CAVENDISH UNIVERSITY ZAMBIA

ASSIGNMENT BRIEF AND FEEDBACK FORM

STUDENT NUMBER: _mm104897 _______ ____

INTAKE JANUARY 2

ONE/TWO YEAR

LECTURER:
E.B. KALUBA

SUBJECT: COMMERCIAL LAW

ASSIGNMENT NO. 1

DATE HANDED OUT:

10/03/2023

DATE DUE IN: 30/03/2023

DAY/EVE/DL DL
ASSIGNMENT BRIEF

GIVEN SHOULD BE IN THIS BOX

THE FATE OF THE CONTRACT SIGNED BETWEEN SPECIAL

FURNITURES LTD AND EASY BEDS LTD

STUDENT INSTRUCTIONS:

1. This form must be attached to the front of your assignment

2. The assignment must be handed in without fail by the submission date (see assessment schedule
for your course)
3. Ensure that the submission form is date stamped by the reception staff when you hand it in
4. Late submission will not be entertained unless with prior agreement with the subject tutor
5. All assessable assignments must be word processed
ASSIGNMENT GUIDANCE

This assignment is intended to assess the student’s knowledge in all of the following areas.
However, greater emphasis should be given to those items marked with a

(Tutor: - please tick as applicable)

ASSESSABLE SKILLS Please Tick.
Good and adequate interpretation of the questions

Knowledge and application of the relevant theories

Use of relevant and practical examples to back up theories

Ability to transfer and relate subject topics to each other

Application or use of appropriate models

Evidence of library research

Knowledge of theories

Written Business English communication skills

Use of visual (graphs) communications

Self Assessed ‘time management’

Evidence of field research

Tutor’s Mark Contribution

MARKS
(Administration only*)

LECTURERS FEEDBACK:

At common law, a company that is yet to be incorporated cannot enter into a contract, as it is
not legal entity. Accordingly, the company is not bound by a pre-incorporation contract
because it does not have a separate legal existence until its incorporation nor can it appoint an
agent before its incorporation. As such, the company cannot ratify a potential agent’s actions,
*
given that any ratification would have to be backdated to the date of the contract, at which
time the company did not yet exist.

In Salmon v Salmon & Co. Ltd1Lord Macnaghten explained that a company is regarded in
law as a person separate and distinct from its members, however, a company comes into
existence on registration and upon issuance of a certificate of registration. Prior to this, one
definitely has no independent entity to enter into transactions, other than a promoter or a
group of promoters. In practice, the process of incorporation and that of setting the business
involves entering into arrangements among others including purchase of equipment. The
problem that arises is that these contracts are concluded in the names of a person not yet born
(i.e. the company) or on its behalf without its participation since it is non-existent.

Under section 20 (1) of Companies Act 2017

“Where a person purports to enter into a contract not evidenced in writing in

the name or on behalf of an entity before it is incorporated, that person is bound
by the contract and shall incur any liability and be entitled to the benefits arising
therefrom”.

Given that a pre-incorporation contract is an agreement entered into before the incorporation
of a company by a person who purports to act in the name of, or on behalf of, the company,
with the intention or understanding that the company will be incorporated and will thereafter
be bound by the agreement2

This was discussed in the case of Kelner v. Baxter3. There the plaintiff, addressing the
defendant promoters “on behalf of the proposed Gravesend Royal Alexandra Hotel Co.,
Ltd.,” offered to sell his extra stock of liquor. The acceptance of the offer was signed by
the defendants, adding the same description after their names. The liquor was accepted and
consumed in the hotel business, and directors by a resolution made at a meeting prior to
complete incorporation specifically ratified the contract. The hotel corporation was

1
[1897]AC 22

2
As defined in S 20 of Companies Act 2017

3
(1866) LR 2 CP 174
subsequently organized and become insolvent, After the suit was brought, the completely
organized corporation again ratified the contract.

The court, in holding the defendants individually liable: “But as there was no corporation
in existence at the time, the agreement would be wholly inoperative unless binding upon
the person who signed it, he is bound thereby; and a stranger cannot by subsequent
ratification relieve him from responsibility”. Certainly, reasoned the court, the defendants
did not intend that the liquor would only be paid for if the corporation was organized,
particularly as payment was promised on a definite date.

In Harrill v. Davis4 the promoters purchased lumber and other materials of the Plaintiff in
the name of a non-existent corporation, the organization of which was never completed, for
the certificate was not filed as required by statute. Although the plaintiff delivered the
merchandise to what he assumed was contracting corporation and intended to extend credit
to it, the court held the promoters liable because “they represented themselves to be a
corporation, when they knew were not.” Similarly, in the case of Hurt v. Salisbury5 here,
the note was signed by the promoters assuming to act as directors of a corporation in
process of formation. The only remaining step necessary to complete incorporation was file
a copy of the articles of association with the secretary of state. The promoters were held
liable on the note as partners, for, said the court, it their duty to prove that their principle
had a legal existence.

In reference, to our present case, the contract entered between Special Furnishers Ltd and
Easy Beds Ltd is a pre-incorporation contract as it was signed in the process of
incorporation meaning the time in which the company has not been formed. As such the
company has not come into existence. This means that, any liability that may arises during
this period will go to promoters because, the company cannot bear the responsibility as it
does not exist.

In Newborne v Sensolid (Great Britain) Ltd, Court of Appeal interpreted the finding of
Kelner v Baxter in a different way and developed the principle further. In this case an
unformed company entered into a contract, the other contracting party refused to perform his
duty. Lord Goddard observed that before the incorporation the company cannot be in

4
168 Fed 187 (C.C.A. 8th, 1909)
5
55 Mo. 310 (1874).
existence, and if it is not in existence, then the contract which the unformed company signed
would also be not in existence. So company cannot bring an action for pre-incorporation
contract, and also the promoter cannot bring the suit because they were not the party to
contract.

