938

Lord Diplock Reg. v. Foreign Sec, Ex p. Indian Assocn. (C.A.) [1982]

Canada, and it is the Canadian courts and not the English courts that
alone have jurisdiction to determine what those obligations are.

Petition dismissed.

J. A. G.

[COURT OF APPEAL]

PHONOGRAM LTD. v. LANE

[1976 P. No. 4701] C

1981 March 9, 10 Lord Denning M.R., Shaw and Oliver L.JJ.

Contract—Parties—Unformed company—Contract purporting to

be made by company—Defendant signing " for and on behalf
of " company—Company never formed—Whether " purport-
ing to act for " or as " agent for " company — Whether j )
defendant personally liable—European Communities Act 1972
(c. 68), s. 9 (2)
In negotiations for the financing of a new pop group by the
plaintiffs the parties contemplated the formation of a company
to manage the group which would enter into a recording con-
tract with the plaintiffs. Under an agreement signed by the
defendant " for and on behalf of " the proposed company an p
advance payment made by the plaintiffs was to be returnable in E
the event of the recording contract not being entered into
within one month. The proposed company was never formed
and no recording contract was ever entered into. In an action
by the plaintiffs for the return of the sum advanced the judge
held that the defendant was personally liable under the agree-
ment by virtue of section 9 (2) of the European Communities
Act 1972 1 as a "person purporting to act for" a company or p
" as agent for a company, at a time when the company has
not been formed."
On appeal by the defendant: —
Held, dismissing the appeal, that the agreement to repay the
advance from the plaintiffs was a contract which purported to
be made by a company at a time when that company had not
been formed, within the meaning of section 9 (2) of the Euro-
pean Communities Act 1972, even though the company was Q
known by both parties not to be in existence but only proposed;
and that, as it purported to have been entered into by the
defendant on behalf of the company, the defendant was
personally liable for it under section 9 (2) (post, pp. 942E,
943D-E, 945A-B, 946c).
Decision of Phillips J. affirmed.
The following cases are referred to in the judgments: H
Black v. Smallwood (1966) 117 C.L.R. 52.

"* European Communities Act 1972, s. 9 (2): see post, p. 942D-E.

 939
1 Q.B. Phonogram Ltd. v. Lane (C.A.)
A
Hollman v. Pullin (1884) Cab. & Ell. 254.
Kelner v. Baxter (1866) L.R. 2 C.P. 174.
Newborne v. Sensolid (Great Britain) Ltd. [1954] 1 Q.B. 45; [1953] 2
W.L.R. 596; [1953] 1 All E.R. 708, C.A.
No additional cases were cited in argument.

_ APPEAL from Phillips J.

