5. Pre-incorporation contracts

The common law problem

A company cannot contract before it exists. At common law it also cannot ratify a contract made before it existed, because ratification needs a principal who was in existence when the contract was made.

Personal liability of the promoter: in Kelner v Baxter the promoters signed a contract to buy wine on behalf of a proposed hotel company. The company was formed and the wine was used, but the company failed before paying. The court held that the promoters were personally liable on the contract, and that the company could not ratify it.

No contract at all: in Newborne v Sensolid the contract was signed in the name of a company that did not yet exist, with Newborne's name added to authenticate the company's signature. The Court of Appeal held there was no contract, so Newborne could not enforce it in his own name.

These results turned on fine points of wording, which was unsatisfactory.

The statutory rule

Section 59 of the Act deals with the problem directly.

Ratification: any contract made by or on behalf of the company before its formation may be ratified by the company after it is formed. The company then becomes bound by the contract and entitled to its benefit as if it had existed and been a party at the date of the contract.

Personal liability until ratification: until the company ratifies, the person who acted in its name or on its behalf is personally bound by the contract and entitled to its benefit, unless there is an express agreement to the contrary.

So in Sierra Leone the Kelner v Baxter and Newborne v Sensolid problems are largely solved. The person who acted is liable, and can enforce the contract, unless he expressly agreed otherwise, and the company can take over the contract by ratifying it.

A clear agreement is needed: in England a similar statutory rule was applied in Phonogram v Lane. The Court of Appeal held that an agreement excluding personal liability must be clear, and is not shown just by signing 'for and on behalf of' the company.