Docstoc

BUSINESS ASSOCIATIONS

Document Sample
BUSINESS ASSOCIATIONS Powered By Docstoc
					                                CHAPTER 15
                        PREINCORPORATION CONTRACTS

I.     INTRODUCTION


Objectives:

We will address these types of questions with a view to achieving the following
objectives:

1.     Be able to set out and apply the common law with respect to pre-incorporation
       contracts and the modifications in the CBCA.

2.     Be able to assess whether the CBCA provision will apply.



II.    A BRIEF REVIEW OF RATIFICATION

A person can ratify a contract entered into by another person on his or her behalf if:

       (i)     the other person purported to act on behalf of the person who seeks to
               ratify;

       (ii)    the person who seeks to ratify must have been in existence and
               ascertainable at the time the other person purported to act on his or her
               behalf; and

       (iii)   the person who seeks to ratify must have the capacity to do the act both at
               the time the other person acted and at the time of the ratification.

-conditions (ii) and (iii) above make it impossible for a corporation to ratify a pre-
incorporation contract
-corporation would not have been in existence at the time the person acted on behalf of
the corporation
-corporation would not have had the capacity to do the act (enter into the contract) at the
time the other person purported to act on its behalf
III.    THE COMMON LAW POSITION

A.      Kelner v. Baxter (1866), L.R. 2 C.P. 174 (Common Pleas)

Facts:
-plaintiff to be the manager of the Gravesend Royal Alexandra Hotel Company, Limited -
-before company incorporated plaintiff offered to sell a stock of wine to the proposed
company for £900
-accepted by the defendants on January 27th, 1866 on behalf of the Gravesend Royal
Alexandra Hotel Company Limited
-February 1st the directors of the Gravesend Royal Alexandra Hotel Company Limited
ratified the agreement
-but certificate of incorporation for the Gravesend Royal Alexandra Hotel Company
Limited February 20, 1866
-directors then purported to ratify the agreement again on April 11, 1866 just days before
the company made an assignment in bankruptcy

Held:

-ratification of February 1, 1866 was not a valid ratification because the company was not
in existence at the time
-ratification on April 11 was also held not to be a valid ratificiation because of the
requirement that a ratification can only be done by a principal having capacity to contract
at the time the contract was entered into as well as at the time of the ratification
-also not valid because company not in existence at the time the promoters purported to
act on its behalf

-court felt there was clearly an intended contract
-only way there could be a valid contract was if the defendants were the other contracting
parties
-court held that there was a valid contract in which the plaintiff was one party and the
defendants were the other parties

Note:

-automatically liable (“rule of law” approach)?
-OR promoter liability depends on whether it was intended that the promoter be a party to
the contract ( “rule of construction” approach)?
B.       Newborne v. Sensolid (Great Britain) Ltd., [1953] 1 All E.R. 708 (C.A.)

Facts:

-Newborne had entered into a contract with Sensolid Ltd. to supply tinned ham to
Sensolid Ltd.
-price of tinned ham fell and Sensolid Ltd. refused to take further deliveries of tinned ham
from Newborne
-contract had been signed by Leopold Newborne underneath the words Leopold
Newborne (London) Ltd (not signed “on behalf of Leopold Newborne (London) Ltd.” as
in Kelner v. Baxter)
-Leopold Newborne (London) Ltd. had not been incorporated
-Leopold Newborne (London) Ltd. was later incorporated and it brought an action against
Sensolid Ltd - action dismissed because Leopold Newborne (London) Ltd. had not been
incorporated at the time the contract was entered into (therefore could not be a party to a
contract)
-Leopold Newborne then sued Sensolid Ltd. in his own name – arguing he was a party to
the contract himself – based on Kelner v. Baxter saying that if the contract was not with
Leopold Newborne (London) Ltd. then it must have been with the person who signed on
behalf of the company, namely, Leopold Newborne

Held:
- correct approach is a rule of construction approach - real test was whether the promoter
was intended, in the circumstances, to be a party to the contract or not
-given the way in which the contract was signed by Leopold Newborne it was intended to
be a contract with the company and only the company – i.e. not intended that Leopold
Newborne be a party to the contract himself
-thus Leopold Newborne could not enforce the contract in his own name
C.       Black v. Smallwood & Cooper (1966), 117 C.L.R. 52 (High Court of Australia)

Facts:

-Black and others had contracted to sell land to Western Suburbs Holdings Pty. Ltd.
which was signed by the defendants as follows:

         Western Suburbs Holdings Pty. Ltd.

