Pre-incorporation Contracts Questions DADA AFA
Where a person enters into a contract on behalf of an unformed
company, a conceptual problem arises. The resolution of this
conceptual problem however varies from one jurisdiction to another.
With the aid of decided cases and appropriate sections discuss the
above statement.
Answer
According to section 13(1) of the Companies Act any contract or other
transaction purporting to be entered into by a company prior to its
formation or by any person on behalf of the company prior to its
formation is a pre-incorporation contract.
The conceptual problems which may arise after a pre-incorporation contract
is executed include: whether the contract will be binding on the non-existent
company, whether it can be adopted by the company on its formation and
who assumes liability of the contract if the obligations of the contract are
regened by the company
The resolution of these conceptual problems of pre-incorporation contracts
entered into on behalf of an unformed company are dealt with differently
under the English law jurisdiction and the Ghanaian law.
In the subsequent paragraphs, how the two regimes of law deal with pre-
incorporation contracts will be discussed and assessed.
Common Law
At common law, contracts that were entered into before the formation of the
company were not binding on the company. This position on the law was
clearly established in the case of Kelner v Baxter. The promoters of a yet-
to-be-formed company purchased wine from the plaintiff which was
consumed before the formation of the company. The company failed before
Kelner could be paid and the plaintiff brought an action against the
promoters personally to recover.
Per Erle CJ, a stranger (company) could not by subsequent ratification,
relieve a person professing to an agent of that stranger of contractual
liability between the agent on behalf of a non-existent stranger principal and
a third party. The company was not bound by obligations when it was
inoperative, hence the contract was binding on the defendants.
Pre-incorporation Contracts Questions DADA AFA
The second case that requires commentary in order to better understand the
common law position on pre-incorporation contracts is Newborne v
Sensolid(Great Britain) Ltd. Here, Leopold Newborne (London) Ltd which
was in the process of being formed purported to sell 200 cases of tinned
ham to Sensolid Ltd by the engineering of the promoter of the company
being Mr. Newborne. Sensolid failed to take delivery and Newborne
instituted an action for damages for breach of contract and failure to accept
goods. The contract was not upheld because a non-existent company could
not be bound by a prior contract.
On appeal, Lord Goddard CJ upheld the arguments of the respondent. He
added that the only person who had any contract with the respondent was
the company; however it not being in existence at the time of the contract, it
was deemed that no contract existed to be enforced. Mr. Newborne also
could not benefit from his wrongdoing by saying ‘well it was my contract”.
The Ghanaian case of Panagiotopoulos v Plastico Ltd. (consolidated)
adopts the common law position of pre-incorporation of contracts. In this
case Apaloo JSC reasoned that a company is not bound by contracts
purporting to be entered into on its behalf by its promoters or other persons
before its incorporation. Neither can it ratify the contract. It is argued that his
case was decided per incuriam without reference to the new position
contained in section 13(1).
Ghanaian Position
However, despite the above case law, section 13(1) of Act 179 has
effectively amended the common law position in relation to ratification of
pre-incorporation contracts. The law now permits a company to consider the
propriety of contracts entered into on their behalf before their incorporation
and have the option of ratifying the pre-incorporation contract. This
lies at the discretion of the company to ratify or not to ratify.
This principle of law of ratification of pre-incorporation contracts was
affirmed and its dimensions espoused in Jabranska Slobodina Plovidra
Split v OSYA Ltd.
Amuah Sekyi J ruled that the burden which lay on a claimant to prove
ratification under Act 179, s. 13 was a very heavy one. There should be a
clear and unequivocal act on the part of the company if ratification was to be
inferred. Such an act might be a resolution of the company in general
Pre-incorporation Contracts Questions DADA AFA
meeting adopting the contract, or a resolution to the same effect passed at a
meeting of the board of directors and confirmed in a general meeting.
Section 13(2) of the Companies Act also declares that, in the absence of
any express agreement, any person who acted in the name of the company
prior to the ratification of the contract will be personally bound by the
contract or transaction and be entitled to any benefit thereof. This provision
seeks to impose liability on any agent of the company who contracts on
behalf that company; in the event that the agent fails to expressly agree that
he would not be personally bound by the contract entered into.
The above provision is in sync with the case of Phonogram Ltd v Lane. The
well-established law illustrated in this case is that, unless a person acting on
behalf a non-existent company expressly excludes himself from liability of
the company he is personally liable for any liability incurred, thereafter.
