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CHAPTER 15

PREINCORPORATION CONTRACTS

I. INTRODUCTION

Often promoters of companies try to enter into contracts on behalf of proposed


corporations in order to secure the contract before the time for incorporation or to
confirm the contracts for the corporation before the expense of incorporation is incurred.
Normally the promoter does not have any intention of being personally liable on the
contracts.

In some cases the promoter is aware that the corporation has not been incorporated but
the person dealt with is not aware that the corporation has not been incorporated. In
other cases neither the promoter nor the person the promoter deals with is aware that the
corporation has not been incorporated. In some cases the corporation is never actually
incorporated. In other cases the corporation in incorporated and purports to ratify
contracts entered into on its behalf before it was incorporated. In some cases the
corporation that is purporting to ratify the contract is insolvent. The third party may be
left to bear a loss if the promoter is relieved of personal liability and the third party’s
claim is solely against the insolvent corporation. The questions that typically arise are
whether the promoter can be personally liable on the contract and whether the
corporation can ratify the contract.

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

Since a pre-incorporation contract involves a situation in which the corporation has yet to
be incorporated, a person who purports to act on behalf of the corporation cannot have
any authority as an agent for the corporation (the corporation would have to exist first
before the steps could be taken to grant a person authority as an agent). Could a
corporation ratify a contract that was entered into on its behalf before it was
incorporated? To assess this, and to understand the problems that arose with the common
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law position, it is important to review the circumstances in which a principal can ratify a
contract that a promoter purported to enter into on behalf of the corporation. 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. The corporation would not have been in existence at the time the
person acted on behalf of the corporation and the 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

This part reviews several cases that set out the common law position on pre-incorporation
contracts.

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

In Kelner v. Baxter (1866), L.R. 2 C.P. 174 (Common Pleas) the plaintiff and the
defendants were promoters of the Gravesend Royal Alexandra Hotel Company, Limited.
The plaintiff was to be the manager of the hotel under the new company. Before the
company was incorporated the plaintiff offered to sell a stock of wine to the proposed
company for £900 which was accepted by the defendants on January 27th, 1866 on behalf
of the Gravesend Royal Alexandra Hotel Company Limited. On February 1st the
directors of the Gravesend Royal Alexandra Hotel Company Limited ratified the
agreement. However, the promoters did not receive a certificate of incorporation for the
Gravesend Royal Alexandra Hotel Company Limited until February 20, 1866. The
directors then purported to ratify the agreement again on April 11, 1866 just days before
the company made an assignment in bankruptcy.

The court held that the ratification of February 1, 1866 was not a valid ratification
because the company was not in existence at the time. The 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. It was also not valid on the basis
that the company was not in existence at the time of the promoters purported to act on its
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behalf. The court nonetheless still felt there was clearly an intended contract and the only
way in which there could be a valid contract was if the defendants were the other
contracting parties. They thus held that there was a valid contract in which the plaintiff
was one party and the defendants were the other parties.

Kelner v. Baxter thus confirmed that a company cannot ratify a contract, or purported
contract, entered into on its behalf if the company was not in existence at the time a
person purported to enter into a contract on its behalf. Kelner v. Baxter also highlighted
the potential for promoters to be liable on contracts they purport to enter into on behalf of
an as yet unincorporated entity. What was not clear after Kelner v. Baxter was whether
promoters were automatically liable in these situations (sometimes referred to as the “rule
of law” approach) or whether the promoter’s liability depended on whether it was
intended that the promoter be a party to the contract (sometimes referred to as the “rule of
construction” approach).

B. Newborne v. Sensolid (Great Britain) Ltd., [1953] 1 All E.R. 708

Many years later in Newborne v. Sensolid (Great Britain) Ltd., [1953] 1 All E.R. 708 the
English Court of Appeal made it clear that promoter liability was to be based on a rule of
construction approach – i.e. promoters were only liable if it was intended in the
circumstances that they were themselves to be parties to the contract.

In Newborne v. Sensolid Ltd. Newborne had entered into a contract with Sensolid Ltd. to
supply tinned ham to Sensolid Ltd. The price of tinned ham fell and Sensolid Ltd.
refused to take further deliveries of tinned ham from Newborne. The contract had been
signed by Leopold Newborne underneath the words Leopold Newborne (London) Ltd. It
was not formally signed “on behalf of Leopold Newborne (London) Ltd.” as had been the
case in Kelner v. Baxter. Unfortunately, Leopold Newborne (London) Ltd. had not been
incorporated. Leopold Newborne (London) Ltd. was later incorporated and it brought an
action against Sensolid Ltd. That action was dismissed because Leopold Newborne
(London) Ltd. had not been incorporated at the time the contract was entered into.

