Let’s get down to business: when are contracts with a  non-existent company enforceable?

Many clients see incorporating a company as tedious administration and prefer to get stuck into trading as early as possible. That can result in contracts which are negotiated, and purport to be signed, for a company which does not yet exist.

Under the common law, the position used to be that such a contract was a nullity. A fresh agreement would have to be reached post-incorporation. The key question was whether, at the time when the contract was concluded, the company had legal personality and the capacity to contract. The position differed slightly where the individual signing the contract was acting as agent for the company, as opposed to signing for the company (Kelner v Baxter (1866) LR 2 CP 174) but in practice the distinction was rarely obvious: companies always require an individual to sign for them and parties tend not to specify their role with legal precision.

After the passage of s.9 of the European Communities Act 1972, the Court of Appeal concluded that a contract signed “for and on behalf of” a company whose incorporation had been contemplated by the parties was enforceable against the person who purported to contract on the company’s behalf.

That principle was taken up for s.36(4) of the Companies Act 1985 and now s.51 of the 2006 Act, which states: “A contract that purports to be made by or on behalf of a company at a time when the company has not been formed has effect, subject to any agreement to the contrary, as one made with the person purporting to act for the company or as agent for it, and he is personally liable on the contract accordingly.”

This approach is far simpler and omits the requirement for contemplation of incorporation: someone purporting to act in any capacity for a company as yet unformed is liable under its contracts unless the contrary is agreed (Phonogram v. Lane, [1982] 1 Q.B. 938).

Having said that, life tends not to be simple and the Court of Appeal grappled in 1991 with an unusual set of circumstances. The case of Cotronic v. Denzonie (Cotronic (U.K.) Ltd. v. Alton Dezonie (Trading As Wendaland Builders Ltd.) and Alton Dezonie (Trading As Wendaland Builders) v. Mrs.H. Osborne, 1991 WL 839504) involved two companies with the same name but different registration numbers. When the contract was signed, unbeknownst to either individual signing it, the first company had been dissolved. A fresh company was later incorporated under the same name but was the contract made “by or on behalf of a company at a time when the company has not been formed?” The Court of Appeal decided that no, this situation did not fall under s.36(4) of the 1985 Act (then the relevant provision): the contract was made by or on behalf of a company which had previously been dissolved.

There is no provision or line of caselaw equivalent to that for pre-incorporation contracts that deals with post-dissolution contracts. Without a departure from basic principles such a contract would be void, and the reasoning in Cotronic suggests departure is unlikely. This leaves a clear difficulty for those who contract with companies that have been dissolved. Section 1032(1) of the Companies Act might have very interesting consequences but it remains to be seen whether applying it to validate a null contract retrospectively would be considered a step too far by the courts.

So, when dealing with companies, make sure to do the following:

• Check the company name on the contract against Companies House and any other documents from the client;
• Confirm its incorporation status, including whether any application is pending; and
• If not yet incorporated, advise fully on the potential for, and consequences of, personal liability under the company’s contract.

To instruct Lucy in respect of litigation for or against companies, or advice on any aspect of corporate liability, please contact Rob Johnstone.