Authored By: Blessing Banda
Cavendish University Zambia
What happens if someone makes a deal for a company that isn’t legally set up yet?
As we are aware , a company is an entity that operates separately from the people that run it. It’s a separate legal personality and it is an artificial person at law which operates just like a human been does. This position was stated in one of the English predominant company law cases , Salomon v Salomon & co ltd(1896) UKHL 1. However , there are certain instances in which the company’s veil of incorporation can be lifted which is something we shall discuss more in the next series.
In England around 1866 , there was a hotel company that was yet to be incorporated. Therefore , promoters of that hotel company entered into a contract with a wine merchant that agreed to sell the promoters wine. The promoters entered into a contract on behalf the company. The wine merchants delivered the wines which were later consumed by the hotel after its incorporation but before the payment was made . Subsequently, the hotel company went into liquidation and the wine merchants opted to sue the promoters personally for liability of the payment that was not made .1
When the matter was taken to court , the issue raised was whether promoters of a company which had not yet been incorporated could be held personally liable for contracts made on the company’s behalf before its incorporation ?
The promoters argued that once the company ratified the contract, any liability for payment had passed to the company, thereby relieving them of personal responsibility。Chief Justice Erle ruled that since the company did not exist at the time the contract was made, the agreement could not be binding on the non-existent company. As a result, the promoters were personally liable for the contract. The reasoning behind the courts decision was that a contract made before a company’s incorporation cannot be ratified retrospectively because the company had no legal existence at the time. Therefore, a third party cannot release the promoters from liability through ratification alone.
In Zambia , the English common law position on pre-incorporation of contracts has been altered by the Companies Act no.10 of 2017.2 Pursuant to section 20 of the Act,the person who made the contract on behalf of the not-yet-formed company is personally responsible for it and gets any benefits from it.In addition, a company can choose to officially adopt such a pre-incorporation contract whether written or not within 15 months of its incorporation, by passing an ordinary resolution. Once the company adopts the contract,It becomes fully bound by the contract and receives its benefits, as if it had existed and been a party to the contract from the very beginning.The person who originally made the contract on the company’s behalf is then released from their personal obligations and loses their entitlement to the benefits of that contract.
Reference(S):
1 Kelner V Baxter Case (1866)LR 2CP 174; Company Law no.10.2017
2 Companies Act no.10.2017
