Ipsofactoj.com: International Cases [2003] Part 7 Case 8 [CAEW]


COURT OF APPEAL, ENGLAND & WALES

Coram

Wise Finance Co Ltd

- vs -

Braymist Ltd

LORD JUSTICE JUDGE

LORD JUSTICE LATHAM

LADY JUSTICE ARDEN

20 FEBRUARY 2002


Judgment

Lady Justice Arden

  1. This is an appeal with the permission of the judge from the order of Etherton J dated 2 March 2001. By this order the Court declared that the appellant, William Sturges & Co (“Sturges”), had effectively rescinded an agreement dated 28 January 1993 made between

    1. Braymist Ltd (“Braymist”) and

    2. The Wise Finance Co Ltd (“Wise”), the respondent to this appeal,

    for the purchase by Wise of a parcel of land adjoining the A380, part of Harcombe Wood, Chudleigh, Devon (“the Property”). The order also declared that Wise’s deposit of £5,000 was forfeit to Sturges. The order dismissed the counterclaim of Wise and ordered Wise within 28 days to pay to Sturges the sum of £67,700.58 representing damages for breach of contract and interest. 

  2. The relevant facts can be briefly stated. At the time of the relevant contract, Braymist was in process of incorporation. Its solicitors, Sturges, signed the agreement as agents and solicitors for it. The Property comprised a piece of land next to a corner site (“the Adjoining Land”) where a minor road joined the A380. On part of the Adjoining Land there stood a filling station. Wise hoped to obtain planning permission to facilitate the removal of the filling station to the Property, thus freeing the Adjoining Land for development. However, the contract was not conditional on this planning permission. The principal point in issue flows from the fact that Braymist, the vendor, was not in existence at the time the agreement was signed. Wise was not aware of this at the time the agreement was made. Sturges now seek to enforce the contract against the purchaser by virtue of section 36C(1) of the Companies Act 1985. Accordingly, the first question is whether an agent is not only liable on the contract where his principal is a company in course of formation but entitled to sue on it. Section 36C(1) provides:-

    A contract which purports to be made by or on behalf of a company at a time when the company 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, and he is personally liable on the contract accordingly.

    I will refer to the concluding clause of this subsection, i.e. the words “and he is personally liable on the contract accordingly”, as ‘the tailpiece’.

  3. Wise made an application for planning permission for the property to be purchased on 11 May 1993. On 21 September 1993, that application was refused. The reason given for the refusal was that the property was situated in an area designated as being of great landscape value and that it would be detrimental to the character and appearance of the area and contrary to local policies and planning guidelines. Notice to complete was served on 2 February 1994 pursuant to condition 22 of the National Conditions of Sale (20th edition) which were incorporated into the contract. The notice to complete expired on the 21 February 1994. Wise failed to complete on that day. On 4 March 1994 Sturges notified Wise’s solicitor that Braymist had rescinded the agreement and forfeited the deposit.

    THE JUDGMENT OF ETHERTON J

  4. Not all of the issues with which the judge dealt arise on this appeal and accordingly I need not summarise them. 

  5. The first issue was whether Sturges were entitled to enforce the agreement by virtue of section 36C. The judge pointed out that section 36C(1) was first enacted in section 9(2) of the European Communities Act 1972 and was intended to give effect to article 7 of the First EC Company Law Directive (68/151/CEE OJ No. 1968 L6) (“the Directive”). He referred to the French and English texts of article 7:-

    If, before a company being formed has acquired legal personality, action has been carried out in its name and the company does not assume the obligations arising from such action, the person who acted shall, without limit, be jointly and severally liable therefore, unless otherwise agreed.

    Si des actes ont été accomplis au nom d’une société en formation, avant l’acquisition par celle-ci de la personalité morale, et si la société ne reprend pas les engagements résultant de ces actes, les personnes qui les ont accompli en sont solidairement et indefiniment responsables, sauf convention contraire.

  6. The judge held that section 36C(1) enabled the agent for the unformed company to enforce the contract. His reasons were as follows. First he held that this was the literal effect of the following words in section 36C:

    [the] contract .... has effect .... as one made with the person purporting to act for the company or as agent for it ....

    He held that section 36C did not reflect the Directive as it could have done if it had provided merely that a person who purported to enter into a contract for and on behalf of an unformed company was liable to the same extent as if he had contracted personally.

  7. Second, he referred to Phonogram Ltd v Lane [1982] QB 938, the first case to come before the Court of Appeal on construction of section 9(2) of the 1972 Act. In it the Court of Appeal expressly rejected the argument that section 9(2) should be construed solely by reference to the Directive. Lord Denning MR said

    Section 9(2) is in accordance with the spirit and intent of the directive. We should go by our own statute and not by the directive ....

    The judge observed that the correctness of that approach was emphasised by the fact that section 36C failed to implement that part of article 7 which provides for a company to assume obligations arising from the contract.

  8. The judge’s third reason was that the Directive did not preclude a provision of national law imposing liability and conferring rights on agents. 

  9. The judge’s fourth reason was that his interpretation of section 36C resulted in both parties being mutually able to enforce the contract and in his judgment this was neither unworkable nor unfair. The judge considered that the concluding words of section 36C(1) would include specific performance and that supported his conclusion on mutuality. 

  10. The judge’s fifth reason was that the concluding words abolished the previous distinction made at common law between agents who made pre-incorporation contracts and on the true interpretation incurred personal liability and those who made such contracts but incurred no personal liability: see Phonogram Ltd v Lane, above, at page 946 in which Oliver LJ held that section 9(2) of the European Communities Act 1972, from which section 36C(1) is derived, made these subtle distinctions irrelevant. 

  11. The third issue before the judge (and the second on this appeal) was whether the execution of the agreement by Sturges “as solicitors and agents” for Braymist satisfied section 2(1) and (3) of the Law of Property (Miscellaneous Provisions) 1989. Section 2(1) and (3) provides:-

    (1)

    A contract for the sale or other disposition of an interest in land can only be made in writing and only by incorporating all the terms which the parties have expressly agreed in one document or, where contracts are exchanged, in each.

    (3)

    The document incorporating the terms or, where contracts are exchanged, one of the documents incorporating them (but not necessarily the same one) must be signed by and on behalf of each party to the contract.

