PRE-INCORPORATION CONTRACTS I.
INTRODUCTION
OBJECTIVES
MAIN CONTENT
CONCLUSION
SUMMARY
TUTOR MARKED ASSIGNMENT
REFERENCES/FURTHER READING
INTRODUCTION
It may be difficult to set a company going after incorporation without making adequate arrangement before its incorporation. Issues like consulting and paying for incorporation expenses, renting or buying of office space, raw materials and other initial requirements for the smooth take off of the newly incorporated company. Therefore certain preliminary agreements have to be made pending the formation of the company. The company having not being formed is not yet a legal personality and so cannot enter into any contract. The issue we have to look at in this unit is to discover how the promoter may legitimately enter into a contract on behalf of a non-existent company, i.e. before incorporation, and how the company may be bound by the said pre-incorporation contract. In this unit we shall examine the common law position and in the unit 2 we shall look at the legislative intervention.
OBJECTIVES
At the end of this unit the student must be able to discuss the common law position on pre- incorporation contracts.
MAIN CONTENT
A company comes into existence only after incorporation and after its certificate of incorporation has been issued by the Corporate Affairs Commission. Prior to that date like a child its not yet born, it is not alive, so nothing can be done on its behalf, and if done cannot be binding on it since it does not exist. As we explained above, as part of its incorporation process the promoters may need to enter into contracts that will assure a smooth take off of the company upon incorporation. The issue therefore is whether the promoter can avoid being held responsible personally for these pre-incorporation contracts since it was contracted on its behalf and for its benefit. Common law simply applied the well-known principles of agency and contract to the issue.
In the law of contract, it is a fundamental principle of offer and acceptance that a party must be in existence in order to enter into an agreement. You cannot pretend to contract with a non-existent person. See Rover International Ltd v Cannon Film Sales Ltd (No. 3) (1989) 1 WLR 912. We may argue that after incorporation the company should be bound by the pre-incorporation contract made on its behalf, but the fact is that since at the time of pre- incorporation contract, the company does not exist, upon its incorporation it remains a stranger to the contract, and the doctrine of privity of contract will operate to prevent rights and liabilities being conferred or imposed on the company. Kelner v Baxter (1866) 2 QB 174.
Under the Laws of Agency a person cannot be an agent of a non-existent principal and so a company cannot acquire rights or obligations under a pre-incorporation contract. These two principles were used and applied in the decision in Kelner v Baxter supra.
A company was being formed to buy a hotel from K. At a time when all concerned knew that the company had not been formed, a written contract was made “on behalf of the proposed company by A, B & C for the purchase of wine from K. the company was incorporated and the wine handed over to it and it was consumed – but before payment was made, the company went into liquidation. The company had ratified the contract before it went into liquidation. The promoters, as agents, were sued on the contract. They argued that liability under the contract had passed by ratification to the company. Erle C. J rejecting this argument and holding the promoters personally liable said that:
‘I agree that if (the hotel) had been an existing company at this time, the persons who signed the agreement would have signed as agents of the company. But as there was no company in existence at the time, the agreement would be wholly inoperative unless it was held to be binding on the defendants personally … and a stranger cannot by subsequent ratification relieve (them) from that responsibility. When the company came afterwards into existence it was totally a new creature, having rights and obligations from that time, but no rights or obligations by reason of anything which might have been done before. There must be two parties to a contract and the rights and obligations which it creates cannot be transferred by one of them to a third person who was not in a condition to be bound by it at the time it was made.” at p. 183.
It follows therefore, and as Erle C.J explained, that where a contract is signed by one who professes to be signing “as agent” but who has no principal existing at the time. The contract will be altogether be inoperative, unless binding on the person who signed it, he is bound thereby, and a stranger cannot by subsequent ratification relieve him of that responsibility. Similarly in the case of Caligara v Giovanni Satori & Co. Ltd (1961), 1 All N.L.R 534, in the case, S obtained a cheque of N800 from plaintiff as loan in the name of and before the defendant company was formed and incorporated. The plaintiff now sue the company for recovery of the loan and interest arguing that the company had ratified the loan agreement. In a regrettably short judgment, Sowemimo J (as he then was) held that a company is not bound by contracts purporting to be entered into on its behalf by its promoters or other persons before it’s incorporation. The company cannot, after incorporation, ratify or adopt any such contract because there is in such cases no agency and the contract is that of the parties making it.”
Neither the person who purports to make a contract on behalf of a proposed company, nor the company after its formation, have any contact rights under a pre-incorporation contract. A company cannot ratify or adopt an agreement entered into before its incorporation. See Shonibare and the National Investment and Properties Company v Mansour (1963) LLR 1, Stephen v Buildco (Nigeria) Ltd (1968) 1 All NLR 188.