From the laws laid down, the current Ghanaian position does allow
companies to ratify pre-incorporation contracts by overt means.
Nevertheless, until the company adopts a pre-incorporation contract it is not
binding on the company. Personal liability devolves on the promoter in the
absence of express agreement to exclude himself from liability.
Pre-incorporation Contracts Questions DADA AFA
“It seems to me that it is necessary that there be a clear and unequivocal
act on the part of the company if ratification is to be inferred. Such an act
may be a resolution of the company in general meeting adopting the
contract, or a resolution to the same effect passed by a meeting of the board
of directors and confirmed by the company in general meeting. I do not
think that a letter signed by the managing director would be sufficient unless
there is evidence that he was communicating a decision to ratify taken by
the company in general meeting or by the board of directors which has been
confirmed by the company in general meeting”
Jadbranska Slobodina Plovidra, Split v OYSA Limited
Comment on this statement.
Answer
A pre-incorporation contract is defined in section 13(1) of the Companies
Act any contract or other transaction purporting to be entered into by a
company prior to its formation or by any person on behalf of the
company prior to its formation.
The law has grappled with how to deal with contracts of this nature which
are entered into by promoters on behalf of non-existent companies or yet-to-
be-formed companies. However, the Jadbranska case lays to rest any
controversies that bedeviled this concept of law in Ghana. By this law pre-
incorporation contracts can be ratified by overt act such as approval by a
resolution of the members of the company.
Pre-incorporation Contracts Questions DADA AFA
It would be prudent however to walk the reader through the
conceptualization of pre-incorporation both at common law and in Ghanaian
Statute.
Common Law Position
At common law, contracts that were entered into before the formation of the
company were not binding on the company. This position on the law was
clearly established in the case of Kelner v Baxter. The promoters of a yet-
to-be-formed company purchased wine from the plaintiff which was
consumed before the formation of the company. The company failed before
Kelner could be paid and the plaintiff brought an action against the
promoters personally to recover.
Per Erle CJ, a stranger (company) could not by subsequent ratification,
relieve a person professing to an agent of that stranger of contractual
liability between the agent on behalf of a non-existent stranger principal and
a third party. The company was not bound by obligations when it was
inoperative, hence the contract was binding on the defendants.
The second case that requires commentary in order to better understand the
common law position on pre-incorporation contracts is Newborne v
Sensolid(Great Britain) Ltd. Here, Leopold Newborne (London) Ltd which
was in the process of being formed purported to sell 200 cases of tinned
ham to Sensolid Ltd by the engineering of the promoter of the company
being Mr. Newborne. Sensolid failed to take delivery and Newborne
instituted an action for damages for breach of contract and failure to accept
goods. The contract was not upheld because a non-existent company could
not be bound by a prior contract.
On appeal, Lord Goddard CJ upheld the arguments of the respondent. He
added that the only person who had any contract with the respondent was
the company; however it not being in existence at the time of the contract, it
was deemed that no contract existed to be enforced. Mr. Newborne also
could not benefit from his wrongdoing by saying ‘well it was my contract”.
The Ghanaian case of Panagiotopoulos v Plastico Ltd. (consolidated)
adopts the common law position of pre-incorporation of contracts. In this
case Apaloo JSC reasoned that a company is not bound by contracts
purporting to be entered into on its behalf by its promoters or other persons
before its incorporation. Neither can it ratify the contract. It is argued that his
Pre-incorporation Contracts Questions DADA AFA
case was decided per incuriam without reference to the new position
contained in section 13(1).
Ghanaian Law Position
However, despite the above case law, section 13(1) of Act 179 has
effectively amended the common law position in relation to ratification of
pre-incorporation contracts. The law now permits a company to consider the
propriety of contracts entered into on their behalf before their incorporation
and have the option of ratifying the pre-incorporation contract. This
lies at the discretion of the company to ratify or not to ratify.
This principle of law of ratification of pre-incorporation contracts was
affirmed and its dimensions espoused in Jabranska Slobodina Plovidra
Split v OSYA Ltd.
Amuah Sekyi J ruled that the burden which lay on a claimant to prove
ratification under Act 179, s. 13 was a very heavy one. There should be a
clear and unequivocal act on the part of the company if ratification was to be
inferred. Such an act might be a resolution of the company in general
meeting adopting the contract, or a resolution to the same effect passed at a
meeting of the board of directors and confirmed in a general meeting.