  12. The judge held that it did not matter that Sturges signed as agents for Braymist. The effect of section 36C(1) was that they were deemed to be vendors even though they had signed as agents. Otherwise, section 36C(1) would be useless in the case of all contracts for the sale or other disposition of land. The statutory purpose of section 2 of the 1989 Act would not be served by that construction. Accordingly, the provisions of section 2(1) and (3) of the 1989 Act were satisfied. 

  13. The fifth issue before the judge (and the third arising on this appeal) is whether Sturges were able to complete and thus able to serve a valid notice to complete under condition 22. Condition 22(1) provides:-

    (1)

    At any time on or after the completion date, either party being ready and willing to fulfil his own outstanding obligations under the contract, may (without prejudice to any other right or remedy available to him) give to the other party or his solicitors notice in writing requiring completion of the contract in conformity with this condition.

  14. At the time notice to complete was served, Sturges were not the owners of the property nor were they directors or shareholders of Braymist or of Plumtree Ltd (“Plumtree”), the registered owner of the property, or its parent company Pique Holdings plc (“Pique”). The judge held that condition 22 was satisfied. The agreement provided for title to be deduced by production of a transfer from Plumtree to Braymist. Before notice to complete was served, Sturges held a transfer executed by Plumtree and Braymist in favour of Wise, being the form required by Wise’s solicitor. In addition, as solicitors for Plumtree and instructed to act in the sale of the property, Sturges were entitled by virtue of their right against Plumtree and its parent company’s majority shareholder, Mr. Pool, to compel the transfer of the property from Plumtree to Wise. As Braymist had not been incorporated Mr. Pool was personally liable on the contract of retainer and it was an implied term of the contract of retainer that if Sturges put in place the legal mechanisms for the transfer of the property to the defendant in accordance with their principal’s instructions Plumtree and Mr. Pool would secure the transfer of the property to Wise. It was an implied term of the contract that Plumtree and Mr. Pool would not leave Sturges exposed to personal liability by virtue of section 36C(1). 

  15. Plumtree was a wholly-owned subsidiary of Pique. Mr. Pool was entitled to 75% of Pique’s share capital. He was also chairman and managing director of Pique. He was also chairman and managing director of Plumtree and he held a power of attorney in property matters for Mr. Gerald Johnson, one of the two other directors of Plumtree. The judge held that neither Mr. Pool or Plumtree was in a position to prevent Sturges from handing over on completion the executed transfer then in Sturges’ possession. 

  16. The next issue before the judge (and the fourth issue on this appeal) was whether Sturges’ title was defective because the land was encumbered by a restrictive covenant in favour of the Minister of Agriculture, Food & Fisheries (“MAFF”). 

  17. Clause 18 of the agreement dated 28 January 1993 provided that Wise should enter into a covenant with the Forestry Enterprise that “it will forthwith cease using and forever after not use the existing soakaway drainage from the property and all the adjoining filling station which system runs on to the adjoining property of the Forestry Enterprise”. 

  18. Clause 4 of the Deed of Covenant and Surrender dated 10 December 1993 between (1) Plumtree and (2) MAFF provided as follows:-

    Plumtree hereby further covenants with the Minister that if at any time within the period of 80 years from the date hereof the Adjoining Property shall come into the possession of Plumtree or its successors in title to the property then Plumtree and its successors in title shall cease forthwith and not thereafter use the existing drainage system on the Adjoining Property and shall not discharge sewage from such system into the septic tank situated on the west side of the A380 or as the case may be any overflow from the system so as to discharge sewage or surface water into any culvert or drainage ditch to the west of the A380.

  19. The Adjoining Property for the purposes of this clause is the site which I have described above as the Adjoining Land. 

  20. The judge held that clause 18 of the agreement was consistent with a restrictive covenant such as was imposed by clause 4 of the MAFF Deed. In any event the MAFF Deed was sent to Wise’s solicitors on 22 December 1993. They did not raise any requisition on title in respect of clause 4 of the MAFF Deed. On 10 January 1994, Wise’s solicitors sent Sturges the engrossed transfer, clause 3 of which expressly provided that Wise would observe and perform the covenant in clause 4 of the MAFF Deed. In these circumstances, Wise was precluded from objecting to those covenants in the MAFF Deed by condition 9 of the National Conditions of Sale which provide for a purchaser to be deemed to accept the vendor’s title unless he raises requisitions on title. Condition 9 was not overridden by clause 4 of the agreement. 

  21. In any event, Wise had acted unequivocally under the agreement, notwithstanding its knowledge of clause 4 of the Deed, by conducting itself on the basis that the transfer would be subject to the MAFF covenants. When sending the engrossed transfer Wise’s solicitors stated that they were awaiting instructions in respect of completion but they gave no indication that if and when completion took place it would not be on the terms of the engrossed transfer. 

  22. The judge, therefore, held that the notice to complete was valid and effective. He also held that, in any event, a reasonable time had elapsed from the contractual completion date before the contract was terminated on the ground of Wise’s failure to complete.

    THE ISSUES ON THIS APPEAL

  23. The following issues arise on this appeal:-

    1. Is the agreement binding on Wise by virtue of section 36C? In other words, can Sturges enforce it as against Wise?

    2. Is the agreement unenforceable for want of writing under section 2 of the Law of Property (Miscellaneous Provisions) Act 1989?

    3. Did Sturges have title to the property so as to be able to serve a valid notice to complete under Condition 22 of the National Conditions of Sale?

    4. Was the vendor’s title defective because the land was encumbered by a restrictive covenant in favour of MAFF?

    5. If the notice to complete did not comply with Condition 22, was it valid under the general law?

    6. If the notice to complete was bad under condition 22, might it still be good because of lapse of time after the contractual completion date?

