Company Formation, Promoters, Pre-Incorporation Contracts Flashcards
Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218
Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218 is a landmark English contract law, restitution and UK company law case. It concerned rescission for misrepresentation and how the impossibility of counter restitution may be a bar to rescission. It is also an important illustration of how promoters of a company stand in a fiduciary relationship to subscribers.
Facts
Frédéric Émile d’Erlanger was a Parisian banker. He bought the lease of the Anguilla island of Sombrero for phosphate mining for £55,000. He then set up the New Sombrero Phosphate Co. Eight days after incorporation, he sold the island to the company for £110,000 through a nominee. One of the directors was the Lord Mayor of London, who himself was independent of the syndicate that formed the company. Two other directors were abroad, and the others were mere puppet directors of Erlanger. The board, which was effectively Erlanger, ratified the sale of the lease. Erlanger, through promotion and advertising, got many members of the public to invest in the company.
After eight months, the public investors found out the fact that Erlanger (and his syndicate) had bought the island at half the price the company (now with their money) had paid for it. The New Sombrero Phosphate Co sued for rescission based on non-disclosure, if they gave back the mine and an account of profits, or for the difference.
Judgment
The House of Lords unanimously held that promoters of a company stand in a fiduciary relationship to investors, meaning they have a duty of disclosure. Further, they held, by majority (Lord Cairns LC dissenting), that the contract could be rescinded, and that rescission was not barred by laches.
Lord Blackburn decided that delay did not bar rescission. As a general “condition to a rescission there must be a restitutio in integrum.” There was a question over this, since phosphate had been mined, and it was not so easy to put the phosphate back. He observed it would “be obviously unjust that a person who has been in possession of property under the contract which he seeks to repudiate should be allowed to throw that back on the other party’s hands without accounting for any benefit he may have derived from the use of the property… [or] making compensation for that deterioration.” In this case, however, adequate compensate could be paid. So there was no impossibility in counter restitution. His judgment ran as follows.[1]
Gluckstein v Barnes [1900] AC 240
GLUCKSTEIN V BARNES; RE OLYMPIA LTD, EX PARTE GLUCKSTEIN: HL 1900
CITATION: [1900] AC 240, [1900] 69 LJ CH 385, [1900] 82 LT 393, [1900] 16 TLR 321, [1900] 7 Mans 321
Coram: Lord MacNaghten, Lord Robertson
Promoters of a company had acquired a property intending its resale through the sale of shares in the company. In doing so the original directors made a substantial profit which they did not disclose (though it was discoverable). The company became insolvent and investors sought repayment of the hidden profit.
Held:
The action succeeded. As promoters they were under a duty to make explicit declarations of the profits already made.
Lord Robertson said: ‘To my thinking, the central fact in the history is, that while the object of the syndicate was to make profit out of the resale, it was a essential part of the enterprise, as originally designed and as actually carried out, that the same individuals who sold as syndicate should buy as directors. This was provided by the third head of the agreement which set up the syndicate, and it has a far-reaching effect at all stages of the argument. First of all, it seems to conclude the question whether these gentlemen were promoters when they bought the mortgages.’
Lord Macnaghten said that a party who discloses only half a story without disclosing the rest can be telling ‘no better than a downright falsehood.’
Kelner v Baxter (1866–67) LR 2 CP 174
Kelner v Baxter (1866) LR 2 CP 174 is a UK company law case, concerning pre incorporation contracts.
Facts
A group of company promoters for a new hotel business entered into a contract, purportedly on behalf of the company which was not yet registered, to purchase wine. Once the company was registered, it ratified the contract. However, the wine was consumed before the money was paid, and the company unfortunately went into liquidation. The promoters, as agents, were sued on the contract. They argued that liability under the contract had passed, by ratification, to the company and that they were hence not personally liable. It was held, however, that as the company did not exist at the time of the agreement it would be wholly inoperative unless it was binding on the promoters personally and a stranger cannot by subsequent ratification relieve them from that responsibility.