Leopold Newborne then sued Sensolid Ltd. in his own name seeking to enforce the pre-
incorporation contract on the basis that he was a party to the contract himself. The
argument was made on the basis of 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.

The English Court of Appeal held that the correct approach was a rule of construction
approach. The real test was whether the promoter was intended, in the circumstances, to
be a party to the contract or not. It was held that 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. In other words, given the way in which it was signed it indicated that it
was not intended that Leopold Newborne be a party to the contract himself. Thus
Leopold Newborne could not enforce the contract in his own name.
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C. Black v. Smallwood & Cooper (1966), 117 C.L.R. 52 (High Court of Australia)

The High Court of Australia took the same rule of construction approach to Kelner v.
Baxter in Black v. Smallwood, (1966) 117 C.L.R. 52 (High Court of Australia). 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 thinking the company had been incorporated and that they
were directors. The plaintiffs wanted to impose liability on the basis of a rule of law
reading of Kelner v. Baxter saying that a contract was clearly intended and since it could
not be with the principal (i.e. the company) which was not in existence it must have been
with the purported agents Smallwood and Cooper personally.

The majority of the court followed the earlier English case of Newborne v. Sensolid Ltd.
It was held that Kelner v. Baxter was not authority for the principle that an agent signing
for a non-existent principal is bound. The court said that the 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. In this case it appeared to be clear that a
contract with the company was intended. The company did not exist and thus it was a
contract with a non-existent party and therefore no contract at all. It was nonetheless
suggested 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.)

Wickberg v. Shatsky (1969), 4 D.L.R. (3rd) 540 (B.C.S.C.) is a British Columbia case that
also addresses the question of the interpretation of Kelner v. Baxter and addresses the
possibility of an action against the promoters on the basis of a breach of warranty of
authority.

Lawrence and Harold Shatsky became shareholders in Rapid Addressing Systems Ltd.
and became directors. They 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. was never formed. It was later proposed that Celer Data Ltd.
be formed to do the takeover. A certificate of incorporation for Celer Data Ltd. was
issued on May 11, 1966. On May 9, 1966, days two before the certificate of
incorporation was issued the plaintiff (Wickberg) was hired as a manager. The terms of
employment were written in a letter dated May 9 and was on letterhead with the name of
Rapid Data (Western) Ltd. on top. The letter was signed by Lawrence Shatsky. The
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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.”

The business did not go as well as had been anticipated and Lawrence and Harold
Shatsky could not keep up with paying Wickberg’s salary. They asked him to work on
straight commission. With the company’s business not doing particularly well, Wickberg
refused to work on straight commission. On Aug. 26, 1966 Wickberg was dismissed for
his failure to work on straight commission.

Wickberg sued and his claim was for wrongful dismissal. His difficulty though was that
he had to prove he had an employment contract. It couldn’t be a contract with Celer Data
Ltd. because the purported contract was concluded on May 9th, two days before as
certificate of incorporation was issued for Celer Data Ltd. Wickberg made the following
arguments (among others):

(i) Lawrence Shatsky was liable as a party to the contract on the basis that the
contract was a contract on behalf of a non-existent principal and thus
applying the rule of law approach in Kelner v. Baxter Lawrence Shatsky
was a party to the contract.

(ii) Lawrence and Harold Shatsky were liable for a breach of warranty of
authority in warranting that the company was in existence and that they
had authority to act on behalf of the company

The court held that the plaintiff was entitled to nominal damages on the basis of a breach
of warranty of authority.

The court held that it is not the case that a person signing on behalf of a non-existent
company is automatically personally liable. The 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. In Black v. Smallwood the
circumstances suggested that it was not intended that the contract bind Smallwood or
Cooper. In other words, the court took the rule of construction approach to Kelner v.
Baxter. The 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.).

The court further 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, there was no connection between the damage suffered
by the plaintiff and the breach of warranty of authority. There were 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. Such an action
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would have yielded nothing because the company through which the business was
operated was now bankrupt and thus had the business been carried on through Rapid
Data (Western) Ltd. as originally planned that business would have been bankrupt on
Wickberg would have collected nothing on a wrongful dismissal claim against that
company.

