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Liable for a contract by a company before it existed

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Posted by Daniel Jennings on 13 October 2015

Daniel Jennings - Defamation Disputes Lawyer
Daniel Jennings Partner

Whilst it seems axiomatic that a company cannot enter into a contract before it exists that is untrue.

Section 51 of the Companies Act 2006 replaced a corresponding provision in the Companies Act 1985 and sets the rules which provide that a company may enter into a contract before it has been incorporated; but in that circumstance unless otherwise agreed whoever signs apparently on behalf of the company will in fact be liable on the contract themselves.

Liability

The provision of the legislation is not new, however it is rarely understood properly that an agent may sign on behalf of a company before it comes into existence albeit they will be personally liable in respect of that contract.

The circumstances where however that will not be the case have recently been explored in the case of Royal Mail Estates Ltd v. Maple Teesdale and Borzou Chaharsough Shirazi. This case involved the company pre-incorporation allegedly agreeing to purchase a property. The contract was signed on behalf of the company by a firm of solicitors and included the provision that “benefit of this contract is personal to the buyer”. The buyer was defined within the contract as being the company.

In due course the seller came to apply to enforce the contract on the basis that there was liability upon the signatory having purported to act as the company’s agent.

In an interesting matter the issue of liability turned on whether the wording above constituted an agreement to the contrary.

The courts view

The courts considering an application for judgment took a restrictive approach in interpreting requirements for a “contrary agreement”. Specifically they confirmed that the defendants were not able to rely upon the wording “the benefit of the contract is personal to the buyer” as sufficient contrary agreement to avoid liability.

In particular the court was of the view that the parties could not have been said to have had the provisions of the Companies Act in mind when agreeing the wording of the contract.

This case is a timely reminder of the risks of signing documents on behalf of a company; and in particular such a circumstance such as this where the company itself was not in existence. To avoid liability it is clear that the parties will have to have had expressly and specifically turned their minds to reaching a definite agreement to exclude the provisions of the Companies Act. A failure to exercise such due care will run the risk of a personal liability arising for the signatory.

About the author

Daniel advises clients on all aspects of commercial litigation and dispute resolution.

Daniel Jennings

Daniel advises clients on all aspects of commercial litigation and dispute resolution.

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