On the other hand, a promoter can avoid personal liability if the company, after incorporation, and the third party substitutes the original pre-incorporation contract with a new contract on similar terms. Novation, as this is called, may also be inferred by the conduct of the parties such as where the terms of the original agreement are changed.
A promoter can also avoid personal liability on a contract where he signs the agreement merely to confirm the signature of the company because in so doing he has not held himself out as either agent or principal. The signature and the contractual document will be a complete nullity because the company was not in existence (Newborne v Sensolid (Great Britain) Ltd [1954] 1 QB 45).
Judgment
Erle CJ held the promoters were personally liable. He said the following.[1]
I agree that if the Gravesend Royal Alexandra Hotel Company had been an existing company at this time, the persons who signed the agreement would have signed as agents of the company. But, as there was no company in existence at the time, the agreement would be wholly inoperative unless it were held to be binding on the defendants personally. The cases referred to in the course of the argument fully bear out the proposition that, where a contract is signed by one who professes to be signing “as agent,” but who has no principal existing at the time, and the contract would be altogether inoperative unless binding upon the person who signed it, he is bound thereby: and a stranger cannot by a subsequent ratification relieve him from that responsibility. When the company came afterwards into existence it was a totally new creature, having rights and obligations from that time, but no rights or obligations by reason of anything which might have been done before. It was once, indeed, thought that an inchoate liability might be incurred on behalf of a proposed company, which would become binding on it when subsequently formed: but that notion was manifestly contrary to the principles upon which the law of contract is founded. There must be two parties to a contract; and the rights and obligations which it creates cannot be transferred by one of them to a third person who was not in a condition to be bound by it at the time it was made. The history of this company makes this construction to my mind perfectly clear. It was no doubt the notion of all the parties that success was certain: but the plaintiff parted with his stock upon the faith of the defendants’ engagement that the price agreed on should be paid on the day named. It cannot be supposed that he for a moment contemplated that the payment was to be contingent on the formation of the company by the 28th of February.
Phonogram Ltd v Lane [1982] QB 938
Phonogram Ltd v Lane [1982] 1 QB 938
In Phonogram ltd v Lane, a contract was made between P and a company was signed by D “for and on behalf” of the company. However, the company was not registered. P sued D for a sum advanced by them which was returnable under the contract’s terms. The trial judge gave judgment for P, holding D personally liable under the European Communities Act 1972 s.9(2).
Held: appeal dismissed. This case was covered by s.9(2) of the 1972 Act. The Court should go, not by a directive drafted with regard to a different system of company law, but by s.9(2) which was in accord with the Directive’s spirit and intent; Applying s.9(2) a person who purported to contract on behalf of a company not yet formed was personally liable.
Braymist Ltd v Wise Finance Co Ltd [2002] 1 BCLC 415.
Braymist Limited and Others v Wise Finance Company Limited: CA 20 Feb 2002
The claimant company set out to sell land whilst it was still only in the process of incorporation. Its solicitors had signed as agents, and now sought an order for the purchaser to complete the contract. The respondent had not known of the non-incorporation of the company. The claimant later rescinded the contract, and forfeited the deposit. At first instance Etherton J had held that the solicitors had been capable of rescinding and had rescinded the agreement, that the contractual deposit was forfeit to the solicitors and that Wise was liable to pay the solicitors damages for breach of contract.
Held: The appeal failed. The section in the 1985 Act implemented a clause in the 1972 Act and the 1968 directive. Was the agent both liable under the contract and able to enforce it, and was the agreement unenforceable for failure to comply with the 1989 requirement for an appropriate memorandum? The European directive was to be interpreted directly. It was a compromise of different laws through member states, but was silent as to the ability of an agent to enforce such a contract. Section 36C should not be read down to limit its meaning. In this case, the solicitor agent could enforce the contract. As a party to the contract, he could also sign, and the 1989 Act should not be read too strictly.
