LLB – WORKSHEET WK 2

PRE- INCORPORATION
CONTRACTS – The Life Blood of
Modern Commerce
“Pre-incorporation contracts should engage
the attention of every corporate, commercial
and real estate solicitor. Clients enter into
these contracts on a daily basis. But they
typically do so without any clear
understanding of the rules applicable to such
contracts, or the risks of contracting on this
basis.” at p. 5.1
Estey
 PROMOTER
 Bagnall v. Carlton [1877] 6 Ch. D.
371. CA
 Twycross v. Grant [1877] 2 CP. D
 Emma Siler Mining Co. v. Lewis & Son
[1879] 4 CP D
 Promoters

 A promoter, the lynchpin of corporate

ingenuity, is an integral component of pre-
incorporation contracts. The term
promoter is not defined by the Companies
Act, and the courts have refrained from so
doing. In the 19th century a promoter was
described as someone who takes it upon
himself to bring into existence. walcott
 Consider ?
 Considering that incorporation is virtually
‘off - the shelf’ in new law jurisdictions
such as Trinidad & Tobago and Barbados
do you accept that the environment of
section 20, 16, 29 and 22 has been
altered significantly or are realistic legal
rules still required to enforce pre-
incorporation contracts?
 The Common Law

The
Common Law
Position

Newbourne Principle of
Kelner v Baxter
v. Sensolid Novation
 challenges
 (I) The an agent who contracted on behalf of a non-
existent principal is personally liable.
 (II). That under contract law there must be at least 2
parties to a contract, both of whom existed at the time
of contracting.(iii)Under contract law principles a
corporation nly comes into existence at the date of its
incorporation and it cannot therefore , reach back in
time and ratify or adopt a contract made on its behalf
before its birth ; and
 (iv) Rule against Parole evidence- extrinsic evidence is
inadmissible where the intentions of the parties and the
terms of the bargain are clear on the face of the written
document .
 Separate leagal personality
POSITIONING
 Section 16(1) BARBADOS
[ Bahamas 22, Trinidad & Tobago
20]
 (1)Except as provided in this section, a
person who enters into a written contract
in the name of or on behalf of a company
before it comes into existence is
personally bound by the contract and is
entitled to the benefits of the contract.
 Jamaica Section 29 Companies Act
No 10 of 1992.
 Except as provided in this section, a
person who enters into an oral or written
agreement or contract in the name of or
on behalf of a company before it comes
into existence or who purports to enter
into such an agreement or contract, is
personally bound by the agreement or
contract and is entitled to the benefits of
that agreement or contract .
 Integration ?
 The European Union
 Section 9(2) of the European
Communities Act
 Where a contract purports to be made by
a company , or a person as agent for a
company, at a time when the company has
not been formed, then subject to any
agreement to the contrary, the contract
shall have effect as a contract entered
into by the person purporting to act for
the company or as agent for it , and he
shall be personally liable on the contract
accordingly.”
 United Kingdom

 What is the solution in the United

Kingdom?
 Position in United Kingdom
 Section 36 , 36 A
‘ In favour of a person dealing with a
company in good faith, the power of the
board of directors to bind the company, or
authorise others to do so, shall be deemed to
be free of any limitation under the company’s
constitution.’
 Foreign Companies Execution of Documents ,
Regulations SI 1994/ 950 as amended by SI
1995/ 1729
 United Kingdom
 What is the solution in the United
Kingdom? A reflection of the Jenkins
Committee recommendations.
 It does not expressly permit adoption or
ratification of a pre-incorporation contract by
the corporation.
 does not expressly permit the promoter to
contract out of liability under the contact.
 UK
 Phonogram Ltd v. Lane considered section
9(2) of the European Communities Act
1972, which was substantially similar to s.
21 of the OBCA.
 A company was formed to manage a rock
group. The company was to be called
Fragile Management Ltd .
 ……….. Phonogram v Lane
 The cheque was sent with a letter
addressed to the defendants personally
which stated, inter alia, that in the event
of the matter no proceeding “ you ( the
defendant) will undertake to repay us the
£ 6000."
 Phonogram v Lane
 Discussions took place between the
plaintiff and the defendant concerning the
funding required to enable the group to
record an album.
 The plaintiff agreed to provide £12, 000 in
two installments of £ 6,000 each. The
company was never formed and the
amount advanced was never repaid.
 …. CONTINUED
 The Court of Appeal was precluded from
finding the plaintiff personally liable on the
basis of the letter because of the finding
of the trial judge- reluctant to disturb his
finding they held that the defendant was
personally liable on the basis of section 9
(2) .
 CARIBBEAN POSITION
 Trinidad & Tobago; Bahamas, Barbados,
Jamaica. OECS.
 ST KITTS & NEVIS

