Section 36C(1) of the Companies Act 1985 provides that a contract that purports to be made by or on behalf of a company at a time when it 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. Consequently, he or she becomes personally liable on the contract that he or she has signed. The provision has been superseded by section 51 of the Companies Act 2006, but the wording remains unchanged.
Royal Mail Estates Ltd v Maples Teesdale [2015] EWHC 1890 (Ch); [2015] PLSCS 202 concerned a £20m contract for the sale of land dating back to 19 December 2008. The buyer’s part of the contract was signed by its solicitors for and on behalf of the buyer, Kensington Gateway Holdings Ltd. Unfortunately, for reasons that are unclear, neither the buyer’s solicitors, nor the seller, were aware that the company had not been incorporated on the date when the contract was signed.
When the transaction unravelled, the seller invoked section 36C and sought damages for repudiatory breach of contract from the buyer’s solicitors in the sum of £5.1m. The buyer’s solicitors asked the court to dismiss the claim. They pointed to a provision in the contract stating that the benefit of the agreement was personal to the buyer and tried to persuade the judge that this constituted an agreement to exclude section 36C. The seller argued that only an express provision stating that the agent is not liable will suffice to exclude the section – and that there was no such provision here.
The judge observed that the section had been enacted to increase the protection provided to third parties who were at risk of pre-incorporation contracts being declared a nullity, and quoted commentators who have suggested that section 36C should be interpreted restrictively. The section would not provide the requisite protection if it could be excluded by a side-wind as a result of a contractual provision being given the widest possible interpretation in favour of the agent of a non-existent company.
A contrary agreement for the purposes of section 36C must be clear. This was not the case here, especially as the provision in question had been agreed without anyone turning their mind to the possibility that the company in question had not been incorporated and to the effect of section 36C. The provision had been inserted into the agreement to restrict assignments or sub-sales and had not been included to prevent the signatory from becoming personally liable on the contract.
Where logistics make it impossible for clients to sign contracts, they may ask their solicitors to do this for them. This case highlights the importance of checking the status of a company first, in addition to obtaining the client’s express authority to do so (because solicitors do not have implied authority to sign contracts on behalf of clients), together with an indemnity against any claims arising as a result.
Allyson Colby is a property law consultant