Moukarim Metal Wood Factory Ltd v Durojaiye (1976) ALR (Comm) 264. In fact, there are cases where the promoters who entered the pre-incorporation contracts are the same people constituting the board of directors of the company, the company will still not be bound by the pre-incorporation contract.Stephen v Buildco Nig. Ltd (supra). There is authority for saying that a company may be bound by pre-incorporation agreements. In the case of Firgos Nig. Ltd v Zetters Nig. Ltd (1965) All N.L.R 113 where the company adopted a running account covering goods supplied before and after its incorporation, it was held that the company was estopped from denying their liability on the pre-incorporation transaction. The only rationale for the decision would be because the expense accounts had been for both pre-incorporation and afterwards, the accounts had been mixed up and part payments had been made leaving only an outstanding balance. In the case of Natal Land Colonisation Co v Pauline Colliery Syndicate (1904) AC 120. The court adhered to the rule laid down in Kelner v Baxter and held in an action to enforce an agreement for lease made before the company was incorporated between Natal company and Mrs. Colliery acting on behalf of the company. The company cannot enforce a contact made or its behalf before incorporation. The company wish to ratify the contact in order to obtain the benefit of a contract purporting to have been made on its behalf before the company came into existence and there was no new contract made with the company after incorporation on the terms of the old contract .
In effect, the company cannot adopt or ratify a pre-incorporation contract, in as much as it was not in existence as at the time the contract was made. The company cannot therefore claim any right or benefit on the contract neither could it be sued on it. However, the company is free to make a new contract in the same terms as the pre-incorporation agreement. In this case, the court will enforce the new contact; even if it was the same as the pre-incorporation contract. See Edokpolo& Company Ltd v Sem-Edo Wire Industries Ltd (1984) 7 S.C. 119.
The promoter will only be held personally liable where he had entered the pre- incorporation contact on behalf of the yet to be incorporated company. Where the promoter entered a contract in the name of the non existent company the contract will be void and a nullity. See Newborne v Sensolid Co. Ltd (1954) 1 QB 45.
In this case, Newborne was forming a company but before it was formed, a contract was signed which purported to be made by the company for sale of goods to the defendants. It was singed “Leopold (London) Ltd” and underneath it was the signature of Leopold Newborne: when market fell the buyers refused delivery and writ was issued by the company
, but when it was found out that as at the time of the contract the company had not been registered, the name of Leopold was substituted as plaintiff. It was held, that the company cannot enforce the contact as he had not purported to sell as principal or agent. As the company was not in existence as at the time of the contract, and it was not signed by the promoter, the signatory was not in existence and unknown, therefore the contract was a nullity.
After incorporation a company may effectively enter into a new agreement to carry out its pre-incorporation agreements. See Re Northumberland Avenue Hotel Co (1886) 32 Ch. 16. Edokpolo& Company Ltd v Sem-Edo Wire Industries Ltd (supra)
CONCLUSION
The rule on pre-incorporation contracts is consistent with the law on privity of contract and agency principles. The rules forms the underlying basis for the rule laid down in Kelner v Baxter that the company cannot adopt or ratify a pre-incorporation contract made on its behalf; that any such contract can only bind the parties to it as the company is not yet in existence and therefore is not a party to the transaction. The company could not ratify or adopt it simply because as at the time of the contract it could not have authorized it. Where the contract was made in the name of the company, then the contract is a nullity.
SUMMARY
The rule laid down in Kelner v Baxter originated from two different principles of law, these are from contract, that anyone who is not a party to a contract cannot enforce such contract, while the principle of agency adopted is that on agent cannot represent a non- existent principal. It follows that where a contact is entered on behalf of an unregistered company, it is the parties to such contact that will be held liable on it and no more. The company cannot be held liable for pre-incorporation contract neither can it enforce it. The result is that the common law position may work hardship not only on third parties who had contracted with the promoters with an assurance that they will be paid by the company upon incorporation. In cases where the company has taken the benefit and refuse to pay, the law had remained rigid, that in as much as there was no company in existence at the time of contract, the contract is only enforceable against the parties. This rule will work hardship also on the company, as it cannot enforce the contract that had been made on its behalf and which is beneficial to it. So also the promoter who entered the contact to benefit the company will also be placed at a disadvantaged position, as he may have innocently done everything in order to ensure that the company is starting on a good footing. The position of common law is totally rigid as we have seen. In some cases we may argue that we should be able to appeal to equity to intervene but equity is not allowed to intervene. See Karibi – Whyte JSC in Edokpolo Ltd. (p. 613). See also KunleAina, 2006, “The Statutory Status of Pre- incorporation Contracts in Nigeria Resolved and Unresolved Issues, U.I.J. P.L, Vol. 5, 2006 page 154.
The stage is therefore set for the legislature to intervene in order to ensure equitable solution to the injustice that the principle has occasioned.
TUTOR MARKED ASSIGNMENT
Discuss the common law position on pre-incorporation contracts.
REFERENCES/ FURTHER READING
- KunleAina, 2006, The Statutory Status of Pre-incorporation contracts in Nigeria: Resolved and Unresolved issues, N.I.J. P. L, 5, 2006 page 154.