 21. (1) Where a transaction purports to be

entered into by a company, or by a person
as agent for a company, at a time when the
company has not been formed, then, unless
otherwise agreed by the parties to the
transaction, the transaction has effect as one
entered into by the person purporting to act
for the company or as agent for it, and he is
personally bound by the transaction and entitled
to its benefits.
 ….Continued
 (2) A company may, within such period as may
be specified in the terms of the transaction or if
no period is specified, within a reasonable time
after it is formed, by act or conduct signifying its
intention to be bound thereby, adopt any such
transaction and it shall thenceforth be bound by
it and entitled to its benefits and the person who
entered into the transaction shall cease to be so
bound and entitled.
 Jamaica Section 29 Companies Act
No 10 of 1992.
 Except as provided in this section, a
person who enters into an oral or written
agreement or contract in the name of or
on behalf of a company before it comes
into existence or who purports to enter
into such an agreement or contract, is
personally bound by the agreement or
contract and is entitled to the benefits of
that agreement or contract .
 Implications of Westcom ?
 Do you accept that the Westcom
decision thwarts the legislative purpose
behind the statutory code, the old
common law rules still applying?
 Maloney ?
 What did she say are the difficulties
associated with subsection (2)
 Within a reasonable time ?
 Problems associated with the type of
contract – restricted to written contracts
 Problems associated with the term
contract in and of itself ?
 Section 16(2)[ 20, 22]
 (2)Within a reasonable time after a
company comes into existence, it may, by
any action or conduct signifying its
intention to be bound thereby, adopt a
written contract made, in its name or on
its behalf, before it came into existence.
 Sherwood Design Services Inc v.
872935 Ontario Ltd
 Here the central issue was whether
the defendant company had adopted
the pre-incorporation contract within
the meaning of section 21(2) of the
OBCA.
 ….. SHERWOOD
An agreement to purchase the plaintiffs’ assets was signed
by the individual defendants “ in trust for a corporation to
be incorporated.” The lawyer acting for the defendants used
one of the company’s shelf this purpose and by letter to the
plaintiff’s lawyer stated that the corporate defendant had
been assigned as the corporation would complete the
purchase on closing. The deal did not proceed and the
defendant – shelf company, was subsequently assigned to
another of the firm’s clients for a wholly
different purpose.
 ……….. Sherwood
 A majority of the Court of Appeal
reversed the decision of the trial judge.
Alberta JA, the Actions of the solicitor, as
agent for the corporation and on
instructions from the individual defendants
was sufficient to evidence to connote an
intention on the part of the corporation to
adopt and to be bound by the agreement.
 ………..Sherwood Designs
 Does providing the corporate number and
draft organizational documents amount to
adoption?
 Is’nt this contrary to common sense and
commercial practice?
 Have the courts gone too far?
 Section 16(3)
 (3) When a company adopts a contract under
subsection (2),
 (a) the company is bound by the contract and is
entitled to the benefits thereof as if the
company had been in existence at the date
of the contract and had been a party to it;
and
 (b) a person, who purported to act in the name
of the company or on its behalf ceases, except
as provided in subsection (4), to be bound by or
entitled to the benefits of the contract.
 philosophical implications
 separate legal personality?
 contract theory ?
 the principles of agency ?
 Subsection 4
 (4) Except as provided in subsection (5),
whether or not a written contract made before
the coming into existence of the company is
adopted by the company, a party to the contract
may apply to the court for an order fixing
obligations under the contract as joint or joint
and several, or apportioning liability between or
among the company and a person who
purported to act in the name of the company or
on its behalf; and the court may, upon the
application, make any order it thinks fit.
 What are the implications of
Canwest International Inc and
Another v Atlantic Television
Ltd and Another (1994) 48
WIR
 Subsection 5
 (5)If expressly so provided in the written
contract, a person who purported to act
for or on behalf of a company before it
came into existence is not in any event
bound by the contract or entitled to the
benefits of the contract.
 Subsection 5 critique ?
 Szecket v. Huang (1999) 168 DLR 402.

 What were the facts

 Do you agree with the decision?

 What therefore are the difficulties associated

with subsection (5) viz a viz third parties ?
 Modern Commerce
 Critique of judgments
Justice Carthy J.
Moldaver, Cronk .

