Validity of Contract Dispute

[jaguarsuk]

A rare one for you, I have a question of my own and if this is in the wrong section Admin please feel free to move to where it should belong.

Here’s the situation, there’s no claim filed yet parties are in pre-action, but using claimant and defendant for clarity. I’m 99% sure this is going to court and therefore trying to get my ducks in a row.

Two companies entered into a contract, the claimant company had not be registered at the time of digital signing of the agreement by their employee and the defendant company was unaware of that being the case.

The contract is for a service and it has been used the all in line with all of the clauses of the contract over years and therefore performance is very easy to prove.

Claimant has breached the terms of the contract and it is impossible for them to remedy the breach, consequently the defendant company has withheld the payments owed for the service that are outstanding.

The claimant is stating that they have no contract with the defendant due to the company not having been formed at the time the employee signed with the defendant, therefore the contract has not been breached and the money is owed to them.

I'm putting a draft defence together, so my question on the defence how would you word the response to the contract not being valid due to the company not being formed and that in performance the claimant has demonstrated that a contract on the terms in dispute was in place prior to the breach?

[R0b]

You may be barking up the wrong tree with your defence.

The scenario you've described is what is known as a pre-incorporation contract, that is a contract agreed on behalf of a company before its formation. It is not possible to sue a company over a contract that did not legally exist at the time it was entered into.

Section 51 of the Companies Act 2006 covers this situation:

A contract that purports to be made by or on behalf of a company at a time when the company has not been formed has effect, subject to any agreement to the contrary, as one made with the person purporting to act for the company or as agent for it, and he is personally liable on the contract accordingly.

In simple terms, this means the contract is legally valid, but it is the person who signed the contract that is personally liable under it, and is entitled to enforce it too. Equally, the company cannot enforce any rights under the contract because it didn't exist and also of the rule of privity, though that can be displaced if there is a specific clause that allows the company to enforce the contractual terms.

If the company is trying to enforce the contract then your primary defence as far as I can see it, is that they have no standing to bring a claim at all. Assuming there are no third party rights clause in the agreement, the contract is personal between defendant company and the employee.

P.s. the term we use for people who act on behalf of unformed companies are called 'promoters'.

[jaguarsuk]

Great thanks R0b , my only question is that the defendant has been paying the claimant based on the terms of the contract and therefore couldn't they argue that they have the right to bring the claim due to the defendants performance of the contract?

Another small detail, Claimant is German and Defendant British with the terms of the contract governed by English and Welsh Law and their courts. Section 1044 if I read correctly means the act is applicable to them?

[R0b]

Well, now that you mention an overseas company that might changes things. If I recall, an overseas co. is required to register with Companies House if it has an establishment in the UK i.e. place of business or branch, not to be confused with doing business in the UK. However, I think that in itself is irrelevant.

Looking at Part 1, s.1 of the CA, it defines a 'company' as a company so formed and registered after the commencement of this Part. Part 2, s.7 - s.16 explains the formation and incorporation of a company. The problem is, that an overseas company is not formed and incorporated in England or Wales. If you follow that logic then I would say that s.51 does not apply to overseas companies, and so you have to revert to the common law position, with English and Welsh law being the governing law of the contract.

The common law position is essentially the same as s.51 of the CA, that the promoter is personally liable.

As to your question, I think it's probably better framed as 'Can you hold the company liable due to continued performance / course of dealings following incorporation?'

This is where it gets a little complex and I did a quick search for any authority but in short, the answer seems to be no. To hold the company to account, it needs to be a new contract but the question of whether a new contract is formed with the incorporated company will be hard to assess.

In Re Northumberland Avenue Hotel Co (1866) the Court of Appeal said that if the company operated on the belief that the contract was binding on them, is not sufficient to hold the company accountable. Another old case, Howard v Patent Ivory Manufacturing Co. (1886) appears to have gone a little further and confirmed that variations to the original contract whilst still under the erroneous belief that it is binding does not form a new contract.

Seems to me you would need to show somehow that the company has adopted the contract. That could be by way of novation, or if both companies had entered into a new agreement even on the same terms. The Howard case did distinguish between Northumberland Avenue Hotel Co. and found in favour of the claimant on the basis that the acts of the incorporation company inferred a new contract, though I haven't fully read it.

Unless you've got something sufficiently concrete, I think your options are limited and I would revert back to the primary defence that at the time the contract was executed, the company was not in existence and so they cannot sue or be sued.

[efpom]

I think this is may be in play
https://www.legislation.gov.uk/uksi/...ulation/6/made

[R0b]

Thanks Efpom,

Don't think that changes much of what I said before but I did have an overnight thought and I think as the company is overseas, you may need to take into account the laws of that company around execution of documents. If it was not properly executed then it may not be enforceable anyway - and from my experience, German law is very strict in certain areas.

[jaguarsuk]

Thanks both, very helpful not just for if a claim is filed, but steers pre-action in a different direction too.

[jaguarsuk]

Okay further on this - a company is not entitled to take the benefit of a pre-formation contracts made by its promoters. This was established in Natal Land & Colonisation Co. v. Pauline Colliery Syndicate Ltd., (1904).

In my circumstances monies have been paid for a service under the belief a contract existed with the company and consequently I read this to mean that those monies are recoverable from the Claimant by the Defendant?

Would unjust enrichment be the claim?

[jaguarsuk]

Happy to report that the parties decided to agree a settlement in their dispute, despite the defendant not being liable in anyway, they wanted to offer the settlement as a goodwill gesture they felt they should pay for the service at the rate that was reasonable.