E. Summary

The following points can be derived from the agency law on ratification and the cases
noted above:

(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

The common law position created a risk for both the promoter and the third party that
there would be no enforceable contract. Black v. Smallwood and Wickberg v. Shatsky
involved cases in which the third party could not enforce the contract against the
company. Newborne v. Sendolid Ltd. involved a situation in which the neither the
promoter nor the company could enforce the purported contract.

This creates a risk that reliance on the purported contract will be defeated along with the
potential for an unjust enrichment of promoters at the expense of third parties or third
parties at the expense of promoters. For instance, had the court not found the promoters
liable in Kelner v. Baxter Kelner would have borne the entire loss on the wines that he
supplied for the hotel company rather than having that loss shared amongst all the
promoters (including Kelner as a co-promoter). A similar problem could arise if
promoters performed the purported contract but could not enforce the contract against the
third party.

The common law position also creates unnecessary costs. To deal with the risk of a
potentially unenforceable contract both parties will have to take precautions to ensure
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that the corporation has in fact been incorporated. It would make more sense to have just
one party incur the cost of confirming that the corporation has in fact been incorporated.
Then it would make sense to allocate this cost to the person who can confirm the
existence of the corporation at least cost. In most cases the promoters will know whether
the corporation has been incorporated or not without having to do any checking. In other
cases, where they were in doubt, they could simply check with their lawyer.

The third party would have expected to have a contract with the corporation itself so, in
most cases, it would be reasonable to allow the corporation to adopt the contract as its
own and relieve the promoter of liability unless it was genuinely intended that the
promoter be a party to the contract. However, one needs to address the opportunistic use
of an adoption of a contract by a corporation. This might arise in a situation where the
contract is no longer beneficial to the promoters. The promoters might then incorporate
the corporation but fail to put any assets in the corporation. They could then have the
corporation adopt the contract relieving the promoters of liability and leaving the third
party with an action against an insolvent corporation. This would give the promoters the
opportunity to gain on a contract if it continued to be beneficial to them but avoid
liability on the contract if it was not beneficial to them – i.e. they would be speculating at
the expense of the third party.

V. CBCA S. 14

A. How s. 14 Modifies the Common Law

Section 14 of the CBCA modifies the common law position. Section 14(1) provides that,
unless the contract expressly provides otherwise (see s. 14(4)), a person who enters into,
“or purports to enter into”, a “written” contract in the name of or on behalf of a
corporation before the corporation comes into existence, is personally bound by the
contract and is entitled to benefits of the contract. Section 14(2) then provides that a
corporation can “adopt” a contract after it comes into existence. If the corporation adopts
the contract then the corporation is bound by and is entitled to the benefits of the
contract, and the person who purported to act on behalf of the corporation is no longer
liable on the contract or entitled to the benefits of the contract. The corporation must
adopt the contract within “a reasonable time” after it comes into existence. The
corporation can adopt the contract by any action or conduct signifying its intention to be
bound by the contract.

Section 14(3) allows the court can apportion liability between the corporation and a
person purporting to act on behalf of the corporation. Section 14(4) provides that the
parties can “expressly” agree in the written contract that the person who enters into the
contract on behalf of the corporation before it came into existence is not bound by the
contract or entitled to the benefits of the contract.

Orginally s. 14(1) did not have the words “or purports to enter into”. It was suggested
that the original wording might be a codification of the rule of construction approach to
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Kelner v. Baxter. If the promoter purported to enter into a contract on behalf of the
corporation before the corporation was incorporated and it was not intended that the
promoter was to be a party to the contract then there was no contract. There was no
contract because it would have to be a contract between the third party and the
corporation (since the promoter was not intended to be a party to the contract). Without
the words “or purports to enter into” the section simply began with the words “a person
who enters into a written contract in the name of and on behalf of a corporation before it
comes into existence …”. There could only be a “contract” if that person was intended to
be a party to the contract. If the promoter was not intended to be a party to the contract
then there was no contract and the promoter was not bound since the rest of the provision
only operated if there was a contract. This was the approach taken Westcom Radio
Group Ltd. v. McIssac (1989) 45 B.L.R. 273 (Ont. Div. Crt.). The section was
subsequently amended to add the words “or purports to enter into”. It thus now appears
to codify the rule of law approach to Kelner v. Baxter.