However, in Phonogram Ltd v Lane6Lord Denning MR emphatically stated that

“… unless 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… (the law) 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.”

In order to get the benefits of a ‘corporate personality’, it is very necessary for ‘an association
of persons’ to become incorporated under the Companies Act, 1956. After the incorporation
of association of persons the company comes in existence, and it can start its business
operations as company only after that. The simple reason behind it is that before
incorporation company do no has any legal existence before incorporation, and if the
‘association of persons’ enters into an agreement in the name of company before
incorporation; the agreement would be void ab initio.

Section 20 (3) of Companies Act 2017

A company may, not later than fifteen months after its incorporation, adopt
the contract specified in subsection

Section 20 (3) also sought to protect the promoter by providing a statutory mechanism
(through section 20 (3) to avoid personal liability on a pre-incorporation contract. This
protection came at the expense of the third party who had to bear the risk of non- ratification
by the company. This section left third parties vulnerable because it did not make provision
for any personal liability of the promoter during the interim period (i.e. between the
conclusion of the pre-incorporation contract and ratification or adoption of the contract by the
company). It also did not take into account any liability upon non-ratification due to the fact
6
[1982] QB 938
that the company was never incorporated, or the fact that it refused to ratify the contract after
incorporation.

As a result the third party found itself without remedy, because the company could not be
held liable since it was not yet incorporated or because the company was incorporated but
neglected to adopt or ratify the contract. In the latter event, the contract merely lapsed and the
company did not receive any resulting rights or duties from that contract. The promoter could
also not be held liable in these circumstances, because he did not contract as the principal and
the third party presumably knew that the promoter was acting on behalf of a non-existent
company.

In 1932 Greenberg J confirmed in the case of Peak Lode Gold Mining Co Ltd v Union
Government7 that section 20 enabled a company, after its incorporation, to ratify or adopt a
contract made before its incorporation by an agent professing to act on its behalf. It seemed to
follow that the position of an unauthorised agent was now the same whether the alleged
principal was or was not in existence at the time of the contract and that such an agent was
not liable as a party to the contract, nor was he liable under a warranty of authority if the
other contracting party knew at the time of the contract that he had no authority8.

In his judgement, Greenberg J also referred to the case of McCullogh v Fernwood Estate

Ltd9 it was held that difficulties were likely to arise as to whether a person who purchased
property, which was to be taken over by a company about to be formed, was acting as an
agent or a trustee. In the present case there was no doubt that the vendors (third party) knew
that the agent had no authority from the non-existent company since the agreement showed
that the company was not yet registered. The agent was not liable under the agreement under
any warranty of authority. He would not be deemed to have entered into the contract of sale
on his own behalf and was therefore not liable under the contract as a purchaser.

7
1932 TPD 48.

8
Ncube, CB “Pre-Incorporation Contracts: Statutory Reform” 2009 126(2) SALJ 255

9
1920 AD 204.
The binding force of the agreement was conditional upon its adoption by the company after
its incorporation. The effect of the agreement was thus that the company, within a reasonable
time after its incorporation, and after receipt of the certificate of incorporation, was entitled to
adopt the contract which, until that date, merely had the effect of granting an option to the
company. The company would not be liable until it was incorporated and adopted the
contract. If the company had not adopted the contract, the agent would also not have been
liable in any way, either on the contract or on a breach of warranty of authority. The original
contract was merely a contract by the third party to enter into a contract with the company to
be formed.

Therefore, in our present case, Jane entered into an agreement with Easy Beds on behalf of a
company Special Furnishers which Easy Beds knew that it does not exists at that particular
time. Easy Beds company singed the offer which was presented to it and the contract was
signed both them and Special Furnishers Ltd, and what follows was for each company to
perform in accordance to the terms the two agreed upon. The cancellation of a contract by
one part attracts damages for the aggrieved party and our above discussions Jane as a
promoter of the company during the whole incorporation was supposed to be held liable
because she was the one that side the company on behalf of a company which does not exist
however, section 20(3) of Companies Act provide an exception were liability shifts to the
company as soon as it has been incorporated and it has adopted the contract.

In our current case, Special Furnishers Ltd adopted the contract three months after its
incorporation which means the company has now have a legal personality as it can sue and be
sued. Therefore, Special Furnishers Ltd will sue Easy Beds Ltd for the breach of contract.
 BIBLIOBGRAPHY

Companies Act Cap 10 of 2017

Flores, Eddie R., 1990, The Case for Eliminating Promoter Liability on Pre-incorporation
Agreements, Arizona Law Review, 1990, page-405

Gross, Joseph J., 1971, Pre-incorporation Contracts, The Law Quarterly Review, vol-87, July
1971, page-367

Gross, Joseph J., 1970, Who is a Company Promoter?, The Law Quarterly Review, vol-86,
October 1970, page-493

Ncube, CB “Pre-Incorporation Contracts: Statutory Reform” 2009 126(2) SALJ 255

CASE LAW

Kelner v Baxter 1866 LR 2 CP 174

McCullogh v Fernwood Estate Ltd 1920 AD 204

Newborne v Sensolid (Great Britain) Ltd 1954 1 QB 45; 1953 1 ALL ER 708 (CA)

Peak Lode Gold Mining Co Ltd v Union Government 1932 TPD 48

Phonogram Ltd v Lane [1982] QB 938

Harrill v. Davis 16 Fed 187 (C.C.A. 8th, 1909)

Hurt v. Salisbury 55 Mo. 310 (1874)