By writ dated October 14, 1976, the plaintiffs, Phonogram Ltd., alleged
that in July 1973 they agreed with the defendant, Brian Lane, that in
consideration of the plaintiffs paying £6,000 to a company called Jelly
Music Ltd. on behalf of the defendant, which sum together with £600
value added tax was paid, in anticipation and/or in furtherance of a contract
to be entered into between the plaintiffs and a party calling itself Fragile
C Management Ltd., the defendant agreed and/or undertook to repay the
£6,600 in the event of the contract not being entered into in a binding form
within one month; and that the contract had not been so entered into or
at all in breach of the agreement of July 1973 and the defendant had re-
fused and/or failed to repay the £6,600 which the plaintiffs claimed. On
July 12, 1979, Phillips J. ordered judgment to be entered for the plaintiffs.
j« The defendant appealed by notice dated August 7, 1979, on the
grounds that (1) the judge erred in law in his interpretation of section 9 (2)
of the European Communities Act 1972; (2) the judge, having found that
the plaintiffs knew that Fragile Management Ltd. had not been incorpora-
ted on July 4, 1973, erred in law in holding that the plaintiffs were still
entitled to rely on section 9 (2) of the Act of 1972; (3) the judge erred in
law in holding that the defendant was personally liable to the plaintiffs
E under section 9 (2) when the undisputed evidence was that the defendant
was employed full time under an exclusive contract of personal services
by Jelly Music Ltd.; and (4) the decision of the judge that the defendant
was personally liable in the foregoing circumstances was against the
weight of the evidence.
The facts are stated in the judgment of Lord Denning M.R.
F
Anthony Thompson Q.C. and Ian Grainger for the defendant. The
appeal concerns the interpretation of section 9 (2) of the European Com-
munities Act 1972, a section not considered in any previous case. The
section was enacted to implement European Community Council Directive
68/151/E.E.C. (Official Journal 1968, L.65/8) which has no application
where the " company " purporting to make the contract has never been
G even in the course of formation. There is disparity between the English
translation and the original French version of the Directive. As the Directive
pre-dates British entry into the E.E.C. the French text should be followed.
If the company is never formed there could never be a time before the
company was formed. The Directive deals solely with the situation where
a company is in the process of formation and is ultimately formed.
JJ In order to avoid disharmony section 9 (2) should not be construed
differently from the Directive, and, in any event, the words of the sub-
section presuppose the formation of a company.
Section 9 (2) purports to reverse Newborne V. Sensolid (Great
940
Phonogram Ltd. v. Lane (CA.) [1982]
Britain) Ltd. [1954] 1 Q.B. 45 but has not affected Kelner v. Baxter
(1866) L.R. 2 C.P. 174 in which the contracting parties were found to be
contracting direct.
Even if the first submission is wrong and section 9 (2) can bite where
the " company " is never formed, it does not do so in the present case
because the word " purports" introduces an element of representation
which is missing here. Nobody was misled: the plaintiffs knew that the
company did not exist. The object of the section is to protect persons B
who believe that they are dealing with a company.
In any event, there was clearly no intention by either party that the
defendant should be personally bound by the contract. [Reference was
made to Hollman v. Pullin (1884) Cab. & Ell. 254 and Black v. Small-
wood (1966) 117 C.L.R. 52.]
Peter Leaver for the plaintiffs. At common law a person can be per- Q
sonally liable if he purports to contract on behalf of a non-existent
principal: see Kelner v. Baxter, L.R. 2 C.P. 174. It seems that under the
common law there were two lines of authority, but section 9 (2) has
swept away any distinction. If a person entered into a transaction assert-
ing that he was an agent for a non-existent principal his liability under,
or ability to sue on, the contract depended on whether he could bring
himself within the contractual orbit: see Hollman v. Pullin, Cab. & Ell. D
254 and Newborne V. Sensolid {Great Britain) Ltd. [1954] 1 Q.B. 45.
The Australian case of Black v. Smallwood, 117 C.L.R. 52 contains
exactly the same distinction.
All the cases depended on their circumstances, but now under section
9 (2) one looks to see whether the defendant is " purporting to act for
the company or as agent for it," and the Australian case and Newborne g
are no longer good law, while in cases such as Kelner v. Baxter, L.R. 2
C.P. 174 the liability of the agent is not now in any way conditional but
absolute.
As to the meaning of " en formation " as used in the French text of
Directive 68/151/E.E.C, see Ripert, Traite Elementaire de Droit Commer-
cial, 7th ed. (1972), pp. 602 and 604.
The Directive only tells the English Parliament what it should try
to achieve, not how or in what form: see article 189 of the E.E.C.
Treaty. Section 9 (2) as a matter of construction is not limited to
companies which are eventually formed.
In Cheshire and Fifoot's Law of Contract, 9th ed. (1976), p. 462 the
comment on the words " subject to any agreement to the contrary " is in
direct conflict with the words of the section. G
On the basis of the judge's findings his decision was wholly con-
sistent with the Kelner v. Baxter, L.R. 2 C.P. 174, line of authorities and