    APPELLANT'S SUBMISSIONS

    Issue 1

  24. Mr. Mark Blackett-Ord, for the appellant, places particular emphasis on the tailpiece (as defined above). He submits that these words are otiose on the judge’s approach and that their purpose was, and was only, to make the agent liable. They provide no support for the proposition that the agent can enforce the contract. Mr. Blackett-Ord does not submit that because the Directive does not provide for the agent to be entitled to enforce the contract section 36C(1) cannot have this effect. He submits that that submission is precluded Phonogram Ltd v Lane

  25. However, Mr. Blackett-Ord submits that bizarre results might flow if the agent could sue on a contract to which section 36C(1) applies. He points that no agent has succeeded on this basis and that there is no reported case in which the point has been taken. If the judge is right, agents for non-existent companies will get an advantage. They can take advantage of their own carelessness in making contracts on behalf of unformed companies. He submits that it is extraordinary to award damages to Sturges. A further bizarre result is that the third party becomes liable to a party with whom he did not intend to contract. That person may be a man of straw or an infant. The effect may be to impose a contract on a party who particularly wished to contract with the company which was in course of incorporation. Moreover, the contract might be a contract to work for that party. There is no reason why Parliament should want to confer the benefit on agents. Sturges, as reputable solicitors, were likely to disgorge the profit to their principal but they are not, on Mr. Blackett-Ord’s submission, required to do so. 

  26. As respects mutuality, Mr. Blackett-Ord submits that this concept is relevant only to specific performance and is not relevant to the present question. The sole effect of section 36C is to prevent the agent from denying the existence of a contract. 

  27. In this case the identity of the vendor was of no particular concern to Wise. 

  28. The purpose of the tailpiece, on Sturges’ submission, is to clarify and not to qualify the effect of the earlier words in section 36C(1). This is contrary to the presumption that words in a statute are always operative. The judge’s fifth reason does not explain the concluding words of section 36C(1). These words do not so much emphasise the abolition of the common law distinction as create another distinction. The preamble to the Directive indicates that the object of article 7 of the First Directive is to protect third parties. A third party is fully protected by having someone whom he can hold liable. He is not protected by a deemed contract. Moreover, if the judge is right, there are several people who under the Directive can enforce the contract – Mr. Pool, Plumtree and William Sturges - and there is no mechanism in section 36C(1) for determining who should be entitled to the benefit of the contract.

    Issue 2

  29. Under section 2 of the Law Reform (Miscellaneous Provisions) Act 1989 the contract has to be signed by the parties to it. Here Sturges only signed as agents and solicitors for Braymist. It was not signed by Sturges in their own right. The effect of section 36C(1) is that the contract may be enforced against Sturges, but not by them. This result is not unknown in the law (compare section 40 of the Law of Property Act 1925). It is an odd result if a deemed agent can be entitled to sell property which he does not own.

    Issue 3

  30. Mr. Blackett-Ord submits that Sturges must be able to show title to the land. The conveyancers in this case ignored the provisions of clause 4 of the agreement requiring a transfer of the land by Plumtree to Braymist to be produced. However, there could not be any estoppel against Wise preventing it from taking this point because it never knew that the other contracting party was really Sturges, not Braymist. Moreover, Mr. Blackett-Ord submits that Sturges could not have compelled Braymist to deliver the land. The situation is different from that in Harold Elliott v Pierson [1948] Ch.452, where the title was vested in a company which the vendor owned. Harman J held that as the vendor was in a position to compel the company to execute the necessary conveyance he had a right to enforce a contract and accordingly the purchaser had no right to repudiate. The vendor had to have the legal estate before he became entitled to an order for specific performance of the contract of sale (Pinekerry Ltd v Needs (Kenneth) Contractors Ltd (1992) 64 P&CR 245 C.A.). In this case Mr. Blackett-Ord submits, Sturges could not have compelled Plumtree to proceed with the transfer to themselves and therefore, they had no document in their favour so that they could not complete the agreement. Even if Mr. Pool could have been compelled to execute the transfer, on Mr. Blackett-Ord’s submission, Mr. Pool could not have compelled Plumtree because that company was insolvent because a loan account due to the minority shareholder of Pique (Mr. Johnson) exceeded the value of its assets. Sturges was not, therefore, in a position to compel Plumtree to hand over title to it and accordingly, Sturges could not be said to be ready and willing to complete the contract.

    Issue 4

  31. Mr. Blackett-Ord submits that clause 4 of the MAFF Deed was a restrictive covenant as to what could done on the Adjoining Property. It went further than the agreement. Clause 18 deals only with the owner of the property and provides what drainage he may use. The restrictive covenant on the other hand restricts drainage when the purchaser becomes owner of the Adjoining Land. This is an additional restriction which affects drainage from the Adjoining Land. This additional restrictive covenant is fatal because it is not mentioned in the agreement. 

  32. Mr. Blackett-Ord submits that neither party appreciated that there was a new restrictive covenant and accordingly there could be no waiver: see Peyman v Lanjani [1985] Ch.457, C.A.. Mr. Blackett-Ord particularly relies on the identification by Slade LJ at 502a of the issue which had to be determined with respect to affirmation in that case:

    The question is whether his conduct on 22 February 1979 would have led the first defendant and his legal advisers reasonably to infer that he did not intend to object to the particular defect in title which had arisen through the first impersonation.

  33. Mr. Blackett-Ord submits that Wise’s solicitors did not intend to object to the restrictive covenant created by clause 4 of the MAFF Deed. The draft transfer which Wise’s solicitors produced was ineptly drafted so its production could not amount to a waiver. He further submits that as the defect in title was fundamental, it could now be raised even though the time for raising requisitions on title under condition 9 had expired.

    Issue 5

  34. If the notice did not comply with condition 22 it would for the same reason fail to be a valid notice to complete at common law.

    RESPONDENTS' SUBMISSIONS

  35. Miss Barbara Rich, for the respondents, made the following submissions.

    Issue 1

  36. Miss Rich attaches particular importance to the fact that section 36C states that the contract takes effect as a contract to which the agent is a party. The Court must give effect to this wording. As Lord Asquith said in East End Dwellings Co Ltd v Finsbury Borough Council [1952] AC 109 at 132/133:-

    If you are bidden to treat an imaginary state of affairs as being real, you must surely, unless forbidden to do so, also imagine as real the consequences and incidents which, if the putative state of affairs had existed, would inevitably have flowed from or accompanied it. One of these in this case is emancipation from the 1939 level of rents. This statute says that you must imagine a certain state of affairs; it does not say that having done so, you must cause or permit your imagination to boggle when it comes to the inevitable corollaries of that state of affairs.

  37. Miss Rich submits that where identity is relevant, the counterparty can rescind the contract, but that is not the case here. This is the answer to Mr. Blackett-Ord’s submission that the effect of section 36C is to impose a contract even if the contract was one of employment. 

