party B and the latter fails to honour his obligation to redeem the instrument after default by the principal debtor, party A can at any time thereafter sue upon the instrument by delivering it to the Court for payment with a statement of the default, without being put to the trouble of proving the original contract between the principal debtor and party B.
A disadvantage in the use of a contract under seal is that it must express the words "signed, sealed and delivered by". If the parties do not use these words in the deed, they will have to plead and prove the facts which brought the deed within the definition in the Act in order to have the deed enforced. This becomes more problematic in the event that the action is brought a long time after the date of the contract under seal, since the defendant may no longer have the necessary evidence to prove the absence of a seal.
However, if the deed has the attestation clause, it is conclusive evidence in the absence of proof to the contrary. Yet the attesting witness may be dead or unavailable, and it may be difficult to prove the lack of a seal at that point.
Moreover, a contract under seal requires more formalities in its execution than in an ordinary contract. They are expensive and inconvenient to prepare, considering that they require lawyers notaries public, witnesses, and a seal. There is obviously a very high court fee associated with any bill in equity or other proceedings in equity in which a decree is sought or obtained; or other proceedings directly concerning a contract under seal.
There is also the concern of personal liability when a contract under seal is made in the course of business. If a company enters into an intermediary agreement with another party, there is a risk that one of the practitioners may find that he himself is quite personally liable. Generally, each partner may be personally liable for every act of the partners when carried on with the view of making a profit. The law requires that the persons or parties executing a contract under seal must clearly identify the capacity in which they are acting and the authority given to them.
Enforceability
Contracts under seal represent an exception to the general rule in contract law that the formation of a legally binding contract requires consideration. Specifically, a written instrument under seal (also known as a deed) binds the parties to all of the covenants therein, despite a failure to provide consideration. This presumption is released if the covenants are clearly identified as being "under seal". In Matthew v. Ætna Casualty Company, the California Supreme Court stated that contracts under seal would be enforceable without the requirement of consideration, absent a "justifiable reliance" on a belief that the deed was "without consideration" or that there was some other requirement, usually statute-specific, regarding the enforceability of contracts under seal. These types of contracts are essentially irrevocable.
California’s Probate Code sets forth instances in which an instrument must be in writing and signed. Any instrument regarding the conveyance of real property or contingent interest must be in writing and signed by the grantor. It must also be duly acknowledged or proved, and recorded in the official records of the county where the property is situated. Such written instruments include deeds, contracts, declarations, options, orders, and agreements. Although such contracts require a writing, no particular language is required to create a contract under seal. As such, not having an appearing seal, or failing to have the word "Seal", or some other designating word, would not invalidate a contract if it otherwise had the characteristics of a contract under seal.
Further, California Civil Code section 1642 holds that "[w]here a contract is partially written, as well as partially printed, or partly in ink and partly in pencil, and the two are inconsistent, the written parts control." If the contract is wholly printed or wholly written, then the contents of the contract are to govern the rights of the parties to the contract. The contract is read as a whole, without regard to whether the printed language is inconsistent with the handwritten or written provisions.
Current Applications and Implications
Contracts under seal continue to find their place in today’s legal practice for their ability to provide clarity and assurance in documentation. Real estate transactions, for instance, often benefit from the use of contracts under seal to ensure that agreements are perpetual, enduring past the usual limits of six years under the Limitations Act (triggering a two-year limitation period of when a claim arose). Beyond such longevity, one can also apply a 15-year limitation period in some cases to virtually ensure that no liability can derive from the agreement. On the practical side, an additional benefit of contracts under seal is that they are not considered a contract made under seal unless and until a dispute arises. Otherwise, it is treated like a normal contract.
Financial agreements where parties expect a long-term relationship are another sector where contracts under seal continue to come into play. For example , a bank and its client might enter into a contract under seal when dealing with a long-term loan and a borrower’s giving of a mortgage as security. Here the long-term nature of the deal makes it advantageous to have confidence against premature limitation periods arising. In Ontario for instance, the Limitations Act provides: "Unless provided otherwise by law, no person shall bring an action upon a specialty after 15 years from the date on which the claim arose." In these examples, parties will most often elect a contract under seal for the long-term nature of the transaction which runs far beyond the six-year limit.
An additional application for modern-day contracts under seal is seen in cases where a court order is needed to rectify an issue with a contract but a limitation period for bringing a rectification claim has expired. A case in point might be where a party hastily executes a new contract, making a mistake that ends up costing thousands of dollars. With a contract under seal, the possibility of rectification remains open indefinitely even if a limitation period has expired.
Jurisdictional Variations
The requirements and recognition as contracts under seal have been a subject of debate in various jurisdictions, particularly as they relate to the common law and civil law traditions.
As noted above, under the common law, consideration is not required for contracts under seal. As discussed above, this has changed in the US, but in Canada the requirement for consideration remains in place due to the Constitution Act of 1867. With regards to registration in land registries, the requirements have also varied by jurisdiction. Several Canadian land title statutes contain specific provisions relating to contracts under seal which distinguish such requirements in Canada in particular. In the UK, provisions for registration of contracts under seal vary by statute, but each provision is distinct in its manner of implementation. However, for the purposes of this paper, the variation in provisions will not be further analyzed.
