Pre-Incorporation Contracts Flashcards
What does s.14(4) of the CBCA do?
Gives the promoter an exception from liability if its expressly provided for in the contract.
It also gets the federal government involved in the regulation of contracts. This is arguably ultra vires governmental authority.
What does s.14(2) of the CBCA do?
Allows for ratification of pre-incorporation contracts.
What does s.14(1) of the CBCA do?
It makes promoters liable for even purported contracts made in the name of, or on behalf of, a non-existent company. In providing for this the legislation reverses Newborne v. Sensolid.
What does NSCA Table A Reg 148(a) do?
Gives Directors the power to carry out the terms of any contract that the company makes.
What doe Table A Reg 2 do?
It permits ratification of a pre-incorporation contract.
Szecket v. Huang
CBCA 14(4) requires a that an promoter’s liability exemption be expressly provided for in the written contract. Huang and Szecket orally agreed that Huang would have a liability exemption but the final contract lacked this waiver. The Court found Huang liable because the final contract didn’t have the required exemption.
Criticize the majority in Sherwood.
Christopher Nicholls criticizes that majority for giving s.14 of CBCA the exact opposite effect it was intended to provide. Sherwood allows an unauthorized individual to bind a corporation to a contract without the company’s concurrence. The lawyer that bound the company was not an officer, director or shareholder–– nor were any of the promoters that signed the pre-incorporation contract (even though there were lawyers authorized to do this at the firm). Therefore, on one with the authority to bind the corporation authorized the numbered company to adopt the pre-incorporated contract.
Sherwood Design v. Numbered Company
This is an issue of interpreting s.14(2)’s conception of an “intention to be bound”.
A law firm’s client signed an agreement to buy land “on behalf of a corporation to be incorporated”. The client told the firm to prepare documents in order to complete the transaction. The Firm’s lawyer used a shelf company to buy the land. At the last moment the client backed out of the deal & the Firm used the shelf company for a different client. The unpaid vendor sued the shelf company.
The issue was whether correspondence between the lawyer and the original client and vendor made the shelf company bound by the contract. The majority decided yes, and cited the policy reason of being able to trust lawyers.
J. Borins dissented and found that the draft documents written by the client’s lawyer suggested control had not been passed to the purchaser. Since the purchases lacked control it could not adopt the contract. The lawyer’s communication should only be treated as a notice of intention to transfer control.
Westcom Radio v. MacIsaac
Ontario legislation, similar to CBCA 14(1), did not apply to purported contracts. Because a contract was made with a non-existent company there was no actual contract and so the plaintiff lost his suit in contract because there was no contract to sue about.
Wickberg v. Shatsky
3P sues Agent. P: Western Ltd. A: Shatsky. 3P: Wickberg.
Shatsky employed Wickberg as GM of a non-existent company. WThe contract of employment was signed by this non-existent corporation. Wickberg was fired and so he sued for wrongful dismissal.
This suit failed because it used an expectation measure of damages for breach of a warranty of authority against an agent not personally liable on the contract. Because the corporation never existed it had no funds. Because the corporation never had any funds it is impossible to prove a loss arising from this lack of authority.
Black v. Smallwood
3P sues Agent for Specific Performance.
Both parties believed that a corporation existed at the time of the contract. The contract was signed in the name of the company, indicating an intention to sign the contract. As there was no intention to make Smallwood personally liable the court dismisses Black’s claim.
This uphold’s Newborne v. Sensolid
Newborne v. Sensolid
Agent sues 3P.
Newborne is suing Sensolid for Breach of Contract because Sensolid refused to accept delivery of Tinned Ham. But, since the contract was signed in the name of a non-existence company, the court found the contract null. Thus, the plaintiff’s suit failed.
Kelner v. Baxter
3P sues Agent.
A contract was signed “on behalf of the proposed [hotel company]”.
Because the contract clearly indicated that it was signed on behalf of a non-existent company this created a presumption that the agent would personally be held liable for any breach. This presumption was confirmed by a contractual provision requiring “immediate delivery”. The court inferred that the parties intended someone to be liable for this immediate delivery of goods.