the personal liability of the defendant. Accordingly, the judgment could
be supported at common law as well as under section 9 (2).
Thompson Q.C. in reply referred to article 58 of the E.E.C. Treaty.
H
LORD DENNING M.R. In 1973 there was a group of " pop " artists.
They included two gentlemen called Brian Chatton and John McBurnie.
The suggestion was that they should perform under the name " Cheap
 941
1 Q.B. Phonogram Ltd. v. Lane (CA.) Lord Denning M.R.
Mean and Nasty." A company was going to be formed to run the group.
It was to be called " Fragile Management Ltd."
Before the company was formed, negotiations took place for the
financing of the group. It was to be financed by one of the subsidiaries
of a big organisation called the Hemdale Group. It was eventually
arranged that money should be provided by Phonogram Ltd. The agreed
amount was £12,000, and the first instalment was to be £6,000. The first
B instalment of £6,000 was paid.
But the new company was never formed. The group never performed
under it. And the £6,000 was due to be repaid. But it was never repaid.
Phonogram Ltd. then tried to discover who was liable to repay the money.
Mr. Roland Rennie was the man who had negotiated on behalf of
Phonogram. Mr. Brian Lane was the man who had negotiated on behalf
of the new company which was to be formed. I will read the letter from
*-" Mr. Rennie to Mr. Lane of July 4, 1973. It is the subject matter of this
action:
" Brian Lane, Esq.,
Fragile Ltd.,
39 South Street,
London, W.l.
D
" Dear Brian,
" In regard to the contract now being completed between Phono-
gram Ltd. and Fragile Management Ltd. concerning recordings of a
group consisting of Brian Chatton, John McBurnie and one other
with a provisional title of ' Cheap Mean and Nasty' and further to
our conversation this morning, I send you herewith our cheque for
E £6,000 in anticipation of the contract signing, this being the initial
payment for the initial LP called for in the contract. In the unlikely
event that we fail to complete within, say, one month you will under-
take to repay us the £6,000. As per our telephone conversation the
cheque has been made payable to Jelly Music Ltd. For good orders
sake, Brian, I should be appreciative if you could sign the attached
copy of this letter and return it to me so that I can keep our accounts
F
people informed of what is happening.
" Yours sincerely,
"Roland G. Rennie
" Signed by . . . for and on behalf of Fragile Management Ltd."
That was signed by Mr. Lane. So there is the written contract embodying
the agreement between those concerned. An invoice was sent by Phono-
^* gram Ltd.:
" Invoice
"To contract between Fragile Management
and Phonogram Ltd.
Re. * Cheap Mean & Nasty ' 6,00000
VAT 60000
H
£6,600-00
" Initial Payment for first album as
in contract."
942
Lord Denning M.R. Phonogram Ltd. v. Lane (C.A.) [1982]
The money was paid over. According to the accounts, it went into the
account of Jelly Music Ltd., which was one of the subsidiaries of the A
Hemdale Group of which Mr. Lane, with others, was a director.
The first question is whether, on the true construction of the contract,
Mr. Lane made himself personally liable. As I read the words of the con-
tract — " I send you herewith our cheque for £6,000 " and " In the un-
likely event that we fail to complete within, say, one month you will
undertake to repay us the £6,000 " — the word " you " referred to Mr. B
Lane personally. The cheque was made out in favour of Jelly Music Ltd.
only as a matter of administrative convenience (as the judge found). It
did not affect the fact that the agreement to repay was made by Brian
Lane: especially when it is realised that it was known to all concerned
that Fragile Management Ltd. had not been formed. So I would have con-
strued the contract, without recourse to any other aids, as making Mr.
Lane personally liable.
But Phillips J. construed the contract differently. He had heard a lot
of evidence. He said in his judgment: " But I am quite satisfied that the
events of July 4 did not of themselves involve a contract with Mr. Lane
personally."
I will accept for the moment that the judge was correct in so holding.
Even so Phonogram Ltd. say that the law of England has been much D
altered by section 9 (2) of the European Communities Act 1972. It says:
" Where a contract purports to be made by a company, or by 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 g
personally liable on the contract accordingly."
That seems to me to cover this very case. The contract purports to be
made on behalf of Fragile Management Ltd., at a time when the company
had not been formed. It purports to be made by Mr. Lane on behalf of
the company. So he is to be personally liable for it.
Mr. Thompson, on behalf of Mr. Lane, argued very skilfully that p
section 9 (2) did not apply. First, he said: " Look at the directive under
the European Community law which led to this section being introduced."
It is Council Directive of March 9, 1968 (68/151/E.E.C.). In 1968 English
was not one of the official languages of the European Community. So
Mr. Thompson referred us to the French text of article 7 of the Directive:
"Si des actes ont 6t€ accomplis au nom d'une soctete en formation, Q
avant l'acquisition par celle-ci de la personnalitS morale, et si la
soctete' ne reprend pas les engagements resultant de ces actes, les per-
sonnes qui les ont accomplis en sont solidairement et ind^finiment
responsables, sauf convention contraire."
Mr. Thompson says that, according to the French text, that Directive is
limited to companies which are " en formation," that is companies which JJ
