1. See J. Gross, ‘Pre-incorporation Contracts’ (1971) 87 LQR 367.

2. European Communities Act (ECA 1972) s 9(2) was subsequently consolidated in s 36(4) of the Companies Act 1985 (CA 1985) and then reworded by s 130(4) of the Companies Act 1989 (CA 1989) and (with effect from 31 July 1990) redesignated as CA 1985, s 36C. This provision will generally be referred to as ‘the provision’.

3. Reform of this aspect of the common law had been recommended in ‘The Jenkins Report’ (Cmnd 1749, 1962 para 54b). The law in other common law jurisdictions has been amended to give companies the power to adopt pre-incorporation contracts.

4. For convenience, these parties will be referred to as ‘the agent’ and ‘the contractor’ and collectively as ‘the parties’ throughout this article.

5. Pre-incorporation contracts should in theory comprise some element of intention that the company be formed to distinguish them from other contracts made with non-existent companies such as post-dissolution contracts. This, however, is an elusive concept: any such intention may be that of the agent alone in which case the distinction would be insignificant to the contractor.

6. This is the premise of the case law on the common law effect of pre-incorporation contracts. See, for example, Kelner v Baxter (1866) LR 2 CP 174; Newborn v Senolid [1954] 1 QB 45; Black v Smallwood (1966) 1 17 CLR 52; Hawke's Bay Milk Corporation v Watson [1974] 1 NZLR 236; Marblestone Industries v Fairchild [1975] 1 NZLR 543.

7. See the cases cited in n 6 above. In reality, the parties may have had no genuine common intention as to who was to be the contractual party. Instead, some form of objective test would have to be applied to ascertain what they must reasonably be taken to have intended. A similar approach is adopted by the law of contract to other problems such as common mistake and mistaken identity. See for example A. Goodhard ‘Mistake as to Identity in the Law of Contract’ (1941) 57 LQR 228 and Ingram v Little [1961] 1 QB 31.

8. On this basis, the function of a particular agent should depend on whether the agent is merely purporting to give effect to a decision that has been taken elsewhere, or is purporting to act for the company in any more general sense. However, the courts do not appear to have made inquiries along these lines when applying the distinction. In practice, an agent making a pre-incorporation contract is likely to be both making and implementing the relevant decisions on behalf of the company so that ascertaining a common intention as to the agent's role would be a highly artificial exercise involving a very strained strained application of agency law principles in the corporate context.

9. See the judgment of the High Court of Australia Black v Smallwood (1966) 117 CLR 52. They interpreted the earlier decisions in Kelner v Baxter (1866) LR 2 CP 174 and Newborne v Smolid (1954) 1 QB 45 as establishing that any personal liability of an agent on a pre-incorporation contract had to be based on the parties' intention, express or imputed, that the agent should be a party to the contract and thus did not follow ipso facto from the non-existence of the purported principal. The fact that an agent was acting as an instrument for the company (or as an executant of its will) negated any intention that the agent be a contractual party. This approach was approved by the Supreme Court of New Zealand in Hawke's Bay Milk Corporation v Watson [1974] I NZLR 236 and Marblestone Industries v Fairchild [1975] 1 NZLR 543 and by Oliver LJ in the Court of Appeal in Phonogram v Lane [1982] QB 938 at 945.

10. It is arguable that a contractor could under the common law have brought an action against the agent involved for breach of warranty of authority which would have mitigated the effect of the contract proving to be a nullity. There seem to be no direct authority on this point although its availability is supported by dicta, for example, in Black v Smallwood (1966) 117 CLR 52. The point is considered by J. Gross, n 1 above, at 385-388.

11. See, for example, the comments of Lord Denning in Phonogram v Lane [1982] QB 938 at 945. He said that the crucial distinction was determined by the form of wording used by the agent in signing the contract: thus a signature ‘for and on behalf of the company’ indicated agency in the ordinary sense whereas signing ‘per pro’ in the name of the company indicated the agent was merely acting as the company.

12. See, for example, Kelner v Baxter (1866) LR 2 CP 174; Re Empress Engineering (1880) 16 Ch D 125; Natal Land v Pauline Colliery Syndicate [1904] AC 120 and Re English B Colonial Produce Co [1906] 2 Ch 435. The point is analysed in detail by J. Gross, n I above.

13. A novation may be inferred from the subsequent acts of the company: Howard v Patent Ivory (1888) 38 Ch D 156. However, such a conclusion was rejected by the Court of Appeal in Re Northumberland Avenue Hotel Co (1886) 33 Ch D 16, where a company, acting on an agreement made before its incorporation, entered into possession of land and expended money in building on it. The court concluded that the company could not have intended to make a new contract because it had acted in the mistaken belief that it was bound by the agreement that had been made.

14. One way around the problem would be to acquire a ready-made company which had already been formed at the time when any pre-incorporation contract was made, change its name to the one used in the contract and then cause it to adopt the contract. See n 42 below.