Contract law is based primarily on both Civil and Common law in French-speaking parts of Canada. Due to this, with regards to enforcing contracts under seal, under French Civil Law, the question of whether a contract was sealed is material and it will be taken into account in the interpretation of the contract. An agreement signed under seal is seen as a formal contract and the parties must offer proof of the seal, in essence putting the burden of proof on the party claiming that the contract has been executed. On the other hand, under English Civil Law (following the English system of law), a document under seal is seen as having the same effect as a normal contract and the fundamental principles of contract law apply; therefore, in this sense, there is less materiality of the seal in the sense of contractual processes.
Creating a Contract Under Seal
An important feature that any properly drafted contract under seal should contain is the intention of the parties that it be sealed, accompanied by suitable wording and/or seals. The words in which this intention is expressed are often as follows: "This Indenture made in pursuance of the statutes in such case made and provided, by and between A.B., of …, of the first part, C.D., of …, of the second part, and E.F., of …, of the third part."
It is seldom that a contract under seal is expressed in these terms. The contract should then be identified as a deed, bond, indenture or covenant, so as to make it clear that it is a contract under seal. It should bear the word "seal" in brackets after it.
The party signing in expectancy of seal should sign as follows: "In expectation of his seal being affixed." The appropriate seal, which is usually referred to as a "common seal," should be reproduced, so that no doubt can arise as to who is to affix the seal. In addition, more appropriately, the seal of the party may be appended by means of the term "caused to be hereunto affixed." A similar phrase to supplement the name of the party whose signature is next to that of the affixing party, should also be used. These clauses even serve to indicate to a person who has no connection with the contract that the signatures have been appended in expectation that they will be sealed, and that the contract is to be delivered as a deed.
It is advisable to insert in a deed, prior to the operative part, the following words: "that the executors, administrators, and assigns of the party of the second part shall be bound by the covenants in the party of the first part," for reasons of bankruptcy, among others.
The clause inserting the consideration is generally the same as in any other contract; however, some cases have determined that where any party pays the consideration, that party is entitled to enforce the contract; but if it is paid by a broker on behalf of the purchaser, only the broker can enforce the contract. Where consideration has been paid, it is therefore advisable for a contract under seal to contain a clause similar to this one:
"The said C.D. doth therefore hereby covenant and agree with the party of the first part for himself, his heirs, executors, and administrators, that the party of the second part will for and with the full intent hereinafter mentioned and according to his covenant and agreement herein before contained, pay, perform, and fulfill all and singular the covenants, conditions, payments, and agreements to be by him required to be paid, performed and fulfilled at the due times and periods hereinbefore mentioned . . . ."
While a consideration is not actually received until it is paid, a promise to pay is still adequate.
Case Examples and Applications
As the use of seals has decreased in many jurisdictions in both enacted and common law (including Canada), these examples further illustrate its significance when and if it is still used in practice.
In a case in British Columbia, 1913 CarswellBC 108, the owners of the 1913 Craven home in Vancouver could enforce the right of indemnity under the insurance policy on the home which was lost once the house was transferred on seal to the Government of Canada without providing for the right to indemnification in the deed. The terms of the agreement between the owner and the Government required that "any right of quarter from the University be vested in the Crown" and that the owners "execute any documents necessary to comply with these requirements." The owners executed an "Indemnitee Agreement", a transfer document and a certificate without making reference to the insurance policy. The insurance policy contained a clause that "the right of indemnity is not assignable". According to Ladner, J, a contract under seal, such as the one presented to the Government, can be enforced by the successor of the promisor without consideration or notice of the title. And if a contract is sealed, any conditions, which relate to the operation of a right of action, must take place on its face, which the deed in question did not contain. The owner signed a transfer document, which only related to the transfer of the land, without referencing the "Indemnity Agreement" and so he could not assign the insurance proceeds to the new owners, who were ultimately out of pocket.
In Canadian National Railway v. The Queen, 2008 FCA 17, the 1993 to 1994 Purchase Agreement for land from the Government of Canada by the Canadian National Railway contained a right of way indemnity subject to seal, which included a provision allowing the CN to sue the Government for damages. The CN paid $936 , 250.31 to the Government for the right of way and the legal fees for the Government. Paragraph 4 of the Purchase Agreement allowed the CN "to assign this agreement to a company associated with it". However, the deed of assignment did not specifically mention the "right of action for damages" nor did it reference a "successor" or "assignee" of the CN being able to sue. According to Evans, J.A., there had to be an intention to include an intention to confer the benefit upon a third party, which was not made clear in either the Purchase Agreement or the deed of assignment. The buyer under the assignment "should not have been left to reflect" regarding the intention to allow a successor or assignee of the CN to sue the Government because the "right to sue the Government for negligence must be made expressly clear at least in the right of action for damages".
In Walker v. McKee, 2009 ABQB 12, the deed of covenant, which is like a deed under seal, was registered at Alberta Land Titles with respect to a mortgage and second mortgage on the owners’ home. The owners were in default on their first mortgage and the bank, in order to recover its loss, sought payment from the guarantors, who were not parties to the covenant. However, stated in the covenant was that the guarantors agreed to pay any amount, including "principal and interest", if the mortgagees had to sue on the covenant and receive judgment. Therefore, the guarantors were "bound by the terms of the covenant", including the "payment of interest and costs associated with any litigation". The amount claimed by the mortgages exceeded the amount owed on the first mortgage.
The examples above demonstrate how the failure to draft a contract under seal, or act in accordance with its terms or to use the seal properly can result in very different outcomes of a case.