COMPANY LAW

PRE-INCORPORATION
CONTRACTS

Introduction
A pre-incorporation contract is a
contract made before a company is
incorporated
Therefore, the company did not exist
at the time the contract was made
The contract is usually made for the
company by the promoters
For instance, purchasing land or
buildings for company business or
securing the services of directors,
managers and so forth

Effect of the contract

A contract made before
incorporation does not bind the
company as it had not come into
existence at the time of contract
Accordingly, the company could not
have authorised the contract
This is similar to an agent making an
unauthorised act for his principal
Nevertheless, the company could
accept liability by ratifying the
contract

Ratification by principal
Under the law of agency, a principal has the
option to ratify any unauthorised act or contract
made by his agent
Provided all the conditions relating to ratification
have been satisfied, the company as a principal
should be able to ratify the agents act
However, one of the conditions for ratification is
that the principal must exist at the time the act
or contract was made
In other words, the company must be in
existence at the time the contract was made
However, the company has not yet been
incorporated, meaning the company does not
legally exist when the contract was made

The position in English Law

English law does not recognise preincorporation contract
The reason is because the company does not
exist at the time of making the contract and so it
cannot ratify the contract made by the agent
Thus, the company is not allowed to ratify a preincorporation contract
As common law does not allow ratification in
cases involving companies, it might be prudent
for a promoter to make the contract under his
own name so that he has the right to enforce it
personally
The only drawback is that he would also be
personally liable if there is a breach of contract

Newborne v Sensolid (Great

Britain) Ltd [1954] 1 QB 45
Newborne made a contract to sell canned ham to
Sensolid (Great Britain) Ltd. He made the contract
under the name of Leopold Newborne (London)
Ltd, a company that was not yet incorporated.
When Sensolid refused to accept delivery of the
ham, Leopold (the company) took action for
breach of contract. Sensolid argued that the
company could not enforce the contract as it did
not exist at the time the contract was made.
The court agreed with this argument and held that
there was no breach of contract as one of the
party did not exist. Newborne himself could not
enforce the contract as well since the contract
was not made under his name but under the
companys name.

The position in Malaysia

Section 35(1) of the Act provides that,
Any contract or other transaction
purporting to be entered into by a company
prior to its formation or by any person on
behalf of a company prior to its formation
may be ratified by the company after its
formation and thereupon the company shall
become bound by and entitled to the benefit
thereof as if it had been in existence at the
date of the contract or other transaction and
had been a party thereto.

The position in Malaysia

Thus, a pre-incorporation contract
made in Malaysia may be ratified by
the company in accordance with
the conditions laid in section 35(1)
In order to bind the company, these
two conditions must be satisfied;

i.

the contract must be purportedly

made on the companys behalf
ii. the company must ratify the contract
after its incorporation

Contract on the companys

behalf
The promoter or agent must make the contract
on behalf of the company, not in his personal
capacity
This is quite similar to agency by ratification
where the agent must indicate to the third party
that he is acting for a principal
The principal may be unnamed but his
existence must be disclosed so that he is
capable of being ascertained at the time of
making the contract
Consequently, the third party knows that the
contract is made on behalf of a principal

Ahmad bin Salleh & Ors v Rawang Hills

Resort Sdn Bhd [1995] 3 MLJ 211
A sale and purchase agreement was executed
in 1991 by a Mr. Chan Wan Long. He made the
purchase for and on behalf of the purchaser
Rawang Hills Resort Sdn Bhd. The company
was not yet incorporated at that time. The
words used in the agreement clearly indicated
that the purchase was made on behalf of
another party, namely the company.
The court held that it was a contract
purportedly entered into by any person on
behalf of a company as stated in section 35(1).

Ratification of the contract

after incorporation
Once incorporated, a company must take steps to
ratify the contract i.e. by showing acceptance or
affirmation of the contract
The Act does not specify how ratification is to be
done
It may be express or implied in accordance with
the law of agency
An express ratification occurs when the company
passes a resolution either at a general meeting or
at a board meeting, to specifically endorse a
particular contract
It is implied when the company does any act
showing acceptance of the contract such as
making use of the goods in the contract or failure
to return the goods within a reasonable period

Cosmic Insurance Corporation Ltd

v Khoo Chiang Poh [1981] 1 MLJ 61
The promoters of Cosmic Insurance Corporation
Ltd (the company) offered the post of managing
director to Khoo Chiang Poh in a written letter.
Following incorporation, the company passed a
resolution confirming Khoos appointment as
managing director according to the terms
provided in the companys Memorandum and
Articles of Association. The term in the articles
slightly differed from the term contained in the
offer letter. The issue arose as to whether the
company had ratified Khoos appointment.
The Privy Council held that notwithstanding the
differences in the terms used, the company had
by its resolution ratified the appointment of
Khoo as managing director.

Liability of agent
It must be noted that the company has the option to
ratify but it is not obliged to ratify any contracts
made before its incorporation
If the company chose not to ratify then the company
is not bound by the contract and the third party may
not enforce it against the company
Under section 35(2), if there was no express
agreement to the contrary, the person who made the
contract shall be personally liable for the contract in
the event the company refused to ratify it
Hence, the agent or promoter who entered into the
contract has to accept liability on the contract even
though the contract was made under the companys
name