  38. The tailpiece makes it clear that the common law distinction is abolished. 

  39. Miss Rich supports the judge’s five reasons. In particular, his construction of section 36C(1) does not make the provision unworkable or unfair. The defendant has no good reason for avoiding the contract in this case. 

  40. Miss Rich submits that the United Kingdom fulfilled its obligation to implement the Directive by implementing it to the minimum extent. Article 7 of the Directive must be construed purposively. That article goes further than simply protecting the interests of third parties. The objective is to impose equivalent safeguards which restrict invalidity to the greatest possible extent. 

  41. Miss Rich submits that the judge was correct with respect to mutuality. The end words of section 36C(1) are not restricted to damages and so it would be odd if there were no requirement for mutuality. 

  42. On Miss Rich’s submission, the effect of section 36C is to substitute Sturges for Braymist as Sturges can enforce any right conferred on Braymist. The effect of this section is to make the agent personally liable and to make the agent the principal. 

  43. Miss Rich makes the point that the Report of the Company Law Committee under the chairmanship of the Rt. Hon Lord Jenkins, (1962) Cmnd 1749, paragraphs 44 and 54(b) (“the Jenkins Committee”) recommended that a company should be able unilaterally to adopt contracts which purport to be made on its behalf or in its name prior to incorporation and thereby become a party to the same extent as if the contract had been entered into after incorporation and that unless or until the company does adopt such a contract the persons who have purported to act for the company should be entitled to sue and liable to be sued thereon.

    Issue 2

  44. Miss Rich adopts the judge’s reasoning. In particular, the appellant’s construction of section 2 would render section 36(C) of no effect in contracts for the sale or other disposition of land.

    Issues 3, 4, 5

  45. Miss Rich adopts the judge’s reasoning. She also submits that no notice to complete could have been served other than under condition 22.

    CONCLUSIONS

    Issue 1

  46. In Newborne v Sensolid (Great Britain) Ltd [1954] 1 QB 45, a company purported to sell goods at a time when it had not been incorporated. The company’s name was appended to the contract as “Leopold Newborne (London) Ltd” and underneath was the name of Leopold Newborne. When it was discovered that the company had not been formed, Leopold Newborne commenced proceedings for damages for breach of contract against the buyers in his own name. The Court of Appeal held that the plaintiff had never purported to contract to sell nor sold the goods either as principal or agent. The contract purported to be made by the company and Leopold Newborne had merely added his name to verify that the company was a party. In the circumstances, the contract was a nullity. In so deciding, the Court of Appeal distinguished the principle, applied in Schmaltz v Avery (1851) 16 QB 655 and other cases, that where a person purported to contract as agent he could nevertheless disclose himself as being in truth the principal and enforce the contract. The only person who had any contract with the defendants was the company and Mr. Newborne’s signature merely confirmed that of the company. At first instance, Parker J expressed the view that if the principle had applied the defendants could have escaped liability if they could have shown that they would not have contracted with the agent. The contract would have been voidable and the defendants could have claimed rescission (page 48/49). In the circumstances, however, it was not necessary for either Parker J or the Court of Appeal to determine the circumstances in which an agent could claim to be the principal and thus enforce a contract. 

  47. Newborne v Sensolid was one of the decisions considered by the Jenkins Committee in their report (referred to above). Their recommendation, however, had two parts. Firstly, that the agent for a company in the course of incorporation should be entitled to sue and liable to be sued on a pre-incorporation contract and also that the company should be able unilaterally to adopt such a contract. On such adoption, the liability of the agent would cease. However, before this recommendation could be implemented, the United Kingdom became a member of the European Community. Article 54(1)(g) of the Treaty of Rome (now article 44.2 (g) of the Treaty establishing the European Community) provides for co-ordination of safeguards for the protection of members and others, such as creditors, involved with companies. Before the United Kingdom became a member of the European Community, the other members had adopted the Directive and accordingly on the accession of the United Kingdom it was necessary for the United Kingdom to implement this Directive. Section 9 of the European Communities Act 1972 was designed to implement the Directive. 

  48. A change of approach has occurred in the interpretation of domestic directive-based legislation. Although in Phonogram Ltd v Lane, Lord Denning MR held that the court should simply construe the English domestic statute and not look at the French version of the Directive, the approach of the Court now is to construe domestic legislation, if possible, in conformity with the Directive which it aims to implement. As Miss Rich explains in her skeleton argument, this is required by the jurisprudence of the European Court of Justice. As Lord Oliver said in Litster v Forth Dry Dock Co Ltd [1990] 1 AC 546 at 559,

    If the legislation [enacted in effect to give the United Kingdom’s obligations under the EEC Treaty] can reasonably be construed so as to conform with those obligations – obligations which are to be ascertained not only from the wording of the relevant Directive, but from the interpretation placed upon it by the European Court of Justice at Luxembourg. - such a purposive construction will be applied even though, perhaps, it may involve some departure from strict and literal application of the words which the legislature has elected to use.

  49. In those circumstances, the starting point, in my judgment, is the meaning of the Directive and any decision of the European Court of Justice on it. 

  50. The judge set out above the English and French language versions of article 7 of the Directive. The French version is silent on the question whether the agent can enforce the contract. Recourse should also be had to the other language versions of the Directive, but they are not before us. Likewise there is no information as to the legal position in the other member states. The Directive is to be construed in the light of its preamble which, having referred to article 54(3)(g) of the Treaty of Rome continues (in material part) as follows:-

    Whereas the co-ordination of national provisions concerning disclosure, the validity of obligations entered into by, and the nullity of, such companies is of special importance, particularly for the purpose of protecting the interests of those parties;

    Whereas in these matters Community provisions must be adopted in respect of such companies simultaneously, since the only safeguards they offer to third parties are their assets;

    Whereas the basic documents should be disclosed ....

    Whereas the protection of third parties must be ensured by provisions which restrict to the greatest possible extent the grounds on which the obligations entered into in the name of the company are not valid;

    Whereas it is necessary, in order to ensure certainty in the law as regards relations between the company and third parties, and also between members, to limit the cases in which nullity can arise ....

  51. I deduce the following points on the preamble. 

    • First, the Directive stems from article 54(3)(g). Accordingly the particular emphasis of the Directive is on the co-ordination of provisions for the protection of shareholders and creditors.