15. See, for example, the comments of Wilson J, in the Supreme Court of New Zealand in Rita Joan Dairies Ltd v Thomson [1974] 1 NZLR 285 at 288. In this case, the agent had tried to escape from personal liability by contracting as a rustee for the would-be company, and argued that the company had become liable on the contract by taking a benefit derived from the contract. The court rejected this attempt to avoid the strictures of the common law's reliance on agency doctrine in the corporate context: if the purported beneficiary was a non-existent company, the contract could only take effect as one made with the agent personally; otherwise it would be a nullity.

16. See n 2 above.

17. The fairness justification would look to the reasonable expectations of the contractor at the time of contracting and support the view that an otherwise valid and enforceable contract should not be upset by a technical requirement of company law. Against this, it could be argued that contractors should be aware of this risk and either take action to ensure that the company is in existence or ensure that they contract personally with the agent. A cost-reduction justification for reform would look to the transaction costs involved in identifying those contracts where there might be a risk of nullity and taking action to guard against that risk: eliminating or reducing the risk would reduce the cost of contracting with companies generally.

18. This reflected the contractor-oriented philosophy of the European Community's First Directive on Company Law which it had been designed to implement. Thus, Article 7 of EC Directive 68/151, OJS edn 1968(I), p 41 states that ‘if, before a company being formed has acquired legal personality, action has been carried out in its name and the company does not assume the obligations arising from such action, the persons who acted shall, without limit, be jointly and severally liable therefore, unless otherwise agreed.’ The philosophy underlying the First Directive was examined by N. Green in ‘Security of Transaction after Phonogram’ (1984) 47 MLR 671, who termed it ‘security of transaction’. It is reflected in certain preambles to the First Directive: ‘Whereas the protection of third parties must be ensured by provisions which restrict to the greatest possible extent the grounds on which obligations entered into in the name of the company are not valid;’ and ‘Whereas it is necessary, in order to ensure certainty in the law as regards relations between the company and third parties, and also between members, to limit the cases in which nullity can arise and the retroactive effect of a declaration of nullity …’ Article 7 addresses pre-incorporation contracts specifically (and arguably anticipates some reform of the problem of non-ratifiability as well as the hazard posed to third party contractors), but the preambles refer to the wider problem of apparently valid contracts proving to be nullities due to the technicalities of company law.

19. This is the current wording in CA 1985, s 36C (see n 2 above). The only significant change from its original wording is that ‘by or on behalf of a company’ previously read ‘by a company or by a person as agent for a company’.

20. See, for example, D. Prentice (1973) 89 LQR 518 at 53-533.

21. [I982] QB 938.

22. The requirements of an agreement that would be sufficient to bring a contract within the scope of the proviso in view of the Phonogram decision are analysed in N. Green, n 18 above.

23. This argument was based on the original French wording of the Directive. The Court of Appeal held that the provision should not be interpreted more narrowly than its wording would otherwise require just because it had implemented a directive.

24. Rover International v Cannon Film Sales (1987) 3 BCC 369 and Cotronic v Dezonie [1991] BCC 200. However, in each of these cases, the court held on other grounds that the contract, which was a nullity under the common law principles, was not within the scope of the provision and thus unenforceable by the agent.

25. This is assuming that in most cases the qualities of the putative company will be less important to the contractor than the qualities of the agent. In those cases where the contractor has resisted enforcement by the agent, such as Newborne v Sensolid [1954] 1 QB 45, Rover International v Cannon Films (1987) 3 BCC 369 and Cotronic v Dezonic [1991] BCC 200, the contractor appeared to have ulterior commercial reasons for trying to escape from the contract rather than a genuine reluctance to deal with the agent personally or with someone other than the company named in the contract.

26. See L. Gower Principles of Modem Company Law (5th edn, 1992) p 308.

27. But see n 7 above.

28. See n 5 above.

29. The contractor might in such cases be able to take advantage of another statutory remedy: under C.4 1985, s 349(4), anyone who ‘signs or authorises to be signed on behalf of the company’ any document within a specified class comprising ‘bills of exchange, promissory notes, endorsements, cheques and orders for money or goods’ and where the name of the company has not been accurately mentioned on the document will be personally liable on the document unless it is paid by the company.

30. (1988) 4 BCC 795.

31. Under CA 1985, s28(6), a new name only becomes effective on the date on which the certificate of incorporation on change of name is issued by the Registrar of Companies.

32. (1988) 4 BCC 442.

33. (1988) 4 BCC 442 at 445.

34. See Nourse LJ (1988) 4 BCC 795 at 797.

35. The Court of Appeal adopted the same approach in Badgerhill Properties v Cottrell [1991] BCC 463 which also involved an opportunistic contractor who attempted to use the provision to impose personal liability on an agent because a company in financial dimculties had been misnamed in a contract. As in Oshkosh, the court looked for a specific person as the party who had purported to make the contract and determined this as a question of objective fact by referring to the common intention of the parties. They found this to be the company that had been misnamed rather than a putative company with the misprinted form of the name. For an analysis of this case, see A. Griffiths ‘Trading Names, Misprints and the Risk of Personal Liability’ (1992) 12 Co Law 102.

