Contract signed before incorporation

Question 1

On behalf

Answer 1

People make contracts on behalf of the company. Companies rely on real people to act for them; these are usually agents of the company. They make contracts on behalf of the company and are not personally liable under the contract.

Question 2

Agent

Answer 2

An agent only makes a valid contract if they act within their powers (something that is outside the powers is called ultra vires).

Question 3

S55 CA 2006

Answer 3

S55 CA 2006 “A contract that purports to be made by or on behalf of a company at a time when the company has not been formed has effect, subject to any agreement to the contrary, as one made with the person purporting to act for the company … and he is personally liable…”. There is no corporate veil as the company does not exist.

Question 3

Promoter

Answer 3

If a company has not been formed, then a promoter is an entity that plans a project or formation of a new firm, and then sells or promotes the plan or idea to others. Promoters are not agents of the company – the company doesn’t exist when they do their work. In this case, [person] is clearly a promoter.

Question 4

Kelner v Baxter 1966

Answer 4

In Kelner v Baxter (1866) it was held that promoters were acting on behalf of a company that didn’t exist so were liable.

Question 5

Phonogram v Lane 1981

Answer 5

However in Phonogram v Lane (1981) the promoter is personally liable “subject to any agreement to the contrary”. In other words, if the contract says the promoter is not personally liable then they are not.

Question 5

Pre-incorporation contracts company not liable

Answer 5

Essentially, in pre-incorporation contracts the company is not liable. The person making the contract will be liable ‘unless otherwise provided’.

Question 5

Company still exists

Answer 5

As [person] signed in the name of [company], and the company still exists, then [company] cannot just refuse to pay for the goods, so they are liable for the contract. Even if they were to go into liquidation before the payment of the debt, [person] would not be liable. [Other person] may still be liable as they were in a partnership with [person] prior to the company being formed.