have already started to be formed.
Mr. Thompson's submission is reinforced by passages from a French
textbook—Ripert, Traitd Elementaire de Droit Commercial, 7th ed.
 943
1 Q.B. Phonogram Ltd. v. Lane (CA.) Lord Denning M.R.
(1972). As I read the passage at pp. 601 and 604 of that treatise—inter-
preting the French as best I can—in the case of a French company or
society there may be, recognised by law, a period of time while a com-
pany is in the course of formation when people have put their signatures
to what I may call " the articles of association." That period is called the
period when the soci&e is " en formation." At p. 604 a parallel is drawn
with a baby at the time of gestation—between the time of conception and
B the time of birth—and a company when it is " en formation."
I reject Mr. Thompson's submission. I do not think we should go by
the French text of the Directive. It was drafted with regard to a different
system of company law from that in this country. We should go by section
9 (2) of our own statute, the European Communities Act 1972. Under
article 189 of the E.E.C. Treaty, directives are to be binding only in so far
as the spirit and intent are concerned. Article 189 says:
" . . . A directive shall be binding, as to the result to be achieved,
upon each member state to which it is addressed, but shall leave to
the national authorities the choice of form and methods."
Section 9 (2) is in accordance with the spirit and intent of the Directive.
We should go by our own statute, and not by the Directive (68/151/E.E.C).
D That brings me to the second point. What does " purports " mean in
this context? Mr. Thompson suggests that there must be a representation
that the company is already in existence. I do not agree. A contract can
purport to be made on behalf of a company, or by a company, even
though that company is known by both parties not to be formed and that
it is only about to be formed.
The third point made by Mr. Thompson was that a company can be
" " a person " within the second line of section 9 (2). Mr. Thompson says
that Jelly Music Ltd. was " a person " which was purporting to contract
on behalf of Fragile Management Ltd. I do not agree. Jelly Music Ltd.
were not entering into a contract. Mr. Lane was purporting to do so.
So all three of Mr. Thompson's points fail.
But I would not leave the matter there. This is the first time the section
F has come before us. It will have much impact on the common law. I am
afraid that before 1972 the common law had adopted some fine distinc-
tions. As I understand Kelner v. Baxter (1866) L.R. 2 C.P. 174 it decided
that, if a person contracted on behalf of a company which was non-
existent, he himself would be liable on the contract. Just as, if a man signs
a contract for and on behalf " of his horses," he is personally liable. But,
since that case was decided, a number of distinctions have been introduced
G
by Hollman v. Pullin (1884) Cab. & Ell. 254; Newborne v. Sensolid {Great
Britain) Ltd. [1954] 1 Q.B. 45 and Black v. Smallwood (1965) 117 C.L.R.
52 in the High Court of Australia. Those three cases seem to suggest that
there is a distinction to be drawn according to the way in which an agent
signs a contract. If he signs it as " agent for ' X ' company "—or " for
and on behalf of ' X ' company "—and there is no such body as " X "
JJ company, then he himself can be sued upon it. On the other hand, if he
signs it as " X " company per pro himself the managing director, then the
position may be different: because he is not contracting personally as an
agent. It is the company which is contracting.
944
Lord Denning M.R. Phonogram Ltd. v. Lane (C.A.) [1982]
That distinction was disliked by Windeyer J. in Black v. Smallwood.
It has been criticised by Professor Treitel in The Law of Contract, 5th ed.
(1979), p. 559. In my opinion, the distinction has been obliterated by
section 9 (2) of the European Communities Act 1972. We now have the
clear words, " Where a contract purports to be made by a company, or by
a person as agent for a company, at a time when the company has not
been formed . . ." That applies whatever formula is adopted. The person
who purports to contract for the company is personally liable. B
There is one further point on section 9 (2) which I must mention. In
the latest edition of Cheshire and Fijoot's Law of Contract, 9th ed. (1976),
after reciting section 9 (2), it says, at p. 462:
" How far it in fact does so will depend on the meaning given to the
words ' subject to any agreement to the contrary' since it could be
argued that words showing that A signs as agent express an agree- Q
ment that he is not to be personally liable. If this were correct New-
borne v. Sensolid (Great Britain) Ltd. [1954] 1 Q.B. 45 would still be
decided the same way. But it may be suspected that the courts will
try to give more content to the subsection."
We certainly will. The words " subject to any agreement to the contrary "
mean—as Shaw L.J. suggested in the course of the argument—" unless jy
otherwise agreed." If there was an express agreement that the man who
was signing was not to be liable, the section would not apply. But, unless
there is a clear exclusion of personal liability, section 9 (2) should be
given its full effect. It means that in all cases such as the present, where
a person purports to contract on behalf of a company not yet formed, then
however he expresses his signature he himself is personally liable on the
contract. E
I think that Phillips J. was right on the section 9 (2) point. I would
dismiss the appeal.