36. See the remarks of Balcombe LJ (1988) 4 BCC 795 at 799.

37. [1991] BCC 200.

38. See note 24 and 25 above and the accompanying text on the nature of the statutory contract.

39. The proceedings had resulted from a claim against the new company and the agent by another company. The defendants instituted third party proceedings against the contractor claiming an indemnity under the contract and payment for the work done.

40. [1991] BCC 200 at 204. The court did however decide that the agent could claim some payment for the work done on a quantum meruit basis.

41. In Phonogram v Lone [1982] QB 938, the company purporting to make the contract was not in fact subsequently incorporated. The provision was nevertheless held to apply to the contract.

42. It may also provide a means of enabling an agent to escape from personal liability under the provision on a pre-incorporation contract: the agent could acquire a ready-made company which was already in existence at the time of making the contract and change its name to that used in the contract. Such a company would be capable at common law of being the party to the contract and the only issue would be to show that it was the intended contractual party. If the agent's intention is to be decisive, it would be difficult for the contractor to dispute the result. That outcome would probably also be consistent with the contractor's expectations at the time of contracting.

43. [1987] BCLC 540 and (1987) 3 BCC 369.

44. See the discussion of this point by N. Green, n 18 above, commenting on an unreported decision of the Court of Appeal in Janred Properties Ltd v Ente Nazionale Italiane pcr II Turismo (14 July, 1983) where a similar restrictive interpretation had been made of ECA 1972, ss 9(1), now CA 1985, ss 35-35B.

45. The decision on this point was only part of a complex sequence of litigation between the parties. There was no appeal, subsequent litigation concerning the remedies available to the distributors for payments which they had made in the mistaken belief that there was a valid and binding agreement.

46. See (1987) 3 BCC 369 at 372. S 735(1) in fact defines ‘a company’ as ‘a company formed and registered under this Act, or an existing company’, ‘existing company’ being defined a a company formed and registered under certain former Companies Acts. Harman J said that this meant ‘a UK Company’, but since the Companies Act does not apply to Northern Ireland, the definition must be limited to companies formed and registered in Great Britain.

47. A similar problem has arisen in connection with the Insolvency Act 1986 which adopts the same definition of the term ‘company’. Thus the view has been expressed that a foreign registered company cannot be put into administration: see Picarda Law Relating to Receivers, Managers and Administrators (2nd edn, 1990) p 501. However, in Re International Bulk Commodities Ltd [1992] BCC 463, a case concerning whether it is possible to appoint an administrative receiver (within the meaning of s 29 of the Insolvency Act 1986) over the property of a foreign registered company, Mummery J held that ‘[a] contrary intention may also appear from the subject-matter and manifest purpose of the relevant provisions when construed in the context of both the immediately relevant provisions and of the Act as a whole’. On this basis, he inferred the necessary contrary intention in respect of the meaning of ‘company’ in that section.

48. It has also been suggested that Harman J should have considered whether the contract would have been enforceable under the law of the company's place of incorporation. See L. Cower Principles of Modem Company Low (5th edn, 1992), pp 308-309.

49. The contract was for the distribution of films in Italy, but to avoid difficulties with Italian exchange control and fiscal regulations, the distributors, including the agent, intended to use a non-Italian resident company as their vehicle for the venture.

50. (1987) 3 BCC 369 at 372.

51. After the decision in Phonogram v Law [1982] QB 938, there must be an express agreement to exclude the effect of the provision. See n 22 above.

52. The agent might even have been able to save the contract by acquiring a ready-made company which had already been formed at the time of the contract. See n 42 above.

53. See n 18 above.

54. An agent is already subject to personal liability for using an incorrect corporate name under CA 1985, s 349(4) (seen 29 above) provided that the conditions of that provision are met. This liability was considered in the Oshkosh case. It is therefore arguable that any reform of s 36C should not impose any greater risk of personal liability on an agent merely for the incorrect use of a corporate name than there is already under the existing remedy. Indeed, some commentators believe that s 349(4) can already provided certain contractors with an unwarranted bonus in the event of a company's insolvency: see L. Cower Principles of Modern Company Law (5th edn, 1992) pp 116–117.

55. For example, in India, Specific Relief Act 1963, s 15 provides that where the promoters of a company have made a contract before its incorporation for the purposes of the company, and if the contract is warranted by the terms of incorporation, the company may enforce it; s 19 of the same Act provides that the other party can also enforce the contract if the company has adopted it after incorporation and the contract is within the terms of incorporation. Other examples are discussed in J. Gross, n 1 above.

56. See Consultation Paper No 121 (1991), paras 5.20 to 5.23