Contract and Common Law Position

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081-AC1221-60 Company Law

The case concerns the pre-incorporation contracts.

Firstly, it is necessary to define the pre-incorporation contracts. They are the contacts which the promoter wants to enter the contract before a company is incorporated. Under Common law position, the company cannot gain contractual rights or incurs liabilities from a pre-incorporation contract. Also; the pre-incorporation contracts cannot bind the company.

In this case, Bosco is the promoter who is on behalf of Bozo Limited to sign the tenancy agreement. However the contract was signed before Bozo Limited was corporated. Therefore, this tenancy agreement is a pre-incorporation contract which the company cannot sue or be sued in this pre-incorporation contract. (Case: Newborne v Sensolid (GB) Ltd [1954] )

Secondly, the company cannot ratify the pre-incorporation contract after its incorporation. But the pre-incorporation can bind the promoters; they may be personally liable on a pre-incorporation contract unless the parties to the contract specifically stipulate in the contract that the promoters will not be liable under Common law position. Also, section 32A(1)(a) provides that the signatory of a pre-incorporation contract will be personally liable on the contract if he purports to act for the company or act as its agent unless there is an express agreement to the contrary.

According to the case, Bozo Limited isn’t liable to pay the outstanding rent to Land Limited because of the pre-incorporation contract under Common law position. However, Bosco is personally liable for the outstanding rent unless there is an express agreement in the contract that the promoters will not be liable. But there isn’t an express agreement to the contrary in the tenancy agreement. Although Bosco signed “For and on behalf of Bozo Limited” in the tenancy agreement, it does not mean that he is not personally liable. Therefore, Land Limited can make a claim against Bosco...
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