    • Second, a major concern of the preamble is the protection of third parties. It may, therefore, be taken that one of the main objectives of the Directive is to make uniform in the laws of the member states the protection given to third parties in relation to pre-incorporation contracts.

    • Third, the preamble refers to the validity of obligations entered into by companies, particularly for the purpose of protecting third party interests, but does not refer to the validity of obligations entered into by agents who are rendered principals on such contracts. 

  52. I then turn to the body of the Directive itself. Article 7 is the first article under the heading “Section II: Validity of Obligations entered into by a Company”. This section also contains article 8 which prevents a company from relying on any limitation in the powers of an organ of the company as against third parties unless the company proves that such third parties had knowledge of that limitation. Article 9 restricts the doctrine of ultra vires and in particular provides that acts done by organs of the company are binding on it, even though those acts are not all in the objects of the company unless such acts exceed the powers which the law confers or allows to be conferred on those organs. Also by article 9, an option is given to member states to permit a company not to be bound by such acts if it proves that the third party knew that the act was outside those objects or could not have been unaware of it. 

  53. There are distinct doctrinal differences between the company laws of various member states with respect to formation and ultra vires and articles 7, 8 and 9 bear all the hallmarks of compromise. It is to be noted that in article 7 the agents are not liable if the company actually assumes the obligations arising from the contract or if it is agreed that the agents should not be liable. Likewise in article 8, a company can rely on irregularities in the appointment of agents (despite compliance with publicity requirements) if it proves that third parties had knowledge thereof. Article 9 deals with the well-known doctrine of ultra vires. Views differ as to the value of that doctrine. Article 9 does not abolish the doctrine absolutely but does so only subject to the qualification such as those to which I have referred. That article 7, 8 and 9 should have been the subject of compromise is not surprising since the Directive was the first attempt at harmonising the company laws of the member states. Significantly, it was negotiated before the United Kingdom entry into the Community. 

  54. From the above analysis I deduce that the Directive has nothing to say on the question whether or not an agent who becomes personally liable on a contract under article 7 should be able to enforce it. The concern of the Directive and the concern of article 54(3)(g) was to provide for the protection of third parties. That is obtained by the imposition of personal liability on the agents responsible for the pre-incorporation acts. 

  55. I then turn to consider whether any jurisprudence of the European Court of Justice throws doubt on this approach. In EC Company Law by Vanessa Edwards (Oxford) (1999), page 32, Ms Edwards says this:-

    The Court of Justice briefly considered Article 7 in Ubbink Isolatie v Dak – en Wandtechniek, a case concerning acts performed in the name of a company not yet incorporated. The Court held that the rules on the nullity of companies in Section III of the Directive did not apply where acts had been performed in the name of a company whose existence was not confirmed by the public register because the formalities for incorporation required by national law had not been completed, and stated that:

    in so far as acts performed in the name of a limited liability company not yet incorporated are regarded by the applicable national law as having been performed in the name of a company being formed within the meaning of article 7 .... it is for the national law in question to provide, in accordance with that provision, that the persons who perform them are to be jointly and severally liable.

    A further point as to the scope of article 7 was made by Advocate General Cruz Vilaça, in whose view:

    When the existence of a partnership is equivalent, under an express disposition of national law or in accordance with the interpretation given of it by legal doctrine or the courts, to a company in formation .... article 7 .... must apply. Were it otherwise, its aim of safeguarding the interests of third parties could be frustrated by the legal expedient of regarding such an organisation as a partnership.

  56. Counsel have not referred us to any more recent authority. So far as I can see the European Court of Justice has not suggested that the Directive requires that the agents should become a party to the contract be entitled to enforce it. 

  57. It is, therefore, apparent that section 36C(1) goes further than the Directive requires. However, I agree with Counsel that it is not appropriate to read section 36C down so that it complies with the Directive and does no more. Parliament has deliberately provided that the contract should take effect as a contract with the agent and the Court must give effect to that wording. 

  58. The only consequence for which section 36C(1) legislates is that the agents should be personally liable accordingly. Personal liability is necessary to ensure compliance with the Directive. Situations in which a director is held merely to have appended his name to confirm that of the company, as in Newborne v Sensolid, would be contrary to the Directive. The decision in Newborne v Sensolid would have been in the mind of Parliament when enacting the predecessor of section 36C(1). Parliament would, therefore, have been aware of the possibility that an agent might sue to enforce a contract which he had purported to make as agent when his principal did not exist. The desire to reverse Newborne v Sensolid accounts in my judgment, for the provision in the first part of section 36C(1) that the contract should take effect “as one made with the person purporting to act for the company or as agent for it.” It does not, however, explain the tailpiece. 

  59. I reject an approach to interpretation of section 36C(1) which would render the tailpiece non-operative or clarificatory only. Such an approach is contrary to well-established principle. In my judgment the words in the tailpiece are operative words and as I explain below the reason behind them can also be found in Newborne v Sensolid. As I see it, the function of the tailpiece is to establish liability only and to leave the question whether the agent can enforce the contract to the general law. For, as the judge observed, the contract imposed by statute is to take effect not with Mr. Newborne or the agent as if he were the principal and had been principal all along but on the footing that “the person purporting to act for the company or as agent for it” is the contracting party. The common law thus applies to determine whether such a person can enforce the contract. There is case law which deals with the question whether an agent can enforce a contract made by him as agent on behalf of his principal if he discloses himself as the true principal. The case law includes Schmaltz v Avery, and other case law, to which Newborne v Sensolid refers. 

  60. The matter is discussed in paragraphs 9–91 to 9–93 of Bowstead and Reynolds on Agency (17th edition) (2001). The learned editor says this:-

    9–91

    Identified principal .... it is held in Rayner v Grote that a person who had purported to sell goods as agent for such a principal but who was really himself the seller could sue for non-acceptance where the third party had become aware of the true position and nevertheless continued with the contract. On this basis it might be argued that such a person can do so in any case, if he gives notice that he is the principal and provided that the third party is not clearly prejudiced. But in such a case the contract is with the named principal, an identified person different from the agent, the agent being by the wording of the contract excluded from being a party, and it is extremely difficult to see how the agent can then intervene and claim the benefit of such a contract. For although mistake is not relevant in the formation of contract where it is not material, it should not be difficult for the third party to show that he intended to contract with the named principal only. He should not be left to establish prejudice, which, in view of the fact that the benefit of contracts is usually assignable, might not be easy. It is submitted therefore that the case itself should be explained on the basis of novation. In other circumstances it is highly doubtful whether [the agent] [Bowstead says “the principal” but this appears to be a misprint] could intervene: this is supported by a dictum of Alderson B. in the case, which has since been cited with approval.

