What happens when someone signs a contract on behalf of a company that doesn’t exist yet?
The starting legal position is that the person signing the contract is liable as if it were the contracting party.
A recent example…
Recently, this question came before the High Court when a firm of solicitors signed and exchanged a contract on behalf of its client, the buyer in a property transaction*. However, the company that was to be the buyer had not been incorporated.
When the contract had been breached, the seller brought a claim against the firm of solicitors. The solicitors applied to the High Court for the case to be dismissed.
The solicitors relied on a statutory provision which provides that a contract which seems to be made by or on behalf of a company at a time when the company has not been incorporated has effect, subject to any agreement to the contrary, as one made with the person claiming to act for the company and he is personally liable on the contract.
The solicitors argued that the contract contained a clause stating that the benefit of the contract was “personal to the Buyer” and so this was an “agreement to the contrary” in accordance with the statutory provision.
However, the court refused to dismiss the case, holding that the words “personal to the Buyer” were not sufficiently clear or specific to exclude the solicitors’ liability. The judge explained that the purpose of the statutory provision was to avoid the consequences of a contract becoming a nullity.
Whilst this case is now likely to proceed to a full trial, parties entering into contracts on behalf of a company should be wary of the risk that they may become personally liable under that contract, if the company has not yet been formed, perhaps because of a technical error in the incorporation documents or due to a delay in processing those documents at Companies House.
Steps should always be taken to check that the correct contracting party has been incorporated in advance of any signing meeting to avoid unintended consequences for those doing the actual signing.