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The dangers of signing pre-incorporation

23/11/2015 | Elizabeth Shaw

If a person signs a contract on behalf of a company that is yet to be incorporated, then the person signing the contract can be liable as if it were the party specified in the contract.

In a recent case, Royal Mail Estates Limited v Maple Teesdale Borzou Chaharsough Shirazi, the High Court considered whether an assignment clause in a property contract, which stated that “the benefit of this Contract is personal to the Buyer”, amounted to a contrary agreement for the purpose of section 36C(1) of the Companies Act 1985 (re-enacted by section 51 of the Companies Act 2006).

In this case, the claimant tried to enforce a contract against the defendant firm of solicitors who had signed the contract as agent for the corporate buyer specified in the contract. The buyer specified in the contract had, unknown to the claimant, not in fact been incorporated when the contract was signed by the parties. It was argued by the claimant that the defendant was liable for the contract as a result of section 36C(1) of the Companies Act 1985, which provides that unless there is agreement to the contrary, an agent will be personally liable for a contract which he purports to make for a company which is not yet incorporated.

Summary judgment was sought against the claimant on the grounds that the claim had no real prospect of success. The defendant was unsuccessful in arguing that it could not be liable under section 36C(1) on the basis that the assignment clause in the contract provided that the benefit of the contract was personal to the buyer, and therefore this constituted a “contrary agreement” within the meaning of section 36C(1).

It was held by the court that, on the proper construction of section 36C(1), there will only be a contrary agreement if there is found to be an agreement between the parties by which they intended to exclude the effect of the section. It was found that the defendant did not produce sufficient evidence to satisfy the court that, on the proper construction of the words used in section 36C(1), the parties had that section in mind, that they ever had in mind that the defendant might be a contracting party, or that they intended to exclude the effect of section 36C(1) in relation to the contract. The judge made it clear that the purpose of section 36C(1) was to increase security of transactions for third parties by avoiding the consequences of the contract with the company being a nullity.

The case is likely to move to a full trial, but lessons should be learnt from the decision. It is very important for anyone concluding agreements as agents for corporate parties to check that the company in question has be validly incorporated, and that it remains so, before the agreement is entered into.

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