    .... In many such cases, such as for instance, the case of contracts in which the skill or solvency of the person who is named as the principal may reasonably be considered as a material ingredient in the contract, it is clear that the agent cannot then shew himself to be the real principal, and sue in his own name; and perhaps it may be fairly urged that this, in all executory contracts, if wholly unperformed, or if partly performed without the knowledge of who is the real principal, may be the general rule.

    9–92

    Unidentified principal. It was decided in Schmaltz v Avery that an agent who signed a charterparty containing a cesser clause purportedly as agent for an unidentified principal could show that he was himself the principal and sue on the contract, on the grounds that it was not of moment to the third party who contracted on such terms to whom he was liable, and that the agent could say that he was his own principal. Such a right is in danger of being inconsistent with the terms of the contract, especially where the contract can be said to be embodied in a document. It is therefore submitted that, even on the most favourable view of the situation, the true analysis is that the contract in such cases is with the unidentified principal, and that the agent can only intervene if he fits such description (if any) as has been given of the supposed principal. Further if the third party can establish that, with whomsoever he was willing to contract, he was not willing to contract with the agent, he should equally be able to say that he had no agreement with the agent ....

    9–93

    Supposed rule doubtful. Schmaltz v Avery is a case arising in the context of particular form of the cesser clause, a very specialised charterparty provision on which there is much case law. The purpose of such a clause is that the charterer can substitute for himself shippers or consignees of cargo whose positions are regulated by bills of lading and against whom the shipowner can recover outstanding charges by the exercise of his lien. A charterer who uses such a clause may well have no principals ....

    .... The general reasoning of the case has been criticised in Scotland for being obsolete in view of the statement of the rules as to interpretation of written contracts by the House of Lords in Universal Steam Navigation v McKelvie and is difficult to reconcile with the principles of law established since that time. The right to sue of an agent purporting to act for a disclosed principal is even more difficult to justify ....

    Even if the third party cannot plead that he made no contract with the agent, he can presumably plead misrepresentation in appropriate cases; and all authorities agree that the agent cannot intervene when such intervention would prejudice the third party, e.g. where the third party could show that he relied on liability of both agent and principal, or where the agent’s liability as principal is by the terms of the contract less onerous than his liability as agent. But this is similar to the rule preventing the intervention of the undisclosed principal in some situations, and it might well be more difficult for the third party to establish such prejudice and not with the agent. Harper & Co v Vigers Bros., indeed, shows clearly the difficulty of establishing prejudice.

  61.  Chitty on Contracts (2nd ed) (1999) Volume 2 page 56, paragraph 32 –095 is to similar effect:

    Where ‘agent’ is in fact principal: his rights. It may also be that a party who has contracted ‘as agent,’ but in fact on his own account, may in certain cases be allowed to sue as principal on the contract which he has thus made. In the case of charterparties there is authority for the proposition that he can do so if he has not named anyone else as his true principal, on the ground that in such a case the other party cannot, in entering into the contract, have been influenced by the personal qualifications of the supposed principal. Secondly, where such a contract has been in part performed and that performance has been accepted by the other contracting party with full knowledge that the party who was described as agent in the contract was the real principal, it has been held that the latter may after that sue for the completion of the contract. But these propositions also are not beyond criticism, and it has been held that an agent cannot sue as principal if the identity of the contracting party is material.

  62. From the above texts, it is clear that the position in the general law is not that an agent can in all circumstances come in and claim to be principal on a contract which he made as agent. The circumstances in which he can do so have yet to be fully defined and winnowed out by the courts. In my judgment Parliament intended to preserve the process of common law adjudication in this respect and to leave it to the courts to complete the exercise of defining the relevant circumstances. Accordingly, as I see it, the purpose of section 36C was limited to:

    1. complying with the United Kingdom’s treaty obligations to implement article 7 of the First Directive,

    2. removing the possibility that the agent would be held not liable on the ground that he merely confirmed the company’s signature and

    3. putting such persons or agents in the same position as regards the enforcement of the contract as they would be at common law and in particular (in the case of agents) this is the same position as agents who contracted as agents.

  63. However, for the reasons explained I do not consider that Parliament intended in section 36C to determine the rules which should apply where an agent makes a contract as agent on behalf of a principal then claims to enforce the contract. As Bowstead and Reynolds points out, in determining such rules the law has to have regard among other considerations to the position of third parties who claim that they would not have entered into a contract if they had known the other party was not the principal whom they thought they were contracting for some other party. It may be that they rely on the skill of that other party or on his solvency or on some other quality altogether. Counsel found it difficult to think of an example where this might happen, but the following example may be supposed as a start. Suppose that the third party agrees to provide legal services as and when required at cost to a company with charitable objects. The contract is made at a time when the company is in the process of formation and is signed by a person who proposes to become a director of the company. The third party in that situation may very well say that the particular quality of the contracting party which induced him to be bound to such a contract was the fact that the other party was a charity. In my judgment, it should not be assumed that Parliament intended in that situation that the agent should be able to enforce the contract to the same extent as if he had been the company itself. 

  64. As to what the rules should be in a situation which I have postulated, that matter will have to await another case. It is clear that in this particular instance it is of no moment to the appellant whether the party selling the property is Braymist or Sturges. 

  65. The United Kingdom’s implementation of article 7 makes no reference to the possibility of the company enforcing the contract when it has been formed. Since so far as it was concerned the contract was a nullity it could only do this by entering into a contract of novation with the agent. Even then the agent would remain personally liable. While the issue does not arise in this case, my provisional view is that this possibility exists because section 36C only applies to the making of the contract and does not require that the contract remains the same throughout its currency. In those circumstances there was no need for Parliament to deal with this additional option. I agree with the view expressed by Vanessa Edwards in the work cited that the omission of Parliament to deal with this aspect of article 7 “is not a serious flaw”. 

