Ch 14 Flashcards
The legal problem with pre-incorporation contracts
• Party purporting to act as an agent has no authority, and the contract cannot be ratified:
o Party seeking to ratify must have been in existence and ascertainable at the time the other person purported to act on its behalf
o Party seeking to ratify must have capacity to do the act at the time the other person acted and at the time of ratification
• So promoters who enter into Ks for a company before the expense of incorporation is incurred – the company doesn’t yet exist, and no one had authority to ratify at the time the other person ratified
Common law principles with respect to pre-incorporation contracts
• Kelner → companies cannot ratify Ks entered into on its behalf if they did not exist at the time
• Newborne → promotors can be liable based on the rule of construction approach. Promotors are only liable if it was intended in the circumstances that they were to be parties to the K
• Black → look to the nature of the contract. Doesn’t mean that an agent signing for a non-existent principal is bound. But you can be liable for breach of warranty for authority, if you purpose to act on behalf of a non-existent company
• Wickberg → someone signing on behalf of a non-existence company is not automatically liable
o Is it reasonable given the circumstances that there was a contract between the plaintiff and persons who signed on behalf of the non-existent corporation?
Criticism of Cases:
There is a risk of no enforceable contract (for both promoter and 3p)
Allows for unilateral reliance and unjust enrichment
Creates unnecessary costs - Parties must take precautions to ensure the corporation has been incorporated
Instead, allocate the costs of confirmation to whom confirmation costs the least
Promoter will usually know by checking w lawyer
Reasonable to allow corp to then adopt contract as its own
Risk of opportunistic use of an adoption of contract by corp (promoters could speculate at expense pf a 3p) … such as where contract is no longer beneficial to promoters who let corp adopt the contract leaving the 3p with an action against an insolvent corp and no liability of promoters.
Other Ways of Enforcing Pre-Incorporation Contracts under the Common Law
Promoter as trustee of a Chose in Action: puts promoter under fiduciary obligation to enforce
Company as assignee: Circumstances may allow court to treat contract as assigned to company (as opposed to ratification)
Restitutionary Principles: Court may say there was a “quasi contract” or unjust enrichment allowing for restitutionary remedy; thus redressing reliance in belief there was a valid contract
Infer a second contract: Court can look at past performance of terms and infer another contract
Order promoter to be an agent for the third party, and thus to make an offer to company on the same terms as original contract
Consider the provisional contract as becoming binding on the effect of incorporation
What are the important modifications to the CL principles about pre-incorporation contracts in the CBCA and the BCBCA
CBCA
o S14 – unless the contract excludes, a person who contracts as a purported agent of a preincorporated company is personally bound and entitled to the benefits
• Corporation can adopt a contract after it incorporates, if done within a reasonable time
• Court can apportion liability between corporation and agents
o This section applies:
• When the K is in writing
• When it’s a company under the CBCA
Landmark Inns (1982): Corporations cannot adopt repudiated contracts BNS v. Williams (1976): As long as the third party is aware of who they are dealing with, they risk the solvency of the corporation
BCBCA
o s.20(2): promoter liable on deemed warranty
• (a) Anyone who purports to enter into a contract for a preincorporated company warrants that the company will (i) come into existence within a reasonable time, (ii) adopt the contract within a reasonable time
• (b) Will be liable to 3rd parties for damages for breach and
• (c) measure of damages are the same if
• (i) company existed when contract was entered into
• (ii) person who entered it had no authority to do so
• (iii) company refused to ratify the purported contract
o s.20(3): Corporations can adopt preincorporated contracts by signifying its intention to be bound by it
o s.20(4): (a) company will thus be bound by the contract as if it has been an original party
o s.20(5): If company does not adopt contract within a reasonable time, any party to the contract may apply for an order to make the company restore any benefit received by the new company from the contract
• No unjust enrichment
o s.20(6): Any party to preincorporation contract can apply for an order (a) setting obligations of the new company under the contract or (b) apportion liability between company and promoter
o s.20(7): Court has discretion to do other things with the order
o s.20(8): Promoters are not liable if the parties have expressly agreed so
Problems with the preincorporation legislation (When does CBCA apply?)
If under the CBCA - but note:Constitutional Problem
(1)Fed or provincial power to create law re enforceability of contracts → does the federal residual power with respect to incorporation allow it to alter provincial contract law with respect to contracts entered into on behalf of a corporation that has yet to be incorporated on the basis either that the promoters had intended to incorporate a corporation under the CBCA or that they eventually did incorporate a corporation under the CBCA?
Can be argued federal power because necessary ancillary power to power to incorp companies with objects broader than provincial objects, despite the fact s14 deals with contracts and thus falls under prov power of prop and civil rights.
(2)Written contract - leaves CL for oral contracts.
(3)Jurisdictional / Conflict of Law problem
What happens if the pre-incorporation contract is entered into in a province where the common law would normally apply and the corporation was intended to be, and was in fact, incorporated under the CBCA?
Presumably if the CBCA is constitutionally valid, and if the CBCA provision was the proper law to be applied, the CBCA provision would be paramount