                Robert Smallwood               }
                                               }       Directors
                J. Cooper                      }

-Western Suburbs Holdings Pty. Ltd. was not incorporated at the time and Smallwood
and Cooper signed as directors – they thought the company had been incorporated and
that they were directors
-plaintiffs wanted to impose liability on the basis of a rule of law reading of Kelner v.
Baxter – i.e. contract was clearly intended and since it could not be with the principal (i.e.
the company) that was not in existence it must have been with the purported agents
Smallwood and Cooper personally

Held:

-majority of court follows English case of Newborne v. Sensolid Ltd
-held that Kelner v. Baxter was not authority for the principle that an agent signing for a
non-existent principal is bound
-basis of the decision in Kelner was the inference that the defendant promoters were
bound by the contract according to the nature of the contract itself
-here it appeared to be clear that a contract with the company was intended
-company did not exist and thus it was a contract with a non-existent party and therefore
no contract at all

-suggested, however, that the defendants could be liable for a breach of warranty of
authority
D.     Wickberg v. Shatsky (1969), 4 D.L.R. (3rd) 540 (B.C.S.C.)

Facts:
-Lawrence and Harold Shatsky became shareholders in Rapid Addressing Systems Ltd.
and became directors
-decided to expand the business and to incorporate a new company, Rapid Data (Western)
Ltd., to take over Rapid Addressing Systems Ltd.
-Rapid Data (Western) Ltd. never formed
-later proposed that Celer Data Ltd. be formed to do the takeover
-certificate of incorporation for Celer Data Ltd. issued on May 11, 1966
-May 9, 1966 plaintiff (Wickberg) hired as a manager
-terms of employment written in a letter dated May 9 on letterhead with the name of
Rapid Data (Western) Ltd. on top
-letter signed by Lawrence Shatsky
-letter noted that Wickberg was to get a salary of $15,000 per annum
-a few days later Lawrence Shatsty told Wickberg that the company was to be referred to
as Rapid Data (Western) without the “Ltd.”
-business did not go as well as had been anticipated and Lawrence and Harold Shatsky
could not keep up with paying Wickberg’s salary - asked him to work on straight
commission – he said no – they dismissed him

-Wickberg sues for wrongful dismissal

Held:
- plaintiff entitled to nominal damages on the basis of a breach of warranty of authority.
-it is not the case that a person signing on behalf of a non-existent company is
automatically personally liable - distinction between Kelner v. Baxter and Black v.
Smallwood is that in Kelner v. Baxter it could reasonably be implied from the
circumstances that there was a contract between the plaintiff and the persons who signed
on behalf of the non-existent corporation - Black v. Smallwood circumstances suggested
that it was not intended that the contract bind Smallwood or Cooper – i.e. rule of
construction approach
-court concluded that it was not the intention that either Lawrence Shatsky or Harold
Shatsky would be personally liable on the employment contract (it was intended that it be
a contract with a company – Rapid Data (Western) Ltd.).

-held that there was a breach of warranty of authority in that Lawrence Shatsky and
Harold Shatsky represented the existence of Rapid Data (Western) Ltd. and that they
could sign on behalf of Rapid Data (Western) Ltd. while they knew the company did not
exist
-however, no connection between the damage suffered by the plaintiff and the breach of
warranty of authority - no damages because all Wickberg would have had had the
representations been correct would be an action against Rapid Data (Western) Ltd. on a
claim of wrongful dismissal and action would have yielded nothing because the company
through which the business was operated was now bankrupt
E.      Summary

(i)     A corporation cannot ratify a contract that a promoter purported to enter into on
        behalf of the corporation before the corporation came into existence (Kelner v.
        Baxter).

(ii)    A promoter can be liable on a pre-incorporation contract but only if it can be said
        that it was intended in the circumstances that the promoter be a party to the
        contract (Kelner v. Baxter as interpreted by Newborne v. Sensolid Ltd., Black v.
        Smallwood, and Wickberg v. Shatsky).

(iii)   Where the promoter purported to act on behalf of a corporation before it came into
        existence the promoter can be liable for a breach of warranty of authority (Black v.
        Smallwood and Wickberg v. Shatsky). However, the damages may be nominal
        where the corporation, or the business which it was intended would be carried on
        by the corporation, is now insolvent (Wickberg v. Shatsky).


IV.     PROBLEMS WITH THE COMMON LAW


V.      CBCA S. 14

A.      How s. 14 Modifies the Common Law

B.      Cases Applying Provisions Equivalent to CBCA Section 14

1.      Landmark Inns v. Horeak, [1982] 2 W.W.R. 377

2.      Bank of Nova Scotia v. Williams (1976), 12 O.R. (2d) 709 (Ont. H.C.J.)


C.      When Will the CBCA Provisions Apply?

1.      Constitutional Problem

2.      “Written Contract”

3.      Jurisdictional or “Conflicts of Law” Problems
VI.    THE NEW B.C. BUSINESS CORPORATIONS ACT

VII.   OTHER WAYS OF ENFORCING PRE-INCORPORATION CONTRACTS
       UNDER THE COMMON LAW

VIII. PRACTICAL NOTES

				
DOCUMENT INFO