  66. In those circumstances, I conclude that Sturges are entitled to enforce the agreement.

    Issue 2

  67. Section 2 of the 1989 Act refers to signature “by or on behalf” of a party. In my judgment, having concluded that Sturges is a party to the agreement by virtue of section 36C and that there is no common law bar to enforcement of the contract by Sturges, in my judgment Sturges is properly to be treated as having signed the agreement on its own behalf for the purposes of section 2. I reach this construction in order to make both sections work properly together. Otherwise, Sturges having shown that it is entitled to enforce the contract under section 36C would be unable to do so because of over-literal construction of section 2 of the 1989 Act. I agree with the judge that this cannot be the policy of section 2. My interpretation does no violence to the language: Sturges did sign the contract. Because it renders sections 36C and section 2 more efficacious, in my view the judge’s consideration is to be preferred.

    Issue 3

  68. I can deal with this matter shortly. In my judgment, Sturges were able to complete the contract because they were able to hand over a transfer executed on behalf of Braymist and Plumtree. This accorded with the contract and the purchaser’s requirements. Section 36C does not affect the contractual provision for the delivery of title. The fact that Plumtree was insolvent would not place a restriction on the powers of the directors and there is no evidence to show that performance of the agreement was not in the best interests of Plumtree. Sturges had instructions from Mr. Pool and Plumtree to effect the transaction, and Mr. Pool could procure the way in which Plumtree acted with respect to the agreement.

    Issue 4

  69. I agree with the judge that clause 18 of the agreement reflected clause 4 of the MAFF Deed. It imposes an obligation not to use the existing soakaway drainage from either the property being sold or the adjoining filling station. It is not suggested that the drainage on the Adjoining Land occupied any area other than the filling station site. Clause 18 does not contain the refinements of clause 4, namely that the restriction does not operate unless the adjoining property is acquired but that is implicit. Moreover the 80 year period in clause 4 is inserted merely to make the clause effective and should have been expected. In those circumstances I agree with the judge that clause 18 of the agreement is consistent with clause 4 of the MAFF Deed. 

  70. In any event, I agree with the judge that, if there was any defect, the defendant’s solicitor waived it. He may not have appreciated that clause 4 of the MAFF Deed imposed a restrictive covenant, but by producing the transfer in the form he did, in my judgment, he clearly intended to waive any objection that he might have had to the fact that that clause 4 went beyond clause 18 of the agreement. The inept drafting of the transfer does not diminish this point.

    Issue 5

  71. This issue does not arise.

    DISPOSITION

  72. Accordingly, I would dismiss this appeal.

    Lord Justice Latham

  73. I agree that the appeal should be dismissed. As to the first issue identified by Arden LJ, I do so for the reasons given by the judge. It is common ground that s. 36 C of the Companies Act 1985, and its predecessor, was enacted in order to give effect to Article 7 of the first EC Company Law Directive already referred to by Arden LJ in her judgment, and in particular to reverse the decision of this court in Newborne v Sensolid (Great Britain) Ltd [1954] 1 QB 45. It also put to rest any doubts that there might have been as to the liability of a person who purports to act as an agent in such a situation: as to these doubts see Chitty on Contracts Vol. 2 32–094 and Note 75. 

  74. The important question which is raised in this appeal is whether or not the person purporting to act for the company or as agent for it can sue, not merely be sued, on the contract. It is submitted that the final words of the section are restrictive, making it clear that the section is only concerned with the imposition of liability and does not affect entitlement to sue which must be determined by the ordinary rules of common law. I have great difficulty in accepting this submission. The express imposition of liability in the final words of the section is said to follow “accordingly” from the main principle set out in the section which is that the contract “has effect .... as one made with the person purporting to act for the company or as agent for it ....” These words do not seem to me to be apt to be words of restriction. A contract can only, in my judgment, have “effect” if both parties are entitled to give it effect. 

  75. I accept that the directive itself, in particular Article 7 is concerned to ensure that obligations assumed in the name of a company yet to be formed should be respected in order to protect the rights of third parties who have apparently contracted in good faith. But there is also, it seems to me, a proper justification for extending that protection to the nascent company by validating pre-incorporation contracts, and also to others who might have relied on the existence of an apparent contract in their dealings with that company; if it were otherwise the fortuitous date of the company’s incorporation might affect a series of significant and important transactions. It is to be noted that the Jenkins Committee, again referred to by Arden LJ, recommended that pre-incorporation contracts should be mutually enforceable. It seems to me that the ordinary common law rules as to the enforceability of contracts are both sufficient and satisfactory to deal with any difficulties, one of which has been described by Arden LJ, which the consequence of this section, construed as I believe it should be construed, could give rise to. For example if the identity of the contracting party is of critical significance, or if there has been a vitiating representation, there could be no question of the contract being enforceable, on ordinary principles. 

  76. I would therefore hold that the section itself provides the answer as to whether or not, in a case such as this, the person purporting to act as an agent for the company should be entitled to enforce the contract, subject to the proviso that I have just mentioned. Although my conclusion may appear to result in the last phrase of the section being apparently surplussage, I find it difficult to construe the main, and operative part of the section otherwise. The result accords with the views of Parker J, with which the Court of Appeal agreed, in Newsome that where a person contracts as an agent in circumstances in which he is to be fixed with liability, he is also entitled to sue on the contract. I would accordingly hold that the solicitors are entitled to rely upon s. 36 C in order to enforce the contract in the present case. In my judgment, this produces a just result in that there is no good reason why the defendants should be entitled to resile from their obligations under the contract as a result of a pure technicality when in truth they wish to do so because it proved a bad bargain.

    Lord Justice Judge

  77. The critical question for decision is whether s36C(1) of the Companies Act 1985 not only provides a remedy for a person (A) who has purported to enter into a contract with a company when it was unformed (the narrow view) but also imposes obligations enforceable against A’s wishes by the person purporting to act for or as agent of the unformed company (B). I describe this as the broad view. The answer to this question is not straightforward, and for some time I was persuaded by Mr. Blackett-Ord that the narrow view was right. I should therefore explain why I have reached the same conclusion as Arden and Latham LJJs. 

  78. There is no difficulty when A chooses to proceed with the contract. He cannot cherry-pick the parts which are convenient or favourable to him. If the contract takes effect, it takes full effect, according to its terms, and the contractual obligations as well as contractual benefits and remedies created by the purported contract, continue in accordance with the agreed terms. But what if B wishes to enforce the contract against A? Is he entitled to do so, against A’s wishes, and when A has done nothing to affirm the contract or to indicate that he wishes to proceed with it? 