Section 13(2) of the Companies Act also declares that, in the absence of
any express agreement, any person who acted in the name of the company
prior to the ratification of the contract will be personally bound by the
contract or transaction and be entitled to any benefit thereof. This provision
seeks to impose liability on any agent of the company who contracts on
behalf that company; in the event that the agent fails to expressly agree that
he would not be personally bound by the contract entered into.
The above provision is in sync with the case of Phonogram Ltd v Lane. The
well-established law illustrated in this case is that, unless a person acting on
behalf a non-existent company expressly excludes himself from liability of
the company he is personally liable for any liability incurred, thereafter.
From the laws laid down, the current Ghanaian position does allow
companies to ratify pre-incorporation contracts by overt means.
Nevertheless, until the company adopts a pre-incorporation contract it is not
binding on the company. Personal liability devolves on the promoter in the
absence of express agreement to exclude himself from liability.
Pre-incorporation Contracts Questions DADA AFA
In our legal tradition pre-incorporation contracts is not a matter to
be taken lightly. A pre-incorporation contract cannot be valid unless
it is endorsed by the highest decision-making body in the company,
the assembly of members. The acts of board of directors,
irrespective of their bona fides, cannot amount to a ratification of
pre-incorporation contracts.
Answer
The issue of pre-incorporation contracts is very delicate to promoters and the
company as a whole. It concerns any contract or other transaction
purporting to be entered into by a company prior to its formation or by
any person on behalf of the company prior to its formation as
maintained in section 13(1) of the Companies Act.
Pre-incorporation Contracts Questions DADA AFA
For years, the law has grappled with how to deal with contracts of this nature
which are entered into by promoters on behalf of non-existent companies or
yet-to-be-formed companies. However, section 13(1) of Act 179 together
with the Jadbranska case lays to rest any controversies that bedeviled this
concept of law in Ghana. By this law pre-incorporation contracts can be
ratified by overt act such as approval by a resolution of the members of the
company.
Ghanaian law used to rely on the common law position that pre-incorporation
contracts were not binding on newly formed companies and could not
ratified subsequently by that company. This law was reflected in the cases of
Kelner v Baxter and Newborne v Sensolid(Great Britain) Ltd and
subsequently consolidated in the Ghanaiian case law of Panagiotopoulos v
Plastico Ltd. (consolidated. In this case Apaloo JSC reasoned that a
company is not bound by contracts purporting to be entered into on its
behalf by its promoters or other persons before its incorporation. Neither can
it ratify the contract.
However, despite the above case law, section 13(1) of Act 179 has
effectively amended the common law position in relation to ratification of
pre-incorporation contracts. The law now permits a company to consider the
propriety of contracts entered into on their behalf before their incorporation
and have the option of ratifying the pre-incorporation contract. This
lies at the discretion of the company to ratify or not to ratify. Therefore
notwithstanding, pre-incorporation contracts are still not automatically not
binding on companies.
This principle of law of ratification of pre-incorporation contracts was
affirmed and its dimensions espoused in Jabranska Slobodina Plovidra
Split v OSYA Ltd.
Amuah Sekyi J ruled that the burden which lay on a claimant to prove
ratification under Act 179, s. 13 was a very heavy one. There should be a
clear and unequivocal act on the part of the company if ratification was to be
inferred. Such an act might be a resolution of the company in general
meeting adopting the contract, or a resolution to the same effect passed at a
meeting of the board of directors and confirmed in a general meeting.
From this decision, it is evinced that acts of directors cannot qualify as
ratification. Even where a resolution of the Board of directors is passed, it
must be given effect by the general meeting.
Pre-incorporation Contracts Questions DADA AFA
Directors cannot on their own volition by this law ratify pre-incorporation
contracts without involving the general meeting. The ratification of any
contract without due reference would be a nullity.
Furthermore, in giving teeth this rule, in the Jadbranska case Amua-Sekyi
J confidently noted that: a mere letter signed the managing director would
be insufficient to amount to ratification unless there was evidence that he
was communicating a decision to ratify taken by the company in general
meeting or by the board of directors which had been confirmed by the
company in general meeting.
Ratification therefore is not the hunting grounds of the board of directors. It
is for the company’s shareholder to determine whether to adopt a pre-
incorporation contract or not.
