Developments

P A G E 9

PRE-INCORPORATION CONTRACTS: POSTKELNER DEVELOPMENTS BY JAYDEE J’MOND K BOURNE

The birth of Kelner v Baxter (1866 LR 2 CP 174) in 1866 was not a quiet one, its emergence was recognisable. Many cries were heard when it surfaced the corporate arena. These cries were not interpreted as noise but messages which seemed to have not been ignored. As a true guardian of justice, the law responded at common law and through legislation. This was necessary because of Kelner’s mischievous nature which discouraged pre-incorporation contracts - the lifeblood of incorporation and a daily occurrence in the business world

(M.A Maloney, “Pre-incorporation Transactions: A Statutory Solution?” (1985) 409, 10 CBLJ ).

It is elementary learning that incorporation brings companies to life. Promoters help to facilitate business opportunities prior to formal incorporation as they enter into contractual relationships with third parties on behalf of the nascent corporation (M.A Maloney, “Pre-incorporation Transactions: A Statutory Solution?” (1985) 409, 10 CBLJ).

In Kelner, the Court was of the opinion that it was not legally possible for a company to adopt or ratify contracts which were made on its behalf before it came into existence. It was also suggested that the promoter would be personally liable on the contract.

Some academics have described Kelner as forming a shaky foundation of the law on Pre-incorporation contracts. Palmer posited, “Promoters may be deterred from engaging in Preincorporation contracts if the Courts show too great alacrity in making them personally liable and outside parties will be reluctant to supply goods, or enter into contracts of service with the agents of unincorporated associations, ” (N.E Palmer,

“ Pre-incorporation Contracts and The Implied Warranty”

123 UQLJ 9, 1).

The stifling nature of the Kelner principle was clear. A just response was therefore necessary to encourage Preincorporation contracts. One hundred (100) years after Kelner, the element of “intention” arose in Black v Smallwood (1966 117 CLR 52). The High Court indicated that if a Preincorporation contract objectively has an intention to bind the company, the promoter would not be liable, especially if he was unaware that the company had not been incorporated. The intention element created at common law modified the Kelner principle. It was indeed a creative mechanism to ensure fairness. Nonetheless, it is an unnecessary consideration in this day and age when trying to determine one’s liability in the Pre-incorporation contract context. Reason being, Barbados’ Pre-incorporation contract provision which is in pari materia with Canada’s Business Corporation Act was created to remedy the common law approach to Preincorporation contracts.

Justice Austin applied the common law rules in Westcom (1989) 63 DLR (4th) 433 Ont Div Ct) and was severely criticized by Justice Conant in Szecket v Huang ( (1998) 169 DLR (4th) 402 Ont CA). Justice Conant stated, “Westcom was of no assistance in resolving the issue of personal liability. There was no need to undertake the two (2) stage analysis suggested and first determine whether it was the intention of the parties to the Pre-incorporation contract.. ”

Some academics have even opined that the legislation does not care about the common law position; the fact that the corporation does not exist is enough, (M.A Maloney, “Pre-

incorporation Transactions: A Statutory Solution?” (1985)

411, 10 CBLJ). The Pre-incorporation contract provision in the Companies Act ( Section 16 Barbados Companies Act CAP 308) is a panacea to the Kelner rule. One can say such because the provision allows companies to adopt pre-incorporation contracts within a reasonable time of its incorporation, it gives the Court the power to apportion liability between or among the company and the promoter. It also states that if expressly provided in the written contract the promoter would not be bound by the contract or entitled to the benefits.

It is unjust to bind someone to a contract who did not intend to be bound by it. Some judges have recognized the harsh implications of Kelner and smartly found ways to avoid applying it. This was seen in Justice Parker’s stance in Newborne v Sensolid (1954 1 QB 45). According to Palmer, “Judges realising perhaps that the statements in Kelner v Baxter were couched in bald and unqualified terms, have sought to elicit distinctive circumstances from the principal case so as to confine it to its own particular facts, ” (N.E Palmer, “Pre-incorporation Contracts and The Implied

Warranty” 123 UQLJ 9, 1).