  79. Section 36C (1) provides:

    A contract which purports to be made by or on behalf of a company at a time when the company has not been formed has effect, .... as one made with the person purporting to act for the company or as agent for it, and he is personally liable on the contract accordingly.

    At common law, if “.... the company was not in existence when the contract was signed there never was a contract” (per Lord Goddard CJ in Newborne v Sensolid (Great Britain) Ltd 1954:1QB45: see also, the judgment of Morris LJ, and the judgment of Parker J upheld by the Court of Appeal). S36C(1) in effect abrogates this principle. There is deemed to be a contract. The purported contract, otherwise a nullity, “has effect”, not as one made with the unformed company but as one made with the purported agent, who is “personally liable” to A on the contract.

  80. My difficulty is created by the concluding words of the subsection, “and he is personally liable on the contract accordingly”. If the contract “has effect” as one made with the purported agent of the company, B would become personally liable on the contract without the concluding words of the subsection. The contract “has effect”. The language of s36C(1) reflects the broad thrust of Council Directive 68/151, first implemented domestically in its predecessor, s9(2) of the European Communities Act 1972. The recital twice refers to “protecting” third parties. In Section II, which concerns the validity of obligations entered into by a company, Article 7 provides:

    If, before a company being formed has acquired legal personality, action has been carried out in its name and the company does not assume the obligations arising from such action, the persons who acted shall, without limit, be jointly and severally liable therefore, unless otherwise agreed.

    If the broad view is correct, the statute has gone much further than the creation of new protection for A. Plainly, as a matter of statutory construction, s36C(1) may have extended beyond simple compliance with the Directive. Nevertheless the concluding words add something: if surplusage, they would not be there. Their presence provides a clear indication that the highlight of s36C(1) is protection for A.

  81. The second relevant feature of s36C(1) is that its language is not apt to undermine or alter any of the well understood principles which govern contractual arrangements. For example, if prior to the formation of the purported contract, and to induce it, B has misrepresented the material facts, A is entitled to the remedies appropriate for fraudulent or innocent misrepresentation. They are not to be ignored merely because the contract “has effect”. Similarly if the purported contract were tainted by illegality, or for any other reason were unenforceable s36C(1) would not remove the taint, or overcome the obstacles to enforceability. In short, the normal incidents appropriate to any contract apply equally to deemed or statutory contracts created by s36C(1). 

  82. This consideration leads me briefly to reflect on the position at common law where A discovers that he has entered into a contract with B when he intended to and believed that he was contracting not with B, but with C. This is not, or will not always be of mere academic interest to A. Sometimes personal, sometimes commercial considerations, sometimes both, may be important. As there was no lengthy citation of authority on this issue, it is instructive to reflect that in Newborne v Sensolid (Great Britain) LD, Parker J commented:

    .... a contract of that sort would be clearly voidable when the other party found that the person with whom he thought he was contracting was not the real principal and he could then claim to have the contract rescinded.

    In the Court of Appeal both Morris and Romer LJJs expressly agreed with this judgment. In the classic case of Cundy v Lindsay (1878) 3 App.Cas. 459 the House of Lords held that a mistake as to the identity of the other party to the purported contract rendered it void.

  83. In principle, the identity of the other party to a contract often matters, sometimes very much indeed. A might happily contract with C, but not with either B, or even D, even if identical terms were available. He may have a complete antipathy to being beholden to or under any legal obligation personally to B, or indeed anyone other than C. There are, of course, well understood exceptions to the principle that an individual is free to decide whether and with whom to enter or not to enter, a contract (for example, the legislation in relation to discrimination on the grounds of sex or race). But I may illustrate the difficulties by considering a contract of employment, underlining that so far as unformed companies are concerned, there are no limits to the contracts to which s36C(1) applies: it applies to them all. A may welcome the opportunity of employment, as, say, an office manager for a particular company, with which he is contracting. If the company is unformed, is he bound to accept similar employment on identical contractual terms, with B? Or become liable to B for breach of contract if he refuses or fails to do so? Surely not. The answer however is not that the contract is automatically deprived of the “effect” which s36C(1) has created, but rather, that just as s36C(1) is not apt to exclude considerations such as illegality, or misrepresentation, or other incidents of a contract, it is equally inappropriate to exclude relief on the basis of the identity of the contracting party, if relief would be available on ordinary contractual principles. 

  84. The insurmountable difficulty with the narrow view is that it requires s36C(1) to be read as if it created a complete option for someone in A’s position, but never for someone in B’s position, either to adopt or reject the contract, a choice to be made unilaterally by him, for good, bad, or no reason. The statutory language could, of course, have been drafted so to provide. Instead s36C(1) specifies that contract has "effect”, language remote from the concept of an “option” or, as here, the wish of the party in A’s position to be protected from the consequences of the deemed contract simply because the bargain is no longer as commercially attractive as it once was.

  85. Accordingly, dealing with the issue as a matter of construction, I prefer the broad rather than the narrow view of the meaning and effect of s36C(1). I am in complete agreement with the reasoning and conclusions of Arden LJ on the remaining issues which arise in this appeal. In my view therefore, the appeal should be dismissed.


Cases

Phonogram Ltd v Lane [1982] QB 938; Harold Elliott v Pierson [1948] Ch.452; Pinekerry Ltd v Needs (Kenneth) Contractors Ltd (1992) 64 P&CR 245 C.A.); Peyman v Lanjani [1985] Ch.457, C.A.; Newborne v Sensolid (Great Britain) Ltd [1954] 1 QB 45; Litster v Forth Dry Dock Co Ltd [1990] 1 AC 546; Cundy v Lindsay (1878) 3 App.Cas. 459

Legislations

Companies Act 1985: s.36C(1)

European Communities Act 1972: s.9(2)

EC Company Law Directive (68/151/CEE OJ No. 1968 L6): Art.7

Treaty of Rome: Art.54(3)(g)

Authors and other references

Vanessa Edwards, EC Company Law (Oxford) (1999), 

Bowstead and Reynolds on Agency (17th edition) (2001)

Chitty on Contracts (2 ed) (1999) Volume 2

Representations

Mr. M Blackett-Ord (instructed by Tarran Jones & Co) for the Appellant

Miss B Rich (instructed by William Sturges & Co ) for the Respondent


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