B. Cases Applying Provisions Equivalent to CBCA Section 14

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

In Landmark Inns v. Horeak, [1982] 2 W.W.R. 377 Horeak and three other persons were
planning to enter into an optical business. On October 25, 1979 Horeak signed a lease
for space in the plaintiff’s shopping mall (the Gordon Place Shopping Centre). He signed
the lease as chairman of “South Albert Optical and Contact Lenses Ltd.” The company
was not incorporated until February 25, 1980. In the interim Horeak and his three
partners decided to lease other premises in another mall (the Southland Mall).

The plaintiff had incurred costs of modifying the premises according to the defendant's
plans. The defendant (Horeak) then notified the plaintiff of its intention not to proceed
with the lease. The plaintiff then claimed for the cost of renovations ($4,150) and six
months of lost rent ($1,792.99 per month = $10,758).

On March 19, 1980 South Albert Optical and Contact Lenses Ltd. adopted the Gordon
Place Shopping Centre lease contract. Horeak then claimed that since the corporation
adopted the contract he was relieved of any liability on the contract by s. 14(2) of the
Saskatchewan Business Corporations Act (the same provision as CBCA s. 14(2)) and that
since he signed in the name of the corporation it was an express provision in the terms of
s. 14(4) that he was not to be bound.

The court held for the plaintiff awarding damages of $12,419.61. The court held that s.
14(1) codifies Kelner v. Baxter (although it did not indicate which interpretation of
Kelner v. Baxter it thought was codified by s. 14(1)). The court also held that a
corporation cannot adopt a contract which has been repudiated since the contract is at an
end and thus there is nothing to adopt. Horeak had repudiated the contract when he
notified the plaintiff of the intention not to proceed with the lease. Therefore s. 14(2)
would not operate to relieve Horeak from liability. With respect to the operation of s.
14(4) the court held that having the name of the company on a contract is not sufficient
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for the purposes of s. 14(4) to alter the liability of the promoter under s. 14(1) – altering
s. 14(1) requires an express provision.

The circumstances of the case are consistent with the kinds of circumstances in which the
Dickerson Committee (the drafters of the CBCA) felt s. 14(3) was necessary. However,
instead of invoking s. 14(3) to allocate the liability back to Horeak, the court seized upon
the notion that a corporation cannot adopt a contract that has already been repudiated.

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

In Bank of Nova Scotia v. Williams (1976), 12 O.R. (2d) 709 Mrs. Aikins put a second
mortgage on her house with the Bank of Nova Scotia. The proceeds were then loaned to
H. Williams Mechanical Contractors Ltd. on July 5th, 1973. A cheque for the amount of
the loan was deposited in the account set up for the company. A certificate of
incorporation for the company was issued on July 20th, 1973. Mr. Williams and Mr.
Aikins were the promoters of the company. They became the directors of the company
and ran the business of the company. On July 26, 1973 the company delivered a
promissory note to Mrs. Aikins for the amount of the loan. There was no directors
resolution with respect to this promissory note but it was signed by the only two directors
of the company.

By July of 1974 the company became insolvent and ceased active business by September
of 1974. Mrs. Aikens made a claim on the loan against Mr. Williams asking that the
court exercise its discretion under the Ontario Business Corporations Act, 1970 to
apportion liability between the promoters and the corporation.

The court refused to exercise its discretion to apportion liability. It said that,

“there may be times when the company and the one who contracted on its behalf
should not be able to agree as to the assumption of liability to the detriment of the
person with whom the contract was made. However, in the situation before me,
Mrs. Aikins was not misled as to which party she was advancing moneys to, nor
did any action of Mr. Williams or the company mislead her as to who would be
assuming responsibility for repayment.”

As noted in the comment on the Landmark Inns case above, the Dickerson Report noted
that one of the instances it had in mind for the apportioning of liability would arise where
the promoters had an insolvent corporation adopt a contract on the eve of bankruptcy.
Kelner v. Baxter arguably involved such a situation. However, it might be argued that as
long as the third party was aware of who he or she was dealing with, he or she accepted
the risk of the solvency of the corporation.

C. When Will the CBCA Provisions Apply?

1. Constitutional Problem
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Pre-incorporation contracts deal with the enforcability of contracts. Laws relating to


contracts fall within the provincial power to regulate with respect to property and civil
rights. The the federal government has a residual power to incorporate companies and
presumably has ancilliary powers associated with the power to incorporate companies.
But does this include a power to regulate contracts that were entered into before a CBCA
corporation came into existence. In other words, does the federal power to incorporate
corporations allow it to alter provincial contract law with respect to contracts entered into
by CBCA corporations before the CBCA corporation came into existence?