SHAW L.J. I agree. Like Lord Denning M.R. I would have read into
the letter of July 4, 1973, an undertaking on the part of Mr. Lane to be
personally liable for the repayment of the £6,000 if the contemplated con- p
tract with Fragile Management Ltd. was not in the event entered into. But
the judge found otherwise on the facts, and it is not open to this court—
as there is no cross-notice in regard to this—to depart from that rinding.
So one has to look to the basis upon which the judge himself came to the
conclusion in favour of the plaintiffs.
The general principle is, of course, that a person who makes a con-
tract ostensibly as an agent cannot afterwards sue or be sued upon it, sub- ®
ject to the qualifications where there is a foreign principal or a del credere
agency. The real problem in any given situation is to determine the status of
the persons who enter into the engagement. Are they entering into it—
whatever form of description they may use—as agents or as principals? It
may be that similar formula in different cases will lead to different con-
clusions because the surrounding facts have a different impact upon the JJ
interpretation of phrases such as " for and on behalf of," as in Kelner v.
Baxter, L.R. 2 C.P. 174. There, notwithstanding the use of that phrase,
the judgment proceeded upon the basis that the reality of the matter was
 945
1 Q.B. Phonogram Ltd. v. Lane (CA.) Shaw LJ.
that the parties so subscribing themselves were acting as principals, and
this was so although reference was made to a company which was in
contemplation but not incorporated when the contract was signed.
It could of course happen—and did happen—that in some cases where
an agent enters into a contract for a company whose incorporation is con-
templated but which had not yet been effected, the third party would be
left without redress. He could not sue the agent on the contract itself
B because the agent had acted as such; nor could the third party sue the
agent for breach of warranty of authority if it was known to the third
party that the ostensible principal was not in existence. In such a situation
section 9 (2) of the European Communities Act 1972 gives a remedy.
Mr. Thompson, in his careful analysis of it, put forward a number of
propositions, but I agree with the result described by Lord Denning M.R.
Q in dealing with the effect of section 9 (2) in the light of Directive (68/151/
E.E.C.) I too think that the note in Cheshire and Fijoofs Law of Contract,
9th ed. (1976), requires to be reconsidered.
I would dismiss this appeal.
OLIVER L.J. I also agree. Speaking for myself, I am not convinced
that the common law position apart from the European Communities Act
1972 depends upon the narrow distinction between a signature " for and
on behalf of " and a signature in the name of a company or an association.
The question I think in each case is what is the real intent as revealed by
the contract? Does the contract purport to be one which is directly be-
tween the supposed principal and the other party, or does it purport to be
one between the agent himself—albeit acting for a supposed principal—
E and the other party? In other words, what you have to look at is whether
the agent intended himself to be a party to the contract. So in Kelner v.
Baxter, L.R. 2 C.P. 174 where the correspondence was directed to the
agents and referred to " the proposed company " which everybody knew
was not yet in existence, there really was no room for the suggestion that
the purchasers were acting in any other capacity than personally. On the
p other hand, in Newborne v. Sensolid (Great Britain) Ltd. [1954] 1 Q.B. 45,
where the contract was on the company's notepaper, it was clearly in-
tended to be a company's contract (nobody realising that it had not yet
been registered) and it could not be said that the individual plaintiff's
signature in the company's name could possibly have been intended to
make him a party to the contract.
The case, in my judgment, does not rest on any narrow point as to the
G way in which the contract was actually signed. The result would have been
exactly the same, in my judgment, as if the signature there had been
accompanied by some such formula as " for and on behalf of " or " per
pro." The judgment of Parker J. and the judgments in the Court of
Appeal of Lord Goddard and Morris L.J. show that the case turned on
what the contract purported to do; and precisely the same applies I
H think in Hollman v. Pullin, Cab. & Ell. 254, where a contract, albeit
signed by the plaintiff as chairman of the association, was clearly
intended to be, and intended only to be, a contract directly with the
association by which the defendant's services were intended to be retained.
946
Oliver L.J. Phonogram Ltd. v. Lane (CA.) [1982]
The same again I think applies to the Australian case of Black v. Small-
wood, 117 C.L.R. 52. The contract there on its face purported to be a A
contract between the vendor and the company as purchaser and nothing
else, nobody then realising that the company had not been incorporated.
Whether that is right or not, any such subtle distinctions which might
have been raised are rendered now irrelevant by section 9 (2) of the
European Communities Act 1972 in a case where a contract is either with
a company or with the agent of a company. It has been suggested that an B
agreement to the contrary may still be inferred by the fact that the con-
tract was signed by a person acting as agent so as to exclude the section.
That I am bound to say seems to me to be wholly unarguable when the
section itself in terms provides " Where a contract purports to be made
. . . by a person as agent for a company," and to interpret it in the way
suggested would defeat the whole purpose of the section. _,
For the reasons which Lord Denning M.R. and Shaw L.J. have given
in the instant case, I agree that the appeal should be dismissed.