 Do you accept the

stance taken?
 The Solution

Pre- incorporation
contracts

Barbados
St Kitts &
Trinidad & Tobago Jamaica
Nevis
OECS
 Examine section 9 & 11 Bahamas
Companies Act and Section 19 of the
Jamaica Companies Act - 2004 “As if
they had been respectively signed and
sealed by each member and the
company.” Do these sections connote a
reference to a pre-incorporation
contracts or the doctrine of separate
legal personality or both ?
 The Solution
EU S.9(2)
1972

Pre- incorporation
contracts S.36/ 36A

Barbados
St Kitts &
Trinidad & Tobago Jamaica
Nevis
OECS
 Third Situation
In the third situation, there is a pre-
incorporation contract, without a
disclaimer of liability and a
corporation has adopted the contract.
On these assumed facts, the third
party and the corporation are
personally bound by the contract and
entitled to the benefits thereof and
subject to the burdens.
 Jamaica position
 Should the legislation be reviewed to
encompass oral contracts? Nb -The
Dickerson Report recommended against
the inclusion of oral contracts on the
ground that it would make it difficult to
determine whether a company deciding
to adopt an oral contract was fully aware
of its terms. It may raise evidentiary
problems.
 ……….. Solution
 Should the provisions be revised to
reflect that the promoter to attempting
to contract on behalf of a non- existent
corporation ie: ‘purports to enter into a
contract’ Note this has been adopted in
the UK and Australia See Oshgosh B
gosh Inc v. Dan Marbel Inc. The latter
case illustrates that the term ‘purport to
contract’ creates problems as well!
 New developments ?
1394918 Ontario Ltd v. 1310210 Ontario
Inc. (2002) 57 OR (3rd) 607 ( Manual )
 ‘Purports’ -Oshgosh B gosh Inc v. Dan
Marbel Inc. [1989] BCLC 507.( Is there
any difference ?)

 (Please note that we will be exploring the

discussion outlined in the LLM manual on
October 31st 2009)
 New developments-
difficulties ?
The uncertainty associated with pre-
incorporation contracts continues.... See
reading in manual for example, in Netmar
Inc. v. Aquilina (c.o.b as Smart Choice
Furniture) (1999) the defendant was a
sole proprietor whose store manager
completed the plaintiff’s new account by
using a business style name that only later
became the name of an newly
incorporated business.
The court concluded that the defendant
was personally liable for payment of the
plaintiff’s invoices because either she had
contracted as a sole proprietor or, if she
was a promoter, her corporation had not
adopted the contract. In Netmar Inc. the
promoter was liable; in Westcom, the
promoter was not. The point here is that
where there is no corporation in existence
at the time of contracting, the common
law result is uncertain and turns on
malleable facts.
The promoter ceases to be liable unless a
party to the contract, which could be the
third party or the corporation, applies to
the court under s. 21(3) and the court
makes an order fixing liability on the
promoter. For example, a third party
might bring such an application where the
corporation has adopted the contract at
the promoter’s instigation and has then
gone on to breach it.
 4th situation identified ?
In the fourth situation, there is a pre-
incorporation contract with a disclaimer (i.e., a
s. 21 (4) type of pre-incorporation contract) [
section 16 5] and a corporation adopts the
contract. As a result, the third party and the
corporation are personally bound by the contract
and are entitled to its benefits. As explained in
1394918 Ontario Ltd., in this type of contract,
the promoter is a functionary and is never
personally liable. The promoter is therefore not
exposed to an order under s. 21(3).
 5th situation Identified ?
In the fifth situation, there is a pre-
incorporation contract with a disclaimer
and no corporation adopts the contract.
Given these facts, it would appear that the
pre-incorporation remains a nascent
contract. No one can sue the third party
and there is no one for the third party to
sue. Again, because of the disclaimer, the
promoter is fully protected, and is not
exposed to an order under s. 21(3).
Further, no corporation is subject to an
order under s. 21(3) because that
subsection envisions a joint liability with the
promoter.
It may also be noted that in the fourth
and fifth situations, in terms of personal
liability, the promoter runs no risk of
contractual liability but also has no rights
or benefits under the contract. For its
part, the third party runs the risk that no
corporation will adopt the contract and,
therefore, there will be no contract to
enforce.
 Conclusions
 Conclusions?
 purposive versus a literal interpretation
 solution stands on its own feet – free standing
concept ? Consider Ziegels’ commentary in LLM
manual – chapter 2
 what language is sufficient to disclaim liability?
 what are the consequences of a successful disclaimer ?
 Legal status of the promoter is not determined by
subsection (3) alone . Nb the section references
subsection (4)!

 THE END

 THE STATUTORY SOLUTION RAISES

DIFFICULT QUESTIONS OF ITS OWN