The federal government does have the power to incorporate companies (see chapter 12).
Thus it might be argued that although s. 14 deals with contracts (and thus falls within the
provincial power concerning property and civil rights) the regulation of pre-incorporation
contracts is a necessary ancialliary power to the federal government’s power to
incorporate companies with objects broader than provincial objects.

2. “Written Contract”

CBCA s. 14 also refers to a “written contract”. Thus if the contract is not in writing the
section does not apply. This appears to leave the common law for oral contracts.

3. Jurisdictional or “Conflicts of Law” Problems

Another problem is the jurisdictional problem. Suppose the CBCA is constitutionally


valid. What happens if the pre-incorporation contract is in a province where the common
law would normally apply (i.e., where there is no provincial statutory provision altering
the common law approach to pre-incorporation contracts)? Presumably if the CBCA is
constitutionally valid the CBCA provision would be paramount. Suppose the contract
was completed in that province and was to be performed in that province but the
company was incorporated in Ontario or Saskatchewan where the business corporations
statute there has an equivalent provision to CBCA s. 14? What if the original intention
was to incorporate under the CBCA but the incorporation took place under the statute in
the province without a pre-incorporation contract provision, or what if the original
intention was to have the company incorporated under the statute in the province without
a pre-incorporation contract provision but the incorporation was done under the CBCA?
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VI. THE NEW B.C. BUSINESS CORPORATIONS ACT

The B.C. Company Act has no provision on pre-incorporation contracts. Thus the law in
British Columbia continues to be the common law. However, the recently enacted, but as
of this writing not yet in force, Business Corporations Act in British Columbia (S.B.C.
2002, ch. 57) contains the following provision on pre-incorporation contracts:

Pre-incorporation contracts

20 (1) In this section:

"facilitator" means a person referred to in subsection (2) who, before a company


is incorporated, purports to enter into a contract in the name of or on behalf of the
company;

"new company" means a company incorporated after a pre-incorporation


contract is entered into in the company's name or on the company's behalf;

"pre-incorporation contract" means a purported contract referred to in


subsection (2).
(2) Subject to subsections (4) (b) and (8), if, before a company is incorporated, a
person purports to enter into a contract in the name of or on behalf of the
company,
(a) the person is deemed to warrant to the other parties to the purported
contract that the company will
(i) come into existence within a reasonable time, and
(ii) adopt, under subsection (3), the purported contract within a
reasonable time after the company comes into existence,
(b) the person is liable to the other parties to the purported contract for
damages for any breach of that warranty, and
(c) the measure of damages for that breach of warranty is the same as if
(i) the company existed when the purported contract was entered
into,
(ii) the person who entered into the purported contract in the name
of or on behalf of the company had no authority to do so, and
(iii) the company refused to ratify the purported contract.
(3) If, after a pre-incorporation contract is entered into, the company in the name
of which or on behalf of which the pre-incorporation contract was purportedly
entered into by the facilitator is incorporated, the new company may, within a
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reasonable time after its incorporation, adopt that pre-incorporation contract by


any act or conduct signifying its intention to be bound by it.
(4) On the adoption of a pre-incorporation contract under subsection (3),
(a) the new company is bound by and is entitled to the benefits of the pre-
incorporation contract as if the new company had been incorporated at the
date of the pre-incorporation contract and had been a party to it, and
(b) the facilitator ceases, except as provided in subsections (6) and (7), to
be liable under subsection (2) in respect of the pre-incorporation contract.
(5) If the new company does not adopt the pre-incorporation contract under
subsection (3) within a reasonable time after the new company is incorporated,
the facilitator or any party to that pre-incorporation contract may apply to the
court for an order directing the new company to restore to the applicant any
benefit received by the new company under the pre-incorporation contract.
(6) Whether or not the new company adopts the pre-incorporation contract under
subsection (3), the new company, the facilitator or any party to the pre-
incorporation contract may apply to the court for an order
(a) setting the obligations of the new company and the facilitator under the
pre-incorporation contract as joint or joint and several, or
(b) apportioning liability between the new company and the facilitator.
(7) On an application under subsection (6), the court may, subject to subsection
(8), make any order it considers appropriate.
(8) A facilitator is not liable under subsection (2) in respect of the pre-
incorporation contract if the parties to the pre-incorporation contract have, in
writing, expressly so agreed.

