Ratified - pre-incorporation contract, Business Law and Ethics

Ratified - pre-incorporation contract:

If the agreement is a written one and it shows that the proposed company was the contracting party the promoters will not be allowed to enforce it in the event of its breach by the other party. This was explained in Newborne v Sensolid (Great Britain) Ltd (25) in which the judge, after observing the way in which the agreement was signed, stated:

"It is a case in which the company is contracting and the company's contract is authenticated by the signature of one of the directors. The only person who had any contract here was the company and Mr Newborne's signature merely confirmed the company's signature".

Mr Newborne, the promoter, could not be allowed to come forward and say, "Well, it is my contract". He could not therefore sue for its breach.

As the company was not in existence when the contract was signed, the legal position is that there never was a contract and the signed document was legally a  nullity.

A pre-incorporation contract cannot be ratified by the company after its registration. This is demonstrated by the facts of, and the decision in, Natal Land Co Ltd v Pauline Colliery Syndicate Ltd (25). Although the court's reasoning is not explicit the rule appears to be a consequence of the common law rule that ratification has retrospective effect. If the company were allowed to ratify the contract it would mean that it contracted on the date the contract was formed. This in effect would mean that the company contracted before it was formed. This is impossible in practice and the aforesaid rule also renders it legally impossible. If the company wishes to revive the abortive contract it must make a fresh offer and, if the offer is accepted by the other party, a contract will come into existence from the moment of the acceptance.

Posted Date: 1/12/2013 2:17:36 AM | Location : United States

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