This article explains the different methods of exchange of contracts and their effectiveness. It also explains about possible problems encountered when using these methods, along with solutions to overcome them.
The exchange is usually initiated by the buyer to show that he is now ready to commit to the contract. Once the contract is exchanged it becomes binding on both parties, and neither would be able to rescind without proper notice or reason. During a residential transaction sometimes it may happen that a person may end up owning two properties or without owning even one of them. This should be avoided at all costs by synchronising the timing of the exchange. Failure to do so would amount to professional negligence. Hence, the conveyancing solicitor should not proceed with an exchange unless and until there is confirmation from parties involved in both transactions. It should not happen that the buyer finds himself in a position where upon exchange of one transaction, the other party has decided to withdraw from the contract. Ideally exchange of both transactions should take place simultaneously. But this is not possible; hence the conveyancing solicitor should ensure that there should as little delay as possible.
Telephone
This is now the most common method of exchange of contract. It was first legally recognised in Domb vs Isoz [1980] All ER 942 by the Court of Appeal. It is preferred due to the fact that it is the quickest way to bring the contract into effect, and is particularly effective during chain transactions.
However, the method is also fraught with risks and hence it makes sense for the conveyancing solicitor to explain them to his client. A contract exchanged over the phone is said to come into effect once both parties agree in the course of the transaction that the exchange has taken place. The physical exchange of documents through post is then a mere formality. But herein lies the risk- when a dispute arises, one of them could easily deny the contents of the telephone conversation, thereby denying the exchange itself. The other risks involved in this method include:
a) Neither is able to check if the other party’s contract has been signed.
b) Neither is able to check if the contract documents are in the agreed form and inclusive of all the amendments suggested by either of them.
If the content of both these contract documents are not identical, or either or both of them have not been signed, the contract cannot come into existence irrespective of the fact that the documents have been/or purported to be exchanged. The conveyancing solicitors may have to ensure that the deposit money has been paid. Not doing so would amount to professional negligence on the part of the solicitors.
To avoid the above mentioned situations, it is important that both parties agree that the telephonic exchange of contract shall be governed by the formulae devised as a result of the Domb vs Isoz decision. This includes making an attendance note of the conversation as soon as possible. The following is an explanation of the formulae:
Use of formulae for exchange
The formulae can be divided into three parts:
a) Formula A: This formula is used when the conveyancing solicitor (usually the seller’s) is in custody of both, the seller’s and the buyer’s contract documents.
b) Formula B: This is used when at the time of exchange, the conveyancing solicitors are in custody of the contract documents of their respective clients.
c) Formula C: This is used in the case of chain transactions.
Personal exchange
Through this method, the contract is physically exchanged when the two parties to the contract meet, usually at the office of the seller’s conveyancing solicitor. The contract is said to come into existence from the moment the contract is exchanged. The biggest advantage of using this method is that the effect is almost instantaneous- there is no confusion as to the time from when the contract comes into existence. Also, both parties to the contract can see the other person’s contract papers before signing them. As for the seller, he can be sure that the deposit cheque is received before agreeing to sign.
Personal exchange is the safest of all methods, but it is nevertheless impractical considering the fact that it is not always possible for clients to come in person to the solicitor’s office. Besides, physical distances between offices also make this impossible.
Hence, it is not commonly used in residential transactions, but it is often used in commercial transactions, especially high-end transactions.
Postal exchange
Postal exchange of contract is not usually preferred when a transaction is linked to other transactions, i.e. in the case of chain transactions. The process begins when the buyer’s conveyancing solicitor sends the buyer’s contract papers along with the signed contract. The seller in turn shall send acknowledgement of the deposit cheque along with his part of the signed document. Under normal circumstances, the contract would come into existence only when the buyer receives the signed contract sent by the seller. Sometimes, it may happen that the document is lost in transaction and never received by the buyer. Thus, to avoid such situations, it was decided under a judgment in the Adam Vs Lindsell (1818) 1Band Ald 6813 case that it is enough if the seller can prove that he has posted his part of the contract to the buyer.
A seller need not necessarily complete his part of the conveyancing transaction by sending the contract papers signed by him. He is free to change his mind regarding the contract and may even withdraw. It is also possible that there could be an undue delay in the buyer sending the contract papers to the seller. These risks may seem small, but could be crucial in chain transactions; and hence not advised when one contract is linked to another.
Documents exchange
DX or Document Exchange refers to a postal system that is privately managed and not under the control of the postal office. It is common for conveyancing solicitors to be signed up with the system. Documents exchanged through DX are done in the same manner as regular postal exchanges, and are subject to the same risks. A contract exchanged through this method is said to come into existence once the seller’s part of the contract is received by the buyer, unless the contract documents state something to the contrary. Standard Conditions state that the contract comes into existence when the last copy of the contract is deposited at the DX office.
Although the rules of postal acceptance do not apply to Document Exchange, the court has accepted the use of this method. This was decided as a judgement in the John Wilmott Homes Vs Reed (1986) 51P and CR90 case.
Fax
Fax is usually used to replace the telephone as a means of transmitting the message. This is usually used when the exchange of contract is done to transmit messages that activate the Law Society Formulae. However, both set of Standard Conditions do not permit the use of fax as a valid method. Thus, delivery of documents is essential and it is not sufficient that both parties have exchanged the contract by faxing copies of the signed documents. Faxing of documents cannot be considered to be a valid method of exchanging contracts.
While emails cannot be used to effect a transfer of contract, they can certainly be used to transmit the message related to the contract so as to activate the Law Society Formulae.
The government has introduced a proposal to allow electronic conveyancing. Thus, there would be only a single copy of the contract that would be signed and stored electronically. And if this proposal comes into effect, there would no longer be a physical exchange of contract; it would come into existence once electronically signed by both parties. To the uninitiated, electronic signature refers to the transmission of an encrypted message that is certified as only coming from the person who is said to be transmitting it.
Photo courtesy: Brian Burger