Notice that s. 20(2) deals with the problem with the word “contract” that plagued the
original version of the CBCA. Section 20(2) refers to a person who “purports to enter
into a contract”. Notice also that s. 20(2) does not make the promoter liable on the
contract itself but rather liable on a deemed warranty (a sort of statutory
misrepresentation provision). It seems to leave open the possibility that the promoter
could be liable on the contract but only if the promoter was in fact intended to be a party
to that contract.
Section 20(2)(c) then sets the measure of damages as if the company existed when the
purported contract was entered into, the person who entered into the purported contract in
the name of or on behalf of the company had no authority to do so, and the company
refused to ratify the purported contract. This would appear to produce the same result as
in Wickberg v. Shatsky. If the third party is dealing with a corporation then it is
incumbent on the third party to check into the credit worthiness of that corporation. If
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the warranty had been true and the third party ended up with a contract with the
corporation but the corporation would have been bankrupt then the third party will get
only nominal damages.
Section 20(5) addresses the potential for an unjust enrichment of the company at the
expense of either the third party or the promoter (“facilitator”). Otherwise the section
appears to map more or less onto CBCA s. 14.

VII. OTHER WAYS OF ENFORCING PRE-INCORPORATION CONTRACTS


UNDER THE COMMON LAW

A creative use of the common law (in the broader sense of law and equity) provides a
number of ways of avoiding the common law pre-incorporation contract problem
discussed above.

1. Promoter as Trustee of a Chose in Action: The promoter could be treated as a


trustee of a chose in action for the corporation. This would put the promoter
under a fiduciary obligation to enforce the contract and would allow an order
permitting the company to sue in the name of the promoter as trustee.

2. Company as Assignee: The circumstances may allow the court to treat the
contract as having been assigned to the company (as opposed to ratification by the
company).

3. Restitutionary Principles: The court might accept that although there was no
valid contract with the corporation there was a “quasi contract” allowing for a
restitutionary based remedy. This could allow a court to redress an enrichment of
one party by the performance of another in the believe that there was a valid
contract.

4. Infer a Second Contract from a Course of Dealings: The court might look at part
performance of the terms of the original attempted contract and infer another
contract between the third party and the corporation.

5. Offer to Promoter as Agent for the Third Party to Make an Offer to the Company:
The promoter might be viewed as an agent of the third party with authority to
make an offer to the corporation on the same terms as those involved in the
dealing between the promoter and the third party. A purported ratification or
adoption by the company could then be considered an acceptance of an offer
conveyed by the promoter as agent for the third party.
Notes on Business Associations 202
© Mark Gillen

6. Provisional Contract to Become Binding on a Future Event (the Incorporation of


the Company): Yet another alternative is to consider the contract a provisional
(or conditional) contract that would take effect on the incorporation of the
company and its adoption of the contract.

VIII. PRACTICAL NOTES

Even with the statutory provisions there are risks associated with pre-incorporation
contracts for both the promoters and third parties. These risks suggest some practical
solicitor’s advice. First, promoters who have approached a solicitor to incorporate a
corporation should be warned of the problem and instructed that they should not enter
into contracts on behalf of the corporation, or at least, that if they do so in a jurisdiction
with a provision such as CBCA s. 14 there is a risk of personal liability. Second, for
those promoters who are intent on proceeding quickly one can often have a corporation
incorporated fairly quickly. However, there can be problems with the corporate name.
This can be addressed by incorporating under a numbered name and then changing the
name later. If this is done the promoters will have to understand that contracts entered
into on behalf of the corporation will have to be entered into under the numbered name
and not the proposed, but yet unaccepted, corporate name. Third, for any significant
transaction, unless one is intimately familiar with the client’s corporate status, it would
be a good practice to check the corporate registry to confirm the corporate status
checking for the certificate of incorporation and that the corporation remains in good
standing.

If one is acting for a third party in any significant transaction it is a good idea to do a
check of the registry to confirm that a certificate of incorporation has been issued for that
corporation and that the corporation is still in good standing. To do this you first have to
make sure you know where the corporation has been incorporated. Then you need to be
very careful that you have the correct corporate name in every detail noting every
character in the name and details such as whether it is “Ltd.” or “Inc.” abbreviated or
“Limited” or “Incorporated” spelled out in full. It is also common in major transactions
to require a certified copy of the certificate of incorporation from the secretary of the
corporation as a closing document for the transaction.