Clause 52
Company Law Reform Bill [Lords]
6:15 pm
David Howarth (Shadow Minister (Energy), Trade & Industry; Cambridge, Liberal Democrat)
I beg to move amendment No. 183, in clause 52, page 21, line 17, at end insert
‘but he may not enforce the contract against any person who did not know, and who had reasonable grounds for not knowing, that the company had not yet been formed and for whom the identity or characteristics of the other party to the contract would have been a relevant consideration in entering into the contract'.
The amendment is mainly a probing one, but it raises a problem that has the potential to be the Hickman of the 21st century. The problem is what happens when someone purports to deal on behalf of a company that has not yet been formed. The situation does not arise often, but it is likely to arise in fast-moving business situations in which people are forming new companies and new businesses.
Originally, the problem was that, since the company did not exist at the time, since no one can be an agent for something that does not exist, and since agents have, in normal circumstances, no liability for the contracts that they make—it is their principals who are banned—someone who made a contract with a person purporting to act on behalf of a non-existent company had no rights at all. A legislative change was brought in to alter that situation. It gave rise to wording similar to that in the Bill. That wording has the effect of saying that, in such a situation, the person who purported to act on behalf of the non-existent company becomes banned by the contract. Therefore, the person on the other side has some recourse.
The problem is that the clause does not say what happens if the situation is reversed. It does not say whether the person who purported to act on behalf of the non-existent company gets rights in contract against the other party to the deal. The clause is silent on that point, which can be commercially important. There was a case in the Court of Appeal called Braymist Ltd v. Wise Finance Co. Ltd. It occurred in 2002. The Court of Appeal decided that in such a situation the person who purported to act on behalf of the company not yet in existence did get rights against the other party. Unfortunately, the Court was divided as to why. A majority of members thought that the meaning of the existing section meant that rights in contract were created, subject to common law restrictions if there were any. The other members thought, on the contrary, that the existing section had no effect on the situation but that contractual rights could be created by common law doctrines.
Why is that a problem? It sounds like the same thing. On one side, people say that the section creates rights subject to common law and on the other, people say that the section creates no rights but the common law can create a contract. The problem is that the area of contract law with which we are dealing is the most notoriously difficult and unclear area of contract law—namely, the area to do with mistake and, especially, with mistake of identity. The difference between the two sides of the Court will be of significance because on one side there is a presumption in favour of the creation of rights and on the other there is a presumption that may work in the opposite direction.
The amendment seeks to put into words the view of one side of the Court of Appeal and to invite the Government to think about whether they want to put into statutory form a solution to the problem, which may in years to come become a difficult and significant one.