Appeal dismissed with costs.

Leave to appeal refused.

Solicitors: Wright & Webb, Syrett & Sons; Denton, Hall & Burgin. D
C.N.

[COURT OF APPEAL]
E
SHELL INTERNATIONAL PETROLEUM CO. LTD.
v. GIBBS
[1980 S. No. 1245]

1981 Feb. 23, 24, 25, 26, 27; F

April 9 Mustill J.
1982 Jan. 11, 12, 13, 14; Lord Denning M.R.,
Feb. 12 Kerr and May L.J J.

Insurance—Marine—Cargo—Conspiracy to make away with cargo

of crude oil—Cargo insured for voyage from Persian Gulf to
Europe—Bulk of cargo fraudulently discharged in South Africa Q
—Vessel with residue of cargo scuttled—Whether loss of cargo
caused by " perils of the seas," " takings at sea " or " barratry "
—Whether cargo owners to recover under policy—Marine
Insurance Act 1906 (6 Edw. 7, c. 41), s. 44 x
Ships' Names—Salem
Conspirators planned and executed a fraud whereby they
made away with a shipload of 195,000 tons of oil from the „n
Persian Gulf, disposed of all but 15,000 tons in South Africa at
a time when there was an embargo on oil supplies from the
1
Marine Insurance Act 1906, s. 44: see post, p. 985E.